GEORGIAN WINE WAR — IS HANGOVER MORE POLITICAL THAN ECONOMIC?

Despite huge losses, Georgian wine merchants continue to suffer the consequences of Moscow’s March 27 ban on imported Georgian wines. Russian authorities claimed to be protecting the Russian consumer market from fake beverages. According to Gennady Onishchenko, Russia’s chief health inspector, more than 1.5 million deciliters of alcoholic beverages from Georgia were kept out of the Russian market in April and May. Georgian wine once controlled 9% of the Russian market.

Georgian vintners are unanimous in believing that a ban was the most serious economic blow Russia could inflict on the Georgian wine industry. The Georgian Chamber of Trade and Commerce has estimated the losses at $10 million. Before the ban Georgia received approximately $100 million annually from its wine exports.

Even if Russia lifts the ban little will flow to Russia soon. Some Georgian analysts predict that only Georgian wine producers supported by Russian capital would be allowed to resume exports to Russia. Experts also warn that Georgian wines would face considerable obstacles to reaching the European market, which they argue cannot replace Russia. “In the Russian market, Georgia’s wines enjoy instant name recognition,” but “there is no name recognition for Georgian wines in Europe,” said Kakha Gogolashvili of the Georgian Foundation for Strategic and International Studies.

Georgian Defense Minister Irakli Okruashvili’s harsh comments about Russia since the embargo have evidently set back the return of Georgian wine to Russia. In a televised interview in April, shortly after President Mikheil Saakashvili appointed him chief “wine ambassador,” Okruashvili bluntly spoke about the low-level of sophistication of Russian consumers, saying it was a market where “even fecal masses could be sold.” Okruashvili suggested that Georgia should impose its own ban on imports of Russian beer and other foodstuffs. Georgian Parliamentary Chair Nino Burjanadze made public apologies on Okruashvili’s behalf during a June 4 interview with Vremya novostei but it did not defuse the situation.

After the June 13 summit between Saakashvili and Russian President Vladimir Putin (see EDM, June 16), the Russian leader clarified that trade could resume once Georgian wines meet Russian standards. Putin emphasized that allowing Russian investors in Georgian wineries could be one way to ensure the requisite high-quality standards (see EDM, April 20). Putin’s statement again confirms the seriousness of Russia’s efforts to control vital branches of Georgia’s economy.

Shortly after the ban was imposed, Russian wine producers began to buy Georgian wineries. Using Georgian production facilities with grapes from their own vineyards should give them an advantage over the local vintners. Levan Koberidze, commercial director of the Georgian Wine and Spirits Company, Georgia’s largest wine producer, said: “We will push toward other markets and expand sales.” He admitted, however, “The impact is going to be heavily painful for Georgia’s economy.” The International Monetary Fund (IMF) mission to Georgia has estimated that Russia’s ban on imports of Georgian products will reduce Georgia’s GDP growth by less than one percent this year and next, and will contribute to a shortfall in external financing.

Georgia is likely to feel the full repercussions of the Russian embargo on wine this fall, during the annual grape harvest. Grapes are Georgia’s second-largest export and 70% of the crop has traditionally been sold in Russia. In Kakheti, Georgia’s leading wine region, 80% of the workforce is involved in the winemaking industry. Local wineries have already slowed or halted production, and the embargo might leave thousands of locals out of work, potentially turning them against Saakashvili’s government.

Some wineries are putting on a brave face, saying the government is seeking new markets. The government is trying to find new outlets for the grape harvest. One plan calls for construction of a grape-juice processing plant in Gurjaani (in Kakheti), which would buy 30,000 tons of grapes annually from peasants. The government claims this is the simplest way to cope with Russia’s ban on Georgian wines. In 2005, wine factories bought 75,000 tons of grapes from farmers. The grape juice factory could absorb nearly 60% of the export-oriented harvest.

“The Russians have cut off our wine market. But in response we are building in Kakheti a grape concentrate factory that will process, according to our calculations, 40% of the grapes. This year we will take on a much wider spectrum of markets, the Ukrainian market, Eastern European markets,” Saakashvili told an audience of business leaders at a charity dinner on May 26, Georgia’s Independence Day.

The Georgian government has undertaken a vigorous campaign to promote Georgian wine, including an inaugural Georgian wine competition on May 11-12. They also organized a Georgian wine festival in Ukraine and negotiations are underway with international organizations and foreign governments about exporting Georgian wine to new markets. The government has also announced tax breaks and plans to produce more “Europeanized” wines with non-traditional grape varieties.

During June 13-15 a delegation of the European Commission discussed wine issues in Tbilisi with Deputy Foreign Minister Valery Chechelashvili. He said that finding new markets for Georgian wine products represents “a fundamental priority in the field of trade.” Chechelashvili said the Georgian government is ready to invest in advertising Georgian wine in Europe. “Very aggressive advertising has been taking place in Ukraine, and I can say that in the first half of the year we sold 25% more wine than last year. These figures are significant, taking into account that Ukraine is the second market for us after Russia,” he stated.

Reportedly, the Georgian government has hired experienced PR specialists from abroad. However, the promotional campaign has been somewhat unusual. The Georgian government reportedly offered singer-actress Jennifer Lopez $500,000 to visit Tbilisi on Georgian Independence Day and simultaneously advertise Georgian wine. She declined the invitation.

During recent trips in Europe, Saakashvili and other officials have actively promoted Georgian wines. The president has dubbed Georgian wine a “liberty beverage,” calling the ban the price Georgia is paying for independence from Russia.

(Itar-Tass May 2; Vremya novostei, May 4; Rian.ru, NewsInfo, May 10; Georgia Today, May 11; Regnum, April 20, May 11, 24; Civil Georgia, May 19, June 16; ORT, May 30; Interfax June, 1; Kviris Palitra, June 5; TV-Rustavi-2, June 13; Trend, June 14, SKRIN Market and Corporate News, June 8; Messenger, June 20)