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Russia: Vodka Today: Profits And Politics -- Part 2

The making and selling of vodka in Russia is one of the country's most profitable businesses -- and, therefore, the object of intense competition among entrepreneurs as well as regional authorities. In part 2 of her report, RFE/RL Moscow correspondent Sophie Lambroschini examines the politics of Russian vodka.

Moscow, 30 August 2000 (RFE/RL) -- Earlier this month, a showdown at Moscow's famous Kristall distillery saw two competing directors in tense conflict over who would control the lucrative vodka factory. Each had armed bodyguards, and police were prepared for a possible shoot-out.

In the end, this particular disagreement is due to be heard in court on Friday (Sept 1). But past experience has shown that Russia's vodka wars -- between conflicting mafia groups or between the groups and the state -- can turn bloody.

Unrelenting demand and relatively simple distilling techniques make vodka a profitable business. In fact, it is one of the most profitable businesses in Russia's regions, after natural resources such as oil, gas and diamonds.

Moscow-based Carnegie Endowment political analyst Nikolai Petrov, author of a study on vodka, explains why.

"Vodka is one of the sources of cash revenues around which a very mean battle has always been -- and is still being -- waged [in Russia] There are two issues involved. One is that most vodka is produced under the counter and is not taxed. The other distinguishing characteristic of vodka is that its production cost is extremely low and it brings in colossal amounts of money."

That explains the doggedness with which the Russian Smirnov company has been fighting for the past eight years in courts all over Europe with the U.S.' Smirnoff firm over the right to the use the brand name. It also helps understand why many of Russia's regions, lacking other natural resources, have turned to vodka as a source of revenue, both legal -- recorded in budget income -- and illegal -- in bootleg sales. The tiny North Caucasian republic of Northern Ossetia, for instance, runs some 200 vodka distilleries. Law-enforcement authorities estimate that, overall, under-the-counter vodka production is greater than legally distilled spirits.

The most impressive example of a region living off the vodka business took place in Pskov after Yevgeny Mikhailov, a member of Vladimir Zhirinovsly's far-right Liberal Democratic Party, was elected governor of this northern region in 1997. The subsequent war in Pskov over vodka licenses greatly resembled similar conflicts over oil and aluminum among Russia's business tycoons -- known as oligarchs -- who competed for the political influence needed for extraction privileges.

In only a few months' time, Mikhailov and his supporters launched a booming local vodka industry -- both legal and illegal -- siphoned off most of the profits and squeezed out possible competition. The regional Pskovalco holding group set up by the governor was granted -- by the same governor -- tax breaks, subsidies and loans. The local government also arranged the bankruptcy of older distilleries, then handed them over to Pskovalko through rigged privatization auctions. When a state bankruptcy official tried to check into the affair, his offices were closed and he was charged with "banditism" by local prosecutors.

A similar vodka war took place last year in Magadan on the Pacific Ocean. It ended with local authorities imposing a monopoly on producing and selling vodka -- even though, unlike Pskov, Magadan has other resources, such as gold and abundant fish. "Those are the main riches of the [Magadan] region," explained the Russian daily Nezavisimaya Gazeta, "not vodka, which has only one benefit -- quick cash."

It's no wonder, then, that President Vladimir Putin's centralization economic-reform plans have targeted the production and sale of vodka. Putin's idea is to paralyze regional autonomy by gaining more control over vodka profits, which would also increase state revenues. By setting up Rospirtprom -- a state-owned holding group that integrates most of Russia's distilleries -- Putin sought to recreate the state's vodka monopoly during Soviet times, when sales made up one-third of Russia's income. The state is also seeking to regain control over famous brand names like Stolichnaya.

At the Kremlin's initiative, too, the State Duma adopted a new tax scheme for alcoholic products this spring. Carnegie analyst Petrov says that the new system is aimed at breaking regional monopolies and thereby weakening regional leaders.

Under the old tax law, producers split their tax contributions between the federal and the regional budgets. That's why governors were tempted to increase vodka production as much as possible in their regions and eliminate competition. Protectionist devices -- such as special stamps and so-called "quality certificates" that took months to obtain -- were forced on importers. Distiller Boris Smirnov, who regularly comes in conflict with regional protectionism, explains how it works.

"Governors build cordons and barriers in order not to let vodka into their regions. If a stamp costs a ruble for a local producer, for an outside producer it will cost 20 rubles. So the local vodka will cost 50 rubles, and the one they imported 100 rubles. Competition disappears and each producer-distiller provides for only one region. No competition, no choice for the consumer -- he drinks only one kind of vodka."

Under the new system, producers now contribute only to the federal budget. Regional budgets are bolstered by retailers, who pay a special sales tax. So the regions now have an interest in increasing vodka sales -- not, as before, local production -- including opening their market to trans-regional commerce.

Vodka's economic importance has made it into a political tool, and not only in the regions. Distilleries are said to lobby their deputies in the Duma, just as Russia's military-industrial complex did in earlier elections. In fact, several vodka barons have themselves run for the Duma.

Vodka politics exist on a more primitive level as well. Politicians regularly promise free bottles of vodka to voters -- an outright, but highly popular, violation of electoral laws.

Even Putin himself, couldn't resist vodka politics during his spring presidential election campaign. After several state officials started speaking publicly of a 30 per cent hike in vodka prices -- thereby unleashing popular fury -- Putin stepped in, promising to prevent such an increase.

According to Petrov, Putin's vodka maneuver exploited Russian fears. The message was, Petrov says, "if you don't vote for me, things could be even worse." Other analysts say it contributed to Putin's easy electoral victory.

But, as the gypsy song says, drink a glass of vodka and politics won't matter much anymore:

"Let the hangover come tomorrow. Today, let's down our glasses and empty our heads with a merry song. Let's just drink a glass of vodka and nothing else will matter."