A Timely Tonic For Vodka Makers?

Moscow is cracking down on bootleggers and imports

If there's one business Russia should be good at, it's selling vodka. Russians knock back 2.2 billion liters, $7 billion worth, each year--nearly 15 liters per capita. But a thriving bootleg market and lax import controls have left manufacturers of venerable brands such as Stolichnaya with a post-Soviet hangover. Production by legal manufacturers fell 45% last year, and many are on the brink of bankruptcy. The government is hurting, too: Tax exemptions and black-market sales cost the treasury more than $2.5 billion in 1995.

Now, after years of talk, the government is boosting efforts to shore up the industry--and its own budget. It is pressuring licensed domestic producers to pay their taxes in full and on time. It plans new trade quotas in January that could cut vodka imports by up to 90%. Across the country, local police have been cracking down on bootleggers, shutting down some 1,700 illegal vodka producers in Moscow alone.

The government faces an uphill battle. Once tightly controlled, Russia's vodka industry is now as wide open as in the days of Al Capone's Chicago. "We have people making vodka in the bathroom of their apartment," says Sergey N. Smirnov, strategic planning chairman for Rosalko, the trade association for Russia's major vodka makers. A government report recently estimated that 40% to 50% of vodka sold in Russia has "clearly criminal origins."

With all the illicit production, Rosalko figures that the government collects excise tax on less than 15% of domestically produced vodka. "[It's] analogous to having the state lose control over the production of money," says Eduard M. Kuzmetsky, deputy director of the Kristall vodka factory, which makes Stolichnaya.

Indeed, making vodka in Russia once was practically a license to print money. Under the czars and the communists, the state produced and sold all vodka, which financed a big chunk of the national budget. But the 168 state-owned factories were privatized as part of Russia's economic reforms. The government also licensed 3,500 new distilleries, many at factories and farms that make vodka as a sideline. Others operate without licenses.

Most of the newcomers dodge Russia's stiff 85% liquor excise tax and undercut prices charged by taxpaying producers. To stay competitive, many old-line producers hide production from the tax man, too. The government has pledged to dispatch inspectors to stand guard at the biggest vodka factories to make sure they report all their output. Moscow even takes payment in kind: In September, the Vladivostok Distillery agreed to settle its tax debt by turning over $670,000 worth of vodka to the tax police, who plan to sell it for a profit.

UNSAFE TO SWILL. Meanwhile, Russian producers are swimming against a tide of imported vodka. The government helped create the problem by allowing well-connected organizations to import liquor duty-free for resale in Russia. One such group, the National Sports Fund, was run by President Boris Yeltsin's tennis coach, ostensibly to raise money for Olympic athletes. It accounted for nearly a quarter of vodka sales in Russia in 1995, costing the treasury an estimated $220 million a month in lost revenues until its exemption was revoked last year.

The Kremlin officials who pushed that tax exemption have since been ousted from power. Even so, the government's new measures may not work. Import quotas have been announced before, then scrapped after protests from importers and former Soviet republics that supply Russia. Previous tax crackdowns have also proved ineffective.

Still, if the government's steps succeed this time, the beneficiaries will be not just the industry and the budget but the health of Russians. At outdoor markets in Moscow, a liter of vodka goes for as low as 8,200 rubles--$1.50. To make a profit, Kristall's Kuzmetsky says, taxpaying producers must charge 15,000 rubles. The cheaper stuff, often moonshine, can be poisonous. A report to the Russian Parliament estimated that 50,000 Russians have died from "subquality" vodka in the past few years.

While prices are expected to rise as a result of the government's tax and bootlegging crackdown, that's unlikely to keep Russians from their vodka. If so, Russia's cash-strapped treasury could also get a badly needed buzz.

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