Georgian Wine Industry: Implications of a Russian Embargo

Russia has certain economic leverage over Georgia, as last year Georgian exports to Russia accounted for around 15% of total exports by value. A disproportionate amount of Georgian exports to Russia are wine, brandy, foodstuffs, and mineral water. The threat of a renewed trade embargo has people in Georgia’s agriculture, beverage and food sectors worried. A review of export data reveals that, should a comprehensive embargo on Georgian wine exports to Russia be imposed, there will be winners and losers in this scenario.

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The imposition of “special controls” on eight Georgian wineries by the Russian Federation’s sanitary authorities is thought to be a “shot across the bows,” to warn the Georgian government and Georgian people that anti-Russian sentiment will have economic consequences. That the government of the Russian Federation may have contributed to these negative sentiments through its actions is beside the point; Russia has certain economic leverage over Georgia, as last year Georgian exports to Russia accounted for 15% of total exports by value. A disproportionate amount of Georgian exports to Russia are wine, brandy, foodstuffs, and mineral water.

The Georgian wine industry’s vulnerability to trade embargo by Russia stems from several issues:

• Despite 13 years of urging by two government administrations to aggressively diversify markets, many wineries have opted to “pick the low hanging fruit” and reactivate their old trading networks in Russia, and excessively rely on a single market.

• The brand recognition of Georgian wine in general, and individual brands, outside the former Soviet Union, is still rather weak (although this is improving steadily).

• Georgian wines are rather expensive compared to rival products. This is a feature of the fragmented supply chain, lack of vineyard mechanization and hence high production cost of grape, fragmented processing base, and poor economies of scale.

• Chaos in foreign land ownership regulation has driven potential foreign equity investors out of the estate winery segment. Estate winery owners seeking to expand have had to rely on government grants and bank debt, instead of equity investors.

• Without access to foreign capital, consolidation in the industry has stagnated, with a knock-on effect on economies of scale.

In 2018, 245,000 tons of grape were processed by 292 winemaking companies; for a country with a tiny domestic consumption base, that is a lot of wineries. By comparison, La Rioja in Spain has 600 wineries drawing grape from 12,000 growers and 45,000 ha of vineyard, but it is at the heart of an enthusiastic wine-drinking country of 47 million people with huge loyalty to that appellation. The availability of various grants and subsidized loans over the past five years has enticed many urban professionals to mortgage their urban properties and engage in their dream of owning a small winery or vineyard with borrowed money. Most small-scale wineries have little capability to invest in brand development and distributor search outside Georgia, other than basic social media presence and participation in wine fairs with government co-funding. Formation of marketing co-operatives amongst clusters of small wineries has not yetbeen very successful.

On the bright side, quite a number of wineries owned by prudent businesspeople have turned down relatively easy money in the Russian market since 2013 and invested heavily in expanding in non-traditional markets. Mid-sized winery Giuaani from Manavi has its own wine shop in Urumqi, Xinjiang Uyghur Autonomous Region, China. Large winery Tblvino for some years maintain that Russia is only a modest part of their total turnover. Boutique negociants like Mukado have established their own online wine trading platforms in Japan and China with local partners, and coupled with substantial in-country promotions, are making satisfactory progress in those markets.

Analysis of the past five years’ export data is sobering. The reliance on the Russian market for absorbing Georgian wine production is substantial, over 60% in 2018.

It is apparent also that Russia has been absorbing much of the lower end of Georgian wine output, as indicated by average price per liter. It is also interesting to note that prices into the East Asian market have softened in the past five years, but most wine-exporting countries to China have noticed this trend, with the exception of New Zealand and Australia.

On the bright side, the East Asia market for Georgian wine has quadrupled in dollar terms in only five years. That is not an unusual growth curve when a product is well-promoted, and priced and positioned correctly in that part of the world. Given that the East Asia wine market (ex-Japan) is still growing quite fast, and presuming that investment in brand recognition and distributor search continues to be effective, the East Asia market for Georgian wine could conceivably quadruple again in another five years. That would account for about $100 million in exports, almost the same as what Russia accounts for now. I am familiar with one respected large-scale winery owner who claims he could sell his entire output several times over in China, as his brand is well-developed there, and he has been turning down quite lucrative Chinese offers for his entire output for some years in order to maintain his presence in Europe and some other markets. Companies like his are well-positioned to survive and thrive in the wake of a Russia embargo.

One note of gloom is that a substantial proportion of Georgia’s wine output is of rather basic quality table wine destined for Russia, which is not competitive with French, Spanish or Italian table wines which deliver well on the price/quality spectrum. The sanctions Russia had imposed on EU wine exporters left Georgia in a privileged position in this segment of the Russian market, and these types of wines may have trouble finding a home in another market, especially as they are mostly white (East Asian markets are predominantly red).

The CIS-ex Russia market has not shown much growth in the past five years, but weak currencies (and war in Ukraine) have not been helpful.

The EU market is showing slow and steady growth, mostly in the Baltic States, Poland, and Germany. That trend should continue. From a very low base, the US market is accepting more and more Georgian wine, and a Free Trade Agreement with the USA should assist that process.

It is to be hoped that the current intimidation of Georgian exporters by a key export country’s government does not persist and that normal trading can continue. Should an embargo eventuate, there will be a substantial disruption of the industry for 5 years or more as Russia-dependent wineries struggle to place the product in non-traditional markets. More prudent operators with existing diversified markets will be in a position to capture underutilized grape supply chain at a more reasonable cost and to acquire distressed or bankrupt wineries and vineyards to expand their business and improve their economies of scale.

If faced with a crisis, the National Wine Agency will have to prioritize its marketing activities based on the fastest return on investment. Activities in Europe and CIS-ex Russia may have to be de-emphasized in favor of faster-growing markets. Investment in brand development and recognition, distributor search and in-country promotional events in East Asian markets, with both government and private companies covering the costs, should balance supply and demand faster than pursuing market share in mature markets with a surfeit of their own quality, inexpensive wine.

About the author:

Simon Appleby is an Australian veterinary scientist and agronomist, and has been operating Hong Kong-based agribusiness group Yu Feng Nong Holdings since 1997. His companies are engaged in M&A consulting, agricultural engineering, farm and asset management.

By Simon Appleby