Georgia’s wine industry is heavily dependent on export to CIS countries and especially Russia. Two main short-run risks associated with the Russian market prevail for Georgian wine exports at present:
1. Russia might cancel its free trade agreement with Georgia. This would reduce the demand for Georgian wine in Russia by 18%, or USD 20 m based on 2014 exports.
2. The economic slowdown in Russia could lead to reduced demand for wine. We estimate that this could reduce demand for Georgian wine by 5%, and at most 10%, or USD 5.5 to 11 m.
These short run risks are substantial but manageable. Reduced demand due to the economic slowdown combined with a cancellation of free trade with Russia would reduce total Georgian wine exports by USD 28.5 m or 17%, but still leave them much higher than their average level in recent years.
In the long run, the Russian wine market is likely to stagnate or even decline as the Russian population shrinks and ages. Hence, steps should be taken to reduce the dependence on this market and diversify exports. A corresponding strategy needs to take into account several factors that reinforce the current dependence on Russian and other CIS markets. These include the brand premium currently enjoyed by Georgian wines on CIS markets, the quality challenges arising from the production structure of grapes with hundreds of thousands of small farmers, and the high up-front costs of switching to new grape varieties and of introducing new winemaking technologies and quality certification systems.
