Absolutely Private

Back in the Soviet times, the Finns were in the habit of building lumber and paper mills on their border with the Soviet Union, downriver from great Russian forests.

As their raw materials, they used logs that had been cut down on the Russian side, but which had drifted aimlessly and wastefully past Russian mills — and into Finland.

This, in a way, served as a model for the spectacular worldwide success of Sweden’s Absolut brand of vodka. Everybody knows that vodka is a Russian invention — and that Swedes drink Aquavit.

Yet, since 1979, when Swedish Absolut single-handedly created the premium vodka segment of the market, it has displaced various Russian vodkas, becoming the world’s second-largest selling vodka brand, after Smirnoff.

Absolut is the best-selling imported vodka in the United States — the world’s most lucrative spirits market — leaving Russia’s flagship brand, Stolichnaya, well behind.

The timing of Absolut’s debut in international markets was extremely lucky. At the end of 1979, the Soviet Army invaded Afghanistan — and New York bar owners retaliated by pouring bottles of Stoli down the gutter. Serving the new Swedish brand, Absolut, became a natural alternative.

It was a blow to the Kremlin alright, since the Soviet government owned Stoli — just as it did all other property in the Soviet Union.

What was much less well-known is that Absolut was also a government enterprise. Absolut was invented and owned by a private individual, Lars Olson Smith, in 1879, but it was Vin & Sprit AB (the Swedish Wine and Spirit Corp.) that revived it a century later.

Since its creation, V&S had been wholly owned by the Swedish government. However, after having achieved tremendous success under the “caring” wing of the state and following the election of a private-minded new government, the Swedish government auctioned off the company to Paris-based drinks giant Pernod Ricard for $8.9 billion in March 2008.

Curiously, this move in Sweden comes nearly two decades since vodka — along with pretty much everything else — was privatized in post-communist Russia.

Stoli is now distributed by the same Pernod-Ricard. With its help, Stoli has been growing strongly in all export markets, especially in Europe.

In addition, plenty of new Russian brands have popped up in recent years, especially in the super-premium category. Russia is fast developing a reputation as a consumer society of top luxury goods — and it is hardly a surprise that its vodka distillers should be moving into the super-expensive market segment.

But even in this segment, egalitarian Sweden has managed to hold its own. Back in 2004, V&S introduced its own super-premium brand, called Level.

What’s extraordinary is Absolut’s proven ability to out-sell Russian vodka, even though Sweden’s domestic market for the stuff is very small. High taxes on alcohol mean that only 1% of its worldwide sales come from its home market.

Russians, by contrast, are among the world’s largest vodka consumers — albeit not particularly discriminating ones.

In fact, the tortured history of Russian vodka reflects the government’s perennial struggle against excessive drinking. The Tsarist government abolished its own monopoly on vodka production in the mid-19th century. Thereafter, it allowed private producers, such as world-famous Petr Smirnov, who promptly raised the quality of Russian vodka.

Vodka taxes became one of the largest revenue sources for the Tsarist Treasury, measuring at times as much as 40% of total government revenues.

The Soviet government, after briefly toying with the idea of banning vodka altogether and prohibiting drinking, went into vodka production — but not at all as successfully as the Tsar’s purveyors.

In fact, it managed to lose the Smirnoff brand which, according to Interbrand, consistently finishes first among the world’s most valuable beverage labels.

Under Vladimir Putin, the results of privatization in the strategically vital natural resource sector have been largely rolled back, and the oil industry has largely reverted to state hands. Can the spirits industry, Russia’s one national treasure, remain private for much longer? One wonders.

Worse, the Kremlin may find its hand forced by events, even if it doesn’t want re-nationalization. The problem rests with the producers of cheap vodka — not to mention numerous counterfeiters of famous brands — who continue to provide poor-quality products despite tightened state oversight and stiff penalties.

In Russia, deaths and crippling ailments traced to the consumption of inferior or outright poisonous vodka remain a widespread problem.

If the Russian state is about to reinstate its vodka monopoly, as many people believe it will, it should take a hard look at the Swedish example.

V&S proved successful even in a market oversaturated by exotic flavors and expensive offerings. While Absolut’s growth has recently slowed due to stiff competition from other premium vodkas, it was an entirely unusual example of competitiveness by a state-owned enterprise.

Moreover, Absolut managed to become a hip drink by running a now-legendary advertising campaign designed by a slew of prominent modern artists, architects and designers, including Andy Warhol, Keith Haring and Gianni Versace.

Not bad for a country that has one of the world’s oldest monarchies, conservative tastes — and a reputation for boring protestant blandness.

But then again, Sweden has been long frustrating critics of its state-private sector partnership, generous safety net and very high salaries. American free-market advocates, in particular, have been predicting an imminent demise of the Swedish “socialist” model for at least three decades.

The Swedish economy, meanwhile, has been going from strength to strength — holding its own even in such “entrepreneurial” fields as information technology, telecommunications and the Internet.

Perhaps both Russians and Americans could benefit from a shot of Absolut — both literally and figuratively.