Fighting Spirits

The Kremlin has cause to celebrate: last month the United States recognized Russia as a market economy, not long after the European Union made a similar acknowledgment. Those decisions boosted Russia’s drive to join the World Trade Organization and attract sorely needed foreign capital. But while Russia may toast itself with champagne, the U.S. and the E.U. may have to forgo toasting with Stolichnaya, the highly successful brand of Russian vodka. The Russian state is attempting to nationalize Sojuzplodimport (SPI), the private company that holds exclusive export rights to the world’s most popular vodka brand and sends abroad 25 million liters of the spirit a year.

Back in 1991, the state privatized Sojuzplodoimport, the monopolist Soviet vodka exporter. Then, in 1997, SPI was independently launched as a competing vodka exporter. The new firm had nothing in common with the old Soviet company, but wanted its new name to sound familiar to foreign markets. So SPI executives dropped the third “o” from Sojuzplodoimport’s name and bought that firm’s rights to Stolichnaya and 42 other vodka trademarks for $300,000. Now, state officials claim that SPI paid too little for rights that have a real value of $400 million. “They are worth that kind of money now that we’ve developed bleak Soviet trademarks into real market brands,” contends SPI spokesman Sergei Boguslavski. “We assumed $10 million in debt and invested another $50 million to accomplish that.”

In five years, SPI has grown into a major business, selling Russian vodka to some 150 countries and bringing an annual $100 million in revenue to the Russian treasury. But in May 2000, masked police stormed The Russian state reverts to the bad old days in a battle to control the country’s vodka distributors the SPI headquarters in downtown Moscow and forced staff members to lie on the floor while they ransacked offices, confiscating documents and computers. “These storm troopers openly said they were assigned to destabilize our business rather than find any proof of our guilt,” says Alexei Oliynik, CEO of SPI.

In October 2000, Russian Prosecutor General Vladimir Ustinov wrote to Premier Mikhail Kasyanov, requesting that, “in accordance with the instructions of the President of the Russian Federation,” SPI brands be turned over to the state. “In this case, the state may restore its rights independently without a court decision,” read the letter. Accordingly, the cabinet issued a decree “to restore and protect the exclusive rights of the Russian Federation” to vodka brands, and punish “those guilty of harming the interests of the Russian Federation.” A year later, the Russian court of arbitrage ruled that Sojuzplodoimport was wrongly privatized in 1991. So the state nationalized 17 vodka brands, including Stolichnaya.

spi has doggedly pursued the case in the courts since then, obtaining several favorable decisions. But, says Oliynik, “the Prosecutor General’s Office overturns them all.” In February, Russian customs officers impounded $10 million worth of SPI vodka earmarked for export to the U.S. SPI responded by exporting from its distillery in Latvia. Now, government officials are asking Western distributors to boycott spi, claiming that the disputed vodka brands now belong to the state. Meanwhile, the General Prosecutor’s Prosecutor’s Office is pressing criminal charges against SPI top executives. “As a citizen, I’d like Russia to be recognized as having a market economy,” Oliynik says. “As a businessman, I don’t yet see that we have one. The state interferes too heavily.”

During President Bush’s visit to Russia in May, Eugene Lawson, president of the U.S.-Russia Business Council, protested to both Bush and Putin about what he said was a violation of ownership rights in the SPI case. Neither leader reacted publicly. Around the same time, 18 Republican Congressmen wrote to Robert Zoellick, the U.S. Trade Representative, decrying Russia’s attempts to renationalize the vodka industry and invoking “significant doubts on Russia’s ability to become a reliable member of the international economic community.”

The Congressional protest referred to other Russian governmental attempts to interfere in the market. One example of such meddling is the case of Sawyer Research Products of Cleveland, Ohio. After Sawyer in 1994 invested $8.2 million in a quartz glass plant in the Vladimirski region in central Russia, regional authorities helped its Russian partners grab the assets by having a local court overturn the lease in February 2001. There is evidence of at least five similar takeovers of American businesses in Russia, in some cases with threats and use of violence. Though Western governments may grant Russia its coveted status as a market economy, the Stoli experience raises doubts about whether private Western businesses will want to invest there.