The Chinese way of doing business has the potential to upend the world of retail, says Robert Joseph.
Ukraine's wines on the edge
Monday, 2. January 2017 - 11:30
A country of hot summers and deep winters, Ukraine’s mainland monks began producing wine in the 11th century. On the Crimean Peninsula, wine culture went back even further, to the 4th century BC. By the early 1980s, Ukraine boasted 250,000 ha of vineyards and was a major supplier of wine to the former Soviet Union.
Then, a series of calamities struck the country’s wine regions. The first came in 1985, when Mikhail Gorbachev ordered that vineyards throughout the Soviet Union be destroyed, as part of an anti-alcohol drive. After the collapse of communism, Ukraine was squeezed economically by corruption and mismanagement, leaving little money to invest in vineyards and winemaking technology. By 2014, the year that Ukraine entered a cooperative agreement with the EU, its economy was smaller than it was in 1992.
Russia was swift to react to Ukraine’s new friendliness with Europe. Fearing Western encroachment on its borders, Russia annexed the peninsula of Crimea, thereby cutting Ukraine’s wine industry off from a major source of wine grapes, many of which had previously gone into top brands.
Despite this, and the centrifugal forces that are tearing the EU apart, Ukraine enters the free trade agreement with the EU with optimism. Yet the rewards for suffering territorial annexation and war with Russia have so far been paltry: prospective visa-related red tape reduction and miserable agricultural produce export quotas.
Through it all, Ukraine’s wine industry has adapted, and now has another major change in front of it – to bring production standards in line with European requirements.
Rise and fall
In recent years, the main tendency of the winemaking industry has been decline: according to the Winegrowers and Winemakers Association of Ukraine (WWAU), there was a major drop in production in 2015, or a fall of 224m L to 751m L. That was an improvement on 2014, which saw a drop of 38% after the annexation of Crimea. In 2013, the fall was 8.6%, an improvement on the 25% plunge of 2012, which itself was much better than the 43% drop of 2011.
When speaking of the ‘wine industry’ in Ukraine, it’s important to understand the numbers: in total, there are a mere 40 or so wine-bottling companies. The reason? The notorious $20,000.00 wholesaler’s license that must be paid each year.
However, in 2016 the Ministry of Agriculture announced that companies producing wine from their own vineyards will not need the license, although the legislation is still being passed.
Former Fuel & Energy Minister Ivan Plachkov, himself a wine producer, expects this will allow hundreds of new producers to emerge. He has said the next step is to lift the moratorium on the sale of agricultural land, which has been in place since the end of communism; it’s currently in place until January 2017. The moratorium, like other initiatives, was declared as a way of ensuring that agricultural land wasn’t traded away in corrupt deals during post-Soviet privatisation of state assets. As wine and brandy making are considered important national enterprises, there are onerous restrictions on what can be owned or sold and how the enterprises can operate.
The constant legislative changes and financial levies are a burden on wine producers. “We have already been robbed once by the state, which forced us to pay a rental amount that was simply conjured up by the government of [former Prime Minister] Azarov,” says Robert Guliev, owner of Guliev Wines and president of Odessavinprom. He says the way the government operates is to issue backdated decrees, which mean producers suddenly find themselves in debt to the government, out of the blue.
“Equipment, management, brands and all production infrastructure was created by us, from our own profits,” says Guliev. “The only things that we were not able to secure for ourselves is the land, which is still owned by the state.” He says this is the way the government controls business: “Private enterprise within public walls, on public land.”
Sergei Chernenko, chairman of the Odessa Sparkling Wine Company, says: “While the whole country was under privatisation, our enterprises remained in the zone of quasi-ownership.” For more than two decades, leaseholders have paid the cost of assets several times in the form of rent.
But opening up the sale of land will bring problems too. First, the wineries will need to find the money to pay for it. And then there’s the question of who will get to the land first – Transparency International have ranked Ukraine as one of the most corrupt countries in the world. If the sales process is opaque, it could mean that someone else can come in and buy the land out from under existing wine businesses.
Image and branding
Market contraction is observed not only in winemaking, but also in alcohol production generally. “Each increase by 5UAH ($0.20) on a shelf has always led to a drop in the market by 20% to 40%,” says Andrey Matuzko, who until July was head of innovation and development at OLIMP, which produces a range of vodkas and Bakhchisaray wines. “At the moment we are observing an increase of 15UAH to 20UAH, due to a 50% excise duty growth, and glass and alcohol cost growth.”
While Olymp is looking to export its range of spirits – it produces a ‘non-hangover vodka’ – its wine portfolio targets Ukrainian consumers. “As it was obvious that alcohol will get more expensive, we designed products to mitigate the associated risks: a vermouth range, two wine ranges, and two vodka projects,” says Matuzko. Previously the Bakhchisaray-branded wines were produced in Crimea. After the annexation, Olymp moved its production to the mainland and now bottles wines in Odessa. Today the range includes two dry, two semi-sweet, and one fortified wine, produced under supervision of sommelier and technologist Bogdan Panchuk.
Interestingly, Bakhchisaray is still produced in Crimea, and still uses the branding developed in Ukraine, which means there are two versions of the same brand. It raises an interesting question: Who gets to use the silver medal awarded in Vienna 2015, or the ratings points awarded by Vino Ljubljana?
The issue of branding is a serious one for Ukraine, and not only because of the potential confusion with the split use of brands by Crimean and Ukrainian wineries. Ukraine itself doesn't have features that are recognisable to export markets. From the viewpoint of wine buyers, Ukraine has no selling point and the country isn’t associated with wine.
The work of giving Ukrainian wine an image has so far fallen on separate individual wine companies, several of which have put a heroic effort into quality and promotion. One such is the renowned Artemovsk Winery (called Artwinery since April), which has been a quality-focused sparkling wine maker since it was founded in 1950. The largest Eastern European manufacturer of classic sparkling wines, it can boast that the full production cycle is carried out at a depth of more than 72 metres, in underground plaster tunnels where the temperature and humidity is constant. The total area of the underground galleries is more than 25 ha, with a cellar of 30m bottles, and a total production capacity of 25m bottles a year, with all wines aged a minimum of nine months in bottle.
Despite dire economic circumstances, Ukrainians still tend to consume more fizz: in 2015, bubbles’ share of production grew by 24%. Unfortunately, that hasn’t been able to offset the dramatic losses of recent years: not only did Artwinery lose its Crimean vineyards, but also its Russian market. And then there is the situation in Donetsk, where the company once sold 30% of its output. Donetsk has been the epicentre of the Russian/Ukrainian conflict since 2014: Artwinery’s four newly opened Charte Bars were closed or destroyed, including the one in Donetsk’s Sergey Prokofiev International Airport, which was reduced to rubble by pro-Russian forces.
Yet the company’s knowhow and commitment to quality remains intact: Grapes are chosen observing 25 quality criteria, laboratories are operating, and retail prices are steady. The range of classic wines includes Krimart White Brut Zero, White Extra-Brut, Rose Brut and Red Brut, all of which were chosen for the Drinks+ tasting at Vinitaly 2016, and which received an enthusiastic response from the audience. There is also the Charte range developed for the Asian markets, which combine traditional sparkling wine with evaporated fruit juice, which results in a lower-alcohol wine. Charte, which is exported to China, was presented this spring during the Drinks+ tasting at ProWine Asia in Singapore. Today, Charte bars exist both at Artwinery and in strategic locations in Kiev.
Another important Ukrainian still and sparkling wine producer actively seeking to export is Shabo, named after its village. It’s already had some success, shipping wines to Japan, China and the Baltics, as well as Belgium. “We characterise our wines as ‘new New World’ wines,” says co-founder and export director Giorgi Iukuridze, speaking at the London Wine Fair 2016. “We are starting exporting to countries where there is interest in new wine countries – therefore Germany and Great Britain are of interest to us.” The portfolio includes traditional and tank sparkling wines, international and local varietal wines, and blends of Merlot, Cabernet Sauvignon, Saperavi, Chardonnay, Telti-Kuruk, and some amphora wine production.
Besides successful participation in international contests – including Mundus Vini, the International Wine Challenge, and Concours Mondial de Bruxelles – and trade shows, Shabo promotes its wines directly to the European on-trade. Iukuridze, who has a parallel career as a political advisor in Europe, has had a multifaceted wine education and conducts tastings for sommeliers. Shabo works with Stéphane Derenoncourt’s consulting company – the flying winemaker is so proud of the results that earlier this year he organised a tasting of Shabo wines for French wine experts and media. Shabo wines have since been placed in the cave of the newly opened Cité du Vin in Bordeaux. Next on Iukuridze’s to-do list is to get his wines listed in Parisian Michelin-starred restaurants.
But the main way the company connects with consumers is on site in Shabo, in the Odessa region; there is a wine culture centre, surrounded by hectares of the company’s vineyards, including plantings of the local Telti-Kuruk variety.
Other important wineries include Koblevo, located between the Black Sea and the Tiligul Estuary. Formerly a big producer of low-cost semi-sweet wines, the winery is moving towards dry quality-wine production; this year the wines were shown at Vinitaly.
The Prince PN Trubetskoy Winery is the most historic in Ukraine. Founded by Russia’s Prince Lev Golitsyn in 1894, it won international awards as early as 1902. Today, it is focused on the domestic market and wine tourism, and doing scrupulous work in the vineyards. As well as its rosé wine made from Ukraine’s first Syrah grapes, it offers a range of dry wines, plus wine tours, hospitality at Ukraine’s only wine chateau, tours of nearby historic villages and an oyster farm, and visits to the Askania-Nova biosphere reserve.
Plenty of red tape
Not everyone is doing so well. Independent winemaker Eugene Shneyderis started Beykush Winery from scratch, choosing young plants from the best European nurseries, and employing the talented and internationally trained winemaker Maria Skorchenko. After intense terroir research and planting, a showcase vineyard appeared – the first in Ukraine to avoid pesticides and herbicides. But the winery has been plagued by problems, including a scandalous tax raid by authorities in 2015, who declared the enterprise illegal. Such raids are not uncommon in Ukraine, and appear to be nothing more than revenue-raising exercises. So when can Beykush wines be tasted again? “Optimistically, in 2017,” says Shneyderis. A simultaneous tax raid was inflicted on the French winemaker Christophe Lacarin in Odessa. But in his case, the local government apparently intervened on his behalf, as Lacarin wines were served at the recent Kiev food and wine festival.
And yet, for all the struggle, Ukraine is still the land of dreams. Not only do Ukrainians possess unique expertise, but we also know how to survive in hard times (even if we sometimes make it harder on ourselves – why not?). We are exceptionally friendly and hospitable. Our wine companies, though not numerous, have amazing wine tourism options. And now, here is a glass of unbelievable Ukrainian Syrah rosé for these hot days.
This article first appeared in Issue 4, 2016 of Meininger's Wine Business International magazine.