The Russian Champagne debacle

The wine world has been in turmoil since last week: Russia has passed a law that requires new certifications of imported Champagne. Reactions from the industry followed promptly. What exactly is behind the new law and what consequences does it have for the wine industry?

Sergey Panov has compiled the most important information.

 

In Russia, soon without appellation on the label: Champagne
In Russia, soon without appellation on the label: Champagne

Update: On July, 9th, Russian Federal Customs Service almost stopped the import of wines and cognacs into Russia. This information has already been confirmed by several major importers. 

The new law changed the categories of alcoholic beverages. In particular, for imported wines the categories of "wines with a geographical indication" and "wines with a protected geographical indication" were abolished. Now for almost all wines, from Veneto IGT to Margaux AOP, importers must go through the entire certification process, from collecting and submitting documents to sending samples for laboratory analysis. According to Natalia Shastina, brand director of one of the largest importers, AST, of all planned shipments of wine, the customs let through with the old certificates only 5 SKU. The same is true for other importers.

Low speed of work and bureaucratization of regulatory bodies make the most pessimistic scenario possible: the long-lasting collapse of all imports of wines and cognacs and supply disruptions for months.

What happened before

On 2 July, Vladimir Putin signed into law Federal Law No. 345 of 2 July 2021. Although the bill itself was introduced more than three years ago in 2017, it was rejected in the first and second readings. No one expected it to be signed in the coming months. The document was amended, and the current convocation of the lower house of parliament had almost completed its work. But on its last working day, the Duma passed a law, which was agreed in the Federation Council, and a few days later lay on the president's desk. And before the ink had even dried on the document, a scandal erupted.

The new version of the law amended the current Federal Law No. 171 from 22 November 1995, which regulates the production and sale of all alcoholic beverages. Among other things, the descriptions of the types of alcoholic beverages were amended. Certificates for customs clearance, excise stamps, etc. are issued according to the types listed in the new article. The previous version of the law adopted after the collapse of the Soviet Union described all sparkling wines as "sparkling wine (Champagne)", while the new version reduced the category name to "sparkling wine" with subcategory "Russian Champagne”. Following the official logic, some Russian sparkling wines retained the right to be called Champagne, while wines from Champagne lost it. Even before the president signed the law, the Russian division of Moët Hennessy announced a halt in shipments. 

Storm in the Champagne glass

At first glance, Moët Hennessy's tactic was to get maximum media attention. On Friday the news headlines said the company was stopping shipments to Russia, but on Sunday the same agencies wrote that Moët Hennessy had agreed to new labeling rules. 

In fact, Moët had no intention of leaving the Russian market. The company's Russian division, Moët Hennessy Distribution (MHD), announced that it was stopping shipments to Russian customers. The company already had an insufficient stock of Champagne, and the new rules could have delayed product certification. The gist of MHD's letter (the original is at Meininger's disposal) was to warn the clients: we are suspending shipments in Russia until we clarify how to certify new shipments under the new rules.  

Champagne is just the tip of the iceberg

Moët Hennessy's public reaction drew attention to the Champagne category, but there is more to it when it comes to the re-wording of the law that regulates the whole alcoholic beverage industry. The most sweeping change is the consolidation of table wines, wines with a geographical indication, and wines with a protected appellation of origin into one category – "wine". If the law is followed exactly, it could mean a new certification requirement and obtaining new excise stamps for all new shipments of all wines that come into Russia. Given the limited capacity of certification bodies, this scenario could mean a long-lasting collapse of wine imports into Russia.

When bylaws are more important than the law

The peculiarity of Russian legislation is that not only the law is important, but the bylaws that describe the application of the law are equally so. According to Maxim Kashirin, president of the Simple group – Moët Hennessy's closest competitor in the Champagne category – requests were sent to the government as early as last week by the lawyers of Simple, other importing companies, and industry agencies. All industry players are trying to clarify: Is re-certification necessary? Will the new categories of excise stamps be used? What will happen with the turnover of goods that have already been certified?

It's one thing if importers will be able to change a wine category in the certificate, and quite another thing if they will have to send a complete package of documents and samples for laboratory analysis for each stock-keeping unit (SKU).  

In addition to Champagne, the law affected Cognac, for example. In addition to approving the category of "Russian cognac", the document defines cognac as a grape distillate with three years of aging in an oak barrel. Thus, the VS cognacs will be rerouted to the category of "brandy" while brandies from the Russian republic of Dagestan worth ten times less will be recognized as "cognac". 

The top 10 Champagne brands, according to Russian Federal Custom Service

 

Pending clarification

Maxim Kashirin believes that the government's clarifications will probably be able to ease the tension. "The adopted law has been discussed for a long time. Together with other industry players we discussed the text of the law, some of the wording has been softened. In this case, the rapid adoption of the law on the last day of the Duma was a surprise to all”, he said.  

On 7 July, the Ministry of Agriculture explained that the new law does not prohibit Champagne wines from being called champagne. According to the ministry, "sparkling wine" is a general category for all wines containing carbon dioxide. The general category may be supplemented by an individual geographical designation if it is registered in Russia, such as "sparkling wine, Champagne region". 

Between Scylla and Charybdis

In fact, the entire burden of responsibility for the government's decisions has fallen on the shoulders of importers. On one hand, importers must adjust to the contradictory requirements of regulatory organizations and, on the other hand, must build constructive relations with suppliers (while bringing profit to shareholders, if possible).

Committee de Champagne, outraged after a superficial reading of the law, called on Champagne producers to stop shipments to Russian partners. By the words of Natalia Shastina, marketing director of importing AST group, out of all maisons de Champagne, only Pol Roger has so far officially announced a halt in shipments. 

But the chaos on the market has spread more widely. For example, Lithuanian logistics operator Essence Group suspended shipments to Russia. In these conditions, Russian importers have to balance on the edge: to comply with government requirements, to maintain relations with wineries, and – of course – to sell wine, if they are lucky. 

How judo affects the alcohol market

The speed of adoption of the new law may surprise only those who are unfamiliar with the Russian market. When the country's biggest oil trader is a childhood friend of the president, and its biggest landowner is the family of a law school classmate, it would be naive to believe that the alcohol market would lie outside Putin's zone of interest. Even if his judo sparring partner and childhood friend Arkady Rotenberg avoids any public references to alcohol, it is impossible to mistake the connections. 

In 2000, when Putin became president of Russia, federal body Rosspirtprom was created. The semi-private organization was supposed to improve the efficiency of state-owned distilleries that produce ethyl alcohol. But in fact, twenty years later the picture is exactly the opposite. For two decades the alcohol industry has been run by Rotenberg's appointees. The biggest swindle on the hard alcohol market, related to the theft of hundreds of millions of dollars from the budget, is connected with a former subordinate of Rotenberg, Igor Chuyan. All this would have been impossible without the direct approval of the first person of the state.

The Rotenbergs' Champagne

Even though the annexation of Crimea in 2014 looked like political madness, it brought quite rational benefits to the president's entourage. Yuri Kovalchuk, Putin's closest friend, became the owner of thousands of hectares of vineyards on the occupied peninsula. Kovalchuk got Massandra, Koktebel and Noviy Svet for next to nothing. The friends of the president seemed to have a premonition of the new laws. On 1 March 2021, the enterprise affiliated with Rotenberg "Soyuzplodmiport" registered the trademark "Sovietskoe Shampanskoe", under which dozens of producers sell their cheap sparkling wines. Thus, the beneficiaries of the new law are not the abstract producers of "Russian Champagne", but rather Putin's very concrete partners in tatami.

Similar precedents have occurred in the past. On 6 April 2009, Russian patent body denied Maison Roederer legal protection of Cristal TM in Russia. The reason for this was the registration of TM Cristall by the same Rotenberg owned company Soyuzplodimport. The vodka producer owns Kristall vodka brand, which was registered a few months earlier. Maison Roderer officially refused to pay royalties for recognizing the Champagne of the Russian Emperors to the producer of cheap vodka. It is symbolic that for the sake of distribution of the historic house of Champagne, the Russian importer agreed to pay royalties to the Rotenberg for the use of the trademark. It is doubly symbolic that the former director of Kristall distillery is now the head of Rosalkolregulirovanie (RAR), the government body which oversees the entire alcohol industry. 

As a conclusion. To summarize, the new regulation largely depends on bylaws, the details and application of which will be known soon. The Russian government is not denying Champagne the right to be called Champagne , but it may create unexpected difficulties for importers and retailers related to certification. Meininger's editorial staff will follow the news in real time.

Sergey Panov

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