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. Last Updated: 07/27/2016

Irish House Taken Over by Russian Partners

The Arbat Irish House, one of the first high-profile Western joint ventures in Moscow, is now Irish in name only.


All of the enterprise's expatriate managers and staff have been withdrawn in recent weeks, according to the shareholders, leaving Russian partners -- including MOST-Bank and the Moscow city government -- solidly in control of the shopping complex jewel in the heart of downtown.


Fundamentally the departures appear to be the result of an effort by Leonid Semenov, a founding partner in 1991 and the venture's director general since January 1994, to assert control over the enterprise and reduce reliance on expensive expatriate employees.


The move comes at a time when increasing competition as well as employee theft have cut sharply into profits, officials of both the Russian and Irish sides said. The Russian partners also clashed with Aer Rianta, the Irish state-owned company, over management questions.


More broadly, the episode reflects a trend among joint ventures in Moscow, where Russian entrepreneurs have sought to muscle out Western investors after initial dependence on them for management expertise and capital.


In this case Aer Rianta -- which also operates duty-free stores at airports in Moscow and worldwide -- has retreated quietly, rather than resorting to court fights and power drills as has Paul Tatum, the central figure in the stormy ongoing saga at the Radisson Slavjanskaya Hotel. (Page 3.)


About 20 Irish employees have left the store and the adjoining Shamrock Bar in the last two months, the final six last Friday, sources involved in the venture said. Most have been relocated to other Aer Rianta outlets in Ireland and overseas after declining to sign new contracts directly with Sitco -- the Soviet-Irish Trading Corporation -- the entity that owns and operates the Irish House and the first-floor gastronom, and leases several highbrow storefronts in the same building.


None of the former employees could be reached for comment.


"We don't feel hard done by," Eamon Foley, director general of administration, said in a telephone interview from Aer Rianta's headquarters in Shannon, Ireland. "It's been a strategic policy and decision of ours to wind down our interest in the downtown operation."


The Russian side views Aer Rianta's decision as good riddance.


"We endured for a long time but when it turned out that our company was going to hell because of these people we could not stand any more," said Yelena Khvatkina, Semenov's deputy. She leveled charges of "absolutely unprofessional" management at Aer Rianta, including ill-timed vacations by foreign employees, negligence over security and failure to abide by Russian laws.


Foley rejected such accusations but did not elaborate.


Still, the final exit of the Irish employees -- who early last year numbered more than 50 -- "was taken mutually," said Khvatkina. Aer Rianta agreed to end its management role after a meeting of Sitco's principal shareholders in early March, Foley said.


The partnership began to unravel much earlier, however. In June 1994, Aer Rianta reduced its stake in Sitco from 45 percent to 19 percent by selling a block of shares to MOST-Bank, Foley said. The sale price was about $7 million, one source said.


Foley said Aer Rianta had an "expectation" at the time that it would continue to provide management services, but said the company knew its role would diminish over time in accordance with its reduced stake.


Under the contract, Aer Rianta was entitled to a percentage of the store's turnover in the 5 to 6 percent range, another source said. Semyonov said Aer Rianta was paid $2.4 million annually by Sitco as a management fee, in addition to $1.6 million in employee compensation.


Sitco was founded in 1991 by Aer Rianta, the Moscow city government, Semenov -- manager of the Novy Arbat building -- and a small Irish shareholder. The enterprise was reregistered as a joint-stock company in 1992 in accordance with new Russian law, Foley said.


Since June 1994, the shareholders have been: MOST-Bank, 31 percent; the Moscow City Property Committee, 25 percent; Semyonov's Novy Arbatski Trading Company, 25 percent; and Aer Rianta, 19 percent.


Throughout 1994, the store's profits dropped while management frictions accelerated. Foley said the enterprise closed in the black for the year, but would not discuss profit margins except to say they declined over previous years. Turnover fell to $35 million from approximately $40 million in 1993, he said.


Competition from other Moscow retailers -- including, notably, the gastronom operated by Semyonov on the first floor -- and drastically lower margins on electronics items accounted for the drop in profits, Foley said. Semyonov, though, said Irish management told him the enterprise recorded a $3.5 million loss in 1994. He said an outside auditor is now trying to assess the books.


Both Semyonov and Foley agreed that employee theft also chipped away at profits. Foley said two Russian staff were dismissed for stealing more than $10,000 and legal action against them is ongoing. Khvatkina estimated overall theft much higher, at over 1 percent of turnover.


Aer Rianta and Semyonov disagreed over responsibility for theft and other stock losses and, according to an outside business source, Semyonov and Irish store general manager Edmund Forest were frequently at loggerheads.


Forest, currently on assignment for Aer Rianta in the Far East, could not be reached for comment. Foley denied there were major personality conflicts.


Semyonov, who recently was honored by President Boris Yeltsin for business achievement, declined direct comment on the relationship but contested characterizations of him as "a dictator" by sources who would not be identified.


The Irish employees were expensive for the venture. A typical compensation package, a former foreign employee said, was almost $30,000, as well as housing and four return trips to Ireland a year. The store had more than 50 expatriates last year and reduced that number to about 24 at the beginning of 1995.


Total compensation for some key managers was over $90,000, Khvatkina said. "The number of Irish they had was really ridiculous," the former employee said. "The partners woke up to it a lot quicker than [Aer Rianta] did themselves."


Compensation for the 19 Irish staff employed by the venture this year equaled the amount paid to 400 Russian workers, Semyonov said.


"We are fed up with such management," Khvatkina said. "Russians could do the same, no worse and often better."


Foley would not comment on compensation, but said "we treat our employees fairly and our packages would be in line with what the market pays for the location."


In any event, the store is now wholly Russian-run. Olya, an employee who would not give her last name, said work "is becoming more difficult" in the absence of the expatriate managers, "but it is always so in transitional periods. Russians had learned to do most of the work on their own without Westerners' assistance, she said.


"Of course it is difficult," Khvatkina said. "All our contacts went through Aer Rianta and now we have to settle our own relations. But it is our company and we are sure it will flourish."


Foley said Aer Rianta does not intend to sell its remaining 19 percent stake in the venture, but would consider any offers submitted. He said the company will concentrate on its "core businesses" of duty-free retailing and will not withdraw from the Moscow market.


Alexander Pankratov, an associate at White & Case who handles joint-venture law, said the Irish House case is part of a "general trend" in Russian-Western enterprises.


"I would not blame either side for this," he added. Foreign "investors pursue their own goals and objectives here. Russians do exactly the same. I do not think there is anything wrong with doing this."