The Russian distillers damaging sales of Scots whisky

The analyst has been monitoring Russia’s alcohol sales day in, day out for 15 years.

Before that he was a senior executive in his country’s booze industry.

So he prefers vodka to what he calls the “exotica” of foreign spirits.

“I think it’s a second-rate product,” he laughed about whisky over the phone from Moscow. “And we don’t drink that much of it.”

He is right. Whisky - along with gin, rum and tequila - represents a small proportion of Russian sales of hard liquor.

But Drobiz’s country is the biggest in Europe with average alcohol consumption per person roughly the same as that of Scotland.

Which means a modest share of Russia’s market is worth a lot money. An awful lot more, in fact, than most people think.

In March of last year - as Vladimir Putin massively and violently ramped up his unprovoked war on Ukraine - some of Scotland’s biggest whisky exporters announced they were pulling out of Russia. Johnnie Walker maker Diageo, for example.

At the time much was made of the official statistics for sales in Russia from the Scotch Whisky Association or SWA.

Direct exports, the trade lobby said, amounted to £28m in 2021. That is quite a modest number. But it does not tell the full story, nothing like it. Why not? Because most whisky enters Russia via third countries.

Read More: Sales fears for Scotch over fake Russian whisky

Latvia, population 1.9m, in 2021 imported £156m worth of Scotch, down from £176m the year before. These figures made the relatively small Baltic nation the sixth biggest importer of Scotland’s most important export. Odd, no?

Are all Latvians downing a dram every night? Of course not. Most of the Scotch they were buying was being sold on to other countries in the former Soviet Union. Exactly how much we do not know.

However, we do have Latvian export figures for all whiskies, including Scotch, Irish, American and other varieties. Customs data captured by the World Bank put that figure at a cool quarter of a billion dollars in 2019. The biggest single market: Russia. It bought $182.4m worth of whiskies from Latvia that year, about 12.75m litres of brown booze.

In other words, until the war flared up a year ago Russia was probably one of the biggest foreign markets for Scotch.

Sure, by both volume and value of imports, it will have been well behind the United States or France. But Russia matters for Scotch makers.

That is why the dramatic changes in the country’s whisky market over the last few years - and especially the last 12 months - are eye-catching.

Drobiz has the lowdown. His Centre for the Study of Federal and Regional Alcohol Markets publishes regular updates on how much spirits Russians are distilling, importing, bottling and drinking.

Last month he put out numbers for whisky. Retail sales, he revealed, were about the same in 2022 as it had been in 2021, around 67.5m litres. (That, by the way, compares with something like 750m litres of vodka consumed a year.) In fact, Drobiz’s estimates, which include the hospitality sector as well as shops, put consumption of whisky up half a million litres.

How did Russians buy more whisky during a supposed boycott? Nicola Sturgeon, the first minister, earlier said no Scottish firms should be trading with Russia. More practically, sanctions mean Russian banks can struggle to process payments for imports. So what is happening?

Well, first because there are still channels for imports, including duty free shops. Moreover, last year the Kremlin legalised parallel imports of key brands.

That means distributors can ship in certain products without the permission of their manufacturers - provided they can find a wholesaler willing to sell and they are able to pay. Such shipments would be made through third countries.

And, of course, retailers and wholesalers still had stocks of whisky.

Read More: 'Dismissive' Scottish Government claim angers whisky industry

But there is another bigger explanation for sustained consumption. Russians have been drinking more whisky made in their own country.

Drobiz reckons domestic production has gone up more than third so since the full-scale invasion of February 2002 - referred to in Russia as the “special military operation”. He puts the current figure at around 37m litres a year. Imports, by contrast, have halved.

What happened last year was dramatic. But it was part of a longer trend for Russia to make whisky. Production, from a very small start, has been ramping up since 2015, a year after Putin seized Crimea and began his war on Ukraine. That, of course, was when sanctions first started to hit.

Drobiz has been around long enough to see how much the market has changed through the collapse of Communism, the free-market and democratic reforms that followed and then the rise of Putin.

“Whisky was made in the Soviet period, but in small volumes,” he said. “There was Soviet whisky and Soviet gin and - by and large - they were not different from imported drinks.

“But back in Soviet days people preferred our vodka and everything that is connected with it. “People didn’t chase down western booze in the same way they tried to get hold of foreign togs, shoes, jeans.”

There were small quantities of imported premium spirits available in the USSR, including but not only in specialist shops which only accepted hard currency.

But prices were far higher than for good-quality vodka or cognac made inside the Soviet Union. So it was only in the 1990s and especially the 2000s that Scotch started edging in to the market, especially among the growing middle classes of bigger cities like Moscow and St Petersburg.

“It was only in about 2000 that we started seeing a lot of whisky, gin, rum and tequila,” Drobiz explained. "I call this ‘exotica’ because or the Russia market it it exotic.”

It took a decade and a half - and the ‘crisis” spawned by the beginning of the Ukraine war nine years ago - for Russian businesses to started making their own “exotica”

What do we mean by “production”? Well, sometimes this is just bottling Scotch shipped in barrels from the UK.

There were plants in Moscow and St Petersburg which churning out low-end Scotch brands under licence from international concerns.

But there are also businesses which were buying alcohol in Scotland in third countries and bottling that under their own Scotch or Scotch-associated brand names.

And - and this is the bit that worries business leaders here - there are also businesses which are turning out whisky that is bottled, labelled and marketed to look like Scotch but which is not the real deal.

As The Herald reported yesterday we have found more than 30 brands on sale online in Russia which either claim to be Scotch or have English-language labels or designs that might make consumers think they were Scotch. Some of these are legit. Some are not.

The Scotch Whisky Association last year lodged objections to 40 Russian whisky trademarks, a third more than in 2021 and more than ever before.

Some brands claim to contain Scotch “distillates” but it is far from clear what this means. This includes a product called Mac Callister, which says it is “the style of Scotland” but spells its ‘whiskey” with an ‘e’. It is understood to be on the radar of SWA lawyers.

So how Russian is Russian whisky? That depends.

“In 2015 Russian distillers were licensed to produce whisky. They started importing ‘distillates” and gradually began to produce Russian whisky,” said Drobiz. “ Well, what do I mean ‘Russian’? It is hard to call it Russian because it was made with imported raw spirits, mostly from Great Britain, including Scotland.”

Drobiz talks of semi-Russian whisky. But he stresses that there are distillers - including those with real know-how - who have started making the product from scratch.

“Several years ago full-cycle production of whisky emerged in Dagestan,” he said, speaking of the Caucasian republic. “There is not a lot of it made and it accounts for maybe 5% of the Russian market.”

He is talking about Viski Rossii, or Whisky of Russia. It produces whiskies labelled in English but which make no claim to be Scotch. Brands include blends like Old Salt, Golden Chest and Ibex.

Right now it is the fake Scotch that worries the SWA. Will Scottish producers have to give some thought to legit domestic Russian brands? Drobiz thinks so.

“Big Russian vodka and cognac distillers dramatically increased their full-cycle production this year. They are already distilling their own malts and laying down barrels. It will then age three years,” he said.

“So by late 2025 Russia will be full of Russian whisky. I think it will be of decent quality. Because we are talking about very serious, authoritative producers.”

Drobiz reckons his country’s own full-cycle products will be competitive. And he stresses Russia has a story to tell on distilling, just like Scotland, which, of course, also produces vodka.

“There are lots of marketing myths and legends around whisky,” he concluded. “It’s a big advertising show.”