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Bravo Heineken! the Impact of Foreign Direct Investment

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Bravo Heineken! the Impact of Foreign Direct Investment BRAVO HEINEKEN! THE IMPACT OF FOREIGN DIRECT INVESTMENT IN THE CASE OF THE BEER INDUSTRY IN RUSSIA A THESIS SUBMITTED TO THE FACULTY LAW OF LEIDEN UNIVERSITY By Roman A. Eliassov Under the supervision of: Dr. Rilka Dragneva IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF LL.M. IN INTERNATIONAL BUSINESS LAW Leiden, August 2002 1 Acknowledgments It is with gratitude that I hereby acknowledge the advice and assistance of a number of my colleagues at the Leiden University in the preparation of this thesis – Dr. R. Dragneva, Prof. dr. W.B. Simons and Celia Jordan, coordinator of the Leiden International Business Law LL.M. program. I would also like to thank Mr. Sergey Sanne, lawyer for Bravo International (Saint -Petersburg) and Mr. Andrey Bushev, lawyer for Vena (Saint - Petersburg), and Mr. Jan van de Merbel, Heineken’s investors relation specialist (Amsterdam), who agreed to share their expertise with me. Lastly, I am grateful to my parents and my girlfriend Ol’ga Zolotareva for supporting me throughout the year. Leiden, August 2002 Roman Eliassov. 2 Introduction ..................................................................................................................5 1. The importance of Foreign Direct Investment........................................................5 2. Russia – FDI .........................................................................................................7 3. Beer .................................................................................................................... 11 4. The task of the thesis........................................................................................... 14 Chapter I..................................................................................................................... 17 1. Background of the research method..................................................................... 17 Chapter II.................................................................................................................... 20 1. Perspectives of foreign investors ......................................................................... 20 2. Investment climate .............................................................................................. 24 2.1. Taxation ....................................................................................................... 25 2.2. Political issues.............................................................................................. 27 2.3. Organized crime and corruption.................................................................... 29 2.4. Privatization ................................................................................................. 31 2.5. Corporate Governance.................................................................................. 33 2.6 Banking......................................................................................................... 35 3. The Russian response .......................................................................................... 36 3.1 Experience in attracting of foreign investors.................................................. 36 3.2 Basic guarantees for foreign investors............................................................ 38 3.3 Comparison of the 1991 law and the 1999 law............................................... 39 3.4 Other legal factors ......................................................................................... 41 3.4.1 Taxation ..................................................................................................... 43 3.4.2 Political issues............................................................................................ 45 3.4.3 Judiciary and enforcement .......................................................................... 46 3.4.4 Corruption .................................................................................................. 48 3.4.5 Organized crime ......................................................................................... 49 3.4.6 Privatization ............................................................................................... 51 3.4.7 Corporate governance................................................................................. 52 3.4.8 Banks ......................................................................................................... 55 3.4.9 Labor.......................................................................................................... 56 3.4.10 Environment............................................................................................. 58 3.5. Lacking elements.............................................................................................. 59 Chapter III .................................................................................................................. 63 1. Russian beer industry background ....................................................................... 63 2. Government regulation of the Russian beer industry............................................ 69 3. Situation on Bravo and Baltika before the investment/privatization .................... 71 3.1. Conclusion ................................................................................................... 73 4. Change of ownership........................................................................................... 73 4.1 Conclusion .................................................................................................... 76 5. Investors background .......................................................................................... 76 5.1. Conclusion ................................................................................................... 80 6. Entry choice considerations................................................................................. 80 6.1. Conclusion ................................................................................................... 86 7. Choice of legal entity form.................................................................................. 88 7.1. Conclusion ................................................................................................... 92 8. The deal .............................................................................................................. 92 8.1. Compromises................................................................................................ 93 8.2. Price............................................................................................................. 93 8.3. Accounting................................................................................................... 95 8.4. Conclusion ................................................................................................... 96 9. Situation on the companies after the acquisition/privatization.............................. 97 9.1. Corporate governance................................................................................... 97 3 9.2. Economic policy........................................................................................... 99 9.3. Conclusion ................................................................................................. 103 10. Investments and strategy of the investors......................................................... 104 10.1. Investments .............................................................................................. 104 10.2. Strategy .................................................................................................... 108 10.3. Conclusion ............................................................................................... 110 Conclusion................................................................................................................ 113 4 Introduction 1. The importance of Foreign Direct Investment What do countries need for growth? According to certain OECD reports, trade and foreign direct investments (“FDI”) are important vehicles for growth in, especially, developing countries.1 It shows that in the last decade, countries that have been more open to foreign investment, have achieved double the annual growth of others. Firms and sectors with high FDI levels have higher average labor productivity and pay higher wages. Therefore, FDI can benefit all parties: outward investment enables firms to remain competitive and thus supports employment at home; investment abroad stimulates the exports of machinery and other capital goods, and increases the demand for intermediary products, know-how and specialized services. The OECD defines FDI as an “ownership of assets in one country by residents of another for purposes of controlling the use of those assets”.2 Therefore, when an investor acquires shares in foreign enterprise for the purpose of having an effective voice in its management or when both creditor and foreign borrower belong to the same multinational enterprise, the flows are considered as a foreign direct investment. FDI occurred mainly among the industrialized countries. During the second half of the 1980s the world FDI increased at an yearly average rate of 41%, whereas the world gross domestic product (GDP) grew only by 3.8%.3 FDI started to play bigger role, and its beneficial nature was realized by countries. However, it seems impossible to please all parties, and the interests of investors and host countries frequently clash. While expanding abroad multinational
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