Global Economics

Vodka Wars Spill into U.S.


What's in a name? Well, quite a lot actually, if the name happens to be Stolichnaya, the world's best-selling vodka. To be precise, some $2 billion in annual sales, including $400 million in the U.S., where Stolichnaya is the third most popular vodka, after U.S.-made Smirnoff and Sweden's Absolut. Americans developed a taste for the stuff back in the days of the Cold War.

Back then, Stolichnaya was the only Russian vodka on sale in the U.S., thanks to a barter agreement with PepsiCo signed in 1972. So it has been tense times for American Stolichnaya swillers while a lawsuit threatened to stop sales. But thanks to a crucial court ruling, they should be able to carry on their consumption.

On Apr. 3, the U.S. District Court of the Southern District of New York ruled that Stolichnaya's manufacturer, a Russian-owned company called S.P.I., has the right to keep using the Stolichnaya trademark in the U.S. market. The ruling follows an 18-month court battle. It's the latest turn in a convoluted trademark dispute that symbolizes Russia's bitter "vodka wars" -- the long-running legal fights for control over Russia's most famous and lucrative vodka brands.

OWNERSHIP DISPUTE. The Stolichnaya ruling is good news not just for S.P.I., but also for its international distributor, French drinks conglomerate Pernod Ricard. It recently became the owner of Stolichnaya's international distribution rights after acquiring Anglo-American drinks concern Allied Domecq, a co-defendant in the case, late last year.

The case was brought by two Russian companies, state import-export agency Soyuzplodimport, and private vodka distillery Ost Alco, which claim that they are in fact the rightful owners of Stolichnaya. They are, in turn, backed by the Russian government, which has been fighting for years to stop S.P.I. and its international partners from using the brand.

Why? It's a twisted tale, but the Russian government claims the brand was stolen. In 1992, the state agency that ran the Soviet-era vodka export monopoly was privatized (the government alleges illegally), and then, in 1997, it sold Stolichnaya and 42 other vodka brands to S.P.I. for only $300,000. The deal wasn't sanctioned by the government, and S.P.I's founder, Yuri Shefler, also headed the company that sold the other brands. In 2002, a Russian court overturned the transaction. Shefler, who lives in Switzerland, faces arrest if he returns to Russia.

READ THE LABEL. None of that history has cut any ice with the New York court, though. The court ruled that "when trademark rights within the United States are being litigated in an American court, the decisions of foreign courts concerning the respective trademark rights of the parties are irrelevant and inadmissible." The court also ruled that after five years of continuous use in the U.S., a trademark becomes "incontestable."

So it's game, set, and match to S.P.I. and Pernod Ricard? Not necessarily. The court decision is still subject to appeal. And although they have won one battle, a second battle remains unresolved -- this time concerning Stolichnaya's claim to be "genuine Russian vodka." The Russian government argues that the labelling is misleading because the vodka isn't exported from Russia but actually comes from Latvia. Indeed, S.P.I. and Pernod Ricard are forbidden from selling their version of Stolichnaya within Russia itself.

To add a further twist to this complex Russian tale, another vodka maker -- Russian Standard -- is weighing in on the Russian government's side. Owned by Moscow-based vodka entrepreneur and banker Roustam Tariko, Russian Standard launched its own premium vodka, Imperia, in the U.S. last year. In promoting Imperia, Tariko claimed that Imperia -- not Stolichnaya -- was the only authentically Russian vodka on the U.S. market. That provoked an angry reaction from Allied Domecq, which threatened legal action.

GENUINE LATVIAN? On. Apr. 6, just three days after the U.S. court ruling on the Stolichnaya trademark, Russian Standard repeated its claims in a statement issued to the media. Russian Standard "maintains that Stolichnaya brand vodka is not authentically Russian, and believes that Stolichnaya's marketing messages are inaccurate and misleading to vodka consumers," the statement said.

So what exactly is the row about this time? When the Russian government stripped S.P.I. of its right to the Stolichnaya brand in 2002, it also banned the company from exporting Stolichnaya vodka from Russia. That's when S.P.I. responded by moving the bottling of Stolichnaya to Latvijas Balzams distillery in Latvia. Yet the Stolichnaya on sale in the U.S. continues to be labelled as "genuine Russian vodka." S.P.I. and Allied Domecq testified in the U.S. court that the vodka continues to be produced in Russia, at distilleries in Kaliningrad and Tambov.

They say it is then shipped in bulk to Latvia for bottling and export to the U.S. Russian Standard is now challenging that claim. The company cites Russian customs documents that apparently show that none of the vodka shipped from Russia to Latvia in 2004 and 2005 was registered as Stolichnaya, or used the Stolichnaya recipe. "If Stolichnaya vodka comes from Latvia rather than Russia, then they should be honest about that. We think they should be proud of their Latvian heritage," Tariko commented in the Apr. 6 statement.

STOLICHNAYA, AKA. Of course, there's some irony in Tariko's words. When it comes to brand image, Latvian vodka carries nothing like the same weight as vodka from Russia, the land of vodka's birth. That's why both sides are so touchy about the issue of whose vodka is "authentically Russian." True, the customs records cited by Russian Standard do not necessarily prove that Stolichnaya isn't made in Russia. Another possible explanation for the discrepancy could be that Stolichnaya is being shipped out of Russia with false customs declarations.

In fact, S.P.I. has already admitted to doing just that. In an affidavit to the New York court last August, S.P.I. frankly disclosed: "Because in 2002 the Russian Federation seized Stolichnaya vodka produced by SPI-RVVC [S.P.I.'s Kaliningrad distillery] for export, we now export the vodka under a different brand name."

It isn't clear if Pernod Ricard now intends to make good on Allied Domecq's legal threats, which Russian Standard is so publicly defying. Pernod Ricard is in the awkward position of having to tell the U.S. court that Stolichnaya is being produced in Russia, while at the same time, to avoid confiscation of Stolichnaya in Russia, its partner S.P.I. has been telling the Russian authorities exactly the opposite.

RAISE A GLASS. In a written statement to Business Week, Pernod Ricard declined to comment on its dispute with the Russian government and Russian Standard, except to say, "Stolichnaya is an authentic Russian vodka made in strict adherence to tradition and using the methods that date back to the 15th century." A Pernod Ricard spokesperson confirmed that S.P.I. distilleries produce the vodka in Russia and ship it to Latvia in bulk for bottling.

Maybe it's significant that Pernod Ricard is staying fairly tight-lipped: There's a chance the French company could settle its dispute over Stolichnaya with the Russian government out of court. If that happens, vodka drinkers around the world may finally get to know once and for all to whom the famous brand rightfully belongs -- and where exactly it comes from.


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