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. Last Updated: 07/27/2016

Georgian Wine Venture Turns Sour

TBILISI, Georgia -- Back in 1993, it looked like a perfect opportunity: a marriage between Napa Valley vintners and an ancient winemaking industry that had recently been liberated from communism and the former Soviet Union.

The group of eager investors included Eric Wente, a top executive of the Wente Brothers winery in Livermore, California, and George Shultz, the former secretary of state. The group invested about $1.5 million into a privatized winery in Georgia called Sameba. Shultz, who was strictly a passive investor, even clinked glasses here in a celebratory toast with Eduard Shevardnadze, the former Soviet foreign minister who is now president of Georgia.

The appeal was obvious. Thanks to a warm climate and rich soil, this former Soviet republic has been producing wines for nearly 5,000 years. The hillside villages and vineyards look as though they would fit better in Italy's lush Tuscany region than in Central Asia. Sweet or dry, red or white, Georgian wines enjoy a special cachet across Russia and much of Central Europe, and could be competitive internationally in a moderate price range, the investors believed.

But today the joint venture bears witness to the difficulties of transforming a former Communist hinterland into an American-style business opportunity. A string of American managers in Georgia have variously quit or been fired; the last one left after the Georgian partners threatened to literally throw him out of their offices. Discouraged and disillusioned, the American investors do not expect to see any return on their money.

"They don't answer our telephone calls or our faxes anymore," Wente said in a telephone interview. "It became increasingly obvious to us that their agenda was not to build a company but to preserve a lifestyle."

The experience is hardly unusual. Six years after the Soviet Union collapsed, Russia and former republics like Georgia have rushed to embrace capitalism and Western investors. But as often as not, companies have balked at conventional Western business practices and slipped back toward the habits of cronyism and self-dealing that ultimately pervaded the old system.

Western investors know this, at least in principle. But the allure of a historic turnaround opportunity can be irresistible. After the collapse of the Soviet Union, Georgia's wine industry seemed to have nowhere to go but up. Government mismanagement had left most wineries with antiquated bottling and pressing plants. The industry's traditional markets in Russia and Central Europe had been devastated by economic depression. Georgia was itself bogged down in civil war. To people like Wente, new equipment and modern marketing could go a long way.

To be sure, some Westerners have thrived in Georgia. The Dutch wine bottler Royal Cooymans has teamed up with entrepreneurs in Telavi, a town northeast of Tbilisi, in a successful joint venture with local entrepreneurs called Georgia Wine and Spirits. The Dutch company has overhauled most of the winemaking process, imported all the supplies for bottling and increased marketing efforts. Sales have doubled from 1.5 million bottles in 1996, at a wholesale price of roughly $3 a bottle, to 3.2 million bottles in 1997.

But for the Americans who bought into Sameba, things have not gone so well. The company remains in full production, based in a vine-covered here in the Georgian capital. But the Americans say they ran into conflicts with their Georgian partners from the first moment, and those problems were only made worse by Georgia's struggles with civil war and economic turmoil. It did not help that a founder of the company killed himself after having seen his two sons killed -- one in a gangland vendetta.

The Georgians insist they still relish their partnership with the Americans, but that they simply cannot get "competent" American managers.

"It was one thing to go into a joint venture and put money in, but something quite different to work here and come to these burdens here every day," said Zourab Tkemaladze, Sameba's general director, in an interview at company headquarters.

Under the original deal, the American investors formed an organization called Georgia Wines that acquired a 50 percent stake in Sameba Co. Tkemaladze, 53, had been part of the company's original management and had helped turn it into a private corporation.

The Americans invested $1.5 million over the next several years, while the Georgians contributed their existing stocks of wine along with their equipment. The Americans, who received three out of five seats on the company's board for the first few years, were entitled to install American managers.

The Americans were able to exercise effective control and conflicts began almost immediately. They complained that they could not make sense of the Georgians' accounting. Some objected strenuously to Georgian plans for hiring workers at nearly slave-labor wages of $10 a month. And the local managers found themselves worn down by a place where telephones did not work, corruption was still rampant and basic supplies were often impossible to secure.

And now, the American investors have lost control. Though they theoretically still own 50 percent of the Georgian joint venture, their agreement stipulated that the Georgians would get a majority of seats on the company's management board after the first few years. Even if the Americans had stayed in Georgia to vote, they would be outvoted every time.