Georgian Wine, Water Take the Back Door to Russia?

Three years after Moscow banned agricultural imports from Georgia, a Kremlin-financed business publication claims that Georgian wine, mineral water, fruit and vegetables are now entering Russia via third countries.

Supplies of Georgian-produced wine, mineral water, fruit jams and tea to Russia more than tripled between January and April 2009, the Russian Business-Gazette (part of the state-run Rossiiskaya Gazeta) claimed in a May 5 article. Azerbaijan, Belarus and Armenia were named as the chief transit countries. Sources for the data were not provided.

Russia banned the import of Georgian wines, mineral water, fruits and vegetables for alleged sanitary reasons in 2006. Georgian exports to Russia declined by more than half after the embargo went into effect, according to the Georgian National Statistics Service.

Both Georgian and Russian government officials state that they have no knowledge of whether or not the goods are entering Russia via other countries. The head of one prominent Georgian business association, however, told EurasiaNet that such exports do, in fact, take place.

"I have some information that Georgian products -- wine and mineral water or bay leaves, for example -- are taken to some third country -- say, Azerbaijan -- and bottled and packed there by a local company," said Jemal Inaishvili, president of the Georgian Chamber of Commerce and Industry. "This kind of product then enters Russia as produced in Azerbaijan or Belarus -- not in Georgia -- as a re-export."

Inaishvili said that "two to three" Georgian companies are reportedly involved in such transactions with Azerbaijani firms, but stated that he does not know their names. That lack of knowledge, however, does not apparently extend to the size of the trade -- Inaishvili claimed that Georgia's re-export transactions to Russia are "not so important" because the volume of such exports via Azerbaijan is "insignificant."

Leading Georgian wine and mineral water companies contacted by EurasiaNet maintained that they are not re-exporting their products to Russia via third countries.

One investment expert in Tbilisi, however, affirms that Georgian firms have been re-exporting wine to Russia since immediately after the 2006 embargo went into effect.

"In fact, we do know that Georgian wines and other products have been re-exported via Ukraine immediately after the embargo was established and via Moldova as soon as the embargo on Moldovan [wine] products was lifted [in 2007]," commented Ditrikh Muller, an economic expert with the Georgian Investment Group, a brokerage and market research firm. Muller did not identify by name the firms allegedly using re-exports to access Russia.

Both Georgia and Russia have a free trade regime with Ukraine, Moldova, Armenia and Azerbaijan, which means that customs fees are not imposed. One Georgian businessperson named dodging Russian customs fees as a key incentive for Georgian companies to consider a re-export strategy.

Aside from transportation, the largest cost would come in the form of the take paid to re-export brokers. Companies fulfilling that function for Georgian re-exports to non-Russian markets typically charge a "50-percent" take of the sales profit, according to economic expert Dato Narmania, who qualified the transactions as legal, but "an extremely private business."

Tbilisi's options for travel to Russia recently expanded with the resumption of daily flights to Yerevan and on to Moscow with Armenian airline Armavia. A Georgian cargo service representative named Armavia as the cheapest option for cargo shipments to Russia from Tbilisi: Armavia charges roughly $1 per 100-300 kilos of Moscow-bound cargo, while cargo to Kiev costs roughly 70 cents (50 euro cents) and to Baku $1.50. Rates are determined by shipment frequency, size and distance, as well as overall volume of trade with a given market.

The Russian Business-Gazette named Belarus and Azerbaijan as the re-export partners of choice, but Airzena's Lakia stated that cargo demand for Minsk is a mere fraction of shipments to Ukraine, Georgia's third-largest trading partner after Turkey and Azerbaijan.

Some leading Georgian companies argue, however, that air fares mean that they would have little incentive to ship cargo to Moscow by plane via a third country.

"Even legal cargo transportation via air is ten times as expensive as via sea or ground. We use air shipments very seldom . . . ." said Giorgi Margvelashvili, general director of Tbilvino, one of Georgia's largest wineries.

Tariffs for cargo shipped between the Georgian Black Sea port of Poti and the Russian Black Sea port of Kavkaz were halved in April. The ferry line currently only operates for Armenia-related cargo.

The lack of diplomatic ties between Georgia and Russia makes it difficult to verify whether or not genuine Georgian food products have been able to penetrate the Russian market. A spokesperson for Russia's Ministry of Economic Development claimed that it was not within his competency to assess the Russian Business Gazette report or to provide referrals to officials who could.

Georgian officials also declined to comment.

"I cannot make any comment [about re-exports of Georgian goods to Russia] since I do not know for a fact that any Georgian product is sold anywhere in Russia," commented Economic Development Minister Lasha Zhvania.

One Georgian economist, however, argues that demand alone suggests that Georgian products -- albeit as contraband -- have found their way into Russia. Russia accounted for roughly 56 percent of Georgian wine exports and 73 percent of its mineral water exports before the 2006 embargo went into effect, according to government data.

"Do you really think that the Russian governmental supervisory structures are so powerful that they will not miss a single case of contraband?" asked Paata Sheshelidze, president of Tbilisi's libertarian New Economic School. ". . . Demand defines supply. There is a demand for Georgian products and some smart guys are making money, that's all."