Spirits’ fallout from Russia’s attack on Ukraine – comment

For many beverage alcohol companies, the news this week that EU and G7 nations, including the UK, would ban all exports of luxury goods to Russia was official confirmation of action that they had already taken; most, if not all, leading producers of whisky, Cognac and other aged spirits had already cut Russia off as a result of the invasion of Ukraine. Brand owners have to tread a fine line here. While they have been firm in denying Russian consumers access to their products, they also have their own local employees to think about, in Russia, Ukraine and, potentially, surrounding states. Public statements have emphasised the importance of supporting these people as they face a difficult and uncertain future; many companies have made sizeable donations to NGOs and humanitarian agencies working in Ukraine and Poland. While Ukraine has been an emerging market of promise for some time for producers of whisky and Cognac, in particular, Russia combines scale and potential as one of the original BRIC markets, undercut by volatility linked to macroeconomic and geopolitical factors, as well as a sometimes troubling regulatory approach to alcohol from the state. Broadly speaking, Western aged spirits brands enjoyed a good year in Russia in 2021 following COVID-impacted 2020, although assessing the true scale of exports to the country is not straightforward. While there are direct shipments - most notably for blended Scotch whisky in bulk - a great deal of trade comes indirectly and via the Baltic states, and especially Latvia. Take Cognac, for example. According to figures from the Bureau National Interprofessionnel du Cognac (BNIC), just under 900,000 bottles of Cognac were shipped to Russia in 2021 - in the context of annual global volumes of 223.2m bottles, this looks insignificant. But, factor in shipments via the Baltic states and the true level of exports is about 5m-to-6m bottles, making Russia Cognac’s sixth-largest global market. Shipments to Latvia were up by 20% on the year. Other categories display a similar pattern: Irish whiskey exports to Latvia rose 17%, with the Irish Food Board (Bord Bia) acknowledging that most of this “was destined for Russia”; while DISCUS figures show that US whiskey exports to Latvia were worth US$49m in 2021, up 22.8%. For Scotch, HM Revenue & Customs numbers crunched by the Scotch Whisky Association suggest that direct shipments to Russia were worth just under GBP28m (US$36.6m) last year. Most of this came in bulk - some 11.6m litres pure alcohol (lpa) of blended whisky to be bottled locally. In volumes terms, exports rose by 41%. Again, Latvia adds significantly to this number: some 11m lpa in 2021 (essentially flat versus 2020), worth a total of GBP156m, down 11.8%. Although its volumes are similar to Russia’s, the value picture is hugely different, showing that almost all higher-priced bottled Scotch whiskies enter Russia via the Baltic states. Add this all together and, according to IWSR figures, the Russian Scotch whisky market in 2021 totalled some 6m cases, more than 90% of that accounted for by blends. The suspension of exports to Russia has come at a time when the market appears to have taken an upward turn as the worst effects of the pandemic have eased. The country is an important market with a growing love for aged spirits and Western products - but the precise degree of exposure to it varies widely by individual company. In Scotch, both Bacardi and William Grant & Sons have benefited from agreements with Moscow-headquartered and listed Beluga Group, which claims to be Russia’s largest beverage alcohol company. Beluga bottles Bacardi-owned blended Scotch William Lawson’s locally - or rather, it did until 10 March, when Bacardi suspended exports - which is the clear market leader in the country. William Grant, meanwhile, has been working with Beluga for more than a decade, extending its exclusive distribution partnership with the company in November. It’s been hugely successful: according to Beluga, William Grant’s total sales in Russia have more than doubled since 2011, with premium brands up by four or five times (Tullamore D.E.W. sales up 6x, The Balvenie 5x, Glenfiddich 4x). Initially, William Grant declined to comment on the status of its operations in Russia. Late last week, however, the privately-owned group confirmed it had suspended shipments in the first week of the conflict in Ukraine, “as soon as the gravity of the situation became clear”. Pernod Ricard also had reason to highlight its good performance in Russia during its fiscal-first-half 2022 results announcement last month, reporting “very strong growth”, particularly for blended Scotch Ballantine’s and Irish whiskey Jameson. Predicting the future for Russia's spirits market prompts many more questions than answers right now. How long will the suspensions last? What will the long-term impact on the Russian economy and disposable incomes be? Will some companies decide, based on the answers to the first two questions, to abandon Russia altogether? For the moment, I would imagine brand owners will be devising export strategies that exclude Russia altogether for the foreseeable future. While that situation might change - and change relatively swiftly - right now, they have to plan for the worst. There are also a couple of less obvious consequences from the war in Ukraine and its knock-on effects. Widespread Western sanctions against wealthy Russians are impacting a small but spend-happy consumer niche that has been a lucrative source of income for brand owners. These consumers don’t only spend big in Russia; they’re conspicuous in London, the ski resorts of the Alps, even the French riviera. They’re also courted as private customers in the luxury market of rare releases and cask purchases. Or rather, they were. Then, there is the issue that everyone was grappling with long before Putin’s troops crossed the Ukrainian border; supply chain challenges and rising costs. If energy prices and inflationary pressures looked worrying before the war began, they’re even more concerning right now. That's a factor that may yet have the biggest long-term impact on spirits brand owners in the months - and years - to come. Russia’s attack on Ukraine – Drinks industry response