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. Last Updated: 07/27/2016

A Warning For Foreign Investors

The chaotic situation at Moscow's Ducat cigarette factory looks like a Western investor's worst nightmare come true. Brooke Overseas Ltd. , a subsidiary of the U. S. firm Brooke Group, entered into a joint venture with the city of Moscow two years ago to build a state-of-the-art tobacco factory and modern office complex. The company sunk $7 million into the office building and put up $700, 000 in capital contribution to the joint venture, called Ducat-Liggett.


But the city has failed to keep its end of the bargain.


When the joint venture learned that the factory director had misused factory funds, the city took action, conducting its own investigation and subsequently firing him in December. But the director has refused to leave, posting guards at the factory, and the city has not moved to preserve its own joint venture.


The situation worsened in January when the Moscow City Council, which had first signed and validated the joint venture's land and property leases, turned around and invalidated both.


Many foreign investors have thought it would be possible to do business outside of the conflicts that have paralyzed Russia's political institutions. But a look at the conflicts shows how difficult this is:


Conflict No. 1, the Moscow City Council versus the mayor's office. For two years, they have been battling for control of the capital, and many foreign firms have found themselves in the middle. Like the Ducat-Liggett joint venture, companies have seen leases first agreed to and then annulled. Property privatization in the city has been held up as the two sides fight, among other things, over the proceeds of land sales.


Conflict No. 2, the parliament versus the president. So long as the battle for control of the country rages between the executive and legislative branches, it seems unlikely to be solved on the local level. Russia desperately needs a constitution to sort out the division of power.


Conflict No. 3, the former nomenklatura versus the reformers. The recalcitrant Ducat factory director personifies some of Russia's industrialists who fear the loss of luxurious lifestyles afforded by their positions. A Brooke audit has alleged that the director embezzled factory funds, which would undermine his claim that he is acting on behalf the workers.


The conflict at the Ducat factory may indeed be a Western company's nightmare. But to the extent that it is symptomatic of the country's obdurate political conflicts, and to the extent that it serves to dissuade other foreign companies from investing here, it becomes Russia's problem as well.