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Posted November 2011

From Russia with love

How the east was won | The day the world changed. On Christmas Day 1991 Mikhail Gorbachev resigned as the last leader of the Soviet Union and Boris Yeltsin ordered the red flag to be lowered from the Kremlin. With 20 years hindsight we know why the USSR disappeared, not with fireworks but a damp squib. President Yeltsin inherited a decaying, bankrupt, thoroughly militarised and just as thoroughly corrupt communist empire, which he set out to reform through a shock therapy to create a private sector and open up the country to private investment. Among the first to latch onto this opportunity were a motley crew of Nordic and Indian investors who thought that building the Russian beer market was the opportunity of a lifetime.
It's important to remember those early crazy years to understand why Russia's beer market decline (-10 percent/-10 million hl) from 2007 to 2010 is now giving international brewers such a headache, propelling leader Baltika to fire its long-serving CEO and SABMiller to combine its Russian brewing interests with Efes' in late 2011.
Napoleon Bonaparte is said to have quipped that “history is the version of past events that people have decided to agree upon.” Most commentators these days concur that the fall of the Soviet Union in 1991 wasn't inevitable because of inherent fatal defects. True, from 1981 to 1989 the growth of the country's GDP slowed to 1.9 percent a year. Yes, economic stagnation was obvious and worrisome. And yes, by running the rouble printing presses red-hot, Mr Gorbachev's government had created a colossal monetary overhang. But many an inefficient state has muddled through for decades.
If you will, it was three factors which sped up the Soviet Union's demise: Mr Gorbachev's messed-up political and economic reforms between 1985 and 1991; Mr Yeltsin's hunger for power which made him topple Mr Gorbachev when he got the chance to do so and the Soviet elite's greed for state-assets.
When on 8 December 1991, the heads of three of the Soviet Union's 15 republics, led by Russia's Boris Yeltsin, met in a hunting lodge near Minsk, in what is Belarus today, to sign documents abolishing that 74-year-old state, they demolished a highly specialised and integrated economy (e.g. dairy in the Baltics and cotton in central Asia) and caused the collapse of production across the former Soviet territories, which fell by almost half in the 1990s.
By the winter of 1991, the Economist newspaper wrote, Russia had two months’ worth of grain left, and producers were refusing to sell their crops to the state at regulated prices. Shops were empty. People were hungry. There was no money to import food, either. Foreign-exchange reserves stood at USD 27 million and the country’s foreign debt, inherited from the Soviet Union, was USD 72 billion.
Price liberalisation, implemented by Mr Yeltsin's government, made the erosion of Russians’ savings visible, and was hugely painful. The other task was to break the communists' grip on assets as quickly and peacefully as possible. The mass privatisations of the years 1992 to 1995, when the Yeltsin government sold state-owned industries for a song to Russian businessmen or foreign companies, were far from just or clean. Moreover, they only broke the central planners’ grip yet failed to create the hoped-for shareholder democracy as most Russians exchanged their vouchers in state-owned companies for small amounts of cash, or even vodka.
In the early 1990s, Russia resembled a host of troubled countries. It had Tanzania's subsistence economy, Pakistan’s corruption, Brazil’s wayward congress, Italy’s mafia, and a Communist Party all of its own. In other words, it was a bit like the Wild West - fast forward by one hundred years.
On to this unchartered territory some Nordic and Indian investors were the first to step: Finnish brewer Sinebrychoff, the Swedish-Finnish venture Baltic Beverages Holding (set up by brewer Pripps of Sweden and Hartwall in Finland), two twentysomething entrepreneurs from Iceland, Thor Bjorgolfsson and Magnus Thorsteinsson and, not to forget, the Indian owners of the Sun Group.
Next came South Africa's SAB and Turkish brewer Efes, who arrived in 1997 and 1998 respectively, when the others had already carved out a large chunk of the market for themselves. For reasons best known to themselves, neither Efes nor SAB continued to grow through acquisitions in the final years of the decade. Considering that Efes had spent a reported USD 120 million on its brewery in Moscow and SAB, in order to buy Miller Brewing in the U.S., had put a cap on expenditures, the reason for their reluctance become clear.
Lastly, brewers Interbrew and Heineken were in a class of their own. For one, they were late-comers, for another their strategy differed fundamentally from the aforementioned because they chose to buy breweries which had already enjoyed some degree of westernisation: Interbrew bought a stake in Sun in 1999, while Heineken acquired Bravo from the Icelanders in 2002.
 
Writing history or hiding the truth
If history, pace Napoleon, is the version of past events that people have decided to agree upon, then the history of brewing in "the 1990s Russian Wild West" (The Economist) still needs to be written.

Apologies, but the rest of this report is reserved for subscribers to Brauwelt International. Read on
 

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