The structure of the pharmaceutical industry and distribution network has changed quite radically in the course of the past decade. Before the break-up of the Soviet Union, domestic production levels covered a substantial portion of domestic pharmaceutical consumption, with the balance made up by imports from Central European countries. The break-up of the Soviet Union caused massive disruption to pharmaceutical production, however, and whole areas of production were confined to newly independent states (Russia, Belarus and Ukraine, and to a lesser extent Kazakhstan and Kyrgyzstan). The industry that remained within the Russian Federation (as elsewhere in the former Soviet Union) was largely out-dated and poorly maintained. With the rapid transition to a market economy, a number of factors combined to make pharmaceutical production unprofitable and cause a drastic decline in production levels: sharp increases in the price of raw materials, energy and transport; disruption of cooperative links between plants; severe resource constraints; lack of customs barriers on imported substances; increased competition from imported products; and tax privileges for suppliers from abroad. As substance production within the Russian Federation dropped by 60% in the period to 1997, local producers increased prices dramatically, making them uncompetitive compared to imports.

The volume of production dropped by a factor of five, according to a report entitled "The State of Production and Realization of Medicines in the Russian Federation in 1998" issued by the Ministry of Economy and the Ministry of Health. By 1997, 120 pharmaceutical factories, 21 plants involved with substance production and 42 research institutes synthesizing immuno-biological preparations were working at 25-50% of capacity, with 70-90% of equipment nearing the end of its useful life.

In the meantime, the volume of imported substances and finished pharmaceutical products increased dramatically. By 1997, 93% of producers were relying on imported substances with the proportion of imported products rising to 65% in the late 1990s. Whereas in 1999 domestic production rose to 44.4%, in 2001 it fell once more to 33.6%. At the same time, consumer prices of pharmaceuticals increased dramatically. While production collapsed, domestic producers raised prices to international levels with the result that domestic output measured in US$ increased by 150% in the four years to 1997. In February 2002 retail prices increased by 10% compared to the same period of the previous year.

In 1997 domestic pharmaceutical production showed some improvement, and profit margins of the top companies were very satisfactory. The total value of domestic production in 2001 accounted for $916.1 million, representing a 4.5% increase from the previous year. Some producers have initiated modernization and installation of new production facilities. An estimated 70% of pharmaceutical producers have been privatized. By 1997, pharmaceutical consumption had reached 70% of pre-reform levels.

The major pharmaceutical purchasers are the federal, regional and municipal authorities, hospitals and polyclinics, pharmacies and consumers. The role of the federal government as purchaser, while declining, is still significant because of the volume needed to carry out its nationwide programmes (e.g. the Diabetes, Mother and Child, and Vaccination and Prevention Programmes, etc.). Following independence, when the centralized purchasing system was abolished, regions developed their own procurement systems. Pharmaceuticals used by hospitals are purchased by territorial mandatory health insurance funds or through the hospital budget. Since the early privatization stage following the breakdown of the Soviet Union, the insurance funds began contracting pharmacias  (drug supply agencies) to supply hospitals with the needed drugs.

Efforts are being made to achieve economies of scale by eliminating the older practice of hospitals purchasing their own drugs. Increasingly, insurance funds buy drugs on the basis of tenders, with pharmacias as one class of bidder, along with private wholesale/distribution companies, which often win the bid.

The system of pharmaceutical distribution is characterized by a high degree of fragmentation. There are about 3500 pharmaceutical wholesalers. Fewer than 30 of these offer nationwide coverage, some with vertically integrated structures, and some providing their own manufacturing capability either within Russia or the CIS, or their own pharmacy network in larger cities. About 10% of wholesalers are importers, while the remaining 90% either deal exclusively with domestic drugs or re-sell drugs imported by the other wholesalers.

Wholesale distributors can be classified in four groups: (a) pharmacias (see above) which supply their regions with drugs for use in public facilities and also function as private wholesalers to the retail pharmacy sector, as well as municipal chains of pharmacies and clinics, usually managed by carry-over employees from the old system; (b) privatized formerly state-owned companies, also managed by former state employees; (c) new, profit-driven private companies, some of which have become nationwide vertically integrated structures; (d) international companies with western-style operations, all based in Moscow, many of which run their own pharmacy networks.

The Russian Federation has an estimated 16 000 to 19 000 pharmacies, of which 23% belong to regional governments, 60% to municipal authorities, and 17% are private. There are also about 50 000 pharmaceutical kiosks. The number of retail outlets has been growing very rapidly.

Pharmaceuticals are provided for inpatients by the hospital, while outpatients must purchase them from pharmacies. While inpatient prescription costs are meant to be covered from the hospital's budget or through the case payment made by the insurer, most inpatients have to purchase their own drugs, and it is estimated that 80% of inpatient pharmaceutical costs are paid for out-of-pocket. This reflects, for the most part, the financial constraints facing hospitals. With the exception of core drugs needed to meet public health requirements (i.e. insulin, vaccines, and TB prophylactics), hospital directors acquire the bulk of the pharmaceuticals used through commercial channels and must therefore pay market rates for goods supplied. Under these conditions, inadequate hospital budgets and frequent irrational drug prescribing lead to shortages within hospitals even when drugs are available in the private sector. The inability of federal, regional and local authorities to pay for supplies to hospital providers in a timely manner is, in turn, an additional reason for the relatively poor financial performance of domestic pharmaceutical producers, which supply hospitals but then have difficulty collecting payment.

At the retail level geared to outpatients, some pharmacies were sold to the private sector immediately after the establishment of the Russian Federation. Most pharmacies initially remained formally state owned, but due to a lack of public funds began to operate on private finances. At the same time, completely new private pharmacies emerged. These "private" enterprises now operate on a for-profit basis, purchasing drugs directly from importers or drug companies and selling them on. Notwithstanding their new status, they are obliged to supply drugs free of charge to vulnerable groups and then to apply to local government for the reimbursement of costs. Many are reluctant to comply with this requirement because of the delays in securing refunds. Most areas still have a state-owned pharmacy which should guarantee provision, but these outlets often experience difficulties obtaining stock. State pharmacies stock about 500 to 700 items, in contrast to private pharmacies which stock over 2000.

While the availability of drugs has increased through imports, drug affordability has fallen and many Russians are unable to purchase needed medications. It appears that overall access to prescribed medications is improving. However, a series of surveys conducted since 1994 show that the percentage of respondents able to get all their prescribed medications was 62 in 1994; 70 in 1995; 75 in 1996; and 78 in 2000. In spite of the improvement, over one in five patients are still unable to obtain their prescribed medications. Whereas unavailability of drugs and lack of money have been the two most important reasons cited over the years for this inability, lack of money has become increasingly important; this was the reason given in October 2000 by 66% of urban inhabitants (compared to 20% in 1994) and 70% of rural inhabitants (compared to 25% in 1994) who were unable to obtain their prescribed medications. Most medications are still obtained from state pharmacies (74% in urban areas and 84% in rural areas in October 2000), but commercial pharmacies are increasingly important as pharmaceutical outlets.

Of all the respondents who were able to get some or all of their medications, 15% were permitted a full discount.

According to other 1998 survey results, half of all surveyed households responded that at least once in the course of a year a household member was unable to afford a recommended drug, while over 20% of households had a family member go without a recommended cardiovascular drug.

It is important to distinguish between actual demand for pharmaceuticals, determined by the population's needs, and solvent demand, which is based on the ability of would-be purchasers (public authorities, health insurance funds, and consumers) to pay. Actual demand in the Russian Federation is influenced by the large proportions of the population comprising pensioners, the chronically ill, and those living in areas with poor air quality (an estimated 85% of the population), as well as by the high rate of infectious diseases. Solvent demand differs substantially by region, depending on local economic conditions, the finances of the regional and local authorities, and the income levels of the citizens. In the Russian Federation solvent demand is clearly lower than actual demand.

Consumption of pharmaceuticals therefore tends to be relatively low. In 1996, per capita consumption was said to be 33% that of Germany and 20% that of the United States. Furthermore, it was estimated that only 60% of the county's drug requirements were being met. These low levels of consumption relative to Western countries make the Russian market extremely lucrative for foreign pharmaceutical companies, many of which have been aggressively advertising, to the confusion of both consumers and prescribing physicians.

The number of drugs registered for sale increased from 5000 in 1992 to 12 000 in 1998. Currently the State Register contains 140 000 products, many of which are new to doctors. Such extreme liberalization of pharmaceutical products makes control impossible. By comparison, most western European countries manage well with a few thousand products on their drug formularies. Many of the pharmaceuticals being sold in the Russian Federation today have no proven pharmacological value whatsoever. Although there are such available sources of drug information as the national drug formulary, and the drug information compendium for all registered products produced under the auspices of the Ministry of Health, in many cases the most readily available information comes from commercial sources.

Hospitals similarly do not always have access to necessary information on drugs. The general public, unused to commercial pressures during the Soviet era, is now influenced by advertising, which reinforces the traditional cultural expectation that each consultation should lead to a drug prescription. The absence of any regulation of drug advertising has led to alarming practices: for example, codeine-based analgesics which should be sold only on prescription have been the subject of intensive television advertising and can be purchased at pharmacies and kiosks. Although drug advertising regulations are in place now, their enforcement is still insufficient. Further, the insufficiently developed quality assurance and regulatory system has allowed the market to be infiltrated with drugs that are restricted or prohibited elsewhere, or drugs with little or no proven therapeutic usefulness and imports of dubious quality from the Far East or eastern Europe. Prescribing doctors pay more attention to price and availability than quality.

The Association of International Pharmacological Producers held a meeting in Moscow in 2002, where it was estimated that counterfeit drugs in the Russian Federation accounted for about 12% of the prescription market in 2001, costing legitimate manufacturers about US $250 million per year. Laws against counterfeit drugs are weak, and penalties are light or non-existent. Counterfeit drugs cannot be confiscated and destroyed, and often find their way back into the market. Amendments made to legislation to deal with these issues have been pending in the Duma since 2001.

Regulation of the pharmaceutical sector has changed with decentralization and while this has brought some positive results, it is also less coherent than that of the 1980s. Responsibilities are divided between the Federal and regional levels. The Ministry of Health makes an overview of federal regulatory issues and monitors controlled drugs and imports of federal licensees, while local authorities oversee the local distribution network including pharmacies. Pharmaceutical manufacturers are subject to inspection by the Ministry of Health and Ministry of Technologies, Science and Industry for manufacturing standards, and by the san-epid network for sanitary conditions.

Drug prices are regulated by several mechanisms. At the federal level the Ministry of Health registers manufacturers' products and prices. After this, mark-up limitations are introduced, intended to hold down retail prices of pharmaceuticals. These limitations specify the allowable percentage of markup for both wholesalers and retailers. According to federal legislation, the maximum mark-up over the manufacturer's price is 25%, and retail prices should not exceed wholesale prices by more than 30% for drugs included in the list of essential drugs (the limit is slightly higher for other drugs). In practice, the mark-ups within these limits are the responsibility of regional authorities and therefore vary from region to region. In principle, mark-ups apply to the first importer, however, in practice there are various mechanisms by which mark-ups can be avoided for distributors further down the chain, resulting in mark-ups varying from 120 to 200%.

Whereas the Russian Federation generally lacks a coherent legislative basis for regulating the health care system, it does have a legislative framework and system of state control of medical goods imports, including a drug law, registration and certification, and quality control systems. According to Russian legislation, all drugs and biological products must be registered with the Ministry of Health at the federal level. Registration is undertaken by the ministry's Bureau of Registration of New Pharmaceuticals and Medical Equipment on the basis of assessments by the ministry's certifying agency, the State Inspection of Quality Control on Drugs and Medical Equipment. Gosstandart-authorized77 laboratories may also certify pharmaceuticals. Thus there is no lack of regulation at the federal level; in fact the system is heavily regulated. There are, however, problems with enforcement, irregular updating, etc.

The federal and many regional governments have taken steps to compile lists of essential drugs in an effort to promote access, especially for vulnerable groups, and cost-effective consumption of pharmaceuticals. In April 1996, the government adopted the resolution "On a list of essential and life-saving drugs", which are recommended for supply and use in public health facilities. This was also intended to boost domestic production, as companies producing these drugs receive tax exemptions. In practice the list also included a large number of domestically produced drugs not always in line with criteria for essential drugs. Hospitals and polyclinics are encouraged to restrict themselves to the administration of drugs listed as essential, but compliance is incomplete.

Various lists of essential drugs are developed and used for different purposes: in addition to the federal government, regional governments develop their own lists, usually an expanded version of the federal one and often used for supplying the public sector and for drug reimbursement purposes. The various ministries and enterprises running their own facilities (i.e. the parallel system) develop their versions, as do the larger insurance companies. The key criteria for selections are efficacy, safety and price. However, as getting a drug on a list implies guaranteed drug sales, bribery and backdoor deals are additional factors determining which drugs get included, as is the case in many other countries.

The federal government in recent years has attempted to take measures to support the pharmaceutical industry, and in 1998 the programme "Development of Medicinal Industry in 1998-2000 and up to 2005" was adopted. It proposed the organization of domestic facilities for the production of new substances that would allow 70% of pharmaceutical needs to be covered by domestic production. However, the programme has remained unfunded by the state budget. Increasingly, individual manufacturers are raising funds for their own development, with the longer-term goal of achieving good manufacturing practice (GMP) standards. The Russian GMP standard was approved in 1998 with a provision that implementation by manufacturers must be within five years. Although after this period non-compliant producers should in principle be closed down, there are very few manufacturers that have taken substantial steps toward implementation.

There are also attempts to encourage prescription of generic drugs. However, this is problematic for several reasons such as unreliable supply, extensive advertising and promotion of brand name drugs targeted at both patients and prescribes, as well as inadequate drug reimbursement and insurance schemes. Nonetheless, because of strong price sensitivity, the local markets are generally more receptive to generics than brand-names. There is no negative list as such.

Promotion of rational drug prescription and use has become an issue in several regions, as well as at the federal level. Tools such as national and local essential drug lists, drug formularies, and treatment guidelines have been developed and implemented in various regions. Competitive bidding has become a common tool for procurement of drugs for public sector needs and is supported by the legislative framework.

A federal centre for monitoring adverse reactions was set up in 1997 and is now a member of WHO's adverse drug reaction monitoring programme. The centre has good links with a number of regional drug information centres, however efforts are still required to establish countrywide activities.

Professional organizations such as associations of pharmacists, distributors and manufacturers are playing increasingly important roles in the regulation of the pharmaceutical sector. Substantial changes can also be observed in activities of various basic and continuing pharmaceutical education and training institutions, both public and private.

While efforts are being made to introduce the evidence-based medicine concept in the Russian Federation, there is a long way to go in this regard. The concept of pharmaco-economic evaluation of pharmaceuticals is also gradually being developed.

In early stages of decentralization several regions compensated for the lack of federal legislation by passing their own pharmaceutical legislation. This practice has gradually diminished and there is now a clear division of responsibilities between federal and regional authorities. Federal responsibilities are clearly defined by the federal drug law that covers the entire Russian Federation, while a large number of federal level regulations and decrees have been proposed as guidelines and recommendations for further adjustments by the regions themselves.

The regulation of new technology is largely in abeyance. However, this is less of an issue at the moment, if only because very little capital expenditure is being undertaken anywhere in the Russian Federation.

In theory, case payments are expected to include a component to cover the cost of routine acquisitions and equipment maintenance. Where providers want to invest in high technology or expensive equipment they are meant to apply to the insurance company or companies with which they have contracts for a grant to cover the costs. It is assumed that insurers will exercise control and only support purchases that correspond to health care needs in the area, with emphasis on primary and preventive medicine. In practice, insurance companies have neither been able to exert control nor to support capital programmes. In those areas where purchases have been made, they have been funded by local government out of tax revenues.

In those few areas that have had funding, there is no apparent control of purchasing policy. Imports are largely at the discretion of local funding bodies, licenses do not need to be issued either for the acquisition or use of new equipment, and the training of staff is left to the discretion of the suppliers.

Experience indicates that when funds are available local authorities respond to the demands of secondary and tertiary physicians in highly specialized niches and invest inappropriately and without regard to long-term strategy or the stated health needs of the population.