The unraveling of Lebanon’s US dollar peg has launched a painful reckoning in its prolific beverage industry, as winemakers and brewers struggle to secure bottles in a country without a glass factory.
“The name of the game is survival – nothing else,” said Nayef Kassatly, owner of Kassatly Chtaura beverage company and maker of Lebanon’s ubiquitous Beirut Beer.
A deepening currency crisis, compounded by Covid-19 global trade interruptions, has in some cases tripled productions costs, a major dilemma in a country reliant on imports, and where customers are watching their purchasing power evaporate.
“Our industry is mainly a transformation industry. We don’t have the resources or raw materials local, so almost 70% of our cost is affected by the current situation,” Kassatly told Asia Times.
For years, easy access to a pegged dollar – interchangeable at ATMs and in daily transactions – made imports to Lebanon readily accessible, and discouraged local manufacturing.
“You’re importing your bottle because there is no glass factory; the caps because you don’t have a cap factory. We have to import malted barley, because the barley here is not suitable for malt production. And the same goes for hops,” he said.
Lebanon previously had two glass bottle factories, Kassatly explains. One was bombed by Israel during the 2006 war with Hezbollah and the owners decided rebuilding it was not worthwhile, and the other was shuttered as the value of its land, near Beirut airport, became more valuable than the factory itself.
Kassatly, like other beverage makers, needs to secure US dollars for the bulk of his product, at the same time as 90% of customers are Lebanese paying in depreciated local currency – and ill-placed to absorb a price hike.
Today, he is only covering costs thanks to exports of carbonated soft drinks to the Gulf and halal markets of Europe, which bring in critically-needed hard currency.
Long term, that will not be enough to make up the difference.
The collapse of the dollar peg has put Lebanese beverage makers on the rails, but it has also prompted what some believe will prompt a necessary – though painful – impetus for local production.
Abdallah Rizk, a lawyer who leases land to one of the country’s largest wineries, Chateau Ksara, has been planning a new glass factory since 2016, well before the financial crisis.
“Glass is like a commodity. It’s a primary packaging,” he said, listing off benefits from reducing the trade imbalance to providing a way to recycle.
In October of last year, Rizk received a major boost from the European Union, which agreed to help finance his initiative. But two weeks later, nationwide protests broke out and banks shuttered, putting the project on hold.
“We’re almost done,” Rizk told Asia Times. “We did the construction. We paid a down payment for the machine. We have the power plant as well.”
While he is cognizant of the challenges ahead – namely the still-fluctuating exchange rate – he believes initiatives like his are the only way forward.
“I think we’re at a crossroads; either things get better and the country manages to get out of this crisis, or the crisis will deepen.”
“If you take every single country which had a currency devaluation, there was a boom of local products,” said Hady Kahale, a wineries consultant and manager of Lebanon’s boutique Atibaia winery.
Pre-crisis, Lebanon was importing around 2 million bottles of wine per year, according to Kahale. That number has plunged amid de facto capital controls and a scarce supply of dollars.
But while wine lovers can be expected to switch to the country’s plethora of local offerings, there are other complicating factors at play.
“The problem with Lebanese production is you don’t have one single product which is entirely locally produced. This is where Lebanon differs from other countries that had a [currency] devaluation,” Kahale told Asia Times.
He offers the example of Venezuela, where a wine might be 100% produced in-country. In Lebanon, winemakers import their bottles, corks, and even labels.
“The products we need to use come from abroad, so prices are going to increase,” he said.
While many wineries still have demand, the quest for a bottle remains daunting.
Kahale says he has two clients who have accepted orders for white wine shipments, but are unable to bottle it because they cannot transfer money outside the country.
A US$100 million fund announced by the Central Bank to allow Lebanese industrialists to secure raw materials will help, says Kahale, but not for long, and not enough.
“If you read how it’s going to be applied, good luck. It’s going to be a war zone. You have to go to customs, then the Ministry of Industry, then the banks – you’re begging [in] three places,” he said.
Moreover, the fund is not a loan or an overdraft, it simply allows industrialists to transfer money from their own blocked accounts.
The result? “Big wineries are going to become bigger and smaller wineries are going to go broke or going to shrink. Unless they are really shrewd and know how to go through this phase,” he said.
Message in a bottle
Chateau Khoury located in the Bekaa Valley may just be one of those shrewd survivors.
The family-owned winery, one of Lebanon’s smallest, had already encountered difficulties with imports before the onset of the current crisis.
Its last shipment of glass bottles from Europe was held up for months by the US Treasury, which has asserted increasing control over transactions from Lebanon with the stated aim of cutting Hezbollah off from dollars.
“The new problem is the banks,” said Jean Paul Khoury. “We can’t transfer money unless we bring ‘fresh’ dollars.”
Fresh dollars are those deposited after Lebanon’s dollar peg began to unravel. Existing dollar bank deposits, accounting for about half of the country’s savings, are meanwhile trapped in the local financial system.
Khoury says he needed $30,000 to order 47,000 bottles. But as it stands, the most he can expect in the coming months is $7,000 from clients abroad – and that is pending the lifting of lockdown restrictions. Already, an order from Japan had to be canceled.
“There is a guy I know who had a stock of used bottles. Now I’m spending a lot of time cleaning and disinfecting,” he said. White wine, unlike red, can only stay in the barrels for a limited time.
Like many wineries, Chateau Khoury has a significant stock to fall back on, and can afford to keep prices stable for the time being.
“We are able to withstand for a few months, maybe a year,” he said.
If the situation continues to deteriorate, Khoury says he is ready to package his wine in boxes to survive.
For Jamil Haddad, founder of Colonel microbrewery and distillery on the northern Lebanese coast, the crisis must be made an opportunity for local manufacturing.
“It’s a turning point for local production. The local industry will shine again in the coming five years,” he told Asia Times.
The weakened value of the Lebanese pound against the dollar means that consumers who once may have discounted his gin for more famous imported brands, are now discovering and enjoying what Lebanon has to offer.
“Suddenly everyone woke up. We need Lebanese products.”
Haddad has aimed to keep his prices low, swapping European bottle suppliers for more affordable Syrian and Turkish options.
A revival of the local industry will not be easy. Lebanese beverage makers cannot count on clean tap water, let alone regular electricity to aid in their production, and are thus forced to budget for basics like water and generators. Successive governments have failed to support local industry.
“The government should help,” said Haddad. But in the future, he believes there is a possibility for everything, whether a glass factory or homegrown hops.
“We’re going to struggle. People are going to be hungry. People are going to be depressed,” he said. “But to fix the country, we need the pain.”
He paused to add, “And I’m positive about the pain that’s coming.”