Privatization of Eastern European and Former Soviet Union Vineyards

Privatization of  Eastern European and Former Soviet Union Vineyards

Large-scale vineyards, state-owned or administered by cooperatives, were commonplace throughout the rule of the communist regimes. Many nations in transition have seen a considerable rearrangement of their grape-producing industries due to privatization and land reform[1].

The Need for Privatization and Restructuring

Like other food processors, wine processors had difficulty obtaining money in the early years of the shift toward communist rule. Land and banking reforms were to blame, as were macroeconomic factors, including the drop in gross domestic product (GDP) and excessive inflation. However, in this battle, winemakers were not alone. Officials blocked winemakers in East Germany and Russia from accessing export markets, leaving many in precarious financial conditions. The best wines were sent to the European Union, while the poorer grades were marketed to the former Soviet Union, Poland, and East Germany[2].

They also delayed payments, especially in the beginning. Many wineries paid farmers in installments. After sharing their grapes, farmers were to wait a few months before receiving the remaining payment. This is a split payment agreement, which lead to supply chain problems and a lack of cash. As a result, and with fewer and better grapes available, it prompted a shift toward farming for one’s monetary gain[3].

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In the meantime, foreign funds brought access to expertise and technology. However, recent improvements in quality and productivity may be attributed partly to an increase in domestic financial resources, both public and private[4].

Australian Wines: An Industry against the Odds

Privatization, Foreign Investments, and Restructuring

A range of approaches to the privatization of processing facilities has led to diverse dynamics in the market and industry throughout this period of transformation. While other CEECs and former Soviet Union nations used auctions to sell off processing infrastructure, the Hungarian privatization method of selling processing facilities to the highest bidder produced much more successful restructuring and a greater influx of foreign capital. So, why did Hungary sell its processing plants to the highest bidder?

The Foreign (Direct) Investments

The food industry has attracted a large amount of foreign investment. The Hungarian food and beverage industry had more than half of its assets owned by foreign investors by 2000. Nearly $257 million in FDI was invested in the Bulgarian food industry in 1998, which equated to 12.7% of the total foreign investment in the nation at that time[5].

As of 2000, FDI in the food industry accounted for 30% of all foreign direct investment in the country. Since 1998, foreign investment in Bulgarian wine production surged from $16.6 million to $81.3 million in just a few years. While much of Romania privatized their wine business by 1999, foreign investment is still quite low. Foreign owners control less than 5% of the country’s more than 600 privatized firms (including those in the wine industry). Also, in 2000, a considerable number of privatization contracts were canceled due to the inability of investors to meet their contractual requirements[6].

The Acts of Privatization and Their Impacts

The diverse privatization methods of countries that were members of the FSU resulted in a wide range of ownership structures. To illustrate this point, managers owned 54% of all Ukrainian assets in 1997 because privatization favored existing management. Business ownership in Russia and Moldova was more diversified than in other nations. Attempts at corporate reform have been stymied by government participation in the running of companies. In Hungary, there are presently a large number of distinct wineries[7].

Regarding joint ventures, there have been various examples of local management. Hungarian ownership and contracts have allowed CANA and Eurobor to keep the company’s historical integration mechanisms. If the new owner does not have total authority over the company, management changes may take time. On the other hand, the wineries have linked their supply networks vertically through contracts in the event of outright buyouts of foreign control, even if their former providers are not certain to be utilized again[8].

The government controlled just 40 of the 1289 food and beverage companies registered in Slovakia as of April 1998. Even though foreign firms owned only a small number of wine-processing assets in Bulgaria at year’s end, the country regarded them all as private property. While many wineries in former Soviet countries, such as Bulgaria and Romania, have been purchased by new owners, some have remained cooperatives[9].

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The Restructuring Methods and Impacts

Boyar Estates was the first step in the reorganization process, which started when the export market for Bulgarian wines began to shrink. The merger of Vinprom-Rousse Seabord and Domaine Boyar, both owned by international investors, formed the Boyar Estates. An organization with enormous market clout was born out of this combination. With this acquisition, the new owners took over four large wineries, two of which were situated north and two in the south[10].

In addition to Gamza Suhindol, several other big wine-processing companies have faced tough economic times. Because of this, as in other industries in transitional countries, greater concentration on the local wine market may promote higher-quality production, innovation, and better supply and labeling.

This Day in Wine History

December 26, 1991: On this day, the Soviet Union fell, and numerous nations began delineating their borders. This resulted in a “transition” between viable economies. Wine was one of the products most manufactured at the time. Consequently, the absence of foreign investments led to the privatization and reorganization of the whole wine industry[11].

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References

[1] Burrell, A., 2000, “The World Trade Organisation and EU Agricultural Policy” in Burrell, A. and A. Oskam (eds.) Agricultural Policy and Enlargement of the European Union, Wageningen Pers, Wageningen.

[2] Euromonitor, 2001, “The Market for Wine in Romania.”

[3] European Commission, DG Agriculture, 1998, “Agricultural Situation and Prospects in the Central and Eastern European Countries”, Working documents.

[4] Gow, H., 2000, “Restructuring the agribusiness sector and the role of foreign direct investment” in Burrell, A. and A. Oskam (eds.) Agricultural Policy and Enlargement of the European Union, Wageningen Pers, Wageningen.

[5] Gow, H., 2000, “Restructuring the agribusiness sector and the role of foreign direct investment” in Burrell, A. and A. Oskam (eds.) Agricultural Policy and Enlargement of the European Union, Wageningen Pers, Wageningen.

[6] OECD, 1999a, Agricultural Policies in Emerging and Transition Economies, OECD, Paris.

[7] Swinnen J., Liesbeth Dries and Hamish Gow, 2001, “Dairy Markets, Policies, and Trade in Eastern Europe and the former Soviet Union”, PRG Working Paper No. 26, Department of Agrikultural and Environmental Economics, K.U. Leuven.

[8] Swinnen J., Liesbeth Dries and Hamish Gow, 2001, “Dairy Markets, Policies, and Trade in Eastern Europe and the former Soviet Union”, PRG Working Paper No. 26, Department of Agrikultural and Environmental Economics, K.U. Leuven.

[9] Swinnen, J., 2002, Transition and Integration in Europe: Implications for Agri-Food Markets and Policy, World Economy, forthcoming.

[10] Tangermann, S., 2000, “Widening the EU to Central and Eastern European Countries: WTO and the Perspectives of the New Member States” in Burrell, A. and A. Oskam (eds.) Agricultural Policy and Enlargement of the European Union, Wageningen Pers, Wageningen.

[11] OECD, 1999b, Agricultural Policies in OECD Countries. Monitoring and Evaluation, OECD, Paris.