Belarus Investment Climate After Spartak and Kommunarka

The indices mainly follow from the analysis of Belarusian legal and regulatory acts. What is going on in the country’s business reality is more difficult to reflect. The case of Belarus’ largest confectionaries Spartak and Kamunarka revealed the most crucial defect in its economy – disregard to private property rights.

The de facto nationalisation of Marat Novikau’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 Kamunarka impeccably. But Lukashenka’s emotional speech of October 12 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 Kamunarka: Start of an unexpected journey

The rise of Spartak and Kamunarka 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 Novikau, became the main private investor of both candymaking 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.

Novikau did not lose the chance. By 2011, he already owned about 10 per cent of stock in Kamunarka, and several times more in Spartak. That was not his limit. As soon as the moratorium expired, as the former General Director of Kamunarka Natallia Kot says, the company’s employees started to sell their stock to Novikau.

State machine at work

The Presidential Decree 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 Novikau had bought from Spartak and Kamunarka 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 Kamunarka and now the state should get additional shares to restore its interests. In case of Kamunarka, the alleged undervaluation amounted up 50 per cent. The State Property Committee also blamed Spartak for other violations of privatisation procedure.

Commenting on the State Property Committee’s claims, Belarusian economic analyst Jaraslau 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 August 22, 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 per cent in Kamunarka and 60 per cent in Spartak from current 22 per cent and 13.09 per cent respectively.

Unlucky big businesses in Belarus

Marat Novikau is the person who has suffered from the stock’s additional issuance the most. According to his own words, he lost control over about 34 per cent of stock in Spartak and 22 per cent in Kamunarka. However, he 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 Krynica 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 “Pinskdreu” although it did not own any shares there. In a few months after Pinskdreu, state officials made one of the main stockholders and the director of a Belarusian big tile and sanitary engineering company Kieramin to vacate his position. After his retirement, state’s share in Kieramin increased from 3 per cent to 57 per cent.

Seeking for justice

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. Surprisingly, not a single claim from investors was submitted to the International Centre for Settlement of Investment Disputes. 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.

It is possible that after investors start to use their rights and initiate international proceedings against Belarus the situation will improve. The government is just to learn that it can be accountable for its mistreatment of investors.

• 0
• 0
• 0
• 0
• 0
• 0
• 0
• 0