Life During Embargo

Spend a few hours wandering any Central or Eastern European city, and you’re likely to stumble across a Georgian restaurant. The cuisine of this small country nestled in the Caucasus mountain range has long been held in high esteem in former Eastern Bloc countries for its pungent flavors: rustic delicacies like light, flaky khachapuri bread, pickled suluguni cheese and adjika, a garlicky, salsa-like concoction that accompanies the region’s grilled meats perfectly. But Georgia’s beverage sector is a longstanding linchpin of its reputation in the region, dating back centuries.

According to a 2003 study by archaeologist Patrick McGovern, Georgia may have been the birthplace of the vineyard, with signs of grape cultivation, fermentation and preservatives dating back to around 6000 BC, earlier than anywhere else; today, grapes like Saperavi, oaky Shavkapito and Khvanchkara are widely drunk beyond the nation’s borders (Georgia having been to the Communist countries roughly what France is to Western Europe).

And as if an 8,000-year-old wine culture weren’t enough, alcohol beverages are only the beginning of the region’s wealth of distinctive drinks. Mineral water by companies like Borjomi and Nabeghlavi is widely recognized for its unusual, slightly salty flavor and its reputation for healthfulness—tsars and their families used to travel to Borjomi spring to quaff the naturally carbonated waters that bubble up from deep underground. This year, IDS Borjomi is projected to sell 114 million liters in its range of waters. Georgia was also one of the main tea and soft drink suppliers for the Eastern Bloc, and remains so today; another common export is a sweet, fizzy, tarragon-flavored drink called tarkhun, alongside pear, apple and lemon-flavored soft drinks.

Despite a strong and lingering regional reputation, the Georgian beverage market hasn’t had an easy time. Following decades of development under the Soviets, the industry was first thrown into turmoil when state distribution channels collapsed at the end of the Cold War, and again when Russia—a titanic importer—implemented a ban on Georgian drinks as relations between the two countries began to take on an increasingly dire turn in 2006. The embargo left Russian consumers cut off from their favorite drinks, but it also demolished dozens of businesses that relied on access to Russian customers to stay in the black.
In 2008, Georgia and Russia went to war over possession of Abkhazia and South Ossetia. Though a tense peace followed, the embargo stayed in place.
 
New Markets
The embargo has meant a shakeup in the survivors’ day-to-day operations, but not all the news is bad. Petter Svaetichin is a Swedish representative of Marussia Beverages BV, which jointly owns and runs Chateau Mukhrani, one of the high-end wines at the forefront of Georgians’ efforts to diversify and expand its wines’ export markets; he says that wine producers are deeply conflicted over the effects of the Russian ban. “Here, [some] are saying the ban was great—it helped Georgian wine producers to stop thinking only about quantity and poor products.”

 Before the embargo, Svaetichin argues, Georgian wine producers could sell virtually any low-cost wine they produced, predominantly to Russia, which comprised a whopping 88 percent of all wine exports in 2005. Wine is of such national importance that many rural Georgian families ferment their own grapes in amphorae buried on their property, and the superfluity of producers resulted in more than 200 different labels packed into a country smaller than South Carolina. Svaetichin says that a minority of cheap Georgian wines were indeed adulterated with syrups and high-strength alcohol, so while the extremity of the ban was probably political, it may not have been entirely unfounded. “Reasonable measures from the Russian side would have been to instigate greater control or demand better laboratory tests,” he observes, “but it served the purpose of getting rid of these half-wines.”

Since their short but bloody war in 2008, Georgia and Russia have moved back from the brink somewhat, though for practical purposes, the embargo remains in place. Svaetichin remarks, “Russian authorities are saying that the market is open again for companies that meet their quality standards, but it’s obviously not true. Georgian officials are saying they absolutely don’t want to start selling to Russia again because we will be under their control again.”

In the meantime, beverage producers have had to find new markets for their products. Since Hong Kong lifted its tariffs on wine imports, Chateau Mukhrani and others have found fans in an open-minded and insatiable Chinese middle class, which typically buys in quantities that Svaetichin says he hasn’t seen before: “They are so much more open—they base their consumer decisions on learning new information, and they’re more open to experiencing a new wine.”

While Georgian wines can be shipped virtually anywhere through Georgia’s Black Sea ports and need never touch Russian soil, small-quantity, dispersed transportation is pricey enough that it’s hard for small producers to gain a foothold in huge wine markets like the U.K. and the U.S. According to Svaetichin, many producers have trouble seeing over longstanding internal rivalries and have never seen a successful branding effort for a country’s wines firsthand, so the Georgian Wine Association founded in 2010 lacks (for now) the marketing and lobbying clout wielded by industry groups in other regions.

According to Georgia’s National Investment Agency, 52 percent of wine sales went to Ukraine and 13 percent to Kazakhstan in 2010, so exports are still more heavily reliant on neighbors than the quality of the wines might warrant. But in December 2011, Chateau Mukhrani took home a gold medal for its own high-end grappa-like chacha at the Hong Kong International Wine and Spirits Fair, where Georgian wine producers scored 27 medals in total, with as many golds (two) as the U.S., so Georgia is gradually taking its place among the ranks of larger producers. Svaetichin also hopes that with the refurbishment of Chateau Mukhrani’s 130-plus-year-old manor, the company’s income from wine tourism will eventually exceed money from wine sales.
 
Non-Alcohol
At the same time as many Georgian wineries had to shut their doors, non-alcohol producers were also hit by the embargo, but are likewise finding new markets for their drinks. Giorgi Menabde runs Georgia Product LLC, a company in Kazakhstan that is working on establishing a market for Geoplant teas and Kazbegi lemonades through local distributors; Menabde says that although exporters have had to learn to find ways around the logistical difficulties involved in transport while avoiding Russia, “there aren’t so many hassles.” Goods for the Central Asian market are relatively easy to manage in logistical terms, with heavily frequented routes through the Caspian Sea, and few tariffs to worry about, at least in Kazakhstan, a country with a growing taste for Georgian drinks.

Conversely, Menabde observes, “The only companies that I can see that are investing are Borjomi and wine.” Raising product and brand awareness takes a greater up-front investment than most Georgian companies can afford in the short term, and like anyone else, Georgian products have to adapt to local market conditions.

The carbonated soft drink market in Kazakhstan makes up $250 million, but a whopping 52 percent of sales are in B-brand drinks, in part due to price—Pepsi and Coca-Cola are priced at 30 percent over generic drinks.
 
What Might Have Been
So, although the Georgian beverage sector has to a large extent diversified its way out of the challenge of losing its biggest market, the many producers bankrupted by Moscow’s decision probably feel less sanguine. But it’s difficult not to imagine what might have been.

Would Georgian wines be in a position to reshape tastes in markets farther afield if they had been able to make rapid improvements in quality control and keep selling at high volume? What would the industry look like if small wine producers had an industry ready to band together for marketing efforts and access to Russian consumers to indirectly fund the effort? And if soft drinks and Georgian mineral waters had been able to plant marketing campaigns beyond their strategic markets like Ukraine, Kazakhstan and the Baltics, would we be seeing ad campaigns touting the health benefits of Borjomi in New York?

On the other hand, more reliable quality control and goods likely to carry a new-thing aura in saturated markets may be just what investors are looking for.