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CRISIS FORCES ARMENIAN PRODUCERS TO REORIENT FROM BRANDY TO WINE
David Stepanyan
ArmInfo
2010-07-16 13:41:00
Interview of Chairman of the Winemakers' Union of Armenia Avag
Harutyunyan with ArmInfo News Agency
Mr. Harutyunyan, according to the official statistics, output of
alcoholic products in Armenia in January-May considerably grew. Does
this growth indicate gradual recovery of the branch?
Negative trends have been observed in winemaking in Armenia over the
last one and half years, that was caused by the global crisis. If
brandy production in Armenia prevailed till 2008, Armenian brandy
production after beginning of the crisis acquired a somewhat different
nature. High-grade brandy was the primary source of income of Armenian
alcohol drink producers in the pre-crisis period. However, low-grade
brandy was also often available in the market, nevertheless, it was
perfectly sold. Armenian brandy sales in the crisis conditions reduced
by 50- 70% that, being a negative phenomenon, had some positive trends
as well. So, in the crisis conditions, Armenian producers realized
that low-grade forged products in the crisis conditions would not be
sold, as even the best Armenian brandies and wines started to be sold
badly. Armenian producers of alcohol drinks had to refuse from output
of forged products. Diversification of investments of alcohol drink
producers from brandy to wine has become the second positive trend,
which started to be considered for the first time in Armenia as a
profitable product.
Does it mean that our brandy producers started investing in wine
production?
Undoubtedly. Earlier the large producers of Armenia produced either
low-quality cheap wine or high-quality wine, but in small volumes,
only to ensure their presence in the market, as the main source of
their income was brandy. Thus, earlier investments were made only in
brandy production for objective reasons, since winemaking requires
more and longer capital investments than the brandy production. It is
much more complicated to produce wine than brandy, wine is softer,
it is kept harder and spoilt more easily, while the brandy spirit
only improves its quality in course of time. However, the crisis has
radically changed the situation. Considerable inflow of investments
to the winemaking sphere of Armenia has been recently observed. For
instance, several large and not so large companies have already
acquired imported, high-quality equipment and capacities to improve
the quality of the produced wine. The matter concerns Proshyan, Avshar
wine factories, as well as the new company "Armenia". Each of the
companies has invested about 1 mln EUR in expansion of wine making.
Certainly, it is not a very big amount, but as almost nothing has
been done in this direction for a long time, it is quite tangible. A
company should invest about 7-8 mln USD to steadily produce some
300-400 thsd bottles of wine annually.
Won~Rt it impact small wine producers and create a regular monopoly
in Armenia?
Earlier, there were about 50 companies in Armenia engaged in wine
and brandy production, moreover, about 20 companies among them
still produce quite a serious amount of brandy, and another 15 small
companies were engaged in production of high- grade wine, naturally,
in small amounts. At present, when the situation radically changed as
a result of the crisis and big companies started making investments
in wine production, it will actually go hard ill with some winemaking
companies, and unhealthy competition has already appeared in the
internal market. The point is that high money, being invested by big
companies in advertising, do not appear as a result of wine production
and sale, they have other sources of financing, while small winemaking
companies have just one source of financing, that is, wine production
which brings quite a low profit. This competition also forces small
winemakers to make new investments in their enterprises, sometimes
unreasonable. For example, let~Rs consider our small "Maran" Company
which annually produces 50,000 bottles of wine. We had to take out
loans being afraid of a competition with big producers. On this money
we acquired equipment in form of new production lines of Delatafolla
and Simer Italian companies. This equipment will allow us to increase
our production capacities 4-5 times, however, currently our market
opportunities actually allow us to increase production only twofold,
i.e. to 100,000 bottles. The point is that having been involved in
this competition, we cannot stop and will have to ramp up production.
Let~Rs speak about objectiveness of the processing enterprises~R
decision to reduce the grape purchase volumes~E
This sphere actually undergoes serious problems this year, taking
into account the fact that unsold reserves of brandy spirit and wine
have been left since 2009. Consequently, there is an essential lack
of packing materials and means for grape procurement, and, by hard
adventure or luckily, a good vintage is expected this year. I think
Yerevan Brandy Company (YBC) would procure much more grapes under
these conditions but for the state pressure. In general, I view this
pressure on the independent economic entity very negatively, as such
pressure has been multiply exerted on the sphere of production of
alcohol drinks since 1990s. That time, we were just forced to take
out loans for us to turn bankrupt, the cost of the enterprise was
close to zero, that would allow to privatize it for trifling sum. A
similar pressure was exerted in 1997-98-99 to artificially inflate
Armenia's economic indicators. Now, this pressure directly impacts
the branch, especially in view of the fact that YBC is one of few
enterprises which are completely in the tax field and do not output
forged products. That is, YBC has no opportunity to someway tack in
these conditions. So, even if YBC refused from 50% of the earlier
scheduled grape purchases, I would not be amazed, as the branch is
in an extremely grave condition.
The Yerevan Brandy Company has refused of 22% so far...
The Yerevan Brandy Company has refused 22% of earlier approved
contracts on purchasing grapes from Armenian farmers. This is
preliminary information, as I do not know what their final decision
will be. In any case, the agricultural producers of grapes have
not so magnificent prospects this year. Moreover, not a single
kilogram of grapes will remain in the fields, I am sure of that,
as the grapes will be bought by various processing enterprises. The
problem is at what prices the remaining grapes will be bought, and
when the farmers will pay these amounts. All the Armenian enterprises
have low-quality empty beverage containers. High-quality tare having
polymeric contactless coverage is needed. Storing up the grapes in
low-quality tare, producers will be unable to produce good products
or will produce them by means of very high expenditures, which will
create extremely doubtful prospects for their sale. That is to say,
all this creates premises for grapes to be purchased at low prices.
The tare has lessened, while production of wine and brandy in 2010,
according to statisticians, grew by 30,8 and 45,9%, respectively.
Don~Rt you trace inconsistencies here?
Wine is actually produced just once during the whole year, in autumn,
our statisticians will have to change the ways of working. All the
rest of the time wine is bottled, put up for sale, etc. That is,
the matter does not concern wine production. As for increase of sales
volumes, it is actually explained by gradual recovery of the branch.
Moreover, the matter does not concern wine again, as Armenia annually
produces 4-5 million liters of wine, that is a miserable figure, and
differences of production by a few score of percents towards up or
down mean nothing. Unlike wine, brandy is produced permanently. There
is actually growth available in production of alcohol drinks, and it
is not surprising, as the main growth of indicators of this sphere
will fall on October- December when export increases many times. For
the time being, producers are getting ready for export for our wine
or brandy to appear in the Russian market by December 10, i.e. on the
eve of the New Year, for which they must be exported from Armenia in
early September.
Exchange rate in Armenia has been continuously bouncing around
beginning with March 2009. How does it affect the Armenian alcohol
products?
It has an extremely negative effect on the export of Armenian alcohol
products. For instance, the "Maran" company concluded contracts
in USD with Russian and European partners in 2000, 2001, 2002. We
successfully worked under these contracts in 2002, 2003 and 2004. Over
that period of time, the USD exchange rates ranged from 510 to 560 AMD/
1 USD. After the USD exchange rate started abruptly falling since 2007,
we suspended our contracts and started negotiating in their conversion
to EUR, and the relevant agreement was reached in 2008. The crisis,
which resulted in EUR exchange rate decline, made us suspend our
contract commitments, which had a negative effect in our activity.
Therefore, one should not speak of real growth in export of Armenian
alcohol products, as the USD exchange rate is falling in Armenia,
and the interest rates on loans, including the CB refinancing rate,
remain at the same level at the best.
By the way, at what interest rate on average the branch is credited?
Producers of alcohol drinks in Armenia occasionally take out loans
at 10-11%, on the average - at 14-16%. Some companies take out loans
at 18% per annum, while even 10,5% is too much for the development of
our branch, and it is very difficult to work successfully under these
conditions. For example, to lay a new vineyard, we are given loans at
15% for a 2-3-year period. It is ridiculous, as loans for 25 years at
no more than 3% are given in the whole to lay new vineyards. Moreover,
it is carried out in conditions when it is unprofitable to lay new
vineyards in Armenia by definition, as the prime cost of one kilogram
of grapes in Ararat valley varies within 90 drams. In view of the fact
that the cost of grapes being procured by processing enterprises had
not been exceeding 110-120 drams for many years, as well as taking
into account periodical natural disasters, the farm enterprises work
with almost no profit. Therefore, it is unprofitable for villagers to
lay new vineyards, while it is to advantage of processing enterprises
only, and in exceptional cases.
From: A. Papazian
David Stepanyan
ArmInfo
2010-07-16 13:41:00
Interview of Chairman of the Winemakers' Union of Armenia Avag
Harutyunyan with ArmInfo News Agency
Mr. Harutyunyan, according to the official statistics, output of
alcoholic products in Armenia in January-May considerably grew. Does
this growth indicate gradual recovery of the branch?
Negative trends have been observed in winemaking in Armenia over the
last one and half years, that was caused by the global crisis. If
brandy production in Armenia prevailed till 2008, Armenian brandy
production after beginning of the crisis acquired a somewhat different
nature. High-grade brandy was the primary source of income of Armenian
alcohol drink producers in the pre-crisis period. However, low-grade
brandy was also often available in the market, nevertheless, it was
perfectly sold. Armenian brandy sales in the crisis conditions reduced
by 50- 70% that, being a negative phenomenon, had some positive trends
as well. So, in the crisis conditions, Armenian producers realized
that low-grade forged products in the crisis conditions would not be
sold, as even the best Armenian brandies and wines started to be sold
badly. Armenian producers of alcohol drinks had to refuse from output
of forged products. Diversification of investments of alcohol drink
producers from brandy to wine has become the second positive trend,
which started to be considered for the first time in Armenia as a
profitable product.
Does it mean that our brandy producers started investing in wine
production?
Undoubtedly. Earlier the large producers of Armenia produced either
low-quality cheap wine or high-quality wine, but in small volumes,
only to ensure their presence in the market, as the main source of
their income was brandy. Thus, earlier investments were made only in
brandy production for objective reasons, since winemaking requires
more and longer capital investments than the brandy production. It is
much more complicated to produce wine than brandy, wine is softer,
it is kept harder and spoilt more easily, while the brandy spirit
only improves its quality in course of time. However, the crisis has
radically changed the situation. Considerable inflow of investments
to the winemaking sphere of Armenia has been recently observed. For
instance, several large and not so large companies have already
acquired imported, high-quality equipment and capacities to improve
the quality of the produced wine. The matter concerns Proshyan, Avshar
wine factories, as well as the new company "Armenia". Each of the
companies has invested about 1 mln EUR in expansion of wine making.
Certainly, it is not a very big amount, but as almost nothing has
been done in this direction for a long time, it is quite tangible. A
company should invest about 7-8 mln USD to steadily produce some
300-400 thsd bottles of wine annually.
Won~Rt it impact small wine producers and create a regular monopoly
in Armenia?
Earlier, there were about 50 companies in Armenia engaged in wine
and brandy production, moreover, about 20 companies among them
still produce quite a serious amount of brandy, and another 15 small
companies were engaged in production of high- grade wine, naturally,
in small amounts. At present, when the situation radically changed as
a result of the crisis and big companies started making investments
in wine production, it will actually go hard ill with some winemaking
companies, and unhealthy competition has already appeared in the
internal market. The point is that high money, being invested by big
companies in advertising, do not appear as a result of wine production
and sale, they have other sources of financing, while small winemaking
companies have just one source of financing, that is, wine production
which brings quite a low profit. This competition also forces small
winemakers to make new investments in their enterprises, sometimes
unreasonable. For example, let~Rs consider our small "Maran" Company
which annually produces 50,000 bottles of wine. We had to take out
loans being afraid of a competition with big producers. On this money
we acquired equipment in form of new production lines of Delatafolla
and Simer Italian companies. This equipment will allow us to increase
our production capacities 4-5 times, however, currently our market
opportunities actually allow us to increase production only twofold,
i.e. to 100,000 bottles. The point is that having been involved in
this competition, we cannot stop and will have to ramp up production.
Let~Rs speak about objectiveness of the processing enterprises~R
decision to reduce the grape purchase volumes~E
This sphere actually undergoes serious problems this year, taking
into account the fact that unsold reserves of brandy spirit and wine
have been left since 2009. Consequently, there is an essential lack
of packing materials and means for grape procurement, and, by hard
adventure or luckily, a good vintage is expected this year. I think
Yerevan Brandy Company (YBC) would procure much more grapes under
these conditions but for the state pressure. In general, I view this
pressure on the independent economic entity very negatively, as such
pressure has been multiply exerted on the sphere of production of
alcohol drinks since 1990s. That time, we were just forced to take
out loans for us to turn bankrupt, the cost of the enterprise was
close to zero, that would allow to privatize it for trifling sum. A
similar pressure was exerted in 1997-98-99 to artificially inflate
Armenia's economic indicators. Now, this pressure directly impacts
the branch, especially in view of the fact that YBC is one of few
enterprises which are completely in the tax field and do not output
forged products. That is, YBC has no opportunity to someway tack in
these conditions. So, even if YBC refused from 50% of the earlier
scheduled grape purchases, I would not be amazed, as the branch is
in an extremely grave condition.
The Yerevan Brandy Company has refused of 22% so far...
The Yerevan Brandy Company has refused 22% of earlier approved
contracts on purchasing grapes from Armenian farmers. This is
preliminary information, as I do not know what their final decision
will be. In any case, the agricultural producers of grapes have
not so magnificent prospects this year. Moreover, not a single
kilogram of grapes will remain in the fields, I am sure of that,
as the grapes will be bought by various processing enterprises. The
problem is at what prices the remaining grapes will be bought, and
when the farmers will pay these amounts. All the Armenian enterprises
have low-quality empty beverage containers. High-quality tare having
polymeric contactless coverage is needed. Storing up the grapes in
low-quality tare, producers will be unable to produce good products
or will produce them by means of very high expenditures, which will
create extremely doubtful prospects for their sale. That is to say,
all this creates premises for grapes to be purchased at low prices.
The tare has lessened, while production of wine and brandy in 2010,
according to statisticians, grew by 30,8 and 45,9%, respectively.
Don~Rt you trace inconsistencies here?
Wine is actually produced just once during the whole year, in autumn,
our statisticians will have to change the ways of working. All the
rest of the time wine is bottled, put up for sale, etc. That is,
the matter does not concern wine production. As for increase of sales
volumes, it is actually explained by gradual recovery of the branch.
Moreover, the matter does not concern wine again, as Armenia annually
produces 4-5 million liters of wine, that is a miserable figure, and
differences of production by a few score of percents towards up or
down mean nothing. Unlike wine, brandy is produced permanently. There
is actually growth available in production of alcohol drinks, and it
is not surprising, as the main growth of indicators of this sphere
will fall on October- December when export increases many times. For
the time being, producers are getting ready for export for our wine
or brandy to appear in the Russian market by December 10, i.e. on the
eve of the New Year, for which they must be exported from Armenia in
early September.
Exchange rate in Armenia has been continuously bouncing around
beginning with March 2009. How does it affect the Armenian alcohol
products?
It has an extremely negative effect on the export of Armenian alcohol
products. For instance, the "Maran" company concluded contracts
in USD with Russian and European partners in 2000, 2001, 2002. We
successfully worked under these contracts in 2002, 2003 and 2004. Over
that period of time, the USD exchange rates ranged from 510 to 560 AMD/
1 USD. After the USD exchange rate started abruptly falling since 2007,
we suspended our contracts and started negotiating in their conversion
to EUR, and the relevant agreement was reached in 2008. The crisis,
which resulted in EUR exchange rate decline, made us suspend our
contract commitments, which had a negative effect in our activity.
Therefore, one should not speak of real growth in export of Armenian
alcohol products, as the USD exchange rate is falling in Armenia,
and the interest rates on loans, including the CB refinancing rate,
remain at the same level at the best.
By the way, at what interest rate on average the branch is credited?
Producers of alcohol drinks in Armenia occasionally take out loans
at 10-11%, on the average - at 14-16%. Some companies take out loans
at 18% per annum, while even 10,5% is too much for the development of
our branch, and it is very difficult to work successfully under these
conditions. For example, to lay a new vineyard, we are given loans at
15% for a 2-3-year period. It is ridiculous, as loans for 25 years at
no more than 3% are given in the whole to lay new vineyards. Moreover,
it is carried out in conditions when it is unprofitable to lay new
vineyards in Armenia by definition, as the prime cost of one kilogram
of grapes in Ararat valley varies within 90 drams. In view of the fact
that the cost of grapes being procured by processing enterprises had
not been exceeding 110-120 drams for many years, as well as taking
into account periodical natural disasters, the farm enterprises work
with almost no profit. Therefore, it is unprofitable for villagers to
lay new vineyards, while it is to advantage of processing enterprises
only, and in exceptional cases.
From: A. Papazian