The challenging path of the export diversification of Georgian wine

The history of Georgia and wine are intertwined like a wine trellis. Georgia, considered the birthplace of wine, developed a unique tradition of winemaking proudly preserved still today, and has become one of the symbols of ‘Georgianness’. In particular, amber wine, a unique, orange-coloured wine fermented and vinified in an earthenware vessel called Qvevri, has increased the popularity and international demand for Georgian wine. Moreover, the boom of the Georgian wine sector, as one of the leading export sections of the national economy, is promoting the international image of Georgia and its tourism, providing opportunities in the impoverished Georgian countryside.

The increased export of Georgian wine, not exempt from problems, has grown steadily in recent years, particularly in key selected markets: Poland, the Baltic states, the United States, Japan, the United Kingdom, and China. Interestingly, in opposition to the trend of recent years, after the outbreak of war in Ukraine in February 2022, Georgian wine exports to Russia are increasing, representing over 60 percent of the national wine exports.External link This high dependency of the Georgian wine industry on the Russian market can threaten not only the sector under examination, but also the economic, political, and social stability of the Caucasian country.

Furthermore, despite growth, Georgian wine exports are hampered by the country's weak bargaining power in comparison to key wine importer countries. The following brief analysis of Georgian wine exports, with three prominent global political actors, the Russian Federation, the EU, and China, demonstrates Georgia's limited trade bargaining power, consequently resulting in its poor export diversification. 

More recent trends in Georgian wine export show patterns in the development of the wine trade in post-Soviet years that reveal why it is so reliant on the Russian market, a market perceived as risky for wine producers. 

After the collapse of the Soviet Union, the wine sector also entered a crisis. To make ends meet, the farmers relied on export ties from the former Soviet Union republics. At the outset of the 21^st century, the Georgian industry generally improved the export balance and the wine quality, which was low. However, the Russian embargo on Georgian wine in 2006, imposed in response to Georgia's pro-EU and pro-NATO policies, markedly influenced Georgia's economic development and trade orientations. This embargo generated a national economic shock, forcing local producers to reposition their exports or shut down their businesses. Interestingly, many wine producers consider the blockade positive. They were forced to find markets other than the Russian oneExternal link and experiment with varieties of grapes and wine typology, as the Russian market mainly asks for only semisweet red wine. Following that, the prohibition on Georgian wine was repealed during the first Georgian Dream government led by Bidzina Ivanishvili (2012-2013), thanks in part to his extensive connections with Russian oligarchs. As a result, Georgian wine production returned to dependence on the Russian market. Overall, the trade dependence on Russia has grown since the first Georgian Dream CabinetExternal link. The more recent confirmation of this trend is shown by the first two months of 2023 trade statistics for Georgia, where Russia is listed as Georgia's first trading partner.External link

Despite the economical rapprochement with the Russian Federation, Georgia, under the rule of the Georgian Dream, entered into an Association Agreement with the European Union in 2014 that included a Deep and Comprehensive Free Trade Area agreement (DCFTA) with the EU, allowing Georgian wine to be exported, eliminating most tariffs, and progressively approaching EU standards. However, in the short term, trade with the EU did not show meaningful positive impacts, other than raw materials, due to the EU's normative requirements for quality standards that are challenging to follow.[1] Moreover, at the beginning of March 2022, Georgia formally applied for EU membership ahead of the 2024 schedule, which would entail a further approximation of and compliance with EU standards. Georgian producers, primarily small and medium enterprises, have difficulties exporting wine to EU countries due to the EU's high internal competition, the segmentation of high-priced wines, and a lack of awareness among European consumers of Georgian wine. Indeed, Georgian wine is more renowned in Central and Eastern Europe, like in Poland and the Baltic states, countries that represent 10 percent of total Georgian wine exports in 2021.External link These countries recall the popularity of Georgian wine from the socialist era. Consequently, the National Wine Agency of Georgia and wine companies should focus their efforts on marketing promotion in Europe and at least partially reconsider their price segmentation. In any case, it is not easy to sell large quantities of Georgian wine in the EU, a market dominated by major world wine producers such as Italy, France, and Spain.

While trade integration in the short term with the EU is not working as planned, on the other hand, Georgia's economic dependence on Russia has been recently increasing as an effect of the war.External link Besides the attempts at trade diversification from the Russian market by the National Wine Agency of Georgia and wine companies, the growth in wine exports is causing concern, seeing as it is dependent on a volatile market. In addition, the wine directed to the Russian Federation is mainly in the segment of cheap wine that is produced by big wine industries.

So, why has the Georgian wine industry’s dependence on Russian exports grown over the last few months? First, due to the war against Ukraine, Georgian wine producers face challenges in selling their wines in Ukraine and are looking for other markets. Furthermore, the EU, the US, and Australia imposed sanctions on Russia, resulting in a substantial decrease in their wine exports to the Russian Federation, allowing Georgia to fill up the thirsty Russian market.

During the last few years, Georgia has started to increase its wine exports to another major geopolitical actor, China, where its citizens have started to appreciate Georgian wines, particularly the red varieties. Besides the EU, Georgia signed a free trade agreement (FTA) with China in 2017, one of the few countries to proceed on this, and has been part of the Belt and Road Initiative (BRI) since 2015. China has a growing presence in Georgia due to its geographical position, but does not consider Tbilisi a strategic counterpart.

In 2021, wine accounted for 10 percent of Georgia's exports to China and 7 percent of total Georgian wine exports.External link However, exporting to the Asian giant during the COVID-19 crisis was particularly difficult due to the restrictive Chinese laws. Even if the relations between China and Georgia are lacking solidity,External link the US and the EU follow the growing Chinese presence and soft power in Georgia with concern, but on the other hand, this presence could counterbalance Russia’s economic weight.

Despite many attempts to escape the risky and unstable Russian market, the Georgian wine industry is still overly dependent on a single country. In particular, small and medium-sized wineries aim to export to countries where their quality wine is better appreciated, such as Europe, the US, and Japan. Moreover, this export direction can alleviate the economic and political pressure of the powerful neighbor in the north, Russia. Indeed, Russia is using Georgia's firm reliance on Russian markets and the possible threat to enforce an economic embargo to influence the geopolitical decisions of the Caucasian country.

On the other hand, at the moment, the DCFTA with the EU and the FTA with China benefit more European and Chinese exports in Georgia than the overall Georgian exports, demonstrating the difficulties small Georgia faces in entering wine markets beyond those in the post-Soviet region.

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This research was realised as part of the EU Commission Horizon2020 MSCA Innovative Training Networks (MSCA-ITN) project MARKETS: Mapping Uncertainties, Challenges and Future Opportunities of Emerging Markets: Informal Barriers, Business Environments and Future Trends in Eastern Europe, The Caucasus and Central Asia, Grant agreement ID: 861034.

Author’s Bio: Margherita Gobbat is an early-stage researcher at the Center for Social Sciences in Tbilisi, Georgia and PhD candidate at the University of Bremen

Peer reviewed by: Prof. Dr. Oliver Reisner, Jean Monnet Chair, European & Caucasian Studies, Ilia State University

[1] Kasradze, Tea, Maka Nutsubidze, and Pikria Kapanadze. 2022. Recent Opportunities for Increasing Georgian Wine Export-Incentives or Obstacles to Improving Wine Quality. European Journal of Interdisciplinary Studies, 8(1): 68-81. https://doi.org/10.26417/357fcq80.