Wine Report Russia / Imports

Will the US-EU wine trade war increase Russia’s wine market attractiveness?

As much as I would like wine market in Russia to become a more welcoming place for all international wine players, we are still facing a lot of difficulties. And, yet, when wines from the EU face a possible increased taxation from the US government, what do you do? You look for other opportunities, closer to home.

It is weird — Moscow. being just 2,5 – 4 hours away by plane from major wine capitals of Europe, and still is not considered an interesting (I’m not even saying priority) market by many wine producers and wine associations (AOCs, DOs and DOCs, what not). This is both good and bad news for everybody: bad, because Russian consumer and a wine professional remains relatively cut off from major exhibitions and wine shows, except several Italian ones and three shows for Portugal, Germany and Spain. Wine appellations are not investing here — not at the moment. They abandoned the market back in 2014, some of them — back in 2008, and haven’t come back (Wines of Germany and Wines of Portugal being rare examples, both explaining it roughly similarly: “We are seeing an increase in mean price per bottle sales”). Fair enough.

The good news is that there isn’t much competition among appellations. Yes, sommeliers are receiving wine importers’ phone calls, but those are seldom creative. A handful of smart wineries, though, are taking Russian market seriously — and they get rewarded really well. Stable place in top ten markets isn’t something new for some EU wineries. And we are talking about HoReCa and private clients segments, not the shady off-trade.

Russian population remains a weak wine drinker for two major reasons: 1) economical and political stagnation that won’t let mass-consumer start really spending money on wine and 2) strict wine trade regulations, corruption and wine advertising ban which makes spreading information about wine much harder than it should be.

Hey, considering vodka-related alcoholism traditions, Russian officials must be happy to promote wine drinking of ANY sorts — be it binge or occasional. With all this in mind, quality wine consumption remains quite limited to a group of people living in big cities like Moscow and StPete, with limited growth in consumption. The fact the that number of middle-class drinkers cannot increase is simply because the middle-class population is not growing. Yes, wine knowledge spread slowly anyway, with all the barriers and nonsense that’s going on, but not nearly as much as it could.

But when the shit hits the fan, so to speak, meaning D.Trump messing with Europe, things can get pretty interesting. Would it be wise to funnel some of that export juice and marketing effort to nearby Russia, instead of sharing 25% wine taxation with your partners-importers in the US? I have no idea how long the 25% tax will remain (and they say Donald is already thinking 100% tax and not only for France). One definitely doesn’t want to lose such a lucrative market as the US. But maybe, just maybe, it’s about time to look at your options in the Eastern markets — not only Russia. Especially when you’ve got electronic visa for a short-term (less than 8 days) visit to Russia, provided you’re flying in to Saint-Petersburg (read here).

In the end, people drink wine here too.

American wines: gambling on Russians

There is no easy way to say it. Wine market in Russia is subject to serious diseases – with subsequent choking and loss of conscience. It’s violent, it’s turbulent. It’s bureaucratic and irrational most times. Ah, yes – it’s corrupt, too. Wine is widely and openly treated as a serious problem by the Russian authorities. Wine is a political instrument for the relations with the former USSR-bloc countries. There are banning taxes and even greater margins in the major networks and wine shops. You would probably ask – why would any sane US winery be willing to be here? Obviously – there are reasons.

The castaway market

In the second half of 2011 I was consulting a well-known British wine merchant. The topic was entering into business with the Russian wine distributors and have wealthy Russians buy wine stocks and hold them in Britain – an understandable desire.

It is widely known in Russia that the best wine distributors in Russia are usually those who actually import wines themselves. So, it’s kind of a vertically integrated business structures – one department imports wines, other department sells wines, and another one promotes and markets wines. Another company or department might be a structure owning a network of wine shops, but this is not a necessary thing.

The mere nature of this interest from the British side was the desire to make business on those wealthy Russians who are wise enough to be aware about the price margins they pay when they buy expensive bottles in the country. Yes, it usually is minimum 50% higher than you expect to pay in Europe, even in restaurants. This figure becomes completely volatile when we move away from Moscow where savvy consumer restrain those margins from skyrocketing.

What the British didn’t consider seriously was the amount of government control and beaurocracy involved in any Russian business, as well as the economy instability and political situation that pushes business risks in the country to heaven. I might say that the resulting extra margins one can make in Russia are what often attract foreign investors to the country. Yet, wine business seems to be one of the most regulated and hard to deal with in Russia.

After some meetings with the importers we seemed to find several major problems in regard to supplying wines from UK to Russia: first of all, weak legal basis and competence of Russian wine importers’ lawyers – they know how to work in the Russian market but they usually have no idea how to build international contracts with third parties (not direct wine suppliers like negociants in Bordeaux). Russian import legislation requires lots of documents to support any bottle entrance and you cannot send a bottle via DHL or any service of that kind.

Secondly, wine importers here would rather prefer less headache and maybe less money than establishing a brand new service for their clients wishing to buy wines abroad – but with lots of paperwork and worries about keeping the client. At last we can imagine that a wealthy person would finally decide to exclude a middleman from the chain. This also corresponds with the competence of the sales staff that is simply not ready to deal with such cases on the regular basis.

And, third, Russian consumer is still buying wines for immediate drinking in 99% of cases rather than for the purpose of laying down. There are, of course, big cellars here – bit these people are usually kept by the wine importers as their golden reserves and the contacts are held in top secrecy. Afterwards, maybe they prefer to buy wines at much higher prices and have much less choice, but to have a good local supplier who speaks their language.

New regulations threaten wine business. Again.

If you are a foreign winery exporting wine into Russia, then you do remember 2006 – the EGAIS scandal with new licensing and stamps that delivered Russia from most of fine wine for some 2-3 months when we were astonishingly observing empty shelves where the imported wine used to proudly stand. Since then the market has almost recovered.

But the Russian government and the Ministry of Mr. Onischenko do not sleep. All this time their minds were actively working on new barriers to make wine imports even harder. And a new Customs Union between Russia, Belarus and Kazakhstan gave a really nice opportunity to create some new sophisticated bureaucratic tools to benefit well on wine business. New licensing was the first bird in winter 2010 – all of a sudden the importers were put in front of the fact that they have to re-certificate most of their bottles. If you remember that EGAIS (the electronic system controlling the turnover of the alcoholic products) was set up to cancel some stupid paper licenses. But in 2010 the licenses came back – and amazingly EGAIS was not cancelled. The new rules also made almost impossible to send wine samples to Russia via ordinary transport companies like DHL or TNT. But this is a minor problem compared to the others stupid rules we have now.