COGNAC AND WINEMAKING IN ARMENIA

[crimson]

Interfax

April 30 2004

COGNAC AND WINEMAKING IN ARMENIA

Armenia is one of the oldest winemaking regions, but it is better

known for its cognac, which it began producing in the late 19th

century. Today cognac is a symbol of Armenia and an important export

product.

Armenian cognac has always been in high demand in Russia but it is

now becoming popular on new markets and is sold in 25 countries.

Armenian wine is not as popular. After the crisis in the industry

that followed the collapse of the Soviet Union Armenian producers

lost their key market - Russia, but in the wine later began appearing

on the Russian and international markets.

Armenia has 24 winemaking and cognac enterprises.

VINEYARDS SHRANK THREE TIMES IN 10 YEARS

Winemaking began in Armenia more than 3,000 years ago. The country is

located in the southern Caucasus in a subtropical region. Armenia's

climate is defined by its mountains. Summers are hot and dry in the

valleys surrounded by mountains and winters are harsh with little

snow. Although Armenia is one of the few winemaking regions where

vines must be protected in the winter, its advantages are that the

air is dry and it has a large number of sunny days during the year

(300 on average). This lends special qualities to Armenian varietals.

The Armenian varietals have a high sugar content and thus high

alcohol, which facilitates the production of fortified wines and

cognac.

Armenia grows more than 200 kinds of grapes, most of them native to

the region. There are about 30 that are the most popular, including

Mskhali, Garan, Dmak, Voskeat, Muscat, Areni, Kahet, Rkatsiteli,

Adisi, Azateni, Anait, Karmrayut, Nerkeni, Tokun, and Megrabuir.

Armenia has six wine regions: Ararat Marz, Armavir, Tavush,

Aragotsoton, Syunik, and Vaiondzor.

The Ararat Valley is the main winegrowing region where up to 60% of

the country's grapes are grown. The region is divided into the Ararat

and Armavir districts. Six varietals are grown here - five Armenian

grapes (Mskhali, Garan, Dmak, Voskeat, Kangun) and one Georgian grape

(Rkatsiteli) are grown here and are used to produce cognac and

dessert wines.

Tavush and Aragotsoton regions, where 25% of the vineyards are found,

produce wine materials for cognac production and for light table

wines and sparkling wines. Syunik region on the border with Iran also

produces these wines. Vaiots Dzor produces the traditional Areni

wines.

Armenia's vineyards were largest in the mid-1980s when they covered

36,500 hectares, but this dropped to 22,000 hectares following the

collapse of the Soviet Union. Growers were forced to cut down the

vineyards to grow vegetables, since local wine and cognac makers

bought little raw material up until 1998 and vegetables brought high

profits.

As of the end of October 2003, vineyards covered 12,000 hectares.

Most are very old and in need of renewal. But this is a costly

process. It costs up to $2,000 a year to cultivate one hectare of

vineyards, and the new vines will produce a harvest only in the

fourth year.

Heavy freezes damaged 50% of Armenia's grapes in the winter of 2002 -

2003 and as much as 70% in Ararat and Armavir regions. The

Agriculture Ministry and wineries were forced to pay higher prices

for grapes to prevent growers from cutting down the damaged vines.

Analysts said only about 10% of the damaged vines died and the rest

will produce a harvest again this year.

Deep freezes resulted in a smaller harvest of 75,180 tonnes of grapes

last year, compared with 103,000 tonnes in 2002. Producers were

forced to buy elsewhere. Winemakers bought grapes from Nagorny

Karabakh, whose grapes had never been used to produce cognac. Some

producers planned to buy from Azerbaijan, but many were opposed. They

said using imported grapes to produce Armenian cognac would go

against national standards and result in a lower quality product.

According to national standards, Armenian cognac (technically brandy)

must be produced from Armenian grapes using the prescribed method and

bottled exclusively in Armenia. But due to last year's small harvest,

the list of grapes allowed for use in cognac was expanded to include

grapes grown in Nagorny Karabakh. Armenian cognac is normally

produced from indigenous white grapes, mostly Mskhali, Garan Dmak,

and Voskeat.

HISTORY OF COGNAC PRODUCTION

Armenia began producing cognac in 1887. Neress Tairian, a Yerevan

merchant, founded Armenia's first winemaking enterprise in 1877 and

10 years later the plant began producing cognac. It initially

produced about 1,200 buckets (one bucket equals 12 liters) a year.

Russian industrialist Nikolai Shustov acquired the enterprise in 1898

and after reconstructing and expanding it, increased cognac

production.

Three more cognac plants were built in Yerevan in 1893 - 1894, and by

1914 there were 15 cognac plants. The Shustov plant was the largest,

however. Yerevan region produced 181,000 buckets of cognac in 1913,

including 81,500 at the Shustov plant. The Shustov cognac was sold in

Moscow, Odessa, Warsaw, Smolensk, and Nizhny Novgorod.

Armenia's wineries and cognac plants were nationalized in 1920 and

the Ararat cognac plant was formed at the Shustov plant in 1922. When

the Yerevan winery was reorganized in 1948 the cognac and cognac

alcohol plants were merged to become an independent plant. A new

building was opened in 1954 and the Yerevan Cognac Plant was formed

within the Ararat trust.

Cognac production grew the fastest in Armenia during the Soviet

regime. Cognac production soared by 17 times from 1940 - 1985.

Armenia had 42 producers by the end of the 1980s with affiliates in

Moscow, Saratov, and Leningrad that produced a quarter of the cognac

consumed in the Soviet Union.

Tight restrictions on the production of Armenian cognac resulted in

numerous conflicts with Ararat plants in Moscow, Saratov, and St

Petersburg. The plant in Saratov was switched to joint production of

cognac drinks, the St Petersburg plant was sold for $300,000 on

condition it no longer produce cognac, and the Moscow plant was

transferred in trust to creditors, which it owed $1.3 million as of

the start of 2002.

The winemaking industry fell into decline after the collapse of the

Soviet Union. The grape harvest dropped from 270,000 tonnes to

105,000 tonnes and many wine and cognac plants stood idle.

The industry began to revive in 1998 when France's Pernod Ricard

purchased the Yerevan Cognac Plant and formed the Great Valley joint

venture. These two enterprises are currently the biggest producers of

cognac in Armenia. The country has seven or eight cognac producers,

which in addition to the two mentioned are the Ararat Cognac Plant,

Proschian Cognac Plant, Avshar Winery, Aregak, and the Yegvard Winery

and Cognac Plant.

Armenian cognac has become popular in many countries and is exported

to 25 countries, but Russia remains its main market, accounting for

80% - 85% of sales. Analysts expect demand for the cognac in Russia

to continue growing.

Yerevan Cognac Plant and Great Valley are the biggest suppliers of

Armenian cognac, but other Armenian producers are also beginning to

sell in Russia.

Naturally, there are imitations in Russia and Armenia, but most

producers try to protect their product by using special bottles and

markings.

YEREVAN COGNAC PLANT

The Yerevan Cognac Plant is one of the biggest enterprises in the

food industry and a leading producer of Armenian cognac with the

exclusive right to use the Ararat name.

Pernod Ricard invested in the plant in 1998. The company paid $30

million for the plant, along with the Armavir and Aigevan plants.

This was the biggest privatization deal in Armenia and triggered

numerous disputes. Some parliamentarians argued the deal should be

contested because the plant was sold too cheap.

In addition to paying $30 million, Pernod Ricard agreed to invest 30

million francs over five years to develop the business.

The company accepted all of the conditions set by Armenia. It agreed

to maintain production at 425,000 decaliters a year and bottle only

in Armenia. The cognac must be produced from local grapes and Pernod

Ricard promised to maintain cognac alcohol reserves of at least 1.660

million decaliters.

In the five years since purchasing the plant Pernod Ricard has

invested about $50 million in the plant and will invest another $10

million this year. The money was used to buy new equipment, improve

technology, repair production facilities, train personnel, expand

product range, grow grapes, and for marketing.

The Yerevan Cognac Plant conducted the Legend of Ararat advertising

campaign in the CIS from September 1999 - 2003 to promote the cognac.

The company spent $2 million a year on the ad campaign.

It spent 44% of this in Russia, 13% in Ukraine, 16% in Armenia, and

11% in Belarus. About 45% was spent on advertising in the press, 20%

on working with consumers in stores, bars, and through distributors,

and 35% on exhibits and production of related products.

The aggressive ad campaign resulted in increased sales. The company

sold 1 million liters of cognac in 1999, 1.7 million in 2000, 3.085

million liters in 2001, 3.486 million liters in 2002, and 4.22

million liters in 2003. It expects a 5% sales increase this year.

Turnover last year totaled $31.4 million, up 17.16% from 2002.

The Yerevan Cognac Plant exports 91% of its product. It sells to 25

countries, with the CIS accounting for 97% of sales and Russian being

the biggest market. The company shipped 2.997 million liters of

cognac to Russia last year, up 10.26% from 2002. Ukraine was the

second biggest consumer at 490,000 liters, up 78.23% from 2002.

The plant sold 360,000 liters in Armenia last year, up 52.68% from

2002.

Yerevan Cognac Plant also wells to Belarus, Kazakhstan, Kyrgyzstan,

Germany, China, the United States, and other countries.

The company is working to strengthen its position on existing

markets. Further expansion is limited by production capacity, which

depends on the harvest.

Yerevan Cognac Plant does not have its own vineyards but works with

more than 5,000 growers in four regions - Ararat, Aragotsoton,

Armavir, and Tavush. The growers have 2,100 hectares of vineyards and

can produce 20,000 - 22,000 tonnes of grapes a year. The plant has

been buying $3 million - $4 million worth of grapes a year since

1998. It bought 18,768 tonnes at 146 drams per tonne last year.

Yerevan Cognac Plant offers free advice to farmers and helps them buy

pesticides and get loans from the ACBA bank. It also works with

growers on a long-term basis. The company signs five-year contracts

with growers and will sign contracts for 10 years with growers that

are planting new vineyards. The company said its purchase prices and

long-term contracts motivate growers to expand.

Yerevan Cognac Plant produces 19 exclusive brands and offers five

kinds of regular cognac (aged three to five years), three kinds of

Ararat (three, four, and five stars), Ani, and Aik, 14 fine cognacs -

a seven-year cognac, 10-year (Armenia, Akhtamar, Dvin, Yerevan, and

Yubileiny), a 15-year cognac (Prazdnichny, Urartu), and 18-year

(Vaspurakan), a 20-year cognac (Nairi), a 25-year cognac (Erebuni), a

30-year (Kilikiya), a 40-year cognac (Sparanet), and a 70-year cognac

(Noah's Ark).

Sales of fine cognacs grew nearly 24% last year. The plant plans to

expand sales of fine cognac this year while maintaining sales of

lower-end products.

GREAT VALLEY

Great Valley, an Armenian-Cyprus joint venture, is the main

competitor for Yerevan Cognac Plant. The company was formed in 1998

by local businessman Tigran Arzakantsian and Cyprus-based Domeravo

Trading.

Competition for the market escalated into a serious conflict in 2000.

After signing a deal with major Russian distributor Rusimport, Great

Valley began working on the Russian market. Great Ararat was its main

product on the Russian market and during its first year the joint

venture captured 3.5% of the Russian cognac market.

But Yerevan Cognac Plant in August 2000 accused Great Valley of

illegally using the Great Ararat brand and said when the deal for the

Yerevan plant was signed, it included its trademarks, one of which is

Ararat. Yerevan Cognac Plant filed a complaint with the Armenian

patent bureau Armpatent in September 2000, and the Great Ararat brand

was cancelled. The decision to give Yerevan Cognac Plant the

exclusive right to the Ararat name cost Great Valley $1 million.

Great Valley is one of the biggest producers of wine products in

Armenia and has six enterprises, including the Yerevan winery Ararat,

the Artashat Wine and Cognac Plant, the Ashtarak Winery, and a winery

in Karmir Shuka (Nagorny Karabakh). It formed the Great Artsakh

subsidiary in Stepanakert in 2000. Great Valley has several growing

centers, one of which is in southern Nagorny Karabakh.

Great Valley exports all of its product, selling mostly to Russia and

the CIS, which accounts for 80% of sales. The company is the second

biggest seller of Armenian cognac in Russia and has a 3.4% market

share there (Yerevan Cognac Plant has 11.4%).

Beverages & Trading, owned by Bacardi-Martini Group, became the

exclusive importer and distributor for Great Valley in Russia in

September 2003.

Great Valley produces three-five year cognac (Armenian three, four

and five star), Great Valley (six years), Kars (seven years), Gavar

(eight years), Sevan (10 years), Akhtanak (12 years), Yerevan (15

years), Collectors (18 years), Arin Verd (25 years), and premium

cognac Tsar Tigran (12 - 30 years or more).

Like the Yerevan Cognac Plant, Great Valley buys grapes from growers.

It bought 5,272 tonnes of grapes last year, but plans to grow its own

as well. Chairman of the Board Tigran Arzakatsian said a group of

private investors representing the Armenian community in France

bought 24% of the company last year. The company will use the

proceeds to plant 2,000 hectares of vineyards.

WINEMAKING

Winemaking dates back further in Armenia than cognac production, but

Armenian wines are far less popular than its cognac. Georgia and

Moldova were the biggest wine producing regions in the Soviet Union,

but Armenian wineries were at their peak under the Soviet Union. Wine

production soared by nine times in 1940 - 1985 and champagne

production grew 10 times in 1960 - 1986. The wine business generated

about 37.4% of earnings in the food industry in the 1980s. about 3%

of the wine produced in the Soviet Union came from Armenia during

this time and three quarters of Armenia's wine was exported to

Russia.

The crisis that followed the collapse of the Soviet Union took with

it large vineyards and winemaking traditions. Wineries stood idle and

gradually deteriorated and the loss of the Russian market was also a

problem.

But winemaking has begun to pick up again in recent years. Foreign

and local investors have committed large sums to the industry. Small

producers have been formed, mostly in Yekhegnadzor region where the

Areni grape is grown.

Armenian wines are gradually returning to Russia, but faced with

competition from the more popular French, Georgian, and Moldovan

wines, and wines from Argentina and Chile, they are having a hard

time finding a niche on the Russian market. The USDA marketing

assistance program (MAP) has helped promote Armenian wines and gave

five producers the opportunity to conduct an aggressive marketing

campaign on the Russian and foreign markets.

Armenia's climate enables it to produce a full range of wines, but

the country has long been known for its fortified and dessert wines

similar to Heres, Madeira or port. Armenian wineries expanded their

product range to accommodate the consumer preference for dry or

semi-dry wines and offer a large assortment of table and fine wines.

Areni, the exclusive distributor in Russia for Armenia's Areni,

Ginetas, Kimle, Maran, Van-777, and Idzhevan wineries, offers more

than 25 Armenian wines, including the dry reds Gandzak, Vaiots Dzor,

and Areni Marani.

Other producers include Vedi-Alko, Yegvard Wine and Cognac Plant,

Aigezard Wine and Cognac Plant, Avshar Winery, Ararat Winery, and

other companies.

Vedi-Alko is one of the biggest producers of wine and vodka in

Armenia. Annual sales total 4 million - 5 million liters of vodka and

about 1 million liters of wine. The company includes the Getap and

Vedi wineries and Vedi Company. Vedi Alko produces 70 products, 30 -

35 different wines, vodka, and champagne. It exports to Russia, the

United States, the Baltic countries, Belarus, and Europe.

The Idzhevan Winery was founded in 1976 and produces nine wines and

one sparkling wine. It has its own vineyards.

Van-777 was formed in 1996 with the support of the USDA MAP program.

It produces five different wines - sweet, Muscat, semi-dry,

semi-sweet, and dry and sells domestically and in Russia and Belarus.

Ginetas was formed in 1998 also with the support of the USDA marking

program. It produces the Gandzak dry red wine and has its own

vineyards. The plant has facilities to process 20 tonnes of grapes

per hour and produces 60,000 - 80,000 bottles of wine a year that it

ages in oak barrels for one to three years.

Areni Winery specializes in the production of premium dry red Vaiots

Dzor wines from the Areni grape. It produces 80,000 - 100,000 bottles

of wine a year and also ages its wines in oak barrels for one to

three years.

This article was written by the Interfax Center for Economic

Analysis.

http://groong.usc.edu/news/msg86073.html