YEREVAN – When British wartime leader Winston Churchill came to the Yalta conference in 1945, Josef Stalin plied him with Armenian cognac. Churchill was so taken with the tipple that, from then on, the Yerevan Brandy Co., makers of the Ararat label, kept him in regular supply.

Churchill was not alone in appreciating the merits of Armenian cognac. With its world-renowned grapes, water and abundant sunshine, Armenia is an ideal place for producing the drink, known also as brandy. For Yerevan Brandy, founded in 1887, it is a lucrative business that survived war, revolution and Mikhail Gorbachev's infamous perestroika-era anti-alcohol campaign that saw vineyards torn up throughout the Caucasus and the Crimea.

For the discerning Soviet-era drinker, Armenian cognac was always a popular choice, and when it came to greasing palms, it was bribe No. 1. In less alcohol-inclined Armenia, the only part of the former Soviet Union that had no sobering-up cells, brandy is a drink of tradition. Enter an Armenian home, and the number of bottles of brandy will tell you how many married daughters the family has – the future groom presents one bottle at the engagement and a second at the wedding.

But the collapse of the Soviet Union, the subsequent disruption of markets and economic chaos saw challenging times for the Yerevan company, which led to its privatization and a $30 million sale to French beverage group Pernod Ricard in June 1998.

"Of course there was debate over the Armenian government's decision to privatize the company," said Director Pierre Larretche. "People said the French just want [to get a foothold in the market] to sell their own French-made cognac, and that we don't know how to sell on the Russian market."

• Investment set

Larretche, sent from France to run Pernod Ricard's Armenian asset, said subsequent investment poured into the brandy factory disproved accusations that the new French owners weren't interested in developing its products. Investment in 1999 reached around $17 million, and another $10 million is expected for 2000, the company said.

"Before we arrived, lack of investment meant the quality was falling," Larretche said. "There'd been no investment in equipment for 15 years. We introduced a ‘total quality' plan for each stage of production and have begun replacing the old Soviet-era metal vats with oak barrels that are better for the aging process."

The new managers also created a sales and marketing department, bought computers and set up training and language courses for employees. "The Armenians are supposed to be good in commerce, but they didn't have a sales department," Larretche said. "As for marketing, the concept didn't really exist."

When the French bought the company, sales were good – 4 million liters in 1997 – but the August financial crisis in Russia saw a more than 50 percent drop in 1998; and for 1999, the figure was down to 1 million liters. The company forecasts a rise to 1.5 million liters for 2000, and Larretche said that, so far, everything is on track.

The Russian market remains by far the largest for Armenian cognac, representing 70 percent of total sales. For Pernod Ricard, one of the main reasons for buying Yerevan Brandy in the first place was a wish to expand in the CIS market. The group was already producing Altai vodka in Russia and owned some Georgian vineyards. It also has separate distribution companies in Russia, Ukraine and Belarus.

Now, Yerevan Brandy is looking to promote its products beyond the borders of the CIS. Churchill may have been a good ambassador for Armenian cognac, but some fresh marketing efforts are needed. The company is putting its stake on countries such as the United States and Israel, where the Armenian diaspora or Russian emigre communities are concentrated. A product launch is planned to take place in Paris in September with French-Armenian singer Charles Aznavour.

Pernod Ricard's entry into Armenia hasn't been without its share of conflict. In Soviet times, Armenian cognac was produced not only in Yerevan, but also at the Armenian government-owned factories in St. Petersburg, Moscow and Saratov. Under an agreement signed with the Armenian government, these factories were to stop producing it, but the St. Petersburg and Saratov factories are still making it.

"We asked the Armenian government to do something," Larretche said. "They said the problem had been solved, but we visited the factories in July and saw that they were still producing brandy."

• Brandy and cognac

Larretche stressed the distinction between brandy and cognac. Essentially, they are the same thing, but "cognac," like "champagne," is a protected name, covering only the drink produced in the corresponding French regions. Yerevan Brandy's products are sold under the name "Armenian cognac," or brandy.

Protection of intellectual property is another major problem. Larretche said the company's Ararat trademark represented the bulk of the company's purchase value. But, in violation of accepted intellectual property law, the Armenian patent office registered Great Ararat brandy sold by a Cypriot company with Russian links, said Larretche, who showed articles from Russian newspapers reporting cases of Great Ararat brandy failing to pass Russian inspection due to poor quality.

"We want the [Great Ararat] trademark canceled," Larretche said. "We notified the authorities, but there's still no solution yet. We asked an Agriculture Ministry official which company he thought was more serious, us or Great Ararat, and he said both were serious. This means the government doesn't see any difference between a real investor and an opaque company that only damages Armenian industry."

It is hard to see the logic behind a government that says it wants to encourage investment but does nothing to attract investors, Larretche said.

• ‘Potential investors'

"Armenia is landlocked and politically unstable," he said. "If potential investors see that a big company like ours has problems, they're not going to want to invest. How can you guarantee that tomorrow someone won't start up say ‘Great Coca-Cola'?"

In an attempt to pressure the authorities to take action, Yerevan Brandy is considering not buying any grapes this year and just using its stocks instead. The company says it doesn't need to buy the grapes, but the decision would be a blow to the grape growers. In 1999, the company bought 18,000 tons of grapes from 15,000 grape growers.

Grape supply far exceeds demand. The growers, who all run small-scale operations, sign no contracts with the company. They deliver their grapes, which then go through quality checks overseen by a commission of representatives elected by the growers. If their grapes are selected, the growers are paid cash.

The company directly employs 450 people, and the average wage is $300 a month – good money in a country where the national average wage is more like $10 a month. Aside from four French expats, all the company's staff is Armenian.

"It's a challenge, what we're doing, but I feel strongly about the success of this venture," Larretche said. "There's also the challenge of bringing some prosperity and investment to Armenia."

That will be the bigger challenge. Armenia has plenty of cheap and educated labor, but so do other countries. The ongoing Nagorno-Karabakh dispute with Azerbaijan and strained relations with neighboring Turkey mean there are few export routes, and the domestic market is small and has little purchasing power.

"I'm optimistic about our success, but concerned for the country as a whole," Larretche said.