Has Carlsberg fallen victim to dodgy machinations?
Or did they just fail to grasp the fundamentals of doing business in a market which is as “interesting” as Uzbekistan’s? In early September 2012 Russian media reported that Carlsberg is in talks with investors to sell its subsidiary in Uzbekistan. Uzbekistan is the most populous and mainly Muslim country of 28 million people in Central Asia.
Potential buyers of the assets and other conditions of a possible deal were not mentioned. Obviously, Carlsberg would not comment on these rumours. When approached by Brauwelt International, a spokesperson for the brewer only said that production has been shut down due to a lack of raw materials.
Now, why would the Danish try to sell a brewery – reportedly with a capacity of over 1 million hl – in which they gained complete control in 2009 after having bought out a local partner?
Carlsberg entered Uzbekistan in 2008 when it acquired the other half in Baltic Beverages Holding (BBH) it did not own. That way Carlsberg also got hold of a brewery in the capital Tashkent, which BBH had built in 2006/2007 for a cost of EUR 60 million through a joint venture with a local Uzbek investor, Sarbast.
We have no idea if the Uzbek investor voluntarily or involuntarily sought an exit. The fact alone that a foreigner like Carlsberg became the sole owner of an Uzbek company and did not seek another local investor, namely one with very good connections to the ruling elite, should have told industry observers that things could only go downhill for Carlsberg from now on.
As we have said over and over again in reports on Eastern Europe, the Caucasus and Central Asia: in these markets, if you lack a krysha, literally a “roof”, which only the powers-that-be can provide, you are doomed. Western companies with “COMPLIANCE” written large on their books may not approve of the way business is done in these “interesting” markets. However, if they want to get ahead, they have to play by their rules. It’s as simple as that.
Uzbekistan, a country rich in history and architectural treasures, gained independence in 1991 with the breakup of the Soviet Union. It is the world’s second-largest cotton exporter, although it also exports gold and natural gas. Over one-quarter of the population remains below the poverty level, and a large portion of the working-age population has migrated abroad for work, mainly to Russia. Its president, Islam Karimov, who was re-elected in 2000 and 2007, has kept the country secular and relatively stable, albeit at the cost of shocking violations of human-rights.
When it comes to international rankings, the country fares poorly. It languishes near the bottom of the World Bank’s Doing Business 2012 report (166th out of 183 states). It is equally scraping the bottom of Transparency International’s Corruption Perceptions Index. In the 2011 worldwide survey published by the Berlin-based corruption watchdog, Uzbekistan ranked 177th out of 182 countries – just above Afghanistan, Burma (Myanmar), North Korea and Somalia.
Miklos Marschall, the deputy managing director of Transparency International, was quoted as saying in 2011 that "corruption is so endemic that it is almost the system. So it’s not a deviation from the system, it is the system."
As recently as August 2012, Eurasianet.org, an NGO news service, reminded its readers that “the most lucrative business opportunities in the country are controlled by a coterie of movers and shakers close to President Islam Karimov. … For those entering the Uzbek market, it is pretty clear that without the continuous endorsement of a very narrow political elite led by the President, carrying out business in Uzbekistan bears high risks.”
Eurasianet went on to list the most high-profile foreign investors in Uzbekistan who had fallen foul with the ruling clan and then faced a “classic shakedown”: the London-listed miner Oxus Gold, U.S. company Newmont Mining Corp, Russia’s dairy and soft drink company Wimm-Bill-Dann (WBD), now part of PepsiCo, and most recently Russia’s mobile phone operator, MTS, which trades on the New York Stock Exchange, and has had to write off USD 1.1 billion after its Uzbek license was permanently revoked last month.
They were all accused of one thing or another: creating organised criminal groups, breaking tax laws and embezzlement.
The WBD saga is well-documented because its executives spilled it all to the Russian media. In 2010 Uzbekistan de facto nationalised the local branch of WBD, following the company’s conflict with the powerful Uzbek National Security Service, which not only controls all large businesses in the country, including foreign investment, but also puts down dissent and insurgency.
Carlsberg must have seen it coming when the Uzbekistan Prosecutor General started investigating the brewer’s activities allegedly on grounds of tax evasion some time last year, well-informed Russian media say. They also claim that Carlsberg quietly told its Russian-born General Manager in Uzbekistan, Evgeny Shevchenko, to leave the country for another position with Carlsberg Latvia or he could have ended up in jail.
It all makes sense now why Carlsberg earlier this year had to suspend its operations in Uzbekistan because of a lack of raw materials. It was probably prevented from converting its local earnings in Soum into foreign currency. No krysha, no forex permit. As the international law firm Baker & McKenzie had already advised its clients in 2009, certain “administrative difficulties” (!) in converting Soum to foreign currency for remittance abroad diminish the effect of currency liberalisation in practice.
This leaves us with the question: who could buy Carlsberg’s operations in Uzbekistan should Carlsberg really consider this option? Only Uzbek companies come to mind. Trust them to dictate the price. With Carlsberg off-stream, there are merely four larger players left, brewers Inter-Rochat and Mehnat among them, plus about 15 microbreweries. Total beer production this year will be 2.3 million hl, insiders say, because of Carlsberg’s brewery shut down.
That’s why foreign brewers should think twice before spending any money on an air ticket to Tashkent. They may not receive a warm welcome.
That includes Turkey’s Efes, too. In 2008 Heineken and Efes signed a joint venture to invest in the Uzbek beer market through the acquisition of breweries. Nothing has come of this yet and most likely nothing ever will. The reason is politics. In the past Turkey has sheltered political Uzbek opposition in Turkey, allowed Turkish groups to carry out religious propaganda in Uzbekistan, and refused to expel Uzbek citizens that Uzbekistan was pressing to have extradited. That did not go down well at all with the Uzbeks.
What will be the most likely solution to Carlsberg’s problems? Unless Carlsberg wants to leave the country once and for all and count its losses like all the other aforementioned companies, it will have to play its hand carefully and lure a local investor on board with promises of a significant stake in the company in exchange for – well, wait and see.
