Email This Post - Print This Post Print This Post

bacchus_titov

By John Helmer, Moscow

Boris Titov (centre) has proposed the revival of Crimean winemaking with at least $20 million in state budget funds each year for the next five. If everything goes according to his plan, the outcome by the end of 2019 will be a state winemaking corporation, ripe for privatization, with 140,000 hectares of vines producing a bumper harvest not seen since the Soviet Union. Even that is less than half the area of vineyards required to support the growing Russian consumption of wine, particularly of the champagne type.

Titov, whose official post in the Russian government is Presidential Commissioner for Entrepreneurs’ Rights, is the owner of Abrau-Durso through Abrau Durso Group Limited of Cyprus, and Solvalub Trading Ltd., a company registered on the Channel Island of Jersey. Abrau-Durso is one of Russia’s leading winemakers, producing premium-priced sparkling and still white wines and reds. For the archive on Abrau-Durso, read this.

Until mid-July, Abrau-Durso was one of the only shares listed on the Moscow Stock Exchange (Micex) to defy the downward trend which has been driven by the intensification of the Ukraine conflict, and the impact on the Russian economy of international sanctions. As the chart demonstrates, from the start of the year to mid-July, accelerating through the March accession of Crimea, Abrau-Durso gained almost 38% in value, adding almost Rb3 billion ($85 million) in market capitalization. The climax was on July 8, when Abrau-Durso’s share price was almost Rb145.

SHARE PRICE TRAJECTORY OF ABRAU-DURSO, YEAR TO DATE

ad_1y_chart
Source: http://www.bloomberg.com/

However, it then started to fall; from August 19 the decline has accelerated. At the current share price of Rb105.09, the decline has been 28%. By comparison, over the same interval the Micex index has oscillated within a 60-rouble range. Right now the index is now marginally above where it was on August 19. But the sustained market enthusiasm for champagne, and for Abrau-Durso shares, reported here in June, appears to have popped. The company is now worth Rb7.7 billion ($215 million) — no more than it registered in January. No company news, neither good nor bad, has been released since this generally positive audited report for 2013 was issued on April 28.

There has also been no bad news for Titov since he met with President Vladimir Putin (left) on May 25 to discuss tax breaks for entrepreneurs. A few days later, nothing worse having happened to Abrau-Durso, Titov accompanied Prime Minister Dmitry Medvedev (right) on a tour of the company’s newest plantings:

titov_putin

On August 24, Titov announced preliminary results of the report the government had earlier commissioned him to prepare on the future of the Crimean wine industry. The final report will be considered by government ministers this month. “We have proposed to establish a large corporation, which will be state-owned at the first stage, which would produce wine materials rather than operate on the wine brand market,” Titov was reported as saying.

His plan will replace imports by Russian winemakers of wine materials from Spain, Chile and Italy. “Russian vineyards’ supplies currently cannot cover even a tenth of the wine produced for sale in Russia. That is the reason we have proposed to establish a state corporation for the purpose of import substitution.” The state wine corporation should produce wine materials and also provide other services to the private sector, Titov said. In particular, it could be used to create a pool of machinery and equipment for vineyard treatment and logistics centres to dispatch grape products to other regions, he added.

The details of the plan have yet to be approved by Deputy Prime Minister Dmitry Kozak, who is in charge of regional development in general, Crimea in particular. According to Vadim Drobiz, director of the Centre for Federal and Regional Alcohol Markets (TsIFRRA), the Titov plan calls for a federal budget outlay of Rb4 billion ($108 million) over the next five years. Additional state support proposed would include tax relief for winemaking investment, and exemptions from the current law banning alcohol advertising. Whether the state funding would come from the federal Ministry of Agriculture’s special programme for Crimea, or from a separate Crimean winemaking programme, hasn’t been decided yet.

According to Drobiz, Russia currently cultivates 90,000 hectares of vineyards, including the Crimea. “We remain dependent on imports for the winemaking materials necessary to produce Russian-branded wine. Our own wine production is mostly bottled from bulk wine material imported from Italy, Spain, Chile. Wine from Russia’s own grapes is not enough to meet consumer demand.”

According to Titov, “growing your own grapes — for us, that’s philanthropy. It’s an occupation for the soul. It is not profitable.” Titov cannot have been talking about his own bottom-line. According to the 2009-2013 financial reports of Abrau-Durso, profitability has been steadily growing over the past five years. Financial reports indicate that in 2009, Abrau-Durso showed a net profit of just $2.5 million; in 2010, $7.6 million; in 2011, $14.2 million. The rate of growth since 2009 has been 139% per annum.

ad_consolidated_statement
Source: http://www.abraudurso.ru/

According to Drobiz, the wine programme being developed now by the Agriculture Ministry has set a cultivation target of 140,000 ha, “but we need about 350,000 ha to support the wine consumption needs. Then the Russian market should establish a ‘healthy’ ratio of domestic and imported wine materials – 70% and 30%, respectively. If wine material will be supplied from domestic fields, it will improve the quality of mass-market wine. What will happen to prices is hard to say. For this development of Russian-made wines, we need at least a decade.”

Drobiz was asked if there are any alternatives to the Titov plan for a state winemaking corporation. “Generally speaking, there can’t be. You must realize the enormity of the task is beyond the power of private investors; that is what is most important. No private investor would be able to achieve the [production target] if, roughly speaking, we want to become a global producer; if we want to multiply the production of own grapes and wine. This is necessary too, because for some unaccountable reason Russia is feeding peasants from France, Italy and Spain. [We are doing this despite the fact that] the world is growing more fragile, and there is a growing risk of confrontation. I’m not talking about war, but about economic competition. Accordingly, since we have unlimited opportunities for our own production of grapes, it’s a sin not to take advantage of them.”

“Private investors cannot do it. There’s one simple reason: it’s too long a business. Roughly speaking if you plant a vineyard, the wine from this grape you will start pouring seven years later. And so here and now what you need is capital mass, a new, powerful volume of investment. Firstly, to revive the Crimea. Secondly, the Soviet Union did it — at least in Russia – in just over six years from 1952 to 1959. During those six years nearly two hundred thousand hectares of vineyards were planted. Although we then had [them] in Central Asia, Ukraine together with the Crimea, and Moldova, Georgia and Azerbaijan. In Russia the plantings were undertaken in the Krasnodar, Rostov, and Stavropol cluster of regions over six years. Private investors cannot accomplish this. Over ten years what will be needed is investment of at least one billion dollars.”

“For now the state is ready to create a state corporation. In the future, for sure it will be privatized, but that may be over 20 years away, maybe in 15 years’ time. But at the moment, the private sector has no such opportunity. So there is no alternative. It’s another matter what decision the government will take right now. Positively, I hope.”

Is Titov creating a state-funded corporation in order for Abrau-Durso to absorb it by privatization later on? “Definitely not,” Drobiz responds. “The project is too powerful — it will be too expensive for a single company. Most likely, the programme will be split into parts. For now it’s important to create production first. There is not going to be one winemaking plant. There will be dozens of factories.”

Why then is Abrau-Durso’s share price falling on the news? Mikhail Moshura, an investment relations spokesman for the company, said he believes the fall is connected with the general situation on the market. Dobriz concurs. “This is absolutely not connected with the activities of the company. All is well there. This is an effect of the negative excitement over the sanctions. The fact is that the company is not export-oriented – this is a company which sells products in Russia. Therefore, the sanctions won’t have a restrictive impact on its activities.”

Leave a Reply