Russia's Vodka Wars

By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"

Vodka is a crucial component in Russian life. And in Russian death.
Alcohol-related accidents and cardiac arrests have already decimated
Russian life expectancy by well over a decade during the last decade
alone.

Vodka is also big business. The brand "Stolichnaya" sells $2 billion
a year worldwide. Hence the interminable and inordinately bitter
battle between the Russian ministry of agriculture and SPI Spirits.
The latter, still partly owned by the state, is the on and off owner
of the haloed brand "Stolichnaya", James Bond's favorite.

SPI's PR firm, Burson-Marsteller, posits this commercial conflict as
a classic case of the violation of the property rights of hapless
foreign shareholders by the avaricious and ruthless functionaries of
an unreformed evil empire. They question Russia's readiness to
accede to the WTO and its respect for the law.

SPI's latest press release consists of the detailed history of this
harrowing tale. The brand Stolichnaya, as well as 42 others, were
privatized in 1992. The firm quotes a document, bearing the official
seal of the maligned ministry, which states unambiguously: "VAO
Sojuzplodoimport has the right to export Russian vodka to the USA
under the following trademarks: Stolichnaya, Stolichnaya Cristall,
Pertsovka, Limonnnaya, Privet, Privet Orange (Apelsinovaya), Russian
and Okhotnichya."

The privatization was completed in 1997 when the old SPI was sold to
the new SPI Spirits. The new SPI claims to have assumed $40 million
in debt and invested another $20 million to rebuild the company
into "one of the world's leading vodka producers". Yet, the Russian
government, as heavy handed as ever, clearly is unhappy with SPI.

It says the privatization deal was dubious and that SPI paid only
$300,000 (or maybe as little as $61,000 claim other sources) for the
multi-billion dollar brands, including "Stolichnaya", "Moskovskaya",
and "Russkaya". The government values the brands at a far more
reasonable $400 million. Other appraisers came up with a figure of
$1.4 billion.

The government, in a bout of new-found legal rectitude, also insists
that the seller of the brands, the defunct (state-owned) SPI, was
not their legal owner. It also questions the mysterious shareholders
of the new SPI - including a holding company in tax-lenient
Delaware. SPI's trademarks portfolio is represented by an Australian
law firm, Mallesons Stephen Jaques.

Putin himself set up a committee for the repatriation of these and
other consumer brands to the state. He craves the beneficial effects
the alcohol sector's tax revenues could have on the federal budget -
and on its powers of patronage. A central state-owned brand-holding
and distribution company was set up less than two years ago. Ever
since then, the alcohol sector has been subjected to relentless
state interference. SPI is not the most egregious case either.

"The Observer" mentions that SPI currently runs most of its business
from inscrutable Cyprus, a favorite destination for Russian money
launderers, tycoon tax evaders, and mobsters. SPI's German
distributor, Plodimex, is increasingly less active - as three new
off shore distribution entities (in Cyprus, the Dutch Antilles, and
Gibraltar) are increasingly more so.

The FSB ordered Kaliningrad customs to prohibit bulk exports of
Stolichnaya. Cases of the drink are routinely confiscated. Criminal
charges were brought against directors and managers in the firm. The
Deputy Minister of Agriculture is discrediting SPI in meetings with
its distributors and business partners abroad. He is also accused by
the firm of obstructing the court-mandated registration of its
trademarks.

The courts have lately been good to SPI, coming out with a spate of
decisions against the government's conduct in this convoluted
affair. But on February 1, the firm suffered a setback, when a
Moscow court ruled against it and ordered 43 of its brands, the
prized Stolichnaya included, returned to the government (i.e., re-
nationalized).

SPI is doing its best to placate the authorities. It is rumored to
have offered last month to use its ample funds to supplement the
federal budget. It has indicated last September that it is on the
prowl for additional acquisitions in Russia - a bizarre statement
for a firm claiming to have been victimized. "The Moscow Times"
reported that it is planning to sign a $500,000 sponsorship
agreement with the Russian Olympic Committee.

Summit Communications, a country image specialist, placed this on
its Web site in November 2001:

"One example of a savvy Russian company that has managed to do well
in the West by finding the right partner is the Soyuzplodimport
company (see also p. 14). Soyuzplodimport, or SPI, has the exclusive
rights to export Stolichnaya, which vodka lovers in the U.S. fondly
refer to as 'Stoli'. Some 50% of the company's export turnover comes
from the United States, thanks mostly to its strategic alliance with
Allied-Domecq for U.S. distribution.

'I'm not sure that all Americans know where Russia is on the map,
but most of them know what Stolichnaya is,' muses Andrey Skurikhin,
general director of SPI. 'I want the quality of Stolichnaya in
America to create an image of Russia that is pure, strong and
honest, just like the vodka. At SPI, we feel that we are like
ambassadors and we will try to do everything to create a more
objective and positive image of Russia in the U.S.'"


SPI's troubles may prove to be contagious. Allied Domecq, its
British distributor in America and Mexico, now faces competition
from Kryshtal International, a subsidiary of the troubled Kristal
distillery, 51% owned by Rosspirtprom, a government agency. Kryshtal
signed distribution contracts for "Stolichnaya" with distilleries
backed by the Russian ministry of agriculture.



Allied and Miller Brewing have announced a $50 million investment in
product launch and marketing campaigns only five years
ago. "Stolichnaya" (nicknamed "Stoli" in the States) sells 1 million
12-bottle cases a year in the USA (compared to Absolut's 3 million
cases).



The trouble started almost immediately with the first foreign
investments in SPI. As early as 1991, Vneshposyltorg, a government
foreign trade agency, tried to export Stolichnaya in Greece. This
led to court action by the Greeks. Vodka wars also erupted between
the newly-registered Russian firm "Smirnov" and Grand Metropolitan
over the brand "Smirnoff".


The vodka wars are sad reminders of the long way ahead of Russia.
Its legal system is rickety - different courts upheld government
decisions and SPI's position almost simultaneously. Russia's
bureaucrats - even when right - are abusive, venal, and obstructive.
Russia's "entrepreneurs" are a penumbral lot, more enamored with off-
shore tax havens than with proper management. The rule of law and
private property rights are still fantasies. The WTO - and the
respectability it lends - are as far as ever.


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AUTHOR BIO (must be included with the article)



Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Global Politician,
Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a
United Press International (UPI) Senior Business Correspondent, and
the editor of mental health and Central East Europe categories in
The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government
of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com