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Development Prospects of the Wine Industry in Russia

Research by the Center for Investigations of Federal and Regional Alcohol Markets
The second half of this summer featured a surge in lawmaking activities in the Russian wine market. The Ministry of Finance is about to raise excise duties on wine products and to introduce excise duties on grapes, but some good news happened as well.
A meeting with winegrowers and winemakers was first in the series of industry meetings arranged by the new Ministry of Agriculture of the Russian Federation. On July 19, Russia’s Minister of Agriculture Dmitry Patrushev met representatives of the wine industry in order to discuss the issues of its development and growth in output of quality domestic wine. Patrushev called this one of the priority directions for activities of the Ministry of Agriculture and, among other things, claimed that the state annually allocates no less than 1.8 billion rubles for vineyard planting and maintenance, the mechanism of preferential loans in the industry is developing, and local legislation is constantly being improved to facilitate the process of running a business. According to him, this has helped increase vineyard areas from 73.8 thousand hectares in 2014 to 87.8 thousand hectares in 2017 and create a trend towards wine production with geographic indicators from Russian grapes.
The Minister defined a number of ambitious goals which the industry is facing – namely, reaching 120–140 thousand hectares of vineyard areas by 2025; fully meeting demand for domestic planting materials in the industry; reaching the level of 80% in wine material import substitution; and generating additional 20 thousand jobs in the industry. He added that efficient tools are required for achieving said results.
Making conclusions of the meeting, Dmitry Patrushev pointed out that, supported by the Ministry of Finance, the stance of the Ministry of Agriculture involves the creation of all conditions required for production and promotion of Russian wine, “Work in this direction is to be done thoroughly, in particular by a working group for issues in the industry, created by the Ministry of Agriculture of the Russian Federation and including representatives of profile ministries and agencies as well as industries”.
After the meeting at the Ministry of Agriculture, on July 23, Head of the Ministry presented a list of measures for development of the industry in Russia to the Government. The Minister of Agriculture is convinced that the state is to create conditions necessary for maximum domestic wine sales. It is not only stimulation of sales in stores, caf?s and restaurants that is in question, but also promotion of Russian beverages on airlines and railways as well as in state organizations and government bodies. This and other proposals to develop the wine industry were directed at First Deputy Prime Minister and Minister of Finance Anton Siluanov. Head of the Union of Winegrowers and Winemakers of the Russian Federation supported the initiatives of the Ministry of Agriculture and added that domestic beverages ought to be given priority.
The Minister of Agriculture articulated the main steps to be made for the development of Russia’s viticulture and winemaking. The document states that the wine industry is currently facing a number of systemic problems, which hold back the realization of the existing potential.
The above implies high dependence on wine material imports, which exceed 53%, as well as the lack of quality domestic wine grape planting materials, which are only sufficient for a third of the current Russia’s needs. Wine imports have a high share in the total volume of retail sales – foreign still wine occupies 50%, whereas imported sparkling wine accounts for 21%. Imported wine beverages containing up to 50% water occupy 25% in the sales structure – this also constitutes a problem, which the Ministry is determined to solve.
Dmitry Patrushev believes that it is high time that new approaches and priorities were set in winemaking and winegrowing. Documents by the Ministry of Agriculture indicate that a more active policy is to be followed in terms of domestic product promotion, aimed at import substitution.
For this purpose, the Ministry proposed the creation of additional incentives and beneficial conditions for Russian manufacturers. In particular, these measures are to be taken:
- creating optimal conditions for Russian wine sales, which would stimulate maximum distribution through trade and catering enterprises as well as other sales channels (e.g. airline and rail transport catering, duty-free shops, state organizations, or cultural institutions);
- providing stable state support allocation for planting and growing vineyards at the level of approximately 3.5 billion rubles per year, in particular with funds obtained through excise payments. At the moment, the state program for agriculture development involves annual funding of the wine industry at 1.5 billion rubles;
- retaining the preferential excise policy in regards to wine produced from domestic grapes, as well as implementing excise duties on wine materials and increasing the rates for wine drinks considerably. According to the Russian Tax Code, the excise duty rate for Russian wine is currently at 5 rubles per liter, whereas the rate for all the rest equals 18 rubles. However, the Ministry of Finance has already outlined its plans for 2019, namely the cancellation of preferential rates for domestic goods and excise duties becoming universal for all wines regardless of their origin. In addition, the agency is considering increasing the rates for wines and wine drinks from the current 18 rubles to 36 rubles. No excise duties for wine materials are in question just yet, and no plans to implement them have been announced.
The letter by the Minister of Agriculture states that, in the future, the implementation of the measures proposed by the Ministry will contribute to growth in vineyard areas up to 120–140 thousand hectares by 2025 (they currently occupy 87.6 thousand hectares, according to the latest data available). Moreover, it is expected that the industry’s demands for domestic grape planting materials will be fully met, 80% of imported wine materials will be substituted, and 15–20 thousand additional jobs will emerge.
In the early morning of July 24, the Ministry of Finance released the following information, “All in all, the directions proposed have been approved, and detailed elaboration, in particular possible adjustments to the regulatory framework, have been entrusted to the federal executive authorities”. Within the implementation of these initiatives, the Ministry of Agriculture will largely focus on protecting Russian winegrowers and winemakers.
The first reading of the issues closely connected with those discussed at the meeting of the Ministry of Agriculture took place in the State Duma on July 25. 
The State Duma received the proposal to separate the processes of growing grapes and wine production from the main alcohol turnover in Russia from a group of United Russia deputies headed by Ivan Demchenko and Natalya Boeva. The authors of the document are certain that “winemaking is a separate branch of agriculture, and the norms of the existing laws on alcoholic product turnover do not always take into account the technological specifics of winegrowing. This initiative sets a number of requirements involving a vineyard register, vineyard inventories, and declaration of grapes harvested for wine production”. In addition, a separate chapter of the bill is dedicated to the specifics of alcohol licensing in such beverages as wine, sparkling wine and liqueur wine. An explanatory note to the bill states the following, “In order to stimulate the industry, production of ethanol-based alcoholic beverages and production of noble grape beverages need to be considered and treated separately”.
As a result, producers of wine and sparkling grape wine grown in Russia may receive financial support and have the volume of annual alcohol production allowed increased. The respective bill passed the first reading at the State Duma plenary session on July 25 and implied the following:
- it is proposed to consider the possibility of providing financial support to small and medium-sized enterprises active in production and sales of excise goods such as wine, table wine, liqueur wine, champagne, and sparkling wine made from grapes grown on the territory of the Russian Federation;
- the right to produce wines and sparkling wines is to be given to farms and individual entrepreneurs having a certificate for simplified licensing of production, storage and supplies of wines.  At the same time, the volume of goods grown in Russia may not exceed 15 thousand decaliters annually (it amounts to 5 thousand decaliters today);
- farms and individual entrepreneurs are to be required to own – or rent for a time period of one year or more, the terms confirmed by a contract – vineyards with the area of at least 0.5 hectares;
- the main technological equipment for wine production from Russian grapes at farms and by individual entrepreneurs is not subject to the requirements involving the installation of automatic systems for measuring and monitoring volumes of finished goods;
- production of wine with Protected Geographical Indication or Protected Designation of Origin is to be performed from grapes available in the vineyard register;
- licenses for alcohol production, storage and supplies to retail may be given for production of liqueur wines and production of wines and sparkling wines. The right to perform retail sales of alcoholic products in the area of their production is in question as well. The maximum validity period for a license to produce, store and supply said alcohol varieties is set at 15 years;
- vineyards are to be excluded from the group of objects which representatives of authorities responsible for state control in production and turnover of ethanol are eligible to freely visit;
- it is proposed to clarify the main existing terms and definitions and to add new ones, in particular: “Russian cognac”, “brandy”, “full-cycle cognac production”, “fruit wine beverage”, “sparkling wine (champagne)”, “carbonated wine beverage”, and “carbonated fruit wine beverage”. In addition, the list of activities requiring a license is proposed to be expanded with a new type of activity, namely “full-cycle production, storage and supplies of cognac”.
Two more readings are awaiting us... Dear deputies, please do retain your eagerness to help the wine industry!

Vadim Drobiz,
Center for Investigations of Federal and Regional Alcohol Markets