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. 
 
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SUMMARY 
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¶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. 
 
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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. 
 
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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. 
 
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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