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. Last Updated: 07/27/2016

LUKoil Greases Its Wheels With Foodstuffs

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"Downstream" in the oil industry can imply gasoline, engine oils or even asphalt — but hardly the fruit jams, pickles and mineral water that Russia's No. 1 oil company has added recently to its array of products.

Over the past four years, oil major LUKoil has built a canning factory and a bottling plant intended to serve the multiple purposes of feeding its workers in the northern hinterlands, promoting the company name and — if possible — bringing in some extra revenue.

"Originally, we were to manufacture for LUKoil employees," said Azmet Dlekhuch, director of the LUKoil-Adygeya canning factory, in a recent telephone interview. "But, at the same time, we didn't want to forget about the market. As long as there was interest in our products, we aimed to capture a broader consumer base."

While 40 percent of the factory's goods go to wholesale distributors in remote regions where LUKoil employees are based, the bulk of its product line can be found on supermarket shelves in Moscow and other major cities. According to Dlekhuch, the factory, opened in 1999 in the southern republic of Adygeya, produces canned goods and preserves made of 37 types of locally grown fruits and vegetables, including such southern specialties as walnuts, cornel berries, citrus fruit and pickled ramson — a type of garlic.

As far as profits are concerned, the Adygeya project is just breaking even. Last year the factory produced 1 million cans worth about 14 million rubles ($500,000) — less than half its capacity of 2.5 million cans, Dlekhuch said. And he believes patience will pay off.

"We've invested in the factory every year," he said. "So we expect a profit in 2 1/2 to five years."

LUKoil's other food-industry project, the KMP-Plastik mineral water bottler, was built in 1997 in the Caucasus city of Pyatigorsk, the site of numerous mineral springs. Last year the plant produced only a fifth of its 1.5 million-bottle capacity. So far, all of the water has gone to retailers rather than to LUKoil work sites, according to the plant's director, Artur Biragov, who declined to comment on KMP's profitability.

While profits certainly seem to be a long-term goal for the two companies, both hope to reap more immediate rewards from sales: a positive promotional campaign for LUKoil.

"When people see our cans, they'll know that LUKoil isn't just about depleting resources," said Dlekhuch, "but that it also helps agriculture and works with wild plants."

The red and white LUKoil logo features prominently both on LUKoil-Adygeya's exotic fruit preserves and on KMP's Pyatigorskaya mineral water — which is also adorned by a portrait of renowned 19th-century poet Mikhail Lermontov, who was killed in a duel not far from the location of the KMP plant.

Both lines of products are also marked as part of LUKoil's "ecological program" — billed on the company's web site as an effort "to increase the industrial and environmental safety of the company's enterprises and reduce their negative impact on the environment." (However, Anatoly Alexandrov, the head of LUKoil's ecological department, which oversees the program, said by phone last week that he was not familiar with either of the factories' work, although he assumed the logo must indicate that their products are "ecologically safe.")

Producing goods completely unrelated to a company's main line of production was standard practice among Soviet industrial giants forced to make up for the chronic deficit of groceries and other consumer goods in state-run stores. Enterprises such as gas monopoly Gazprom or metal producer Norilsk Nickel had so-called special departments of workers' provisions to coordinate such supplies.

Today, some companies continue to manage these relics of the socialist past. The trick now is to strike a balance between subsidizing some of the factories producing essentials for workers, while turning others into commercially viable businesses.

Norilsk Nickel, for example, owns several production facilities built along with its industrial complex in the 1950s. These include a beer brewery and a bread bakery, and dairy and meat processing plants that supply 78 cafeterias in the northern city of Norilsk, where the company has its headquarters.

While the bakery covers two-thirds of the city's daily bread consumption, its prices are so low that it stays afloat thanks to funds from Norilsk Nickel.

The brewery, on the contrary, does post profits, according to Vladislav Shestopalov, director of housing maintenance and trade for Norilsk Nickel's polar operations.

Its various brands — with names such as Bear Brook and Old Town — cover 80 percent of Norilsk's beer market, thanks in part to the competitive advantage it gains by avoiding the high transportation costs to the far northern territory. The brewery worked at nearly full capacity to pump out 160 million liters of beer last year, Shestopalov said in a telephone interview. He declined to specify how much the brewery was making, but said it had been renovated last year using its own profits.

Representatives of the LUKoil-Adygeya canning factory seemed upbeat that their somewhat anachronistic project would be a success.

In the two years since it opened, the factory has won several medals — including three golds — at the Moscow-based Products of Russia fair, director Dlekhuch said. The acclaim has helped attract domestic dealers and even led to some international contracts, with trial shipments of preserves going to Israel and Finland.

Dlekhuch said it was not just the positive feedback but also the "attractive packaging" that gave rise to the idea of promoting LUKoil through its affiliate's food products. Hence, the factory's goods are marketed in places where LUKoil has a strong presence — St. Petersburg, Murmansk, Nizhny Novgorod, Kirov, Vologda, Syktyvkar, Chelyabinsk and even at LUKoil gas stations.

But the biggest market remains Moscow. Major supermarkets, such as the Sedmoi Kontinent chain, carry some of LUKoil-Adygeya's products. The most popular ones, like pickled ramson or walnut preserves, can go for as much as twice the wholesale price.

"People buy them, so we order them," a manager at the Magistral supermarket in northern Moscow said of the products. "But I don't think anyone notices the LUKoil name on the jars."