by John Helmer, Moscow
@bears_with
Wine, and the money to spend on drinking it, are growing at an unprecedented pace in Russia. For a country at war in Europe this has not happened in modern times, and probably not since the ancient Roman emperors and medieval English kings arranged for their city fountains to flow with wine in celebration of military victories and coronations.
The surge in wine consumption signals the growing confidence of Russian consumers in their future. A parallel surge in wine imports since April is also a signal that the Russian Finance Ministry aims to raise taxes on this good cheer.
In 2023, 320 million litres of still and fortified wine were imported to Russia, which was 4.4% more than in 2022, according to a study by the large Moscow importer, distributor, and retailer, the Luding group. According to other market reports, by the end of last year the largest supermarket groups had increased their imports of wine by 7% compared to the year before. The X5 group, for example, which operates the Pyaterochka and Perekrestok stores, reported an 18% annual increase; the Magnit chain was up 83%.
This year the rate of increase in wine imports has been accelerating. Through April, the Russian Customs figures show a 20% rate of increase in the volume of wine imports compared to the first four months of 2023. The most noticeable surge was observed in April, when twice as much wine was imported as a year ago.
Part of the reason is that the Russian war economy is now generating significantly faster growth in consumer income than the rate of inflation. Adjusted for that, real wages grew 0.3% between March 2022 and March 2023. This is after a prolonged decline in real wages between 2013 and 2021. In the first quarter of this year, January through March, real disposable income – a slightly different metric measured by the state statistics agency Rosstat — jumped 5.8% compared to the year before. This was a relative slowdown compared to the last quarter of 2023, when real disposable income was up 7% year on year. Rosstat is reporting also that real wages grew by a record 13.3% in May 2023. The agency’s measurement reflected the jump in war-related civilian sector wages and in payments to military personnel. Pensions, by contrast, were shrinking slightly in real terms.
The government is now estimating the full-year 2023 rate of real income growth at 5.4%; in 2024 at 2.8%, and next year at 2.8%. Consumer demand is predicted to rise in step.
Despite Russian casualties at the front already running ahead of the ten-year Soviet Afghanistan War, the Russian war economy, and the impact of the NATO sanctions war, are paying a large domestic dividend – and not only at the wine shop.
Read the twenty-year archive on the Russian wine business, as well as Russian beer, vodka, mead, cider, and cognac.
Top: April 16, 2023.
Bottom: September 21, 2022.
The bigger part of the reason for the April wine surge, industry experts acknowledge, is that importers and wholesalers were anticipating the government will introduce a prohibitive 200% penalty duty on wine from the unfriendly NATO states – France, Spain, Italy – and also an increase in alcohol excise tax.
This penalty on imports of wines from western Europe is being promoted by the domestic wine lobby, the Association of Winegrowers and Winemakers, to encourage new investment in domestic vineyards and wine production in the southwest and Crimea. The lobby proposal is being considered by the State Duma, but no legislative or government action has been decided yet.
Customs statistics of the wine surge so far this year show that 32% of the volume has come from Italy, 12% from Spain, 7% from France, and 5% from Portugal. The government has already introduced smaller penalty import duties on wine and other alcohol imports from the NATO states, and these have begun to curtail consumer purchase of French, Spanish and Italian wines, adding marginally to sales of Russian wine; in physical volume, these now amount to more than 51% of the consumption market. Georgian wine is increasing its market share significantly.
Starting on May 1, the Finance Ministry introduced a sharp increase in excise tax on wine and other alcohol. The new excise tax rate on wine is Rb108 rubles per litre, which is more than triple the previous rate of Rb34 per litre. Anticipating the new tax and the rise in bottle prices, importers decided to stock up on imported wine in April, according to industry sources.
The impact has been double-barreled: Russians consumers have begun switching from the higher-priced wine from the NATO states, especially from Italy, to lower priced wine from Georgia, South Africa, Chile, and Argentina. In parallel, there has been a sharp increase in customs revenues; these have jumped fourfold between January and May of this year, compared to the same period of 2023.
Source: https://www.rbc.ru/
A new report by the Luding group, published earlier this month by RBC, reveals how the structure of wine imports in Russia has been changing in the war conditions since February 2022. According to Luding, last year 37% of the wine on retail shelves in Russia was imported from the hostile states; their share of the market had been growing from 31% in 2021 to 33% in 2022.
On March 15, 2022, the European Union banned the supply of very high-priced wines (above €300 per bottle) to Russia, but this had next to no impact in the Russian market. Then on August 1, 2023, the Russian government raised the import duty on NATO wine from 12.5% to 20% of value, with a minimum impost of €1.50 per bottle. For cheap European-source wines, in effect this amounted to a duty of 100% to 200%. The new wine lobby proposal is to impose a 200% duty across the full range of imported wine.
Source: https://www.rbc.ru/
“The most intensive import growth occurred in the first half of 2023. In the second half of the year, the increase in duties and sanctions restrictions had the expected effect: if there was an intensive growth in the first half of the year, then in the second half of the year there was a drop relative to similar indicators in 2022," Luding reports. According to the study, 43% more sparkling and still wine was imported to Russia in the first half of 2023 than in the same period of 2022, and 17.5% less in the second half of the year.
Source: https://www.rbc.ru/
According to the Luding report, 73 million litres of sparkling wine were imported to Russia in 2023, which was 2.9% more than in 2022. The share of Russian sparkling wines by the end of 2023 amounted to 71% in volume. The main importers in this wine category have been Italy — 50.6 million litres in 2023, France, 12.5 million literes and Spain, 7.8 million litres. Compared to 2022, shipments from Italy fell by 2%; from France shipments increased by 20%; from Spain there was no change. Russians prefer semi-sweet white sparkling wine; this type accounted for 48% of sales in 2023, while dry or brut came to 25%. Over the past two years, brut has become more popular (a change of 3 percentage points), and semi-sweet has been losing ground (by 5 percentage points). Luding concludes that "sparkling wine imports will not likely increase in the coming years, as the top importing countries comprise the unfriendly countries. An increase in the volume of imports of sparkling wine from friendly countries is predicted (because networks and distributors will look for replacement options), but their share will remain insignificant; the main role in this segment will be played by Russian manufacturers.”
Wine industry sources quoted by RBC are predicting a sharp drop in wine imports for the remainder of this year, and the reorientation of supply to friendly state suppliers like Argentina, Chile and South Africa, duties on which have not been raised. South Africa is also predicted to move ahead of Chile, along with Georgia.
The experts also agree that the combination of the new excise tax and new import duty will “now lead to the fact that imported wines will be very uncompetitive on the shelf in terms of price. Prosecco, which an importer can buy for €2.8-€2.9 per bottle, will eventually turn out to be closer to Rb1,300 rubles at retail. At a price of up to 1,000 rubles. you can buy a very good Russian wine, which will be competitive not only in price, but will also be very acceptable in quality.”
What happens next in the Russian wine market?
Answers to that question follow in an interview with Kommersant by Anatoly Korneyev, one of the founders of Simple Group, a leading Moscow importer, distributor and retailer which has been in the wine business since 1994. The interview, published last week, has been translated verbatim. Illustrations have been added.
June 6, 2024
When wine prices rise, per capita consumption falls —
and this is frightening
Interview of wine retailer Anatoly Korneyev by Ilya Sizov
Anatoly Korneyev, Vice President of Simple Group, discusses the Russian wine market What will happen to the prices of imported wine? What are the prospects for Russian winemaking? And what is actually a threat to domestic wine producers?
Q. Last year, Russian wine entered the top 3 in sales in the Simple group, second only to Italy and France. Is it not the case, or is it not only that access to imported wine has somehow become more difficult? And in your opinion, does Russia have the opportunity to become a full-fledged wine country?
A: Not only an opportunity, we actually have already become one. We are at the very beginning of the road, and it is for this reason that, most likely, sooner or later the third place should turn into the first. This is not a political slogan, but an absolute opportunity that coincides with the will of the state, which is very actively investing in this industry. It is the most advanced sector of the economy today due to the fact that subsidies are given very successfully; moreover, the state also supports communication.
THE TOP FIFTEEN RUSSIAN VINEYARDS
by location and area in cultivation (hectares)
Source: https://ru.wikipedia.org/
* For analysis of the business of Abrau-Durso, click to read.
Source: company website, The Ariant group, which owns Yuzhnaya, is under court-ordered re-nationalization of the assets of former owners, Yury Antipov and Alexander Aristov.
How have Russian winemakers increased production volumes? It so happens that we are now in a closed loop — in this regard, of course, winemaking supports domestic tourism and vice versa It is probably much more comfortable everywhere in the world where wine and tourism go side by side. In France, for example, wine is responsible for 2% of GDP. But if you take related sectors of the economy, such as tourism or gastronomy, restaurants, HoReCa [Hotel, Restaurant and Catering Industry] and so on, this figure turns into 5% of GDP.
The Massandra vineyard, a leading tourist destination in Crimea. For a sample, click to follow.
Q: And what is the situation with imported wine now? What has changed in two years? Have new partners have appeared? Did you have to resort to parallel imports?
A: Surprisingly, the market has remained stable so far, despite the fact that we have, of course, healthy protectionism. I would really like to hope that prudence and logic will prevail over emotions when we talk about unfriendly countries. We need to keep some hope that we will not burn all the bridges — this is economic diplomacy. Of course, agriculture, on the one hand, is the most vulnerable environment, because any winemaker depends heavily on uncontrolled weather conditions, crop failures, droughts and so on. On the other hand, the consumer market is very strictly regulated. In Russia, the situation looks like this: the average price of Russian wine sold on the shelf is 520 rubles — this is Rosstat data. One can hope that the Russian consumer will follow all the changes that occur due to the increase in duties and excise taxes, and will be ready to invest, vote with his ruble for Russian wine. You can look at the example of the excise tax: not all agricultural enterprises in the Russian Federation have a benefit embedded in the price, because very often they divide their business according to the law. There are agricultural divisions which produce grapes, and then they transfer this to enterprises which produce wine and commercialize it. And here the VAT will arrive together with the excise tax, and the so-called peasant farms (KFH), which are exempt from paying this very excise tax, will still receive VAT. This is 20 rubles, not so much, but if you think in the logic of cost, 200 rubles. 20 rubles of additional encumbrance is 10%. That is, we are gradually increasing the price.
Why are Poland and Lithuania halting cargo at the border? Returning to your question about imported wines, for each wine crossing the customs border of the Russian Federation, we get 290 rubles of extra charge. This figure consists of the excise tax, which has been increased three times; the import duty which seems to have been increased by only 7.5%, but there is the minimum cut-off at the border at €1.50 That is, all imported wine up to €7 in purchase, these are wines such as chianti, petit chablis, to which we have accustomed Russians for 30 years, will receive this set of cost additions. When there was prosecco, for example, at 900 rubles per bottle, it was a sought-after product, but now an additional 300 rubles on the bottle price transfer it to a completely different marketing and price segment. 95% of all wine retailed in the Russian Federation has a bottle price of up to one thousand rubles, that is to say, there is not much price elasticity in the market demand. In this sense, imports are still preserved, and the good news is that, most likely, due to the fact that 2022 was a favourable year, in 2023 everyone was preparing to increase duties first, then excise taxes, and so everyone bought and stocked. And the first one who did it very aggressively was retail. These were not distributors, because they don’t want to sit on large stocks – this is expensive. And retail needed to keep the consumer feeling calm and smooth out the price changes. Globally, there are no big problems with imports today. We are all provided with goods, everything is safe, everything is wonderful, no one is looking for new countries, because there is stable demand, but changes await us. My forecast is that you and I will live until about January 1, 2025 with the old prices. This feeling of comfort will remain in high season. But then inevitably we will notice that the price is changing, and the difference will be noticeable.
When wine prices are constantly rising, per capita consumption is falling, and this is frightening, because we live in a space where all alcohol-containing products are divided into three large blocks. Just now wine has an official consumption figure of 6.9 litres per capita per year, and if you subtract fruit wines and wine-containing drinks with the addition of ethyl alcohol from that, leaving pure wine, then there will be even less; this compares with 57 litres of beer consumption per capita. In large absolute numbers, it looks like this: in Russia, we consume about 800 million litres of wine annually with 7.5 billion litres of beer, and this is a big threat. A significant market share is being taken away from the most professional, most profitable category for the state, because 9% of the wines alone are responsible for 21% of the state’s profitability.
In reverse, it looks completely different. Beer is less substantial, less profitable. That’s why we say: cancel VAT on Russian wine, you will lose 50 billion rubles. And they can be compensated by adding only 10 rubles to a bottle of beer in the form of an excise tax – by redistributing the fees, you will receive the same amount of revenue.
CLICK ON SOURCE TO ENLARGE: https://www.statista.com/
Q: You spoke about reasonable protectionism, so is the 200% duty on wine from NATO countries reasonable protectionism?
A: Of course not. If you look at how the market works, you will see that already today there is a change in price, which so far is at least 290 rubles extra per bottle, and this will cause a reduction of demand and sales. For example, just in the prosecco category we have counted minus 35%; in the category of wines such as chianti, rioja and so on, which are purchased at a price of about €7, you are getting a consumption decline of 50%. Let’s say this is somehow compensated by price elasticity or customer loyalty to brands. But this is a large amount, because unfriendly countries are currently responsible for 75% of all imported wine.
Why has the import of wine from abroad increased dramatically? Let’s say I am a wine producer in Georgia — I understand the political regime, the background associated with the absence of duties. At the same time, there are a lot of producers of good Georgian wine who cannot enter the Russian market. Due to the way the protection regime was formed, including the so-called SGRs [state certificate confirming health and quality control] which do not allow some producers to enter the market, and old producers still bring tonnes of totally banal, not the best wines of Georgia here.
Of course, we need to conduct this dialogue very rationally here. I started talking about Georgia because it is duty-free, but it is now the first in the list of countries in the import category, overtaking Italy, which has remained the absolute market leader for 30 years in a row. And here it is necessary to find a dialogue, to look into a new way for quality control of the Georgian wine coming here. This should not be protective duties, but some new special approach by the regulator.
LEAD PICTURE: Junior officers pour sparkling wine into a helmet during the graduation ceremony for servicemen of Moscow Higher Military Command School in front of Saint Basil's Cathedral on Red Square in Moscow, July 2021.
LESSONS: from a lifetime of drinking rosé and sparkling wine, read Dunce Upon a Time, chapter 8.
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