I have a vineyard next to Kyiv, and I know firsthand the problems wine producers face in our country. The village where the vineyard is located has all the necessary resources for wine production: grapes, wine streets. However, even though the resources are there, neither I nor my neighbors are allowed to utilize them. That’s how Ukrainian law is getting in the way of wine production.
Although ambitious and capable, the Ukrainian wine sector is not living up to its full potential. Unjustified increased state interventions, the bureaucratization of basic processes and outdated existing standards make it unbearably difficult to produce and sell wine for small wine producers. Tackling these issues and putting in place rules of the game that stimulate wine production for domestic and international markets should be a crucial component of agricultural liberalization in Ukraine.
Ukraine’s wine market is mostly dominated by imported products and large domestic producers. There are officially only 25 small wine producers in Ukraine at the moment. In comparison, in France, that number skyrocketed to a staggering 27,000 and in Germany 10,000. Even Canada with a much colder climate has more than 900. The problem isn’t Ukraine’s lack of potential producers – there are hundreds of them – but market barriers created by a plethora of interventionist regulations.
Barriers
To start wine production in Ukraine, prospective producers need to obtain a production license. The existing process that facilitates it is highly bureaucratic, creates opportunities for extensive government control and puts brakes on the industry’s development. For small wine producers, this also implies additional time costs. The groundless inspections, excessive monthly reporting, declarations submitting and more overburden prospective wine producers.
I have stressed many times that bureaucracy creates opportunities for corruption, and the Ukrainian wine sector suffers from this as well. Our goal should be to reduce the number of state-business interactions while improving their quality. For small wine producers, it should be enough to simply declare the start of wine production.
To become prosperous, Ukraine should pursue smart tax liberalization for all, not only wine, producers. The very nature of taxes and various administrative costs is such that, at the end, they get passed on to consumers making prices higher for them.
Let us look at the costs small wine producers in Ukraine have to bear. As of 2020, the excise tax rate for ordinary, non-sparkling wines, with an actual strength of 1.2 percent to 15 percent was Hr 0.01 per 1 liter. On top of that, the price of an excise tax stamp is Hr 0.19. Labeling administration can range from Hr 4 to 6 per bottle of wine, at a tax rate of Hr 0.01. Lastly, the excise stamp gluing machine costs can cost about Hr 500,000, which is unaffordable (and unjustifiable) for small wine producers.
Added to that, the government also determines the areas of grape production with certain grape varieties for these areas and regulates the varietal composition of its cultivation. Small wine producers are allowed to use their own grapes and wine materials. Such an approach slows down wine production since it requires each individual business to do what often could have been delegated to other parties. This results in inefficiency.
Current Ukrainian legislation also discriminates against small wine producers by excluding them from state aid programs. Small and medium-sized wine businesses do not have access to the presidential credit program “Affordable Loans 5-7-9.”
In Ukraine, even labeling and bottling of wine are regulated. It is required that only glass bottles produced in line with the current standards are used, or souvenir bottles and artistically decorated ware from glass, glazed ceramics, or a tree. It should be up to wine producers to decide since their knowledge of wine production and international experience is more technical than that of the government. In most “wine countries,” for example, metal barrels and cans have become extremely popular.
Solutions
During the recent National Reforms Council meeting on July 29, the Office of Simple Solutions & Results presented a concept of the wine sector reform with a special focus on small wine producers. Our policy recommendations have been developed together with Ukrainian wine producers, relevant wine producers associations and other civil society organizations, the Ministry of Economy, and the Ministry of Agriculture.
In brief, we believe that all the listed restrictions and barriers are harmful and should be removed. To liberate the Ukrainian wine industry, an excise stamp for wines whose strength does not exceed 15 percent by volume of ethyl alcohol of enzymatic origin should be scrapped. Similarly, the requirement to obtain a license for the production and wholesale of wine should be abolished for small producers – instead, there will be a simple notice about the start of production, and reports about the volume of production will be submitted not monthly, but quarterly.
It is key to allow small wine producers to buy grapes and to make them eligible for state aid. The purchase ban should be repealed. Similarly, restrictions on planting vineyards in areas defined by the state, and regulation by the central executive body of varietal composition of grape growing and zoning should be removed.
The Office of Simple Solutions & Results has developed the necessary draft laws, and I would like to encourage Members of Parliament to endorse these draft laws. These draft laws are currently being discussed with representatives of the Ministry of Finance and the relevant Verkhovna Rada Committee.
These draft laws will reduce market entry barriers and make it easier to produce wine in Ukraine. The implementation of the wine industry reform will help create hundreds of small wineries in several next years and will revive the Ukrainian wine industry.
