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Cablegate: Armenian Brandy: Churchill's Favorite Faces New Threats

VZCZCXRO9956
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHYE #1335/01 2690252
ZNR UUUUU ZZH
R 260252Z SEP 06
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 4005
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1116
RUCPDOC/USDOC WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC 0056

UNCLAS SECTION 01 OF 02 YEREVAN 001335

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EUR/CARC
ANKARA FOR FCS

E.O. 12958: N/A
TAGS: ECON EINV ETRD EAGR PREL GG RS AM
SUBJECT: ARMENIAN BRANDY: CHURCHILL'S FAVORITE FACES NEW THREATS

REF: A) TBILISI 871 B) TBILISI 419 C) YEREVAN 661

Sensitive But Unclassified. Please protect accordingly.

-------
SUMMARY
-------

1. (U) Standing on one end of Yerevan's "drunken" bridge, the
Yerevan Brandy Company (YBC) is Armenia's leading exporter of
brandy/cognac; a signature Armenian product, famous throughout the
former-Soviet world. The company exports approximately 90 percent
of its product, 75 percent to Russia. While recent changes in
Russian excise stamp and phytosanitary regulations have hurt company
sales, the larger threats facing the company are look-alike
competitors and poor regulation of the industry. END SUMMARY.

--------------------------------------------- --
AN IMPORTANT SOURCE OF INCOME FOR RURAL ARMENIA
--------------------------------------------- --

2. (U) The YBC was founded in 1887 and was sold to
French-beverage-giant Pernod Ricard in 1999 for USD 30 million.
According to YBC President Herve Caroff, YBC holds the exclusive
license for the Ararat Brandy trademark, a brandy so famous that is
said to have been Winston Churchill's preferred drink. The company
employs over 400 workers and has direct purchasing agreements with
over 5,000 Armenian grape farmers who sell to collection facilities
in three rural provinces. YBC also purchases grapes from Nagorno
Karabakh. These facilities store and crush grapes and produce the
distilled spirits which are blended and aged at the YBC factory in
Yerevan.

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------------------------
SALES TO RUSSIA CRITICAL
------------------------

3. (U) YBC sells approximately one third of its product during the
New Year's-Russian Christmas holiday season. While the bulk of
sales (75 percent) are to Russia, YBC is hoping to expand sales in
Ukraine and other CIS countries. Total sales in 2005 were
approximately 4.4 million liters, a rate which YBC hopes to match
this year. YBC is also expanding its storage capacity, but because
of the aging process, the impact of the expansion will not be felt
for three to five years.

----------------------------------------
EXCISE STAMPS, FRAUD AND OTHER OBSTACLES
----------------------------------------

4. (SBU) One of the challenges faced by YBC this year has been the
change in Russian excise stamp regulations in spring 2006. The
change occurred on very short notice and YBC had to airlift product
with the new stamps to Russia to avoid running out of saleable
supply in that market. Currently, YBC has the new stamps in stock
and is producing to meet the anticipated holiday spike in demand,
but according to Caroff, the company has a million-bottle stockpile
in Russia with the old stamps which it cannot use.

5. (SBU) Russian phytosanitary regulations are also a concern to
YBC. While YBC is confident that their product can meet the
regulations, Caroff claims that other local Armenian producers are
producing look-alikes to YBC's premium brands using imported wine
spirits, substandard spirits or even grain spirits as a foundation.
He is concerned that, as with Georgian wine (ref A), the Russians
will decided to bar all brandy exported from Armenia as a result of
this fraud. Caroff admitted, however, that the situation in Georgia
was probably politically motivated and therefore such a crackdown
against Armenian products was less likely.

6. (SBU) Caroff claims that official grape harvest statistics are
exaggerated to conceal the illegal production of faux-brandy by
YBC's competitors. In 2005, the grape harvest in Armenia was
officially 130,000 tons, but Caroff claims that actual production
was no more than 60,000. According to Caroff, companies which have
been in existence for five or six years are selling "twenty-year
old" brandy, a clear sign of fraud.

-------------------------------------------
A LUCRATIVE BUSINESS FOR INFLUENTIAL PEOPLE
-------------------------------------------

7. (SBU) Caroff also said that look-alike products are threatening
YBC's market share. He complained about the Noy Wine and Brandy
factory, which sits on the other side of the "drunken" bridge and is
owned by influential businessman-turned-politician Gagik Tsarukyan

YEREVAN 00001335 002 OF 002


(ref C). The Noy factory has the right to use the Ararat seal for
its products, but was expected to use that seal for wines, not
brandy. That firm recently has begun producing look-alike brandy of
questionable provenance. Caroff told us he had spoken with the
Ministry of Agriculture about setting up a commission to monitor
brandy quality in Armenia, but was discouraged about the
commission's prospects when he was told that brandy production had
become a lucrative business for influential people.

GODFREY

© Scoop Media

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