Russia Thirsts for Vodka Plants’ Profits

With evident satisfaction, Alexander Z. Vartanov strained to be heard over the din of clanking bottles.

“There are three things a man can watch forever without growing bored,” the factory foreman said with the air of someone unburdening himself of an ancient Russian proverb. “A fire burning, water flowing . . . and other people working.”

On display behind him was a living tableau of the last-mentioned--several dozen women tending two serpentine production lines on which thousands of bottles were being filled with a crystalline liquid, then capped, labeled and packed in cases.

This is the Topaz plant, about 25 miles north of Moscow, one of the few factories in this country manufacturing a product that people are willing to buy. That product is vodka, which is once again--as it often has been throughout Russian history--the gold standard by which all other Russian industry is measured, and a favored instrument of state fiscal control.

Today the vodka industry, privatized only six years ago, is under an assault engendered both by the product’s obvious value and its sheer ubiquitousness.

The government, desperate for a way out of the fiscal and economic crisis gripping this land, announced on Sept. 29 a plan to bring alcohol production under greater state “control.”

Most observers interpreted the term as meaning, at the very least, an increase in licensing fees and taxes on alcohol producers. Others heard a suggestive hint of “nationalization.” Although Prime Minister Yevgeny M. Primakov said there would be no reestablishment of Russia’s traditional government alcohol monopoly, one Moscow magazine quoted a vodka executive as remarking: “In the brains of the government, the idea of nationalization is already fermenting.”

That’s not surprising: Vodka provided as much as 30% of all government revenue under the czars and the Soviet regime; now it contributes less than 5%.

Since the Soviet state crumbled seven years ago, Russia’s gross domestic product has shrunk by well over half. Acres upon acres of land on which once-bustling, if woefully inefficient, collective farms operated now lie fallow while imported foodstuffs fill the shops. According to a recent analysis in the journal Foreign Affairs, in 1997, capital investment in Russian industry, agriculture, transportation and communications was no more than 17% of investment in the same sectors seven years earlier.

Industry Hit Hard by Taxes

The exception to this baleful record is the vodka industry. It is not unusual to hear the directors of vodka plants boast about how much they already pay in taxes--this in a land where tax avoidance is a national sport and many large companies pay as much as 90% of their taxes by barter. Even Gazprom, the natural gas company that is Russia’s privatized heavyweight, recently announced that it will pay 25% of its $790-million tax bill in food.

“There are perhaps 20 companies like ours in the whole country,” said Vladimir V. Antonov, the Topaz plant’s deputy director for production and quality, referring to fully private enterprises capable of turning a consistent profit.

Topaz maintains a work force of about 500 people on full wages, he noted, and boasts some of the most modern distilling equipment in Russia.

The company paid 120 billion rubles in taxes last year, or about $20 million at 1997 exchange rates, he said; this year, after a currency reform, it will pay 200 million rubles--still about $13 million, despite the sharp devaluation of the ruble last August.

It is not only because of its storied capacity to raise money that vodka plays a unique role in Russian policy and life. As the Japanese revere rice and the French their own language, to Russians vodka represents much that is quintessentially Russian, a symbol of hospitality, conviviality, peasant heartiness and wintry despair. Its role is evident in traditional sayings: “There are only two kinds of vodka, good and very good.” Or: “Tea is not vodka--you can’t drink a lot of it.”

But while vodka’s profitability makes it a ripe target for government control or even a takeover, legitimate vodka producers face what may be an even greater threat: crime.

Fiscal Burden Spawns Illicit Operations

Official statistics suggest that the real business of Russia is not vodka production, but illegal vodka production. And those illicit operations, which avoid the government’s stiff excise taxes, can undercut the street price of legitimate vodka by as much as 50%.

Government tax police say that in 1997, when Russians consumed 660 million gallons of vodka, legal production for domestic consumption amounted to only 217 million gallons. That means as much as two-thirds of all the vodka drunk in the country that year was produced or imported illegally--”a rather sad figure,” Viktor L. Khvorostyan, major general of the tax police service, said at a recent news conference.

In regions such as the Caucasus, virtually all known vodka-producing capacity appears to have been turned over to illicit production. One government official recently noted that in parts of the north Caucasus some distilleries appear to be working at 4% to 5% of their known capacity.

“It is hard to believe that any sound-thinking businessman would want to launch a business that would work at 4% to 5% of its real capacity,” he said. “This means that the bulk of the work is done at nighttime, when no one should be working. Can you imagine how huge a potential for illegal production of alcohol this creates?”

But that only hints at the enforcement task facing the tax authorities in a country where “there are at least mini-distilleries or shops at every railroad station, in every village, in every town,” said Vladimir A. Samuilov, head of the tax police service’s investigations department.

“In some provinces,” he added, “vodka is produced even in former cowsheds, pigsties and hay barns. Then all this is neatly bottled and packed and sold to the people. And it’s only after you buy a bottle like this and have a shot that you realize you haven’t paid for the real thing.”

Legitimate vodka producers say what fuels this trade is the government’s own ham-handed tax system. While production of an average bottle of vodka costs about 5 rubles, or about 30 cents, the government tax on that same bottle is 10 rubles--which must be paid by the producer. Since no tax is typically collected at the store counter, retail shops nationwide have plenty of incentive to offer customers the underpriced, if illegal, product.

As anyone would know from studying the Prohibition era, the one economic sector certain to profit from arbitraging the gap between the cost of real and illicit vodka is organized crime.

“No illegal alcohol business can be done just by one person acting alone,” said Maj. Gen. Khvorostyan. “As a rule, what we have are well-organized criminal groups consisting of both downright criminals and people who seem normal at first sight, but are in reality corrupted officials.”

The harvest, he concluded, has been that “this is truly a bloody business, one of the cruelest types of business in Russia today.”

Not that legitimate vodka producers have always conducted their business serenely, as is attested to by the Topaz factory’s top-of-the-line product, Saproshin vodka, which comes in a slender milky-white glass bottle topped with a pointed brown cap and designed to resemble a rifle shell.

That’s a memorial, Antonov cheerfully reveals, to the eponymous Saproshin, who perished by gunshot not long after he and two partners pooled 1 million rubles each to turn a Pushkino scrap yard into a private vodka factory in 1994. The circumstances of his death? “It was a dispute over ownership,” Antonov says simply.

State Portrays Moves as Against Contraband

Given the Wild West nature of the vodka trade, it is perhaps not surprising that the government portrayed its efforts to secure a greater share of vodka revenue--including beefing up the tax police force and tightening up the licensed sale of alcoholic beverages--as an anti-contraband policy. To the extent such a policy would aid legitimate producers, it is more likely to gain their support.

“This is the right decision made at the right time,” said Grigory A. Koshkarov, deputy general director of Kristall, the Moscow-based producer of Stolichnaya vodka. “The market mechanisms are not in place for normal competition.”

It is also more likely to gain public favor, since one noticeable result of the spread of illegal vodka is a rise in poisonings by adulterated spirits sold as pure. According to the tax police service, more than 90,000 people died from drinking methanol or other substandard alcohol in the last year.

But most market observers view Primakov’s Sept. 29 directive more as an attempt to regain ground lost when the post-Soviet government of 1992 relinquished the state’s 68-year-old monopoly on alcohol.

“The majority of our people think it was either a grave mistake or a criminal conspiracy for the state to allow such an enormous amount of money to slip out of the hands of the government,” said Valery A. Oreshkin, a trade expert who is director of the All-Russia Market Research Institute in Moscow.

It would not be the first time Russian leaders fumbled this reliable source of revenue.

A History of Government Control

Vodka income kept afloat the budgets of several czars and successive Soviet leaders--up until the advent of Mikhail S. Gorbachev, who in mid-1985 took what to many Russian historians remains the supremely perverse step of instituting an anti-alcohol campaign.

This was the brainchild of Gorbachev’s deputy party leader, Yegor K. Ligachev, a teetotaler who was appalled at the spectacle of a government extracting revenue of more than 50 billion rubles a year (or nearly $81 billion at the official exchange rate at the time) from such a degenerate habit.

The predictable results included the soaring production of bathtub vodka and the flowering of the black market.

Among the unexpected results, say many historians and others, was the more rapid severing of economic ties between the Kremlin and the Soviet Union’s far-flung republics, which relied even more than the central government on what had become a “vodka tribute.”

It was also the beginning of the cat getting out of the bag. Russian experts say the vodka market is now so highly criminalized that the government’s task resembles that of eradicating the narcotics trade in the United States.

“The question is whether the government has the ability or guts to interfere in such a criminal sphere,” said Oreshkin, the trade expert.

How firm the government intends to be is still unclear, as the formal regulations that will implement Primakov’s September ukase have yet to be published.

“One aspect of Soviet and Russian socialism,” said Antonov, sounding like a man whose business fortune has been subject to the whims of bureaucrats for far too long, “is that no document ever stands on its own. Who will I have to pay for my license? Who will I have to bribe? Until the subsidiary documents explain this, no one will know what will happen.”