What Makes A Great Scotch Whisky?

One of the enduring images, legends -- or perhaps myths-- surrounding Scotch whisky, especially single malt whiskies, is the mystique of location. Whisky connoisseurs pride themselves on their collection of whiskies from beautiful and obscure distilleries in glens of the highlands, the  lowlands, the wind-swept islands and other regions of Scotland.

The source of the water – streams from pristine hillsides or through peat bogs – the very air or the unique barley and malt are all supposed to create distinctions that marketers love to talk about. Make no mistake! Distinctions among the wide variety of single malt whiskies do in fact exist. But whether they stem from a distillery’s precise location, what French wine makers refer to as terroir,  is another matter altogether.

To study this question more closely I joined a friend recently to visit distilleries on the island of Islay just off the west coast of Scotland. Despite the logistics problems of producing anything on an island, Islay is home to eight distilleries that together account for a good portion of Scotch whisky exports. These distilleries include well known names like Laphroaig, Lagavulin,  Bowmore, and some like Bruichladdich that have been rejuvenated in the last decade.

The Bruichladdich distillery in Port Charlotte on Islay

Islay, about the size of Martha’s Vineyard in the United States, is wind-swept, filled with rich peat bogs and often buffeted by storms rolling across the North Atlantic. Jim McEwan, an Islay native and production manager of Bruichladdich, swears by the importance of location in the taste of a malt whisky.

“I can tell, for sure, the difference between Islay malt made from the barley grown on Islay and the malt made from barley grown in the north of Scotland. That’s a fact,” he says emphatically.

Others are less sure. “Regionality is an example of generalisation at its worst. . .  every distillery has a thousand quirks, and I believe it is these quirks, these points of individuality that build together to make the dram,” says Georgie Crawford who manages the Lagavulin distillery on behalf of the multi-national drinks company Diageo. She has a point.

We learned that the vast majority of barley used in making Scotch whisky comes, in fact, from England. Very few distilleries even make their own malt. Most buy the malt that has been prepared to their specifications. For example, some distilleries prefer using malt with a heavy peat flavour while others use malt that is only lightly flavoured.

Whatever the pluses or minuses of the argument about location influencing flavour, there is no doubt whatsoever that the very nature of the distilling process, from the fermentation to the bottling, varies from place to place and goes a long way to explain each whisky’s distinctive taste. Fermentation times, shape of the stills ,amount put into the stills, make-up of the condensers, preferences when to extract the spirit, alcoholic strength of the spirit that goes into the casks, and then the all-important character of the casks themselves play major roles in determining the final taste of a whisky. Many types of wood can be used, but the distilleries we visited seemed to favour oak that had previously been filled with American bourbon or Spanish sherry.

 

The all-important stills

 While bourbon manufacturers have to dispense with their casks after a year or two Scotch whisky manufacturers can use those same casks for 30 or even 40 years. These casks are usually filled at 63.5% alcohol (Bruichladdich fills at a higher percentage), and often stored for 10 or more years before being put into bottles at an alcoholic percentage of 40% - 46%. Many distillers will keep the spirit initially in a bourbon cask and then finish it with several months in a sherry cask.

Most of the whisky produced on scenic Islay is shipped off to some distinctly less scenic warehouses in central Scotland to be aged and ultimately bottled. Bruichladdich is almost unique on storing and bottling on Islay. Does it make a difference to the final taste? That question can stir up vigorous debate, and the answer is best left to the palate of the consumer.

Whisky isn't the only thing produced on Islay

What has been proven beyond doubt is that Scotch whisky production (blended and single malt) can be a very good business. Even in these tight economic times the value of Scotch whisky exports increased to £4.3 billion in 2012, up 87% over the last 10 years, according to the Scotch Whisky Association. The top market for all this whiskey was the United States, which accounted for £758 million of the exports. Exports of single malt whisky in 2013 increased to £778 million, up 190% in the last decade. France is by far the largest consumer of blended whisky, while the United States is the largest consumer of single malt.

The demand for premium whisky is nicely illustrated by Bruichladdich. A group of investors bought this decommissioned Islay distillery in 2001 for £7 million. They kept the original, ancient equipment – indeed, made a virtue of it -- persuaded Jim McEwan to join them from the Bowmore  distillery across Loch Indaal, and added a line of gin using many herbs local to Islay. They were so successful that in 2012 they were able to sell Bruichladdich to Remy Cointreau for an eye-popping £58 million.

The large global drinks companies that dominate production (Diageo alone owns 28 distilleries) have worked hard to broaden the customer base and spread the appeal of Scotch whisky around the world. The numbers alone would indicate a success that their counterparts in the French wine industry can only envy.

Time For Change On Cyprus? Maybe, Just Maybe.

Few places better than the island of Cyprus demonstrate the futility, the touchingly naïve earnestness, embodied in the English word ‘should’.  Given the climate, resources, relatively well educated population and rich history the Eastern Mediterranean island should be a shining example of harmony and prosperity. It isn’t.

In addition to the recent, largely self-inflicted, financial collapse the island suffers from a long-standing division between the 800,000 Greek Cypriots in the southern part of the island and the roughly 300,000 Turks who live in the politically and economically isolated northern part of the island. About half of the Turkish population is native Turkish Cypriots while the others are immigrants from Anatolia.

This island 'should' be a paradise

 The Greek part of Cyprus is the internationally recognized and European Union member Republic of Cyprus. The self-proclaimed Turkish Republic of Northern Cyprus is recognized only by Turkey. It survives largely on casinos, tourism and about $600 million in annual subsidies from Turkey. Until recently the Republic of Cyprus enjoyed a much higher income than its northern counterpart. With the collapse of the Cypriot banking bubble this difference has narrowed sharply.

Reasonable people might think that this is the perfect time for the two groups on the island to overcome their past differences, re-unite and build a prosperous island that begins to fulfil its potential. Unfortunately, as is often the case in this part of the world, such people are simultaneously right and wrong. They are right to believe that a unified island would be much stronger than a divided island. They are wrong to think this is going to happen any time soon. Cyprus is very close to the Middle East, and in that part of the world the mere fact that such a move would make sense is absolutely no guarantee that it will happen.

Why not? How much time do you have? The tangled history of Cyprus involves centuries of invasion, co-habitation, the sometimes malevolent influence of religion, colonization, communal strife and, above all, a deeply ingrained sense of grievance and victimhood.

However, there are changes in the wind that, according to one astute observer, could change the narrative, the frozen paradigm of the divided island. Metin Munir, a native of Cyprus and formerly a prominent columnist with the Turkish daily newspaper Milliyet, has long been sceptical of the real chances of reunification. Now, however, there are changes that might, just might, in time help bring the island together.

“The economic difference between the two sides is diminishing. In addition, Turkey  is bringing water to the island from the mainland and will soon be bringing electricity for much less than it costs to generate it on the island. The rapprochement between Turkey and Israel also has the potential to change the situation. If Israel ships its gas through Turkey via a pipeline there could be a great deal of pressure on Cyprus to do the same for its offshore gas, or at least sell its gas to Israel who in turn would use the pipeline to Turkey. The alternative is to build a very expensive LNG plant on Cyprus. It is difficult to see right now who would spend the $7 - $8 billion for such a plant when a much cheaper pipeline alternative (Turkey is only 40 miles away) is available.

Turkey is so close and so far away

“Nothing is going to happen immediately, but the potential for change is emerging. For one thing there is a lot of sympathy on this side of the island for what the Greeks are going through right now. One major obstacle is what the Greeks perceive as Turkey’s belligerent approach to Cyprus. Turkey has to change its tune, and then we will see what happens.”

He has a point. No one can accuse Turkish foreign policy of being subtle. Why use a scalpel when a sledge hammer will do? There is a certain aggressive, chip-on-the-shoulder attitude in the comments of many Turkish politicians that make it difficult to create a win-win rather than an I-win-you-lose situation. A recent example is Turkey’s heavy-handed threats against the Cypriot development of the offshore natural gas deposits without including the Turkish part of the islands.

To be fair to Turkey, the internal timing for any concessions on Cyprus couldn’t be worse. The Turkish government is already in tense negotiations with the Kurds to end decades of conflict. This is prompting outrage on the part of Turkish nationalists who see any move to accommodate the Kurds as a betrayal of the very concept of a Turkish nation. Any concessions on Cyprus would send this outrage off the charts and stir up the old cries of ‘selling out’ their brothers on the island.

The best chance for a settlement on the island was in 2004 when negotiations under the auspices of U.N. Secretary General Kofi Annan produced a plan that was overwhelming approved by the Turkish population on Cyprus. The Greek Cypriots, however, already promised a place in the European Union and prompted by the Archbishop of Cyprus who called the plan ‘the work of the devil’, rejected the plan.

Despite this history, calls for a radical re-think are growing. Former Greek Foreign Minister Dora Bakoyannis recently expressed her support for reconciliation on the island.

“We need a solution in Cyprus. This will also be the answer tocooperating for a solution to the gas exploration,” said Bakoyannis at the 16thEurasian Economic Summit held in Istanbul on Wednesday.

Will these discoveries prompt settlement or strife?

It is too early to tell if the faint signs of reconciliation and common sense will prevail over long-held and possibly no-longer-relevant grievances. But the world, and more particularly Cyprus, has changed dramatically in the last few decades. It may just be time to dust off those under-utilized negotiating skills

Cyprus Badly Misplayed Its Hand

Cyprus has just learned a very old lesson the very hard way – nations don’t have friends, they only have interests. Assuming protection for the last decade from its membership in the European Union, the Euro zone, and close ties to Russian oligarchs Cyprus tried to remake itself as a global financial service center and a significant regional political player. Whatever productive businesses it had were wound down in favor of a service-based economy. Cypriot politicians mistakenly thought their consistent support of Russian stances on issues like Kosovo and Syria would earn them Russian protection when times got hard.  Wrong.

Cyprus just learned a hard lesson

These delusions were brutally punctured when a remorseless European Union led by Germany forced a complete restructuring of the island’s unsustainable banking system in return for helping rescue the country’s battered finances. This restructuring will lead to failed businesses and large losses for many savers, including thousands of Russians who thought Cyprus was a safe place to stash their funds protected by the notoriously incurious Cypriot financial regulators. Essentially, the island’s economy is back to Square One.

Cypriots were ‘shocked, shocked’ that their fellow EU members would do this to them. They were even more shocked when the Russians, demonstrating a bit of real politick, showed they valued their relations with the EU more than their Cypriot ties and refused to help, leaving the island nation well and truly in the lurch.

This plea fell on deaf ears

The Cypriots badly misread their presumed support from the EU. The reality was that many EU countries deeply resented Cypriot membership in the first place and were increasingly annoyed at the lax financial regulation on the island. In 2004 Greece essentially threatened to veto the entire EU expansion project unless Cyprus was included. Greece and Cyprus won the short-term game, but lost longer term support. No one likes being blackmailed. The Germans in particular did not want to accept a country that was divided by the break-away Turkish Republic of Northern Cyprus in the north and the Republic of Cyprus in the south.

The Cypriots did not help their reputation when they overwhelming rejected a plan to unify the island just before they were admitted to the EU. Cyprus further overplayed its hand by consistently blocking any closer relations between the EU, NATO and Turkey. What began as a major victory for Hellenism in 2004 has sadly turned to dust as both Greece and Cyprus, largely through their own doing, are now little more than wards of the humourless northern Europeans.

In a twist that only the gods could arrange, Cyprus’s implosion has coincided with major strides forward by its arch-enemy Turkey. While Cypriots leaders were desperately shuttling between Nicosia, Brussels and Moscow seeking bail out money Turkey not only made a major breakthrough in the peace process with the Kurds but succeeded in amending its torn relations with Israel. At a stroke, the geopolitics of the Middle East changed. Turkey, whose economy is humming along quite nicely, re-established itself as a credible, powerful force in the ever-changing dynamics of the Middle East.

The implications of these developments for Cyprus are mixed at best. Israel now could be much more interested in shipping the gas from its offshore field to Turkey rather than Cyprus. Turkey has long protested that Cyprus should not develop its own gas fields without taking into consideration the Turkish population of the island. Now that Turkey is finally living up to its potential as a regional power more countries and major oil companies could be willing to consider the Turkish position before doing more work on the offshore Cyprus gas fields. Certainly countries like Germany and Russia have many more strategic interests in Turkey than they do in Cyprus. And they most likely would not like to jeopardize those interests for the sake of Cypriot gas.

Cyprus is in a tough neighborhood

There is at least one step Cypriot leaders could take that could restore their credibility and possibly lay the foundation for recovery. They could think the unthinkable and work out a deal to re-unify the island. After nearly 40 years of division following the Turkish military incursion this will by no means be easy. One of the more thankless jobs for any diplomat since 1974 has been to seek peace between the two sides of Cyprus. The best chance came in 2004 when a plan supported by former United Nations General Secretary Kofi Annan was overwhelmingly supported by the Turkish side and just as overwhelmingly rejected by Greek Cypriots after a vigorous ‘No’ campaign led by former president Tassos Papadopoulos.

Such reunification talks would undoubtedly be challenging. Much has changed over the last several years on the island and the two sides no longer have much in common. Cyprus also would be negotiating directly with Ankara rather than with just the Turkish Cypriots. Touchy issues include the presence of the Turkish military that by now has built up a substantial infrastructure on the island, restitution of Greek Cypriot property seized in 1974, the status of the thousands of immigrants from the Turkish mainland that have been settled on the island, and many, many others. But Turkey has reasons of its own for wanting a settlement. Currently it spends about $600 million a year to support the Turkish part of Cyprus, money it can ill afford to spend. It has been unable to get a single country to recognize the Turkish Republic of Northern Cyprus, and its negotiations with the EU have been hindered by Cyprus for several years. Also, the Turkish military is in a much weaker position than it was in 2004. It is no longer in a position to block a settlement and pretty much does whatever Prime Minister Erdoğan says.

The economic and political benefits of a unified island just might push the parties toward the negotiating table. Now that the former Cypriot economic model is broken beyond repair the political leaders might be willing to re-think the unification issue. This would require leadership and statesmanship that so far have been in short supply. But in this case necessity might just the catalyst for welcome change.

Challenges To Long Term Economic Success

Deputy Prime Minister Ali Babacan of Turkey never spoke truer words. Whether the words will ever be translated into action is another matter. But for the moment, the words are welcome.

Regarded as an economic technocrat in a government of zealous ideologues, Babacan is widely credited for Turkey’s recent strong economic performance. 

He has kept a tight rein on the country’s financial management since the Justice and Development Party swept to power in 2002. He has often warned his countrymen against taking on too much debt, and once famously compared running the Turkish economy to driving a truck down a steep, winding road in a thick fog.  Perhaps most importantly he has kept economically illiterate politicians from wrecking the budget with their pet projects or handouts to favoured groups.

Deputy Prime Minister Ali Babacan

In a recent meeting hosted by theFoundation for Political, Economic and Social Research he said that Turkey needs a “predictable rule of law” to improve its investment climate. “We must certainly create a more rapid and consistent judicial process,” he told the audience. “We are not at an ideal point regarding fundamental rights and freedoms. We need more judicial reforms. To become a country where there is a functioning (italics are mine) democracy and the rule of law is our sine qua non.”

Welcome words indeed to those hundreds of people incarcerated in prisons for long periods without being brought to trial. Then he got to the heart of the matter.

“Without political reforms, economic success cannot be maintained . . . development based on economic growth alone falls short of satisfying people.” Never were truer words spoken. I wonder what the Chinese would make of them.

He continued by stating the obvious about Turkey’s education system. “Our educational system is not very pleasing. The average number of years of schooling for adults is 6.5 years. With this kind of education level it is hard to achieve a target of $25,000 per capita GDP. We can achieve this goal with a better education level,” he told the group. It is a measure of Babacan’s importance to the government that he felt free to make such comments. Most other ministers with the temerity even to hint that there was any risk whatsoever to Turkey’s economic growth would quickly be transferred to supervising car parks near the Iranian border.

His comments come on the heels of the Global Competitiveness Report that showed between 2006 – 2012 Turkey’s justice system declined from 56^th place to 83^rd place. The country’s tax regime declined from 95^th to 117^th, and the education system fell from 58^th place to 74^th place. With this kind of performance Babacan’s concerns about Turkey’s economic success are well founded.

Problems in the legal and judicial system that hurt Turkey’s growth are not limited to criminal cases. Recently there was a closely contested bidding procedure for the privatisation of the country’s toll roads and bridges that attracted three bids and was won by a consortium of Turkey’s largest conglomerate Koç Group and the Malaysian UEM Group with a bid of $5.7 billion. The process followed Turkey’s complex privatisation regulations to the letter. The winning bid was far above what the other competitors were willing to pay, and was considered very rich by other market participants. Despite this, Prime Minister Tayyip Erdoğan complained that the winning bid was too low and that he would be ‘accused of treason’ if he permitted the privatisation to be completed at only  $5.7 billion. The prime minister did not reveal how he arrived at this conclusion.  Predictably, the bid was cancelled. Nothing has been said about compensating the winning bidders for the considerable investment they made merely to make the bid.

Abrupt cancellation of the bidding process when the government is unhappy about the results is, unfortunately, nothing new. A few years ago a client of mine won a small bid for a property containing deposits of a low value industrial mineral. Two weeks after the bid the client received a two sentence notification from the Ministry of Energy saying the bid had suddenly been cancelled. No explanation, no reason was given. I made several fruitless trips to the ministry seeking some sort of explanation. Various officials had the grace to be embarrassed, but said there was nothing they could do. “It’s out of our hands,” they said.

This lack of transparency has plagued Turkey for decades. With its massive electoral mandates Turkey’s ruling Justice and Development Party has had the perfect opportunity to make long overdue and fundamental reforms to the country’s governing institutions – the very ones that Babacan talked about. By focusing instead on expanding his own authority, emasculating the military, and creating vote-gathering construction projects the prime minister has missed an excellent opportunity to make these fundamental changes that would transform Turkey’s recent economic growth into lasting economic and social progress.

Understandable Preference For Foreign Policy

Turkish foreign policy in the last few years has become something wondrous to behold. It really has. Before the rise of the ruling Justice and Development Party the country’s foreign policy was somewhat predictable and, well, boring. Highly educated, multi-lingual diplomats worked quietly and professionally to promote the interests of Turkey within the solidly western oriented framework of Ataturk’s republic. No more. Now the country’s foreign policy is firmly in the hands of the prime minister. Zig-zagging from the Middle East to Africa and back again to central Asia – with scarcely a glance at the European Union – Prime Minister Tayyip Erdoğan is desperately seeking a seat at the high table of global affairs. With all this frantic activity -- including opening several new embassies, seeking potential new alliances, and aggressively expanding the national airline’s route network --  it is perhaps only natural to find a hefty portion of hypocrisy and bombast.

Take the recent events in the hitherto little known African country of Mali. Threatened with radical Islamic insurgents, the government of Mali requested French military assistance. Supported by the United Nations, the Economic Community of West African States (ECOWAS), and most of the Western world the French sent a military force to help the government. This annoyed Erdoğan and Foreign Minister Ahmet Davutoğlu greatly. Why the detested French of all people? Ignoring the deep linguistic, diplomatic and commercial ties between France and many West African countries, not to mention the UN and African states’ approval, Turkey complained that the former colonial power should not intervene. Perhaps the prime minister was miffed because none of Turkey’s former colonies has asked Turkey for armed assistance. Turkish media hinted darkly that the real goal of the French was to exploit the natural resources of the region, as if Turkey’s new best friend China was not already exploiting African resources on a major scale all over the continent.  As in the case of Libya, however, this initial opposition can soon turn to approval once it becomes clear which way the wind is blowing.

Should these be Turkish troops?

The prime minister’s dislike for the European Union is well known. He is angry at the long delay in Turkey’s admission to the club and resents continuing EU criticisms of things like Turkey’s human rights record, abuse of the journalists, and a dysfunctional judicial system. His cronies made a big point of publicly throwing the latest highly critical EU ‘progress’ report into the trash bin and saying that they will come out with the Ankara proposals – whatever they may be.

Now, as if to show the EU that it is not the only game in town, Erdoğan has said perhaps Turkey should join something called the Shanghai Five. For those not familiar with this particular grouping (actually six countries), it is a loose alliance of authoritarian regimes and includes Russia, China, Kazakhstan, Uzbekistan, Kyrgystan, and Tajikistan – the greater part of Central Asia. Turkish papers report Erdoğan suggesting to Russian President Vladimir Putin that Turkey could say farewell to the EU and join this group. From Erdoğan’s point of view this grouping has certain obvious attractions. No one is going to write scathing reports about such issues human rights, for example. Erdoğan’s distaste of journalists with their annoying questions is shared by the other Shanghai Five leaders.

At least the Shanghai Five do not ask annoying questions

While the desire to thumb his nose at the EU is understandable, his rush to join this clique of autocrats does present a couple of problems. One is the sticky issue of NATO – of which Turkey happens to be a member. According to the American think-tank Brookings Institute the Shanghai Five can also be construed as a group that would like to limit the power of the United States. The prime minister’s desire to join such a group could be tricky to explain during his next meeting with President Obama just as NATO is installing Patriot missiles in Turkey to guard against threats from the East and South.

One sad result of all this foreign policy noise is to divert attention from some of the serious, long term issues that negatively impact the Turkish economy. In arecent article Prof. Güven Sak of Ankara University noted that Turkey lags way behind others in attracting major high technology investment. “Turkey is considered a good pharmaceutical customer – not a manufacturer.” He added that some of the reasons for this failure to attract more high tech manufacturing can be seen in the results of the Global Competitiveness Report.  Between 2006 – 2012 this report said the ranking of Turkey’s judicial system declined from 56^th to 83^rd place. The tax regime declined from 95^th to 117^th place. And, perhaps most important of all, the education system declined from 58^th to 74^th place.

One can understand the prime minister’s preference for foreign policy. It is so much easier and satisfying to jet around the world lecturing others on what they should or should not be doing rather than dealing  constructively with these difficult, long-term structural problems at home