This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
News
Putin’s ‘grey market’ hits premium spirits brands hard
The police raid of a Russian factory making fake Johnnie Walker Black Label and other whisky, Cognac and rum brands has more to it than meets the eye.
The Russian authorities said they were acting to protect public health and to stop their excise revenues being eroded.
After all, heavily advertised brands with healthy profit margins are very attractive to counterfeiters; one need only look at the history of Treasury Wine Estates’ Penfolds range in China, where it has been subject to faking on an industrial scale.
A Euromonitor study in 2018 found that because of their high value and relatively low bulk, spirits accounted for more than 80% of the illicit trade in alcohol.
But well-informed sources in the spirits industry believe that the real reason for the Russian concern was that close friends of President Vladimir Putin were being hurt by the fakers.
Nobody is willing to speak out openly but a picture is becoming clear.
The insiders believe that a pattern can be traced in which the distribution of spirits in Russia has been turned on its head, with widespread availability of big, imported brands throughout the country despite the international embargoes on supplying ultra premium styles.
The source of these supplies is the parallel or ‘grey’ market, which producers say they can do little about apart from applying moral persuasion on traders around the world.
Before Putin invaded Ukraine more than a year ago, distribution of spirits in Russia was controlled through tight regulation of about licensed 40 companies. Most, including Pernod Ricard, operated through their own local subsidiaries.
Producers were able to remit profits from their activities, including distribution, while they were also able to control their brands in line with their global marketing strategies.
That has all now changed and a new distribution network has developed with great speed.
As soon as international sanctions were mooted, the Kremlin let it be known that it would positively welcome new entrants to the system in a prelude to ending co-operation with global brand owners.
Numerous Russian entities rapidly appeared on a replacement list of those allowed to import big spirits brands.
At the same time, Putin announced that he would encourage parallel imports.
Discreet background checks on those heading the stream of applications showed they came almost entirely from people with close contacts to the Kremlin.
In October Putin issued a decree to formalise the new system, effectively transforming the grey market in Russia into a lucrative sanctions-busting system with his cronies at the centre of it and redirecting profits previously made by brand owners into their own pockets.
In less than a year, the spirits business in Russia had been turned on its head.
New source of supply
Some of the country’s biggest retailers, including the giant Red and White, openly courted the new source of supply while websites such as http://winestyle.ru blatantly continue to offer a full range of global spirits to customers, all with full political backing.
Industry sources believe that up 50% of imported spirits on Russian shelves and in bars are arriving through the parallel import system and that overall stocks are virtually back to pre-war levels.
Some 60% of Scotch whisky supplies now available are reckoned to be coming from resellers outside Russia with the proportion rising fast.
In effect, the international sanctions on exports of top-end spirits to Russia have hurt not the regime that waged the war in Ukraine but the distillers in the West who all complied with the squeeze designed to hurt Putin.
They are losing profits while there is little diminution in volumes of their products available across the country. Meanwhile, Kremlin cronies enjoy a lucrative new source of income.
Nor is there much prospect of halting the grey market, which brand owners believe impacted between 5% and 15% of global spirit sales even before Russia officially opened its doors to it.
While they may be able to identify to whom a particular order was consigned through product coding, there is little effective action that brand owners can take to stop the grey market.
Free trade laws, especially in the European Union, mean that the trademark owner has no control over what an initial purchaser does once goods have been delivered.
If retailer X chooses to sell on a consignment to shipper Y in another country, the brand owner would fall foul of the law if it tried to intervene.
So it is widely known that large grey market consignments of spirits are reaching Russia via the Netherlands and much of the parallel imported Scotch enters via Latvia.
Both countries are members of the EU which imposed sanctions on Russia.
Nor can distillers restrict shipments to companies they believe to be resellers to Russia because that would breech anti-trust laws.
The most they can do is plead that their reputations are being damaged while Russian drinkers continue to enjoy a full spectrum of choice that they cannot control.
Widespread sympathy
That is why there is widespread industry sympathy for Pernod Ricard, which bore the onslaught of criticism when it became known that it was shipping its minimal supplies to its Russian subsidiary to safeguard its 300 employees in the country.
They are now losing their jobs and livelihoods while parallel importers ensure a flow of the French giant’s products into Russia, and Putin’s pals pocket the profits.
Meanwhile, faking in Russia continues to rise despite the closing of the Johnnie Walker imitators outside Moscow.
The Scotch Whisky Association said recently “Of course, the legal and political situation in Russia does make it more challenging, but it is important that we are consistent in our approach to remove all fake Scotch whisky from sale around the world.”
The Herald in Scotland reported that lawyers acting for SWA lodged 40 objections to Russian whisky trademarks last year.
That is a rise of a third on 2021 and the most yet in a single year.
Related news
Suntory to shift Irish whiskey bottling to Spain and Scotland