Policy Briefing Series [PB/04/2015]

Short-run risks and long-run challenges for production in Georgia

- Summary of results -

German Economic Team Georgia

in cooperation with ISET Policy Institute

Stephan von Cramon-Taubadel, David Saha

Berlin/Tbilisi, May 2015

German Economic Team Georgia

Grape and wine production and exports

. account for 40% of Wine exports by destination (average of 2013 and 2014) fruit production Rest of world Other CIS Belarus 4% 1% . 162 mt, 88% consumed 5% domestically, mainly as wine EU (2008-2013) 8%

. Wine 16% of agricultural Kazakhstan 10% exports, and over 4% of total 57% exports (2013) Ukraine . Exports concentrated on CIS 15% (88%) and especially Russia Source: Own calculations, Ministry of Finance of Georgia (57%)

German Economic Team Georgia 2 Exports to Russia are important but volatile

Wine exports by destination, 2008-2014 200 USD m 180 160 Russia 140 Ukraine 120 Kazakhstan 100 Belarus 80 Other CIS 60 EU 40 Rest of world 20 0 2008 2009 2010 2011 2012 2013 2014

Source: Own calculations, Ministry of Finance of Georgia

German Economic Team Georgia 3 Short-run risks facing Georgia’s wine industry

Estimated reduction of Risk Mechanism wine exports to Russia (baseline 2014 exports)

1) Russia cancels Wine import tariffs increase from free trade with 0% to 20%  prices in Russia 18% (USD 20 m) Georgia increase  wine demand falls

2) Economic Incomes in Russia fall by 2.9% to contraction in 4.6% (World Bank)  wine 5-10% (USD 5.5-11 m) Russia demand falls

Tariff increases combines with 26% (USD 28.5 m, = 17% of 1) and 2) together lower incomes in Russia  wine total demand falls exports)

German Economic Team Georgia 4 Summary of short-run risks

. 17% reduction in total wine exports would be a substantial loss . Not devastating – would cut into but not reverse 2013 and 2014 growth in Georgian wine exports . Exchange rate developments are an important unknown – Lari strengthened vis-à-vis Rouble in late 2014, but has recently weakened, restoring competitiveness – Georgian exports might even gain due to strengthening of the Euro vis- à-vis the Rouble . Short-run risks largely uncontrollable

German Economic Team Georgia 5

Long-run challenges

. Regardless of their magnitude, short-run risks highlight the fundamental vulnerability of Georgian wine exports  Russian wine market is lucrative, but unreliable due to threat of trade restrictions . Russia’s population is ageing and shrinking (projected to fall from 142 million in 2015 to 121 million in 2050)  Russian wine market will stagnate and perhaps even decline in coming decades . Strong incentives to diversify export markets for Georgian wine

German Economic Team Georgia 6

The most dynamic markets are outside Russia and CIS

Wine imports by selected countries (1992=100)

Source: Own calculations, FAOSTAT

German Economic Team Georgia 7 Georgia’s fetch high prices…

Average prices received for Georgian wine in different export markets

6 USD/litre 5

4 Rest of the world 3 EU CIS 2 All destinations

1

0 2008 2009 2010 2011 2012 2013 2014 Source: Own calculations, Ministry of Finance of Georgia

German Economic Team Georgia 8 … especially on non-CIS markets

Shares of wine exports in different price ranges (2014) 80 % 70

60

50 Russia 40 EU 30 Rest of world 20

10

0 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6 6 to 7 7 to 8 8 to 9 9 to 10 over 10 USD/litre

Source: Own calculations, FAOSTAT

German Economic Team Georgia 9 Georgia is locked-in to Russian and CIS markets

. production fragmented in Wine exports by variety (2013-14) many small operations Tsinandali Other (White) 5% . Dominance of unlabelled wines 5% Unspecified Unspecified for own consumption (Red) (White) 36% 16% . Winemakers cannot secure Mukuzani reliable supplies of grapes (Red) 4% . Most indigenous varieties little Khvanchkara known outside CIS (Red) Saferavi Kindzmarauli 5% (Red) (Red) . Costs of adopting new grape 10% 19%

varieties and winemaking Source: Own calculations, Ministry of Finance of Georgia technologies are high

German Economic Team Georgia 10 The challenge of lock-in Objective: diversified, stable and growing exports

Current situation: dependence on CIS markets

German Economic Team Georgia 11 Recommendations

. Implementation of a quality control system that targets selected wines destined for new export markets – No unnecessary compliance costs for those who supply traditional markets – Strict observance, no leakage! . Continuation of the National Wine Agency’s international marketing activities . Strengthen investments in education and research on grape growing and winemaking (international partners) . Foster vertical integration in the wine supply chain – Cooperation between grape growers, and delivery contracts between grape producers and winemakers – Ultimately winemakers will own vineyards

German Economic Team Georgia 12 Summary

. Short-run risks are substantial, not devastating, uncontrollable . Long-run challenges of dependence on a volatile and stagnant market can be addressed . Need to diversify export destinations  Take advantage of growing non-CIS markets  Fetch higher prices . Recommendations  Establish separate and strict quality control system  Foster development of wine varieties suited to non-CIS markets  Invest in education and research on grape growing and winemaking  Provide incentives for increased vertical integration between grape growers and winemakers

German Economic Team Georgia 13 Contact

Stephan von Cramon-Taubadel [email protected]

David Saha [email protected]

German Economic Team Georgia c/o BE Berlin Economics GmbH Schillerstr. 59, D-10627 Berlin Tel: +49 30 / 20 61 34 64 0 Fax: +49 30 / 20 61 34 64 9 Twitter: @BerlinEconomics

German Economic Team Georgia 14