Russia begins to turn to its own vineyards

Thursday, 11. September 2008 - 13:00

An analysis by Igor Serdyuk

Low prices for agricultural land and high customs duties on wine are encouraging Russian entrepreneurs to invest in localvineyards - leading to a renaissance of Russian winemaking. While ten years ago the wine regions of southern Russia looked deserted, a growing number of premium local brands from this region are now on the market.

In five years Russia will celebrate the 400th anniversary of the first vineyards planted near the city of Astrakhan, by order of the tsar. By pure coincidence, the celebration will happen one year ahead of the 2014 Winter Olympics in Sochi, which the leading wine producers consider an excellent showcase for their new range of premium wines.

The renaissance of the Russian winemaking, although not yet evident on the supermarket shelves or restaurant wine lists, can clearly be seen when you travel across the Krasnodar Region, where the majority of Russian wineries are located. Well-managed vineyards with even rows of young vines and strained wires can be seen all the way from Anapa to Novorossiysk. About 30 wineries have vineyards in Krasnodar region now, and 18 of them are selling wines under their own labels.

Investing capital into wine production looks attractive because of the relatively cheap land. According to the public records of the Rostov or Krasnodar regions, you can buy one hectare of land for agricultural use for 30,000-45,000 rubles ($1,160/€835), and in the real deals it could be even cheaper, whereas land for housing would cost not less than 5000 rubles ($193/€139) per square meter.

Winemaking was excluded from the Russian investment priority list in early 1990s when hyperinflation practically stopped the industry. And in spite of further stabilisation of the economy, the niche for the local premium wine remained small on Russia’s rather sophisticated wines and spirits market. Most of the wineries that survived the 1990s were bottling imported bulk wines and were selling them with the shelf price below $4.

But market research shows that Russian consumers have become more interested in quality wines. Аs much as 80% of the wine sold in 2004 in Russia, had a shelf price below 100 rubles (at that time, below $4). In 2007, Business Analytica market research company estimated that the market share of wines in this categorynow represents only 56% of the market.

The first to explore the local premium niche was Chateau Le Grand Vostock, founded in 2003 on the base of former state farm Avrora in Krasnodar region. A group of investors bought the land with 10-15 year old vines of both indigenous and international varietals, replanted some of them with new French plants, built a cutting-edge winery and invited Frank Duseigneur, a young French winemaker, to implement the latest technological achievements. All the production was divided into five quality lines, starting from $4 a bottle Terres de Sud through to the $27 Chene Royal. The success of the latter exceeded expectations, according Elena Denisova from Chateau Le Grand Vostock. She says Chene Royal sold 15,700 bottles last year, and the company can’t supply enough to meet the demand.

A few wineries followed the example of Chateau Le Grand Vostock, trying to seduce consumers with premium class labels and upgraded quality wines: Fanagoria, Russkaya Loza, Kuban-Vino, Myskhako and Sauk-Dere from the Krasnodar region; Vina Vedernikoff from Rostov; and Abrau-Durso and Tsymlyansky Zavod, traditional sparkling wine producers. Most of them have installed new equipment and invited foreign consultants to produce the modern style wines.

Probably the most ambitious one, Russkaya Loza winery, created in 2000 as a facility for the production of ‘bag in box’ and Tetra Pak wines imported by Vinikom group, started to plant new vineyards near Anapa in 2002. Now, producing about 15m litres of inexpensive wine per year, they are ready to launcha premier line with a shelf price of 400 rubles ($15/€11) per bottle. The first vintage of 2007 will offer five varietal wines - Cabernet, Merlot, Chardonnay, Sauvignon and Muscat - in the quantity of 450,000 bottles.

Another bottling giant, Fanagoria, producing over 20m litres a year, successfully launched its premium Cru Lermont line in 2007 (vintage 2005), having sold 49,800 bottles of the French-style Merlot, Cabernet and Chardonnay with the retail price of 300 rubles. It’s planning to increase sales to 51,500 bottles of the 2006 vintage in 2008. Fanagoria’s CEO, Vladimir Pukish, cites the increasing demand and promises to expand the varietal range of Cru Lermont next year.

Especially interesting is the example of Vina Vedernikoff winery, located in the valley of the Don river near Rostov, where severe frost forces vintners to cover the vines with earth for the winter. However, this area has an interesting selection of native-born varieties (such as Krasnostop and Sibirkovy), some of them cultivated ungrafted. Riesling also shows great potential here, and Vina Vedernikoff will release one next year. The company launched its premium wines in 2007 and is now selling over 40,000 bottles.