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By John Helmer, Moscow

If wine were an investment, like company shares, gold, or real estate, then you would expect the Russian oligarchs to put their hands into this particular till. But hobby vineyards and French chateaux aside, there haven’t been many. Still, Vadim Varshavsky’s Croizet cognac (Charente) has not proved to be as ill-fated as his steel business. Eugene Shvidler’s Chateau Thenac (Bergerac) is doing better than that with a range of wines selling for as little as £7.95, but as a business among Shvidler’s holdings it’s still small beer.

Thinking less of price than rate of return, the value of wine over the past decade has generated 15% per annum growth, according to the Liv-Ex Fine Wine Index. That’s equal to gold, but much, much better than stocks. Of course, most of the contents of wine caves is drunk, not traded. So the rate of return is a nominal one. That may be why wine doesn’t meet the swift payback standard of the Russian oligarchs, and why they haven’t taken positions in the Russian wine business as they have in pigs, fish, grain, farm land and fertilizers.

As the drunkard president, Boris Yeltsin was a visible advertisement for the value to be extracted from the grape. But his administration was disastrous for the wine-growing regions of southwestern Russia; they saw the destruction or abandonment of two-thirds of their vineyards as cheap imported and unregulated domestic alcohol flooded freely into the market. In June 2011, when Russian wine-growers presented the industry to the London International Wine Fair, they reported more than 40 specialized farms with a total planted area of 27,000 hectares of vineyards; and 26 wine producing companies. According to the Krasnodar region governor, Alexander Tkachev – himself a vigneron with his wife – the target is to replant vineyards up to 67,000 ha, roughly the level of 1984.

For the time being, the biggest man in the Russian wine business is Boris Titov (image). His Abrau- Durso, a producer of sparkling wines located in the Krasnodar region, issued a small initial public offering (IPO) on Moscow’s Micex exchange in April. Titov said the purpose was to start fixing the market value of his business before he tries selling it to foreign investors. The launch price was Rb5,307 and it is currently at Rb5,801 ($176). That’s a gain of 9% when the Micex index was going in the opposite direction, down 9.5%:

ABRAU-DURSO SHARE PRICE TRAJECTORY SINCE APRIL IPO:

MICEX INDEX OVER THE SAME PERIOD:

The Liv-Ex Fine Wine index makes a similar, if more subdued point: between the bust of 2008-2009 and the last year’s boomlet, the asset value has jumped 71%:

Does this mean that with a current market capitalization of Rb4.3 billion ($129 million) Abrau-Durso can look forward to a comparable acceleration in the increase of its share price, no matter which way the stock market goes? If as chief executive and control shareholder Titov plans, it doubles its production from 17 million bottles to 34 million bottles, and more than doubles its sales, can its asset value can beat the finer wines on the Liv-Ex chart?

Rye Man & Gor (RMG), a Moscow-centered brokerage with bigger enthusiasm than capital, is forecasting a target price of $318 per share – that’s up 81%. The RMG forecast is also predicting a slower rate of growth of output and sales than Titov, but with a larger share of sales to be taken by higher-value wine, and an expanding share of the Russian market at the expense of imports from France and Italy.

French winemakers were engaged at the start of the enterprise, when it was decreed into existence by Tsar Alexander II on land, near Novorossiysk port, owned by the Romanov family. They gave Prince Lev Golitsyn the concession to start producing domestic champagne. He hired the French, and by 1896 the first 13,000 bottles were released. True to its pre-World War 1 origins, the champagne was sweeter than is the conventional taste of the stuff nowadays. Soviet-branded champagne began appearing in 1920, and in 2006 Titov’s SVL holding took over the entire property.

Titov has made the champagne house safe against the property restitution claims of the surviving Golitsyn family, and their attorney, son-in-law, and would-be prince, Alexei Binetsky.

According to Abrau-Durso’s presentation for the Micex listing, in 2011 sales revenue was $99.6 million; earnings (Ebitda), $32.5 million, net income, $17.9 million. The growth rates compared with the 2009 results were 57%, 77%, and 162%, respectively.

The offer to investors is essentially that Russians will consume more wine as their gross domestic product per capita moves towards European levels, and as wine as a proportion of alcohol consumed grows from around 1% in 2010 to the European level of 25%. This trend also means that Russian drinkers are substituting wine for vodka; alternatively, the vodka drinkers are dying early deaths, and being replaced by younger but just as thirsty winos.

In the domestic market for wine, according to the right-side chart, still dry wine accounts for 57% of the total consumed, while sparkling wine comprises 25%. The latter volume is growing at 12% per annum, according to the Abrau-Durso prospectus, putting Russia now at 9th position in the top-10 champagne drinking table, just behind New Zealand and Australia.

Within the Russian market, Abrau-Durso says it is holding a 6.4% share of the sparkling wine market, by value of sales. It ranks behind Sparkling Wines of St. Petersburg and the import brands of the Bacardi & Martini group.

Titov is confident enough that the dynamic of more money in Russian pockets should translate into more consumption of Abrau-Durso products. So he’s taking a busman’s holiday. On June 21, President Vladimir Putin issued an order appointing Titov the federal government’s ombudsman for businessmen’s and entrepreneurs’ rights. Titov has announced that he aims to introduce a review of criminal cases in which businessmen have been unfairly convicted and penalized.

The mandate, which has yet to enacted by the State Duma, apparently does not include prosecuting business conduct which has so far escaped Russian law and penalty altogether. But that’s something to drink to.

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