By John Helmer, Moscow
Russian consumption of wine, beer and vodka declined during the last economic crisis in 2008 and 2009, and the early signs are that this is happening again. But cognac is in a very special category. All the alcoholic drinks, but one, respond to the availability of money in Russian consumers’ hands. When the supply of money dries up, and consumers are thirsty, they opt for moonshine. But even that obeys the laws of money supply and demand. Cognac, however, is a type of currency itself. The volume of cognac sales goes up when the value of bribes is rising.
Last week, the government regulator RosAlkogolRegulirovanie (RAR) announced that it has decided to raise the minimum price in retail of a bottle of domestic brand champagne (0.75l) to Rb115 ($3.71). The move, which follows an earlier one in 2010 to raise the minimum retail price of vodka to Rb125 (for 0.5l), has been requested by the sparkling wine producers association. The objective is to make it easier for the regulators to stop the sale of illegally produced champagne which is averaging Rb99 a bottle. At that price, it currently commands about 40% of the market. When the vodka minimum was raised, the effect, according to the experts, was to drive about one bottle in five of moonshine vodka off the market. A plan to do the same for still wine is under consideration at RAR at present.
The weather has also been hurting the price of domestic sparkling wine, according to Abrau-Durso , one of the top-5 producers and vignerons in the Russian market. Says Vitaliy Ryazantsev of Abrau-Durso, no reduction in output or sales has been observed. But “in general, the situation in the Krasnodar region was quite difficult for our colleagues and neighbours , who are engaged with still wines, and whose vineyards are located in open areas. This is because the winter was very cold. In Novorossiysk [where Abrau-Durso is based] there was an ice storm that froze everything. Part of the vines suffered and yields fell, and therefore reduced the volume of wine produced. The same has been true in western Europe. But the Abrau-Durso vineyards are located in a micro-climatic zone which is protected by the mountains and the sea. They are in a valley, with a milder temperature, and they are not affected by the frost.”
Abrau-Durso, he says, expects to harvest the volume of wine grapes this year as it planned for a year ago, with the same yield of 2,500 tonnes per hectare. “This corresponds to the plan made in 2011, so there were no crop losses.”
The stock price of Abrau-Durso, listed on the MICEX exchange since April of this year, has been fizzing upwards, apparently recession-proof, at 24% so far. At best, Russia-wide consumption of sparkling wine has been growing this year at a rate of between 1% and 3%.
SHARE PRICE TRAJECTORY FOR ABRAU-DURSO SINCE APRIL 2012:
Vadim Drobiz is the director of the Moscow-based Centre for Research on Federal and Regional Markets for Alcohol (TsIFRRA) and the leading independent expert on the market trends. “Firstly, indeed, vodka production has been growing this year by 12%, as reported. But we forget that our production has been reduced since 2008 by about 7% per year on average. In 2010 output fell by 6%. Then in the past year it fell by 11% because of licensing and regulatory problems. So, if you take that fall and the increase of 12% this year, it appears that in 2012 we are still down by 7.5% relative to 2010. In 2011 we have fallen into the pit, and now we are just getting out of this hole, but declining slowly. That means there is, in fact, no growth for vodka.”
“As for wine, indeed only champagne is gaining at 3% for consumption. But the consumption of wine produced domestically is falling. This is related to the crisis in the first place, the world crisis, which has been decreasing wine production primarily, and also the consumption of beer. We are not unique in this. In Belarus beer production has fallen by nearly 10%. Over four years Ukrainian beer consumption has fallen by about 14%. In Russia since 2007, we have seen production decline by 10%. On the other hand, beer consumption here rose in 2011 by 7.5%. Therefore, there is nothing happening in the beer market which you can describe as catastrophic.”
“In 2007 beer consumption had jumped to 81 liters per capita. That rate of growth did not happen in any other country of the world, and it never will again. There were especially favourable conditions created for the beer market. Then a slight decline began, associated with demographic problems. On to the market were appearing two to three times fewer young people than before – 17 to 18-year olds. Since the 1990-97 period far fewer children have been born. So now there are fewer of them to start drinking beer. Even with last year’s growth average per capita beer consumption is back to 76 liters. So in fact, there is no growth in consumption over the 20-year period.
“Beer prices are also rising slightly. This is related to the fact that there is a small but increasing component of excise duty. In 2009, on a bottle of beer there were 1.5 rubles in excise. In 2010, the excise tax was 4.5 rubles per bottle, and consumption almost didn’t decline. Now each year there will be an increase of about 1,5 rubles in excise duty. But this still leaves beer as the cheapest alcoholic beverage, with which no one competes.”
“Unfortunately, we still have falling wine consumption. This is not only due to the [economic] crisis. After all, in the post-Soviet period we lost the old wine and vodka framework which had been formed in the Soviet era. Then we drank much more wine — wine at more than 20 liters per capita per year. And now, it’s no more than 6 liters per year, or three times less. Our vineyards are also three times smaller. This is related to the fact that the state does not stimulate the growth of wine consumption. Therefore, consumption of vodka and its surrogates and other spirits is increasing. This is also one of our biggest problems today.”
“But cognac production is growing notwithstanding. Between January and September production grew by 29%. However, cognac is a special segment of the market. It cannot be compared with other products. It should be compared with whiskey, rum, gin, tequila, or premium vodka; in other words, it is a more expensive product. Even in the low-price segment of the cognac market, we have the cheapest cognac costing about 240 rubles ($7.74). This is not a mass consumption product. And the volume of cognac is almost fifteen times less than the consumption of vodka in Russia. So cognac lives and develops by its own laws.”
“Every year we are seeing increasing consumption of cognac. And partly it is a competitor, like whiskey, rum, gin and tequila, which competes with vodka and takes a small part of the vodka market away from its customers.”
“But there is something else — cognac is a special product in the following sense. Cognac is a gift product. It is the product for passing bribes in Russia. This is traditional, and large volumes of cognac are given away as gifts and bribes. You can safely believe that corruption in Russia is growing, because the evidence is that the production of cognac has sharply increased. That’s because cognac is primarily the option for gifts and bribery.”
Not without irony in these circumstances has there been a change of ownership of the leading Russian cognac producer, KiN, whose brands include Kinovsky, Old Town, A. Bergerac, Matryoshka and Katyusha. The distillery and associated assets were controlled by a holding called Business Combinations, which in turn was owned by Andrei Borodin through his Bank of Moscow. Borodin lost the bank to VTB last year , and became the target of prosecution in Moscow. In July of this year, VTB sold the cognac business to an unidentified buyer for an undisclosed price.