- The ruble has risen in value, allowing Russian importers to cut prices.
- The Russian authorities have embraced parallel imports.
- While sales of other goods have fallen by up to 41%, wine has been far less badly hit.
- Where some brands have withdrawn from the market, others have moved in to take their place.
- The biggest hit to the Russian economy is yet to come, as the EU reduces its dependence on its gas, coal and petrol.
A month after the Russian invasion of Ukraine began, the future of the alcohol market looked apocalyptic. Economists were talking about a 15% drop in GDP during 2022. Exports of American and Australian wines were officially banned by the governments of both those countries. Moët Hennessy, Diageo, Pernod Ricard and Brown Foreman, whose marketing budgets were hugely important to Russian restaurateurs and retailers, all voluntarily exited the market.
Even so, the Russian market could have used the quotation attributed to the US writer, Mark Twain: “The reports of my death are greatly exaggerated."
“The reports of my death are greatly exaggerated."
Exchange rates turned out to be an unexpected ally for wine merchants. The ruble has been steadily declining in value for 30 years. But the lack of balance between imports and exports in 2022 led to an unexpected result. Whereas in February the dollar was worth 75.76 rubles, now it’s up to 56.31. The ruble is worth almost 30% more than before the war. As a result, in April-May many importers reduced prices, and current shelf prices are not much different from the ones before the war.
For importers of New World wines, the main difficulty was the boycott by international carriers. Eight of the ten largest logistics companies refused to book ships for orders that involve Russia. Chinese and Russian logisticians were unable to cope with even a tenth of the demand that arose. But the market managed to adapt in new ways. Wines were, for example, shipped to ports in Georgia and Turkey while paperwork was handled by offshore companies set up by importers. Even more cannily, shipments destined for Kazakhstan, were, by prearrangement, refused by the Kazakh consignee while the cargo just happened to be in Russia. These are just some of the ways containers found their way to Russia.
An even broader measure was the EU's ban on Russian trucks. This action did not stop the trade, but redirected the profits to Baltic logistics companies. The Russian government had a few moves of its own. As of October 10 it will introduce a ban on the transit of European trucks through Russia. According to the new rules, after crossing the border, the trailer will be detached from the European truck and attached to the Russian one. This measure will not affect trucks carrying alcohol and food, but will raise transport costs in general.
If late last year, shipping a 40-foot container from Chile to a warehouse in Moscow cost about $5,500 ($3,000 by sea and $2,500 by land from Riga to Moscow), the cost is now around $11,000 ($6,000 and $5,000 respectively). For a wine producer, whose container cost $30,000, this led to a significant rise in the shelf price. Another often overlooked factor was the refusal of banks and insurance companies to insure shipments to Russia. Importers of premium wines, accustomed to using credit lines, faced a dramatic shortage of working capital.
While Champagne imports fell by 95%, whiskey by 70%, cognac by 60% and imported beer by 60%, the situation in the wine sector looks less dramatic.
Current status: contradictory signals
Although the Ministry of Economic Development predicts a GDP decline of only 2.9% in 2022, other macroeconomic indicators paint a different picture. Data from the Ministry of Finance for the second quarter shows a dramatic decline: total budget revenues fell by 26% year-on-year; non-oil and gas revenues were down by 29%; internal VAT plummeted by 41%. The collapse of these revenues and increased expenditure led to a huge budget deficit of 892bn rubles (about $15,65bn.) in July.
Fortunately for wine merchants, most of this drop is in non-food items. In August, food retail spending decreased by 2.3% and non-food retail by 14.0%. Russians are not yet cutting back on food, but they are already giving up buying new cars and TVs. But the biggest risks for the Russian economy may yet come. If the European Union agrees on a price cap for Russian oil, Moscow might loose its main source of income, which is far more important than gas or coal.
While the Customs Service no longer publishes data on imports, its status can be judged by indirect signs. The Association of Retail Trade Companies (AKORT), which includes the largest Russian retailers, writes that, during the summer, Champagne imports fell by 95%, whiskey by 70%, cognac by 60% and imported beer by 60%. These numbers can largely be attributed to the withdrawal by international corporations.
In the wine sector the situation looks less dramatic as an analysis of the number of declarations received by importers and wine producers suggests (see table below).
These declarations are mandatory for both importers and local producers. While not exactly accurate, they reflect the number of imports: e.g., in August 2022 out of 130 declarations only 26 were filed by Russian winemakers. It is very likely that the volume of orders decreased, but the total number of orders in 2022 was slightly higher than in the previous year.
What is a parallel import?
After the big brands left, Russian retailers asked the government for permission to import goods without the brand-owner’s agreement. Russian laws do not prohibit importers from purchasing brand X and importing it into Russia. The problem is further resale: if the brand is registered in Russia by the official Russian distributor, he can go to court and reclaim his lost profits. So far, the government has allowed unofficial imports of products like cars and smartphones. But in September, the Ministry of Industry and Trade not only favoured the inclusion of alcohol on the list, but also compiled a checklist of a hundred brands including Moet & Chandon, Cinzano, Martini, Hennessy, Jameson etc. The alcohol market regulator, Rosalkogolregulirovanie, proposed making Soyuzplodoimport, a quasi-state enterprise associated with Putin's sparring partner Arkady Rotenberg, the sole operator. If the government approves this scheme, instead of Russian branches of Moet Hennessy, Diageo, and Brown Forman, Putin's closest friend will receive the profits from the sale of their brands.
But even if the government approves such a scheme, two barriers remain:
- The first is technical. In order to get a declaration for wine and spirits, the importer needs an agreement signed directly by the producer, in which the latter confirms the compliance of the products with Russian technical regulations.
- Second, foreign intermediary companies that are involved in the import of sanctioned products can fall under secondary sanctions. This applies primarily to Australian and American wines, as well as European wines retailing for over €300.
Nature abhors a vacuum
While ‘parallel imports’ are still under discussion, new producers are taking the place of the departed ones. Thus, although Antinori have not officially declared their departure from the Russian market, the supply of their wines to Russia has actually stopped. At the same time another Tuscan producer, Mazzei, announced the launch of a cooperative effort with TD Abrau, Russia’s biggest sparkling wine producer which is also a major distributor. The agreement was marked by a luxurious press dinner at Moscow restaurant Butler, hosted by Mazzei’s brand-ambassador Dario Penino.
The coming months will show the effect of events like this and sales on the Russian market on the reputations of overseas brands...