How Dream Deal Turned Into a Russian Nightmare : U.S. Cigarette Company’s Joint Venture Got Bogged Down in Disputes

It seemed a business marriage made in heaven: pair the New York-based maker of Chesterfields and Larks with a Moscow cigarette plant. The payoff: a fat government contract to sell 5 billion smokes a year to nicotine-starved Russians, plus a chance to make millions of dollars from real estate.

Two years ago, that union was sealed, and the Russian government coughed up the contract. But since then, the cigarette deal has almost gone up in smoke.

The two partners are now deadlocked over administrative and legal issues, and the joint venture has yet to produce a single cigarette. Worse, the dispute is getting increasingly nasty. Workers at the factory have been attacked. Journalists covering the matter have been threatened. Accusations of wrongdoing are made by both partners.

On the Russian side is Moscow’s Ducat tobacco factory. The U.S. partner is the Brooke Group, whose Liggett subsidiary is the sixth-largest American cigarette maker.

Brooke officials do nothing to hide their frustration.

“We’re in the middle of a political battle,” Brooke Vice Chairman Richard Ressler, who is based in Century City, said during a recent visit here. “Had I known when we entered into the agreement that the city, effectively, and the federal government, effectively, would lose control over their ability to deliver what they promised, I probably wouldn’t have done this deal.”

The way in which the Ducat-Brooke agreement soured sheds light on why doing deals in Russia today is so excruciatingly difficult--and why the Americans claim that this deal’s breakdown will have a big ripple effect.

“If there is no resolution, this will chase away any investor who hears this story,” Ressler asserted.

The idea for the partnership was hatched in 1990, when the Soviet Union was suffering from a cigarette shortage so severe that “nicotine riots” broke out throughout the country. Several Russian emigre business executives approached Brooke Group about a possible joint venture with Ducat, one of the largest Soviet producers of cigarettes.

Brooke was anxious to enter the Soviet market to keep up with competitors--both America’s largest cigarette producer, Philip Morris, and the second largest, R. J. Reynolds, do business in Russia.

To avoid future tobacco shortages, the Russian government even agreed to buy the new venture’s first 5 billion cigarettes a year, with the 80 million smokers in the former Soviet Union sure to puff up about 17 billion more.

And the Ducat deal offered something more--land. The Ducat factory stands on a valuable five-acre parcel in central Moscow, providing the joint venture with a foothold in the capital’s increasingly lucrative real estate market.

The idea was to build a new plant in the Moscow suburbs, where Ducat’s 1,000 workers would be given state-of-the-art technology to replace the dust-belching relics the company has been using for four decades. The old factory’s plot on Moscow’s Gasheka Street would be developed into a Western-style commercial center, perfect for the big-budget foreign firms flocking to Moscow.

The joint venture was officially launched in February, 1991. Under the initial agreement, 70% of the profits were to go to Brooke Group and 30% to Ducat.

However, said Ressler, “almost immediately, Russia, Moscow, Mosagroprom (the Moscow city agricultural organization), all the people we were starting to negotiate with in addition to the factory, started to disintegrate. . . . We just ran into one huge problem after another.”

One such huge problem was the death of the Soviet Union in December, 1991. Organizations with which the joint venture had negotiated ceased to exist. Instead, the venture was caught up in a whirlwind of fighting between government organizations. Brooke was left unsure who had ultimate control over the Russian side of the joint venture--the Ducat factory management, the pro-investment Moscow city government or the more cautious legislative body, the Moscow City Council.

Worse, Moscow authorities would suddenly rescind decisions or issue conflicting orders, leaving Brooke personnel dazed and frustrated.

The confusion was compounded when the American side tried to take over day-to-day management of the existing factory in March, 1992. According to Ressler, an independent audit found the factory loaded with debt. Supplies of tobacco were missing; factory officials had stolen hard currency funds earmarked for tobacco purchases.

Ressler said that the Ducat factory director, Vladimir Tyumentsev, retaliated by doing everything in his power to sabotage the work of the joint venture.

Brooke turned for help to the Moscow mayor’s office, which investigated, and, finding improprieties, fired Tyumentsev in December. But because it was unclear who had the power to fire Tyumentsev, the director kept coming to work, posting private security guards at the entrance to the plant to protect him. The City Council recently reinstated Tyumentsev, who declined to be interviewed.

Tyumentsev’s lawyer, Vyacheslav Satov, asserted that no money was stolen and that the funds that Brooke said were embezzled were actually spent for the factory to buy a foreign-made machine to manufacturer cigarette filters.

“This new equipment will help in the work of the joint venture,” Satov said.

Satov accused the American partners of reneging on promises to invest in the factory. He said Brooke is interested only in Ducat’s land as the base for not just an office building but also a multi-block business center.

Brooke has already spent more than $7 million to transform an empty building next to the factory into “Ducat Place,” a Western-quality office complex that is now 95% complete.

But potential tenants are afraid to move in as long as the owners are embroiled in a dispute, and several foreign businesses have backed out of signed leases.

After months of stalemate, the conflict may finally be moving toward resolution, both sides said. Brooke has backed off threats to take Tyumentsev to court; the Ducat director has removed his guards and allowed Brooke officials into the factory again.