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Wine industry, once upon a time
Iurie Gotisan, July 15, 2009
The effects of the global crisis and decline of demand on the Russian market put the domestic wine industry in a pretty difficult economic-financial condition. In fact, it could be described as dramatic, with technological capacities being overcharged two months before the start of the new winemaking season, a fact confirmed by both specialists and authorities. For example, 1/3 out of about 170 wine plants are on sale or go bankrupt. The wine production decreased by about 32 percent in January-May 2009, and wine exports dropped by more than 20 percent, compared with late 2008. In addition, stocks of wine enterprises exceed 26 million decilitres, which is equivalent to almost two annual crops while the harvesting campaign will start soon.
Firstly, many wine companies did not manage yet to redirect their exports from CIS to the West, others recovered little by little after the export barriers imposed by Russia in 2006 or they face a crisis again. Secondly, companies which keep exporting wines to Russia are displaced by quality wines made in Latin America as sold from Chile or Argentina, which are cheaper than Moldovan wines. Thirdly, the great majority of winemakers contracted bank credits and cannot sell their production and reimburse the debts to banks, going bankrupt finally. Well, we already have a precedent in Moldova, as a well-known company was declared insolvent. Finally, the authorities are also to blame, as they did not support winemakers. Even more, the export of wines in bulk was forbidden. Perhaps, a stricter control was necessary, a monitoring of every supply in bulk, not the restriction when enterprises were already in a serious condition.
The European Union set an import quota of 60,000 hectolitres for Moldovan wines for 2008 (6 million litres, which is 3 percent of the supplies from 2007), used by all companies. Moldova-Vin officials have recently stated that the Moldovan wine exports to EU exceeded almost threefold the quota in 2008, but that was not a solution. Although wine exports have grown more than twofold in Ukraine, fourfold in Poland, and several fold in Romania, wine supplies to Europe increased slowly in general. That’s why Moldova cannot join so far other markets capable to replace the wine supplies to Russia, which were evaluated at more than 70 percent in 2006 and 20 percent at present.
Given the current situation, winemakers will be double losers, as many of them have contracted credits from domestic commercial banks and will have to reimburse them. Although the value of loans provided by banks to producers is unknown, the impact will be negative for both sides. On the other hand, hard-to-reimburse credits are also called non-performing loans in bank theory, and banks likely calculate their risk margin accordingly to provided credits, anticipating potential loan-related risks and system risks in general.
Of course, it depends on the size of risks as well, and they seem to be pretty high in this case, being capable to challenge a serious crisis. Secondly, the current situation could have dramatic impacts on exports in particular and on economy in general. One should not forget that winemakers are among largest contributors to the state budget. Wine exports covered one third of overall Moldovan supplies until recently. So, a deeper decline of budget incomes should not be excluded. Even more, many employees are and will be dismissed during the crisis, increasing the unemployment per total, while grape prices decrease every year and they are expected to be by 50 percent lower than in 2008.
Big problems will actually appear when grape prices will fall, as debts for raw material are on the rise, and it seems that this year will not be an exception. The grape crop this year is expected to be similar to 2008, but wine enterprises will unlikely be so avid like the precedent years since most of them face grave financial problems. Therefore, farmers could sell their production for a derisory price. A solution in this regard would be for the state to let farmers sell their grapes in Ukraine or Romania without requiring lots of certificates and by excluding lots of customs procedures for such supplies like the precedent years.
In addition, much more funds and more aggressively should be invested in marketing programmes, and Moldovan wines should be introduced on new markets. Moldovan producers and exporters were allocating only 0.5–1 percent to promotion and marketing programmes from the incomes raised from sales, but this is a very small amount compared with Romania, which allocates up to 10 percent of revenues. As known well, the government had a programme to conquer new markets besides Russia, but nobody knows when it will be implemented.
It seems that owning known brands or winning medals at international contests and exhibitions is not enough to conquer new markets. For this purpose, Moldova shall undertake some institutional and regulatory reforms in the certification and quality area. More "filters" shall be organised in Moldova to ensure the quality of spirits.
On the other hand, the government could intervene by subsidising winemakers and exporters, but it will unlikely do so, given the current condition of the budget and economy in general. Thus, Moldova runs the risk to keep 15–20 out of approximately 170 wine companies, should these trends go on.