The Domino Effect: Will the Russian Wine Market Collapse?

The war with Ukraine unleashed by Vladimir Putin has already caused huge numbers of casualties and led to the displacement of millions of refugees. Sergey Panov reports about the difficult situation in Russia and its effects for the Russian wine market.

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Trade Sanctions (Foto: Vadi Fuoco/AdobeStock)
Trade Sanctions (Foto: Vadi Fuoco/AdobeStock)

 

  • Russia imported 3.5 million hl wine in 2020.
  • Sanctions of the EU and US as well as possible countermeasure by Russia may restrict trade – and that not only for luxury goods.
  • The ruble ceased to be a convertible currency.
  • Many wines are becoming unaffordable for the Russian middle class. While prices are rising rapidly, distributors are looking for domestically produced alternatives, or imports from countries such as Georgia, Armenia or Turkey.

 

Sanctions against Russia

Shocked by the scale of the military conflict, the U.S. and EU have imposed numerous sanctions against the Russian State, its officials and oligarchs. In two weeks, Russia became more isolated from the world economy than the Soviet Union was after the invasion of Afghanistan, and the wine market could not isolate itself from this fate.

According to Farida Rustamova a former journalist of the BBC Russian service, the attitude towards the war within the corridors of power is ambiguous. An anonymous source cited Kremlin officials as "carefully enunciating the word clusterfuck" when describing the invasion. Revealingly, this is a Vietnam-era term defined by Bob Sutton, business professor at Stanford University as “those debacles and disasters caused by a deadly brew of illusion, impatience, and incompetence that afflicts too many decision-makers, especially those in powerful, confident, and prestigious groups.”

Similar expressions are heard in the offices of wine trade companies as several countries move to restrict wine exports.

  • On March 14 the U.S. announced an embargo on American wine and spirits imports to Russia.
  • The EU has also decided to limit exports, but so far measures have been restricted to the luxury segment, aiming at wine priced 300 euros or more. So far, this spares most European wine.

At the same time, Russian buyers fear that the Russian government may retaliate by banning imports of European wines, in a similar way to the ban it imposed on European food in 2014.

In 2020, imported wines accounted for 32% of domestic sales in Russia, and more than 56% of that share came from EU countries. 

RUSSIA AT A GLANCE (2020)

  • Vineyard acreage: 96,000 ha
  • Production: 4.4 million hl
  • Consumption: approx. 10.3 million hl
  • Import volume: 3.5 million hl
  • Import value: 948 million Euro

Focusing on specific companies and organizations that have ceased or suspended their operations in Russia seems redundant; there are almost too many to list. The luxury goods company, LVMH, announced its intention to close its approximately 120 stores in Russia. Diageo, Pernod Ricard and Eddington all halted sales. The California Wine Institute and the German Wine Institute stopped their marketing efforts and the Vinitaly Roadshow Russia which was due to be held on March 3 was cancelled.

But more important than specific names is the question of which factors will determine the future of the Russian market in the coming weeks?

Falling Ruble and Rising Interest Rates   

Over the past month the ruble-dollar exchange rate set by the Central Bank has plummeted from 73 rubles to 116 rubles per dollar. For the first time since the 90s, the ruble has essentially ceased to be freely convertible currency. Selling cash to private individuals is forbidden, while banks have instituted an enforced 12% commission on top of the exchange rate. The only opportunity to buy dollars at market prices remains the stock exchange. Wine importers have concluded sales deals at the rate of 73 rubles per dollar, but have to buy new shipments at a rate of 108. Companies that don't have enough financial resources to make up the difference risk having to suspending their business. 

Often, cash is an issue. The Central Bank raised its key rate from 9.5% to 20% and the banks are raising their lending rates. All of this creates a danger of a cash gap. With the fall in demand, the collapse of the national currency, and expensive loans, companies are facing increased risks. The first to close its doors is Delta Club, 20 year-old distributor of Russian wines, Alma Valley from Crimea and a range of ‘Collection Personelle’ bottlings from Bordeaux chateau including Léoville Poyferré, Lascombes and la Gaffelière.

Bankrupt Banks?

Even worse for the economy might be effects for financial institutions. Russian economist Sergei Guriyev, former head of the European Bank for Reconstruction and Development, has described the danger of bankruptcy and possibly nationalization of private banks within a few months. A large part of bank assets are in the form of shares in Russian companies and loans to Russian enterprises. On February 24, stocks suffered their steepest fall ever, with the main Russian stock market indicator, the RTS Index, plunging 61% on February 24. The Moscow Stock Exchange has not opened trading since February 28 and will not open this week, in an attempt to delay the inevitable consequences.

Complicated Logistics

If there is still hope for European producers, the New World is experiencing even more turbulence. Eight sea lines (Maersk, CMA-CGM, MSC, Evergreen, Yang Ming, HMM, Hapag Lloyd, One) have suspended shipments to Russia, making 95% of container shipments unavailable and complicating logistics for wines with the broadest following among Russian consumers.

Falling Purchasing Power and Rising Wine Prices

According to a forecast by Robin Brooks chief economist at the Institute of International Finance, Russian GDP will fall by 30% in 2022, rolling the economy back to the level of the early noughties. Sanctions will severely tighten financial conditions, leading to a contraction of domestic demand. Russians were not wealthy consumers before, and now their share of spending on food and basic necessities will have to increase even more, inevitably reducing spending on wine. 

For many, wine is becoming not just expensive, but virtually unaffordable. Even before the crisis, the average wine bottle price was about 350 RUR ($4.60/€4.20) on the shelf and ($1.55/€1.40 ex-cellars). Now, in just two weeks, the second most popular Argentine brand, Canciller Malbec, has gone up in price from 369 RUR to 629. At the other end of the scale, Roederer Brut Collection went up from 8,790 to 12,200 RUR. A bottle of Champagne now costs just slightly less than the minimum monthly wage of 13,890 RUR ($120/€110 at the ‘postwar exchange rate’)

Shifts in Trade

It is likely that the most popular price segment of up to 400 RUR will be exclusively made up of Russian, Georgian and Armenian wines. Last week, Russia’s largest importer of premium wines, Simple, signed three new contracts with Russian wineries Shumrinka, Zakharin and Alma Valley (the Crimean winery previously distributed by Delta Club). Moreover, Turkey, a country whose currency experienced a significant drop, might benefit. The buyer of the St. Petersburg alcohol stores "Gradusy" announced contracts with three producers from Turkey.

The Russian wine market never recovered from the annexation of Crimea. The country imported €1.227bn/$1,350bn worth of still and sparkling wines in 2013, and has not been able to return to that figure despite the steady growth of wine culture. Vladimir Putin has yet to defeat Ukraine, but he has already succeeded in defeating the Russian economy. A market rollback to the level of 2009, when Russia imported €638m worth of wine now looks like an optimistic scenario.

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