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Posted January 09

War and wine

You don’t anger the powers-that-be with impunity. Not in Georgia. Remember Prometheus? He stole the sacred fire from the god Zeus and gave it to mortals. In punishment, Zeus had Prometheus chained for eternity to a rock in the Caucasus while an eagle picked at his liver every day. Too bad, lesser mortals tend to forget the lessons of mythology. Or the Georgian wine industry would have tidied up its act sooner, adopted stringent wine quality controls and clamped down on the sale of falsified Georgian wines in Russia - before the Russian authorities took matters into their hands and issued an embargo on Georgian wines in March 2006. While Spanish and Argentine vintners have been rubbing their hands with glee as sales of their cheap and sweet plonk to Russia have surged, Georgian wine producers have been wailing and gnashing their teeth. Wine exports have tumbled to less than a quarter they were before the embargo.

Try saying “Khvanchkara”, “Kindzmarauli”, or “Tsinandali”. These Georgian wines were to Soviet consumers what “Jacob’s Creek”, “Gallo” or “Yellow Tail” are to us: household names. Especially when sober “Khvanchkara” or “Kindzmarauli” rolled off Russians’ lips easily and made them dream of things most of them lacked: sun, sand, sea … and whatever else begins with an “s”. Georgia was the Soviet Union’s Promised Land, a land of golden beaches, majestic mountain ranges and scenic villages, where food was bountiful and living was easy.   

It is difficult to overstate the importance of wine for Georgia. Many experts believe that in this part of the world, wedged between the snow-capped Caucasus Mountains to the north and a desert-like wasteland adjoining the Azerbaijani border to the south, man turned the humble grape into wine as long as 5,000 years ago. Whether this is true or not, it only took a bit of myth-making and Soviet–style administration of scarcity for Georgian wines to obtain an almost magical cachet in Russia and become the drink of choice at family celebrations or gatherings of the party elite.

A friend of mine who lived in Moscow in the 1980s still remembers how hard it was to get hold of a decent and affordable bottle of Georgian wine unless you were friends with a Georgian fruit vendor who would sell you a bootlegged bottle of “Kindzmarauli” from below the counter, as they say. In those communist times, the Evil Empire (Ronald Reagan) may have been able to send her cosmonauts into space, yet when it came to alcohol her offerings were pitiful: there was vodka, beer of very dubious quality and wine from Georgia (in declining order of availability).

When Europe was divided by the Iron Curtain, communist countries only drank wine made in communist countries, which left Russians with wine made in the Soviet Union: namely Moldova, the Ukraine, southern Russia and Georgia. Most Russians like their wine sweet. Their needs were mainly met by wines from Moldova, which were so sweet that they made your teeth rot as you drank them. For the discerning minority of Russians, there were Georgian wines. Georgia only sold about a quarter as many bottles as Moldova to the rest of the old Soviet Union, but she got a better price for them.

Georgia has long been considered by Russia as her “near abroad” - a zone of influence that stretches from Eastern Europe to Central Asia. Hence the Soviet Union started exerting a powerful influence on the development and perception of Georgia as a centre for quality wine production as soon as Georgia was forcibly incorporated into the Soviet Union in 1922. Research has shown that Soviet planners in the 1930s restored indigenous varietals in Georgia, despite their inability to produce mass yields, while in many other regions of the Soviet Union they replaced indigenous varieties with more resilient and higher yielding Western varietals.

This is not to deny that for almost seven decades Georgia’s wine industry has been completely integrated into the Soviet economic system. Collective farms supplied the grapes to state-owned wineries, which made the wines and sent them to Russia for further processing.

 

Falsifying wine considered as one of the fine arts

Like Moldovan wines, Georgian wines were shipped to Russia in bulk to be bottled in Moscow and St. Petersburg. With 12 million and 4 million inhabitants respectively (out of a total of 145 million), those are the largest Russian cities. Imported bottled wine was mainly consumed there. Moscow, then as now, took the biggest share (60% to 70%), followed by St. Petersburg (10% to 15%).

Unfortunately, the Soviet system emphasised quantity, not quality, and during the decades when wine was made to the plan, communist winemakers turned falsifying wines into a fine art. As the demand for Georgian wine increased, they learnt to cheat, spiking grape juice with sugar to increase its alcohol content after fermentation, and then cutting the wine with water to increase production volume.

Adulterating wines was bad enough. What made matters worse, though, was whole scale fakery. Many bottles, sporting a Georgian wine label, did not contain any Georgian wine at all. Some wine makers carried things even further: they mixed up an alcoholic cocktail, laced it with artificial colours and flavours and called it Georgian wine!

By the 1980s, Georgian wine production was rife with corruption. Then crisis hit. It came by the name of “prohibition”. Mr Gorbachev’s anti-alcohol policies, in true Soviet fashion, knew only one instrument of curbing alcohol consumption, which was diminishing supplies. In Georgia, as in other Soviet republics, farmers were forced to “grub up” vines. In 1985, before prohibition, Georgia processed 564,000 tonnes of grapes. Five years later volumes were down to 434,000 tonnes.

When Georgia regained independence in 1991, her collective farm system collapsed and grape processing went downhill. The privatisation of these collective farms gave farmers small plots of land with low yields. Consequently, by 1995 there were only 38,000 tonnes of grapes to be processed – or 7 percent of the original volume a decade before.  

Those were the days when a new breed of men, whom Russians call “bisnesmeni” (derived from the English word “businessman”) could make their fortune and quickly acquire control over formerly state-run companies and industries. All the while Georgia was sinking deeper into chaos and civil war, bisnesmeni turned their country’s disintegration to their personal advantage. Today, no one cares to ask the question if the country’s new business elite has a past. Of course, it does. But as said, mum’s the word.

The bisnesmeni who made good for themselves are the pillars of society now.

Take Levan Vasadze, a 38-year-old Georgian businessman, whose personal wealth has been estimated at USD 500 million by the newspaper Georgian Times. Officially he calls himself “unemployed”, which may well be true as currently he only serves as chairman (and owner) of Bagrationi, the leading Georgian champagne house. In the past, he held high-ranking posts at the Russian conglomerate Sistema and Rosno, Russia's leading insurance company.

Although he has not sought an active role in Georgian politics yet, rumour had it that the Byronic-looking Mr Vasadze could succeed Mr Saakashvili as president before his current term is over. Given Mr Vasadze’s background and his close ties to the Georgian Orthodox church, the pious father of five would be a more Moscow-friendly candidate than Mr Saakashvili, … provided the two men can kiss and make up after their recent fall-out.

Or take Levan Gachechiladze who found his wealth (USD 10 million according to estimates) in wine. In 1994, at the age of only 30, he set up a joint stock company called Georgian Wine and Spirits (GWS). The company is one of Georgia’s largest wine companies and now wholly owned by French drinks group Pernod Ricard. At its peak – that is before the ban on Georgian wines by Russia - GWS sold an estimated five million bottles a year with a turnover of USD 15 million.

Never mind that Mr Gachechiladze’s first partner, a Dutch distiller, probably provided the funds to buy up wineries. Mr Gachechiladze had 49 percent of the shares (according to unconfirmed reports) and was in charge of running the company until 1999 when he was elected Businessman of the Year and successfully ran for parliament.   

That business elites often strive to become their country’s political elite is not just a common feature of former communist countries, it is a special feature of small countries. Mr Gachechiladze was not alone in moving into politics.

He was joined, albeit on a different ticket, by Prof Gogi Topadze, the leading shareholder of the beer company “Kazbegi”, whose personal wealth has been estimated at USD 50 million. Yet Prof. Topadze, 68, who was a director of a state-owned brewery before he became the major shareholder in Georgia’s number two brewing group Kazbegi, did not find parliamentary work to his liking and left after one term.

The portly Mr Gachechiladze, on the other hand, decided to make politics his new career. What a colourful one it has been, marked by erratic behaviour and petty squabbles, thus underlining the impression that Georgia’s political parties are simply vehicles for their leaders and their financial backers. Nevertheless, Mr Gachechiladze became “our friend” in the West, when Mr Saakashvili’s politics took a more authoritarian turn and Mr Gachechiladze decided to throw his hat into the ring in the January 2008 presidential elections. In the end he lost the election (with 27 percent of the votes) and with it some of his money. In order to finance his campaign he had sold his remaining 9 percent of the shares in GWS in December 2007 to Pernod Ricard. No financial details of the transaction were disclosed.

 

No turning west - yet

Many have wondered why after independence the 140 or so Georgian wine companies did not try to engage in western markets in earnest. This sort of question ignores the deep economic interdependency between Russia and its former republics. To the extent that Georgian wine producers depended on sales to Russia for their livelihood, Russian bottlers depended on Georgian wine supplies to stay in business, explains Zurab Ramazashvili, the founder and chairman of The Telavi Wine Cellar. Also, why stray far, if you can command a relatively high price – USD 5 to USD 20 for a bottle - in Russia and the newly-formed CIS states for your wines?

Mr Ramazashvili knows what he’s talking about. He found himself stranded in Russia when Georgia became independent, having just finished his training as an otolaryngologist (an ear, nose and throat specialist). Going back to Tbilisi to practice medicine did not seem like a good idea. With the old Soviet medical system in disarray, would a doctor’s fees feed a family? No. Instead, Mr Ramazashvili went to business school and started playing the stock exchange. As he says, he was lucky. At that time, Russian bottlers suffered from a lack of Georgian wine supplies. So Mr Ramazashvili, who was born in Telavi, the centre of Georgia's eastern province of Kakheti, a region criss-crossed with vineyards where nearly everyone works in the industry, became a wine broker by default. There was no job alternative.

However, in 1997, when the Telavi Wine Cellar came on the market, a winery that had been founded in 1916 and gone bankrupt just two years after privatisation, Mr Ramazashvili assessed the risks and decided that the time was right to invest his money in a winery. Don’t be mistaken, Mr Ramazashvili is no bored-out-of-his-brains doctor who bought himself a hobby winery on his second career iteration. This is Telavi - not the Napa Valley. Mr Ramazashvili considers himself an owner who takes an active interest in the management of his winery. It was he who decided to bring in experts from Europe and Australia; to plant 270 hectares of vineyards in order not to have to purchase grapes of varying quality; and to upgrade the winery’s facilities with sophisticated, modern equipment.

Initially, Mr Ramazashvili’s plan was to supply bottled wine to Russia - not bulk wine. Even in these post-Soviet times, bulk wine from Georgia was customarily blended with lower quality Russian and Moldovan wines. While many of his Georgian competitors produced so-so quality wines, Mr Ramazashvili pushed for good quality wines. Success proved him right: In less than ten years, he brought his production volume up to 3.5 million of bottles of wine annually, 90 percent of which were exported.

Mr Ramazashvili readily admits that he did not have a clue how much of his own money – he says USD 5 million to date– he would eventually sink into the bricks and mortar of his winery. Perhaps he would have thought about it twice had he known that he too would be hit hard by Russia’s embargo on Georgian wines with his sales dropping to 1.5 million bottles.

 

The wine war

The Russian import ban of Moldovan and Georgian wines began in late March 2006. The embargo was issued after Russia’s chief medical examiner had found heavy metals and pesticides in Georgian and Moldovan wines and falsified alcoholic products labelled as wines.

Wine producers in both countries were up in arms: Wine trade with Russia was responsible for 80 percent to 90 percent of their total wine exports. The Georgian government was quick to blame Russia for using the wine embargo as a stick to punish Georgia for moving closer to the European Union and the United States. Admittedly, the embargo may have been politically motivated, but you cannot really blame Russia for monitoring if her food safety standards are upheld. And while we are on the subject, neither Moldova nor Georgia disputed the findings of Russia’s chief medical examiner.

Russia’s embargo could serve as proof of my thesis (see Brauwelt International 6/2008) that business – or the deterrence of it – can be a continuation of war by other means, were it not for the fact that Georgia’s wine producers should have seen the embargo coming. Sorry to have to say it, but they were really asking for it.

Only a fool would ignore the advice that “you don’t anger the powers-that-be with impunity”. Certainly not if they are called Russia and 90 percent of your wine exports go there.

According to Georgia’s Department of Statistics, wine was the country’s number two export commodity in 2005 - the year before the embargo came into effect. The sad thing is that the number one export commodity was scrap metal – obtained from factories that had gone out of business following the collapse of the Soviet Union. In 2005, wine represented almost 10 percent of Georgia’s exports and was valued at USD 81 million. That year 41 million litres of wine were sold abroad, 36 million litres to Russia, followed by the Ukraine (2.8 million litres) and the U.S. (660,000 litres).

The following year, wine exports declined to number nine position and USD 41 million. Volume sales dropped to 15 million litres as exports to Russia hit a low of 8 million litres.  

In 2007 wine did not figure among the top ten export commodities any longer. Georgian wineries only managed to sell 9 million litres at a value of USD 29 million outside their country, more than half of it to the Ukraine (4.9 million litres), followed by Kazakhstan (1.1 million litres) and the Baltic States (660,000 litres).    

Some eager government official may have polished the statistics here and there, yet the long and short of it is that within two years, revenues from wine exports have more than halved. Even if we accept that money in the Caucasus follows a straight path – it always ends up in the same pockets – some of the money must have tickled down to those who really needed it. Small wonder the Russian embargo had an immediate and painful effect on Georgia’s wine industry and probably pushed 70 or so wineries out of business.  

Russia knew that the ban would tweak Georgia’s pride more than it would hurt Georgia’s economy. Agriculture has not ranked highly with Georgia’s President Saakashvili, if the “topple rate” of his ministers for agriculture – on average one per year – is anything to go by. Mr Saakashvili wants Georgia to be the next Panama, a country thriving on financial services and the transit fees for Caspian oil transported across her pipeline. Agriculture’s contribution to Georgia’s GDP has been declining for years. So, what are USD 81 million for wine exports out of a total GDP worth USD 6 billion (figures for 2005)? The answer is: “Peanuts”, especially if only two dozen Georgian wineries and their owners, many of whom might be Russian, benefit from the bulk if it.

With the wine industry not receiving the attention it needs, it should not come as a surprise that Georgia’s wine law seems like a half-hearted effort. Although the Food and Agriculture Organisation of the United Nations (FAO) prides itself in having held the government’s pen when it came to drafting the wine law, many experts complain that the law lacks one vital element: compulsory and consistent controls. The legislators, who penned Georgia’s wine law in 2002, bowed to international standards and instituted an appellation of origin labelling system, which provides details about where the wine comes from, the grapes used in it and how it was produced. However, these self-same legislators showed little enthusiasm in setting up a control system that would help enforce the law.  

On behalf of the German federal ministry for economic cooperation and development, the German Development Corporation (GTZ), a donor agency, has spent several millions of Euros since 2003 to help Georgia establish a wine quality system worth the name. In 2006 GTZ even subsidised an accredited wine laboratory in Tbilisi. Still, when the funded project came to a close at the end of 2008, the Georgian government turned down the offer for a German-Georgian public-private partnership for wine which would have continued to work on quality, control and legislation issues. No reason was given.   

In retrospect, it is remarkable for how long Russian authorities have turned a blind eye on Georgian wine producers and their shady Russian partners and allowed them to flood the market with falsified Georgian wines. The amount of counterfeited wine sloshing about Russia must have been huge. Only when the FAO estimated that nine out of ten bottles of all exported Georgian wine are falsified, including those that travel to European and U.S. markets, Russia knew she had to act.  

 

What’s next?

Three years into the embargo, experts reckon that Georgian wine producers have 65 million litres of unsold wine in their tanks. To wag a finger at them and scold them for not having entered European markets sooner misses several points. It’s not as if Europe has been waiting for yet another wine producing country wanting to sell huge amounts of wine in the premium price bracket. For one, the European Union itself is suffering from a surplus of unsold wines, amounting to more than 13 million hectolitres or about 1.7 billion standard-size bottles annually. For another, potential price points for Georgian price wines are much lower here than in their traditional markets. Georgian vintners were shocked when they travelled to Germany and saw that quality wines were sold for as little as EUR 2 per bottle in supermarkets.

This brings us to Europe’s powerful supermarket chains. The Tescos, Carrefours and Aldis that command most of the wine sales probably served as the biggest turn-off to Georgian wine companies. As Mr Ramazashvili points out, most of Georgia’s wine producers are too small to supply a supermarket chain with their wines. Even if they grew big enough, which guarantee would they have that their wines would be stocked again the following year? Take GWS, for example. Although GWS is owned by the world’s number two drinks group Pernod Ricard, they do not sell their wines in Europe but, following the Russian embargo, have increased their marketing spend  in the Ukraine, Kazakhstan and the Baltics. Why? Apparently, whatever profits GWS could make in Europe would not justify the effort to adjust their sweet and semi-sweet wines to European palates. Or as Mr Ramazashvili puts it: Only when consumers in the Ukraine, the Baltics and Kazakhstan adopt western European preferences, will Georgian wine producers supply wines that can also be marketed further west.   

This is not to say that entering the markets in the former Soviet republics of Kazakhstan, the Ukraine and the Baltics has been a smooth ride. Georgian wines may still enjoy some prestige there, but they have to compete with wines from Europe and the New Worlds that know a thing or two about viticulture and marketing. Besides, the Ukraine has become a rather crowed market after the Russian embargo. Everybody is there, says Ana Beriashvili, 25, and Director of Operations at GWS.

It does not help that prices for wine in the Ukraine are low and distributors are well aware of how desperate the Georgians have become. It’s not unheard of for restaurants in Kiev, the Ukraine’s capital, to charge Georgian wine companies a listing fee of USD 25,000 per year. Ukrainian restaurateur bisnesmeni evidently want their cut from the Georgians’ miseries. 

There is no alternative: Georgian wine producers have to turn West eventually. The more progressive wine producers like the champagne house Bagrationi have done so already. Bagrationi’s owner, Mr Vasadze, hired experts from Germany to bring his company up to international standards, technology- and marketing-wise. Drawing on its prestigious name – Bagrationi is the Georgian royal family’s name – and its long history (since 1882), the present management aims for Europe’s high-end markets with Bagrationi’s sparkling wines. Having committed USD 15 million to this long-term project, Bagrationi hopes to sell 5 million to 10 million bottles of sparkling wines by 2012. Unlike its three domestic competitors, Bagrationi has a local market to speak of. Thanks to focused marketing investment, 75 percent of the 2.5 million bottles it produces today are emptied in Georgia.   

All the same, Georgia’s wine producers secretly hope that one day soon Russia will lift her embargo. In January this year it was reported that the Georgian ministry of agriculture sent an official appeal to Russia's chief medical examiner, with a request that Moscow allow Russian businesses to import and sell Georgian wines. This is not the first time the Georgian ministry has made that appeal, but this year Tbilisi hopes for a more positive response – irrespective of last year’s war. What has nourished high expectations in Tbilisi is the Russian chief medical examiner’s recent remark. He said that there should not be any link between wine sales and politics, if Georgian wines meet Russian health standards.

Georgian vintners should know that returning to the Russian market will be an uphill struggle. Not only will they have to overcome the anti-Georgian attitudes many Russians now have, but they will have to deal with a decline in consumption, driven by the economic crisis in Russia and increased competition from New World wines. In November last year a rumour made the rounds among Georgian wine producers that Chilean vintners were supplying bulk wine to a Moscow bottler at less than EUR 0.30 per litre, including transport.

Perhaps the fate of Moldovan wines could serve as a warning. A year after the ban was imposed, Chisinau was able to show that it had dealt with the problems and thus was allowed to export its wines to Russia again. Although Moldovan wines have improved their quality as well, they have not been able to recover their earlier market share.

Looks like the last chapter on “War and Wine” awaits to be written.

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