Russian stock exchange sends a message to the wine world

Shares of Russian alcohol companies rose on news of the introduction of a lockdown from 28 October. What other factors could be behind the volatility in the Russian market? Meininger investigates.

Credit: Lassedesignen - Stockadobe.com
Credit: Lassedesignen - Stockadobe.com

On October 21, shares of Russia's largest sparkling wine producer, Abrau Durso, rose by a record 31.2%. According to Liya Baimukhametova, analyst for corporate ratings group, NCR , two factors were responsible: news from the annual Russian Winemakers’ Summit, at which producers from the Kuban and Crimean regions, including Abrau Durso, expressed their willingness to participate in an e-commerce experiment, which should begin in late March 2022. Until now, online sales in Russia have been strictly forbidden.

Additionally, there was the announcement of a Covid-19 lockdown, during which only pharmacies and convenience stores will operate.

The next day showed the volatility of share trading  in Abrau Durso. Within two hours of the start of trading on 22 October the shares of Abrau fell by 14.5% . There is reason to believe that this volatility also reflects an expected increase in customs duties on imported wines. 

As recently as week ago Moscow restaurateurs were flying high. The Michelin Guide had published its first Russian edition (following encouragement from the Moscow authorities), and nine establishments there received stars, with a further 15 entering the BiB Gourmand category. But a week later, brought less welcome news. From October 28 to November 8, all restaurants, cafes, service industries and entertainment will be suspended: only pharmacies and grocery shops will be open. However, no one ruled out an extension to shutdown beyond November 8, as was the case last year. The government's support for business remains minimal. Entrepreneurs will receive a lump sum payment equal to the minimum wage per employee ($180 at today's exchange rate). It is likely that many establishments, forced to pay rent and wages during the forced downtime, will not reopen after the lockdown. 

Despite exporting Russian vaccine abroad, the authorities' success in vaccinating their own population remains modest. According to RBC, as of 18 September only 31.39% of the population had received the first dose of the vaccine. The low vaccination rate and aversion to masks has led to record levels of illness, with the daily death toll from the coronavirus surpassing a thousand in October and the number of people suffering from Covid passing the 30,000 mark. With these figures, it is highly likely that the lockdown could drag on. 

 

The company in question is Abrau Durso

 

What can wine producers expect?

The lasty year has changed the structure of alcohol consumption in Russia. The traditional 9: 91 ratio between restaurant and retail sales has shifted even further in favour of shops. At the same time, hypermarkets also lost market share to smaller convenience store chains. For the year as a whole, however, retail sales rose 6.1% in value, according to Nielsen. 

Obviously, the lockdown will shift consumers' preferences in favour of the wines  they will be able to find in convenience stores. An alternative sales channel could be online sales. Although the bill allowing the sale of wine online, which has been under discussion for a number of years, will come into force on March 31, 2022, the restrictions it includes it make the business unworkable. These sales will only be possible in Moscow and the Moscow region, only Russian wines will be sold, and logistics will be handled by the Russian Post, which is notoriously slow. Wine enthusiasts are already joking about the ageing of the wines during the delivery of the order.   

It is likely that a third factor played a significant role in the share volatility: the proposal to raise excise rates on imported wines. On 18 October, the Russian Winegrowers' Summit in Abrau adopted a resolution to establish a Federal Self-Regulatory Organisation of Winegrowers and Winemakers. In fact, this means that the existing Union of Winegrowers and Winemakers will be transformed into a lobbying body. 

The current head of the organization, chairman of the board of the Union of Winegrowers and Winemakers, Dmitry Kiselev, has already outlined one of the objectives: "...to raise the issue of restricting imports. For example, by introducing a special excise tax that could be redirected to support the planting of vineyards in Russia..." The precise level of the future excise tax has not yet been revealed, but it is likely that this news is fuelling the volatility on the stock exchange. 

In fact, large Russian producers are seeking not only to impose additional duties on competitors, but also to distribute the proceeds. One does not have to stretch one's imagination to imagine how the subsidies will be distributed. Over the past five years total investment and state support for vineyards planting in the Krasnodar region amounted to 3.3 billion roubles ($46.5 million). 48% of this amount was a loan of 1.587 billion roubles from Rosselkhozbank to Chateau de Talu, which belongs to Olga Tkacheva, wife of the previous governor of Krasnodar Krai and former agriculture minister.

Ultimately, the subsidies to selected Russian winemakers will be paid for by the Russian consumer, who will pay this excise tax embedded in the price of imported wine. This is already happening with food products. The ban imposed by the Russian authorities in 2014 on imports of food products from the European Union costs Russians 445 billion roubles ($6.27 billion) annually, which corresponds to about 3,000 roubles ($42.31) per person. 84% of this is redistributed annually in favour of domestic producers. 

In the case of wine, it is not a total ban, but rather an artificial redistribution of demand. The only thing that may inspire optimism is that Russians are used to drinking wine, and consumption is dropping slightly, even in times of crisis, although it is shifting to a lower-priced segment. How serious this shift will be will become clear when specific figures for new customs excise duties are announced. 

 
 

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