Policy Briefing Series [PB/04/2015] Short-run risks and long-run challenges for wine 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 . Grapes 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% Russia 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 Georgian wine 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 wines 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 . Grape 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 .