- The Washington Times - Friday, May 24, 2002

Congress is now considering granting Russia permanent normal trade relations with the United States. Russia is also seeking entry into the World Trade Organization (WTO).

These are essential components of Russia's long-term effort to modernize its backward economy. Given the close cooperative working relationship between Russian President Vladimir Putin and President Bush on U.S. foreign policy concerns, the United States is positively disposed toward helping the Russians.

But the question remains whether Russia has sufficiently developed its internal legal and economic institutions to make full participation in the modern world economy practical. Russia's current effort to renationalize its vodka industry suggests it is not.

Vodka is the second-largest industry in Russia. It is probably the country's only successful consumer product export. So we are not dealing here with a minor example of how Russia might be expected to act if it was granted full participation in the modern world trading system.

In 1992, Russia privatized its vodka industry. The former state company VVO SPI, the owners of Stolichnaya, the most popular brand of Russian vodka selling worldwide, became a private company owning the Stolichnaya trademark.

The old Soviet bureaucracy had contracted with Pepsico in 1972 to import Stolichnaya vodka into the United States. Pepsi organized a whole network of raw material suppliers, Russian distilleries, quality-testing and assurance procedures, and U.S. distributors to make the Russian vodka a world-class consumer product.

As part of this arrangement, Pepsi also acquired the right to use the trademarks "Stolichnaya" and "Stoli." It then spent more than $300 million in advertising promoting these brand names, before ultimately selling out its role to others. In 1997, a group of investors bought the privatized SPI company and assumed ownership of its assets and liabilities, including the residual rights to its trademarks.

Recently, however, former Russian Deputy Agriculture Minister Vladimir Loginov has been denying that the Stolichnaya trademark belongs to SPI, despite the fact that SPI has registered it in more than 150 countries of the world. He is now asserting Russian state ownership instead. The Agriculture Ministry has also denied permits to ship newly produced vodka to the U.S.

On Feb. 22, 2002, the Russian Leningrad District Court recognized all of these facts and ordered the Russian government to allow rapidly accumulating vodka now owned by Western importers to be shipped to the U.S. But the government has refused to comply.

A report in the Moscow Times on April 4, 2002, seems to explain all this. The report states that the Russian government has set up a new state enterprise through which it intends to renationalize and monopolize the country's vodka industry. The designated CEO of this new state run monopoly is none other than Vladimir Loginov.

In even more of a throwback, those in the country trying to get the court order enforced and the vodka released are being threatened with baseless criminal investigations and prosecutions, and even violence. Richard Edlin of Greenberg, Traurig representing the privatized SPI company recently told the U.S. Import Trade Administration that "We have absolutely no reason to believe, based on recent acts taken by the Russian government, that they will allow us to export any more Stolichnaya Vodka."

In regard to the vodka industry, therefore, the Russian government has failed to respect contracts, trampled on property rights, and flouted its own court orders and the rule of law. The attempt to steal the Stolichnaya trademarks also violates the international trademark treaty to which Russia is a signatory.

Moreover, this is far from an isolated example. In the Wall Street Journal Europe, former Russian Deputy Prime Minister Boris Nemtsov discusses the similar case of Pallada Asset Management, Russia's top performing mutual fund in 2001, owned by the U.S. State Street Global Advisors. Pallada is suffering at the hands of the chairman of the Federal Commission for the Securities Market in Russia, Igor Kostikov, who uses his regulatory post to favor a major brokerage and asset management firm he helped to found.

Last summer, a federal court in New York documented another case where a state-sponsored Russian company tried to rescind copyrights recently issued to an American company.

If Russia is not yet equipped to respect property rights, contracts and the rule of law, and enforce official integrity, then granting the country full participation in international trading markets and institutions is just going to create chaos in those markets, not prosperity in Russia.


Peter Ferrara is executive director of the American Civil Rights Union and a former member of the Reagan White House Office of Policy Development.


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