Belarus Investment Climate After Spartak and Kommunarka
Published: 24 October 2012
According to Doing Business 2013, Belarus is now on the highest level in its history. It occupies the 58th place out of 185 countries. Last year the World Bank named it among the quickest reformers on the way to the “Ease of doing business” goal.
The indices mainly follow from the analysis of Belarusian regulatory acts. What is going on in the country’s business reality is more difficult to reflect. The case of Spartak and Kommunarka revealed the most crucial defect in its economy – disregard to private property rights.
The de facto nationalisation of Marat Novikov’s and many minor shareholders’ property could go smooth without attraction of the world’s tense attention. Belarusian state machine did its work on Spartak and Kommunarka impeccably. But Lukashenka’s emotional speech of 12 October when he ordered to transfer the reins of power over these almost entirely private companies to the State ruined all efforts to make Belarus attractive for investors.
Spartak and Kommunarka: Start of An Unexpected Journey
The rise of Spartak and Kommunarka as well as their popularity within the former USSR began long before Belarus’ independence. Carried by beliefs for soon-coming market economy, in 1993 and 1994 the government initiated their transformation from state enterprises into joint-stock companies.
The shares were distributed among the state, private investors, and the factories’ employees. An American friend of Belarusian high officials, Marat Novikov, became the main private investor of both chocolate giants.
For years, the initial distribution of shares in the transformed companies could change only slightly. One of the reasons for that was moratorium on sale of employees’ stock introduced in 1998. In January, 2011, the moratorium’s term expired and big investors got a good opportunity to broaden their economic presence in the country.
Novikov did not lose the chance. By 2011, he already owned about 10% of stock in Kommunarka, and several times more in Spartak. That was not his limit. As soon as the moratorium expired, as the former General Director of Kommunarka Natalya Kot says, the company’s employees started to sell their stock to Novikov.
State Machine at Work
The President’s Edict No. 107 adopted in March, 2011 interrupted such deals. City executive committees got the preemptive right to purchase of employees’ shares. The provision applied to relations starting from January 1, 2011. That meant it actually disregarded the universal principle of non-retroactivity of law.
Using the edict’s retroactivity, city executive committees wanted to get back the shares that Novikov had bought from Spartak and Kommunarka employees.
The difficulties on the way to the conflict’s mitigation found an unexpected embodiment in a new claim against the two companies. This time they arrived from by the State Property Committee. The Committee argued that in 1993 the appraisers underestimated values of Spartak and Kommunarka and now the state should get additional shares to restore its interests. In case of Kommunarka, the alleged undervaluation amounted up 50%. The State Property Committee also blamed Spartak for other violations of privatisation procedure.
Commenting on the State Property Committee’s claims, Belarusian economic analyst Yaraslau Ramanchuk says that the new figures of the companies’ value in the early 90s claimed by the state rely on contemporary investments’ amounts and costs of stock. In the economist’s opinion, that is a rude violation of basic principles of economy and law.
However, on 22 August 2012 the High Economic Court of Belarus satisfied the State Property Committee’s claims with regard to both companies. Under the decision, the state’s share was going to increase by means of additional stock issuance.
Shareholders tried to resist the judgements. But their hopes, as well as the hopes of Belarusian businesses looking for foreign investments, crashed after the famous Lukashenka’s orders: to dissolve Advisory Boards, assign state officials as their sole directors, and increase the state’s share up to 57% in Kommunarka and 60% in Spartak from current 22% and 13.09% respectively.
Unlucky Big Businesses in Belarus
Marat Novikov is the person who has suffered from the stock’s additional issuance the most. He lost control over about 34% of stock in Spartak and 22% – in Kommunarka. However, Novikov is not the first to face the specifics of relation to private property in Belarus.
Examples of similar treatment exist with regard to both foreign and national investors. In 2001 the plans of Russian-Sweden brewery company Baltika to invest in Belarusian plant Krynitsa failed, because Belarus suddenly refused to comply with its contractual obligations to the investor. The state’s refusal came after Baltika already invested in Belarus about $10,5mln.
In 2002 McDonald’s had to close one of its most profitable restaurants in Belarus, because the Belarusian State University started construction of a new building on the restaurant’s land plot. The fact that Minsk State Executive Committee had previously leased the land to McDonald’s till 2036 did not prevent the closure.
In January 2011 Belarus took administrative control over a huge furniture joint stock company “Pinskdrev” although it did not own any shares there. In a few months after Pinskdrev, state officials made one of the main stockholders and the director of a Belarusian big tile and sanitary engineering company Keramin to vacate his position. After his retirement, state’s share in Keramin increased from 3% to 57%.
Despite all the troubles, examples of smooth international investment projects in Belarus still exist. American Coca-Cola, German Man, and Holland Heineken are just a few of an already quite a long list of foreign investors who appear to be successful in Belarus.
In fact, foreign investors in Belarus are even in a safer position compared to their local colleagues. The possibility of impartial consideration of their claims against Belarus is the main reason for that.
Since 1992 Belarus is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. It has entered into bilateral investments treaties with more than 50 countries which provide substantive grantees to foreign investors. Even more, under the new draft law on investments, investors from any country of the world will be able to draw a suit against Belarus to international arbitral tribunals.
Surprisingly, not a single claim from investors was submitted to the International Centre for Settlement of Investment Disputes against Belarus.
It is possible that after investors start to use their rights and initiate international proceedings against Belarus the situation will improve. This way the government will learn that it can be held accountable for its mistreatment of investors.