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. Last Updated: 07/27/2016

A Battle for the Lips and Noses of Moscow

In 1989, Estee Lauder came to town, spent about $1 million renovating a central Moscow storefront and turned Perfumery No. 36 into the Soviet Union's first foreign-run boutique, a splash of color and opulence in a row of drab, empty stores with names like "Cheese" and "Groceries."

The cosmetics giant struck a retail gold mine: Lines snaked out the door of the shop on what then was called Gorky Street as Muscovites and busloads of Soviet tourists gawked at an unheard-of selection of lipsticks and perfumes and bought up to $10 million worth of Estee Lauder products a year.

All that changed in 1992. Seizing an opportunity under early privatization rules, the store's Russian employees took over the premises, locked out the company, changed the sign from "Estee Lauder" to "Perfumery" and turned the boutique back into shop No. 36.

Shop No. 36 got the gleaming new doors, windows and sleek display cases that make it hard to mix up with Nos. 35 and 37, and Estee Lauder got mad. The company has been fighting ever since to regain control of the store at the foot of Tverskaya Ulitsa, which is now Moscow's equivalent of a prime retail spot on New York's Fifth Avenue.

"We put in everything -- floors, windows, doors, walls, wiring, plumbing, air conditioning, telephones, furniture," said Elizabeth Susskind, director of Estee Lauder's operations in Russia. "It's as if you were sitting on my couch and suddenly it became yours just because you were Russian and you happened to be sitting there when privatization came along."

Store personnel refused to discuss the conflict and said they had no connection to Estee Lauder.

"The store is independent," said one administrator, who refused to give her name. "It always was. What else could it be? We are working here on Soviet soil."

Estee Lauder goes to court next week to try to force the employees' eviction. Susskind said a victory would score points for common sense and make other foreigners "more secure about having an investment here."

And in that quest the company has a powerful ally: Mayor Yury Luzhkov.

Mayoral spokesman Igor Zverev said Luzhkov is personally supporting Estee Lauder in order "to show that the Mosco Karakozov, but were dropped for lack of evidence. Karakozov, once the head of the Defense Ministry's Trade Administration, now works in the Air Force's maintenance division.

But the murder of Dmitry Kholodov, 27, a journalist investigating illegal activities in the Western Group, has brought the accusations back to the top of the news. On Tuesday, howls from the Russian media toppled the Western Group's last commander, First Deputy Defense Minister Matvei Burlakov.

Yeltsin's dismissal of Burlakov culminated an investigation that Boldyrev began as long as three years ago, following widespread reports in the Western press that demoralized Soviet troops stationed in East Germany had begun a fire sale of equipment and resources after the fall of the Berlin Wall in December 1989.

But Boldyrev's buried investigation became a political football in the battle between Yeltsin and the former Supreme Soviet. Former Public Prosecutor Valentin Stepankov told the legislature he had documentary evidence directly implicating Defense Minister Pavel Grachev in the scandal. But apart from Boldyrev's report, none of the supposed evidence was ever made public.

Since then, the ball has been picked up primarily by journalists such as Kholodov. In a series of articles, he went on to allege that there was a mafia operating within the armed forces.

"Our Russian Army is sliding into the world of organized crime," he wrote in August. "A well-organized, disciplined and strictly hierarchical mafia structure is coming to us from the (Western Group)."

In the meantime, the Public Prosecutor's Office has been conducting a series of minor investigations into illegal activity in the Western Group, but no evidence of widespread corruption has been found, according to spokesman Alexander Zvyagentsev.

Sergei Ushakov, a spokesman for the Military Prosecutor's Office, said his office was investigating four cases of "abuse of military power" in the Western Group, but that these did not involve top level officers.

Sergei Yushenkov, chairman of the State Duma's defense committee, intends to hold hearings on the same matter in about two weeks. In preparation, Yushenkov has asked the Federal Counterintelligence Service, the Defense Ministry and the Customs Control Committee to turn over any relevant information they had. On Thursday he got his first answer, from the counterintelligence service. "The documents are secret, but I can say this: They confirm that there is corruption in the Western Group," Yushenkov said.

An examination of illegal arms sales is not the only investigation touching on the military's highest echelons. A team of investigators led by the Public Prosecutor's Office is now pouring over the Kholodov's murder.

Fyodor Ladygin, head of military intelligence, claims "foreign espionage services" are to blame for Kholodov's death, but he may have a tough time convincing the public of that.

"The investigation is headed by one of the office's senior prosecutors," Zvyagentsev said. Acting Public Prosecutor Alexei Ilyushenko, Federal Counterintelligence Service Director Sergei Stepashin and First Deputy Interior Minister Mikhail Yegorov met Tuesday to discuss strategy.

On Thursday, Stepashin announced that the murder was "definitely political," aimed at destabilizing Russia's armed forces, Itar-Tass reported.w government keeps its word to foreign investors: If they invest money here, they will be allowed to keep on developing."

Luzhkov has come under fire from some foreign business people who say his conservative approach to privatization threatens investment security because it gives city officials tight control over privatized enterprises and favors long-term rent over private ownership.

Susskind, though, says Luzhkov has fought to save Estee Lauder's investment from the beginning.

In 1992, Moscow launched its first privatization program, under which most of the city's shops, restaurants and other small enterprises were handed over to employee collectives for largely symbolic sums. Workers at state-run bread stores, grocery stores and shoe repairs were privatizing left and right, and Estee Lauder's employees, who were inherited from Perfumery No. 36, were watching.

"Our employees saw pennies from heaven," said Susskind. She said Estee Lauder offered the 40 employees a deal under which they would get 25-year work contracts, share profits and own 5 to 10 percent of the store -- the percentage of the store's value that came from Soviet state property.

"Their attitude was, 'You're offering us a bribe,'" said Susskind. "They wanted it all."

Luzhkov, then deputy mayor, issued a special decree on behalf of Estee Lauder and other early Western stores saying that because of their investments they should be allowed to "participate in privatization." Susskind thought the problem was solved.

Then the Moscow Property Committee wrote to say it was about to approve Estee Lauder's application for privatization -- an application Susskind said was never submitted.

The employees, she said, had made up Estee Lauder stationery and an Estee Lauder stamp and forged a letter authorizing privatization.

Store director Olga Bazhennova demanded Estee Lauder lease the store back from them, continue paying for renovation and maintenance, and supply goods on consignment, Susskind said. Instead, the company walked out.

With help from top city officials, Estee Lauder won a court ruling that the takeover was illegal because only wholly state-owned entities could be privatized, said their lawyer, Mikhail Korobkov.

But the workers stayed put. With the help of the Moscow City Council, now dissolved, they had obtained a lease, Susskind said. A sign appeared in the window with the name of their new firm, apparently named for the director: Olga.

Estee Lauder is now suing the Moscow government -- which plans to lose, Korobkov said -- in order to get a court eviction order stating that the workers' lease violates the company's prior contract with the city.