In Europe - East

By Mark Baker, feature article in Foreign Policy magazine, July-August 2015

As former Soviet republics develop closer ties with the West, Russia is pulling out all the stops to keep them in the fold. Amid this battle, Moldova’s wine industry has become the unlikeliest front.

Wine harvest in Moldova (Nicolae Pojoga, EurasiaNet)

Wine harvest in Moldova (Nicolae Pojoga, EurasiaNet)

On a sunny spring afternoon this year, winemaker Cristina Frolov was leading an impromptu tour through ridges of dried mud, gravel, and shoots of green at her family’s winery in Moldova. The season’s grape vines at Castel Mimi were just beginning to flower. The central Codru wine region, where the vineyard is located, is traditionally known for its white grapes. But Frolov explained that they’ve had success in recent years growing higher-value-added red varieties such as cabernet sauvignon. The experiment is part of her plan to cater to Western wine drinkers, who are often seen as having more demanding palates.

The 270-acre vineyard, near the village of Bulboaca, about 20 miles southeast of Moldova’s capital, Chisinau, produces an average of 1 million bottles of wine annually. Castel Mimi is part of a network of some 100 vineyards in Moldova that export tens of millions of bottles every year, putting the country’s wine industry in the top 20 globally. In fact, wine is at the core of the country’s economy, accounting for one-fifth of its GDP and employing one-quarter of its labor force, according to a 2010 government report.

Even still, Moldovan vineyards have long been considered a backwater in the global wine-drinking hierarchy. With the hope of finally making Moldova a true destination for Western customers, the past five years have seen winemakers across the country investing as much as $100 million in renovating and expanding their properties and output.

Map of Moldova

Map of Moldova

On the main grounds of Castel Mimi, the evidence of that investment is clear: The otherwise bucolic setting is actually a massive construction zone. Dozens of men in hard hats and fluorescent-yellow protective vests hunch over rolls of blueprints and scuttle around the property. They’re in the final stages of a $6 million transformation project, launched in 2010, that will restore the neoclassical château that once belonged to Constantin Mimi, an early 20th-century politician who initiated winemaking on the site. When the project is completed in the spring of 2016, Castel Mimi will feature a brand-new restaurant, hotel, spa, and conference center.

In a country with just over 3.5 million people and a per capita GDP of roughly $2,200—among the lowest in Europe—such spending is significant, to say the least. Yet the improvements being carried out at wineries across the country are about more than beverages, tourism, or even the bottom line. Wedged between Romania and Ukraine, Moldova finds itself much like its neighbors: caught in the cross-hairs of a struggle for influence in Eastern Europe that pits Russia against the West. And this small republic’s wine industry has become perhaps the unlikeliest battleground in that fight.

Over the past decade, the United States and the European Union have pledged an estimated $100 million in grants, loans, and other sector support to assist Moldova’s wine producers—and, in turn, reinforce the rest of the local economy. Much of this largesse has come in the form of a multiyear European Investment Bank credit line that started in 2011 and will run through 2017. It not only promises to provide direct financing to winemakers, but it also will add indirect assistance as wineries tap additional lines of private equity. The United States, for its part, has invested $17 million-plus via development programs that have helped Moldovan industries, wine included, diversify their markets. These ventures are only part of Moldova’s broader integration with the West; in recent years, the country has bargained with Brussels to establish a free trade agreement and a visa-free regime for short-term travel.

Russia, of course, has not sat idly by while the West makes overtures in what Moscow considers to be its backyard. Nearly two years ago, in September 2013, Russian officials, backed by President Vladimir Putin, announced that the country was freezing imports of Moldovan wine—a critical blow because, prior to 2013, Russia accounted for around 30 percent of Moldova’s wine export market. It was the second time in less than a decade—the first being in 2006—that Moscow used wine as a means of punishing its former satellite. Although Russia justified the 2013 decision on questionable grounds of sanitation concerns, the move was widely considered retaliation for Moldova’s increasingly close ties to the European Union.

The interest from the West has enabled the wine industry to find a toehold in Europe and to ultimately stay afloat during the Russian ban; sales of bottled Moldovan wine in Western Europe actually grew 14 percent in 2014. The reality, though, is this aid hasn’t been enough. The Russian moratorium has hurt many vineyards, including Castel Mimi, which, before September 2013, sold around 300,000 bottles a year to Russia. The winery had hoped to raise this amount to 500,000 bottles by 2015, Frolov says, but that looks increasingly unrealistic. Even with the support provided to Moldova by the United States and the EU, Russia can still exert a devastating amount of control over the small country.

The crisis is far from over. The main U.S. aid program backing Moldovan wine closed its doors this year, a result of an expiring mandate—and it’s not clear when a successor program will begin operating. While relations between Russia and the West only grow increasingly acrimonious, Moldova’s vineyards and the country itself remain caught in the middle of this geopolitical dispute between major powers—one with very real stakes. The embrace of the West may ultimately be a boon for Moldovan vineyards, but given the possibility of further Russian aggression, it might prove to be the very salvo that sinks them.

In Moldova, winemaking is more than a business: It’s also integral to the country’s history and has long been a point of national pride. When the Romans arrived some 2,000 years ago in what would become Moldova, production was already thriving. The industry’s golden age, locals say, came in the 15th century under the rule of Prince Stephen the Great. Revered as a heroic defender of the medieval Moldovan principality against incursions by Ottoman Turks, Prince Stephen is lauded as a champion of wine. He imported new grape varieties and created a position in his court specifically to oversee operations.

Over the next two centuries, wine production and quality began to fluctuate, as the territory of modern-?day Moldova became a vassal state of the Ottoman Empire. The Russian tsars who finally pushed out the Ottomans in 1812 helped revive the industry, even steering it through a deadly infestation of phylloxera aphids, a grape pest, near the end of the 19th century.

So Moldovans like to joke that their wine survived the Ottomans, phylloxera, and two world wars—but not the Soviets. When Moldova was part of the Soviet Union, from 1940 to 1991, wineries actually received relatively lavish investment. In the aftermath of World War II, the Soviets even expanded Moldova’s vineyard lands, purportedly reaching 220,000 hectares by 1960. But quality during the Soviet era suffered. Moldovan wines were traditionally dry, in keeping with the best French and Italian varieties. Russians, though, had long preferred heavier, semisweet wines that were inexpensive to make and didn’t typically bring home blue ribbons. Moldovan winemakers shifted to cater to these tastes, planting lower-quality, higher-yield grapes and in turn developing a reputation for “cheap and sweet” wines—a slight that mattered little at the time because nearly all Moldovan wines were sold to its Soviet neighbors.

After declaring independence from the Soviet Union, Moldova’s government sought to distance itself from Moscow, forging closer ties to a range of European institutions and even switching from Cyrillic script to the Latin alphabet. But the country remained economically and culturally tied to Russia. Ethnic Moldovans, who are nearly all Romanian-speaking, have long shared the same small country with Russians and Ukrainians. According to the 2004 census, the most recent for which full results are available, around 80 percent of the nation’s population identified as either ethnic Moldovan or Romanian. The next two leading groups were those who identified as ethnic Ukrainians (8.4 percent)—most of whom speak Russian—and ethnic Russians (5.9 percent). (In Transnistria, a pro-Russian breakaway region of some 500,000 people, Ukrainians and Russians made up around 60 percent of the population.)

Meanwhile, Moldova’s wine industry had a difficult time untangling itself from the Russian Federation, which continued to provide reliable sales. In the 1990s and early 2000s, some 80 to 90 percent of Moldova’s annual wine exports continued to go to Russia, according to a 2007 International Monetary Fund report.

This cozy state of affairs abruptly ended in 2006, when Russian officials banned the import of Moldovan wine, citing quality concerns. Just the year before, Russia had also cut off wine imports from Georgia. In both cases, the trade crackdown was seen as political retaliation. In Moldova, it was interpreted as punishment for Chisinau’s attempt earlier that year to impose customs controls on goods moving in and out of Transnistria. Russia, which supports the region’s efforts toward greater autonomy, labeled Chisinau’s actions a blockade. William Hill, who served as the head of the Organization for Security and Co-operation in Europe (OSCE) mission to Moldova from 2003 to 2006, says there’s “no doubt” that the 2006 wine ban was an attempt to coerce political action from Moldova. “Economic bans like that have been a Russian modus operandi for ages in that part of the world,” he says.

The ban was effectively lifted a year later, after Moldova set up a new quality-control regime for its wine and signed a bilateral deal with Moscow under which it explicitly agreed to support Russia’s membership in the World Trade Organization. But the damage was already done: Moldova’s wineries—which had changed their profile to satisfy Russian customers and, as a result, had made their products unpalatable to European markets—lost some $180 million in just eight months. (The entire industry was only worth around $300 million at the time.) Wine output, which accounted for a third of the country’s GDP before the ban, dropped 60 percent that year, according to Moldova-Vin, one of the country’s main export agencies at the time.

If the 2006 wine ban showcased Russia’s willingness to use trade penalties as a political weapon, it also provided the West with a perfect entree for prying Moldova out of Moscow’s grasp. Since the 1990s, the United States and its European allies had been operating aid programs throughout much of the former Soviet Union, but these programs had relatively modest goals. Kent Larson, the current head of the U.S. Agency for International Development (USAID) in Moldova, explains: “Much of that early work was in assisting land privatization as a way of helping the economy transition from a communist system to competitive markets.” But Larson notes it wasn’t clear at that point how U.S. aid could most effectively serve post-Soviet transition efforts. “We had to feel our way around to focus on areas where we could make a contribution,” he says.

By the early 2000s, though, the political landscape in the Western-leaning former Soviet republics, such as Ukraine and Georgia, had changed. Democracy movements like Georgia’s 2003 Rose Revolution, which swept President (and former Soviet Foreign Minister) Eduard Shevardnadze from power, and Ukraine’s Orange Revolution a year later, which enabled the rise of pro-Western reformer Viktor Yushchenko, had put Moscow on the defensive. These events also solidified the involvement in the region of the United States and Europe, both of which played at least an indirect role in the political uprisings. In Georgia, for example, OSCE-funded foreign election observers and USAID were instrumental in computerizing voter lists that ultimately helped secure President Mikheil Saakashvili’s victory.

While Moldova didn’t have its own democratic revolution at the time, it was still caught up in regional events. Hill claims Russia’s wine ban was actually a direct outgrowth of Yushchenko’s coming to power in Ukraine: The new Ukrainian president was pushing an “action plan” that gave Chisinau greater customs control in Transnistria. This, Hill says, was “what the Russians were reacting to in the first place.”

In light of regional political developments, Larson explains, the United States saw an opportunity to build on its previous work in Moldova and promote the country’s democratic aspirations through more-targeted economic assistance. In 2005, USAID launched the Competitiveness Enhancement and Enterprise Development (CEED) program, which went through two iterations—totaling more than $17 million over 10 years—before closing its doors in June 2015. On paper, CEED aimed to identify promising Moldovan industries and help producers find export markets to bolster the economy. But in reality, the program had a deeper—if explicitly unstated—geopolitical aim: to reduce Moldova’s economic dependence on Russia. Larson notes that CEED and later its successor program, CEED II, were designed “to help Moldovan companies diversify away from what were highly unstable markets [in the former Soviet republics]” and toward more reliable and less politically sensitive markets in the West.

Given its cultural and economic importance to Moldova, wine was one of the sectors CEED chose to focus on. And Russia inadvertently gave the fledgling program its first big boost when it slammed the door on Moldovan wine imports in 2006. After Moscow dropped the hammer, Moldovan President Vladimir Voronin, who had actually risen to power advocating closer ties to the Russian Federation, publicly admitted, as Hill tells it, that Moldova needed to reorient its industries away from the East.

Larson, who has been working for USAID since 1994, says, “CEED is unique. I’m not aware of any other aid program quite like it.” It hired consultants and sent winemakers on fact-finding trips abroad, including a trip by Castel Mimi’s Frolov to the Finger Lakes region of upstate New York in 2011. It also shaped Moldova’s outdated legislation on wine production to allow new privately owned wineries to compete more effectively with old Soviet-era behemoths. (While a part of the Soviet Union, wine production and exports in Moldova were concentrated in the hands of a few large state-owned enterprises. Since independence, the industry has been largely privatized, and today only a couple of wineries remain in government hands.) Diana Lazar, CEED II’s wine industry manager, explains that Moldova also needed help reforming layers upon layers of outdated regulations—like the unnecessarily large amount of storage space that wineries were required to have on-site—in order to get smaller producers into the market and foster competition within the sector, a critical factor in improving quality. “The rules have allowed for a whole new generation of wineries to emerge,” Lazar says. Legislation also created a national wine fund, paid into equally by the state and individual wineries, to shift some of the economic muscle away from old state-run operations.

Perhaps most importantly, CEED worked to reorient Moldova’s wine toward Western markets. Its money supported participation at international trade fairs such as the annual ProWein exhibition in Düsseldorf, Germany, and the CEED team helped revamp Moldova’s international wine branding, including creating a French-style appellation d’origine contrôlée, or a seal of approval, affixed only to bottles and winemakers that meet higher European export standards as determined by the country’s new National Office for Vine and Wine. The program also helped produce a splashy marketing campaign—“Wine of Moldova, a Legend Alive”—which aims at making Moldovan wine appealing to Western customers used to buying European, American, and Australian wines. At the heart of that campaign is a new logo depicting a medieval Moldovan legend in which a stork delivers a beakful of grapes.

USAID’s Larson explains that a lot of wineries, hooked for years on high-volume, low-quality exports to Russia, were initially skeptical of cracking the more demanding Western markets. “It’s a familiar problem of moving from a centrally planned economy to a market economy,” he says. “The winemakers had great technical skills, but they lacked skills in marketing and understanding the needs of consumers.” Nevertheless, they slowly adjusted as CEED’s efforts in training winemakers and its assistance with promotion came to bear fruit. Not only are sales of bottled Moldovan wines to the EU rising rapidly—sales to Lithuania in 2014 grew by roughly 35 percent and to Romania by 60 percent—but Moldovan wines have begun winning over critics as well. Just in June, wines from Moldova’s highly regarded Château Vartely, an active participant in the CEED II program, won two gold medals and two silvers at the Festival of European Wines and Enotourism, held in Oeiras, Portugal.

Meanwhile, EU support for Moldova’s wine industry has been centered largely on a $100 million line of credit from the EU’s European Investment Bank, plus a much smaller technical-assistance program funded by the Dutch government. Moldova and the European Union have also now established a “deep and comprehensive free trade area,” which has made it easier for Moldova to export many goods, including wine, into the rest of Europe.

In spite of these relative successes, Russia’s second wine ban came down in September 2013, exposing yet again the vulnerabilities of Moldova and its wine industry. As before, Russian officials were very careful not to explicitly link the move to any aspect of Moldova’s foreign policy. Gennady Onishchenko, the head of Russia’s public health authority, said only that impurities had been found in the wine: “We don’t intend to act as a nanny for the Moldovan economy.… The ban is a necessary step that we have undertaken reluctantly, but it is the only possible way of solving the present situation.” (Subsequent tests by the Moldovan government could find no evidence of such contamination.)

But the wine ban didn’t emerge from a vacuum. From 2006 to 2013, in step with USAID’s efforts to reform Moldova’s wine industry, the country had drawn ever closer to the EU, with visa facilitation in 2007 and more formal labor, migration, and travel agreements in 2008. The real turning point came in April 2009, when mass protests erupted over allegations that Moldova’s then-ruling Party of Communists had rigged parliamentary elections earlier that month. The demonstrations eventually brought to power a coalition of four pro-European parties. While the new leadership was wary of antagonizing Moscow, it put at the forefront of Moldova’s foreign policy European integration and the signing of an association agreement with the EU that would bring the country economically and politically directly into Brussels’s orbit.

Russia, unsurprisingly, was deeply critical of the shift. Referring to the protests after the disputed 2009 vote, Foreign Minister Sergei Lavrov used exceptionally harsh language, describing the protesters as “pogrom-makers” set on destroying the country.

So the timing of the wine ban, just two months ahead of when both Moldova and Ukraine were set to sign formal association agreements with the EU in Vilnius, Lithuania, left little doubt that Russia was again up to its old tricks. “They were trying to put pressure on the Moldovan government ahead of the [Vilnius] summit and the signing of the association agreement,” Hill, the former OSCE head in Moldova, says. (In a similar move the following year, Russia also banned Moldovan apples, another key export, in an attempt to turn farmers against the government just ahead of parliamentary elections. The vote in the country’s north, where apples are grown, ended up falling heavily in favor of Moldova’s pro-Russian Party of Socialists.)

Nevertheless, Moldova agreed to ratify an association agreement with the EU in Vilnius; Ukraine fatefully did not. (Kiev’s new government eventually did sign an agreement in June 2014.) Though Moldova hasn’t been plunged into violence by Russian-backed separatists as its neighbor has, it has hardly survived unscathed. Moldova has lost around one-third of its wine market—a significant improvement from the nearly two-thirds loss in 2006, thanks in part to CEED, but devastating nonetheless. Russia’s actions have even jeopardized Moldova’s traditionally second-largest wine market in Ukraine. “The Donbass [area of eastern Ukraine], where the fighting is taking place, is Ukraine’s wealthiest region outside of Kiev,” Castel Mimi’s Frolov says. “And there’s no selling there anymore.”

The ban couldn’t have come at a worse time for the Moldovan economy. Adrian Lupusor, director of the Chisinau-based think tank Expert-Grup, predicts the economy will stagnate this year, after expanding ?4.6 percent in 2014. In a now-infamous banking scandal, around $1 billion disappeared in November 2014 from the three largest domestic banks, equivalent to more than one-fifth of the country’s GDP at current exchange rates. As of June, the Moldovan currency had lost roughly 30 percent of its value since that scandal.

Moscow, though, may be showing signs of easing its punishment—at least in the more Russia-friendly parts of Moldova. In May, it partially relaxed the ban for a handful of winemakers in the autonomous Gagauzia region, in Moldova’s south, after Russia’s public health agency announced that tests showed those wines again complied with its standards. To observers in Chisinau, it wasn’t clear whether the move heralded a wider rollback or was simply a reward for Gagauzia’s behavior: In April, the area’s 160,000 residents elected a stridently pro-?Moscow lawyer, Irina Vlah, as regional governor. And in a 2014 referendum, 98 percent voted in favor of integrating with a Russian-led customs union. It’s no accident that the Kremlin excluded more Western-leaning areas of Moldova, but it’s uncertain whether this political jockeying will persuade the rest of the country to follow Gagauzia’s example.

While Russia continues to toy with the Moldovan economy’s largest sectors, the general population, it seems, blames its own government, not Moscow, for the fiscal woes. “Things like the banking scandal,” Hill says, “very much play into Russia’s hands.” Moldovans think, he explains, that “if this is democracy, let’s go east.” A public opinion poll conducted in the spring by the Chisinau-based Institute for Sociological and Marketing Research, in fact, showed a 3-to-2 majority of the population favoring Moldova’s membership in the Russian-led Eurasian Economic Union over joining the EU. Moreover, the Party of Socialists has emerged as the single largest party in Parliament and a force on the political landscape.

This Eastern-looking shift comes during a lull in Western assistance for the wine industry as CEED II formally ended in June. In theory, the program has left Moldovan winemakers with a clear path forward, but the real test may be whether Russia does in fact lift the wine ban wholesale. Lazar says that winemakers are convinced by the strategy of producing higher-quality, smaller-batch wine for Western markets but admits that wineries would welcome a lifting of the ban. “Of course,” she says, “they want to sell their wines on the Russian market again.” A repeal of the ban would lead to an immediate injection of cash for many Moldovan wineries, including Castel Mimi, which in addition to bottled wines makes wine distillates used in brandies that are popular with Russian consumers and that were also affected by the ban. But there’s always the danger that some wineries could fall back into their old bad habit of depending on the unpredictable market to its east.

In the meantime, Moldova’s winemakers continue to hope for the best—and to look for a way out of this geopolitical tug of war. “We were so hopeful in 2009 with the democracy movement,” Castel Mimi’s Frolov says. “Now we are simply tired of politics and are losing faith in the country.”

Mark Baker (@markbakerprague) is a Prague-based writer and has authored numerous guidebooks on Central and Eastern Europe for Lonely Planet, Frommer’s, and Fodor’s. A version of this article originally appeared in the July/August issue of FP under the title “Corked.”


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