Cox Moscow
November 20

Coca-Cola has learned a painful lesson in this former Soviet bastion: Blood is thicker than soda.

What started as a quiet dispute within the first family of Uzbekistan escalated to jailings, deportations, a bill for $9 million in back taxes and a four-month shutdown of Coca-Cola production.

Before that unfortunate turn of events, Coke appeared to have a textbook recipe for international business success: Strike a partnership with the Uzbek president's son-in-law to gain government access, smooth the start-up process and gain quick market penetration.

But after President Islam Karimov's daughter filed for divorce this year, Coke's partnership became a nightmarish liability.

Last month, in a soap-opera-style takeover, the government ousted Coke's ally and installed new management at the bottling plant.

Uzbekistan long has been regarded as unfriendly to foreign business. But the shake-up in plant management has raised doubts among Western business leaders in the region about whether the Florida-sized country, which borders Afghanistan, deserves to be praised by Washington as a prized ally in the war against terrorism.

"Rewarding a government like this?" said a longtime U.S.-based investor in Central Asia. "It's not the usual American way."

When the divorce drama between first daughter Gulnora Karimova and Mansur Maqsudi got nasty, Coke quickly became ensnarled.

In apparent retaliation for the humiliation suffered by the president's daughter, authorities jailed some members of Maqsudi's family and deported others to their native Afghanistan.

The timing of the deportations helped twist the knife: They occurred last autumn, while fighting raged between U.S.-backed Afghan forces and the Taliban.

Saying he was afraid for his life, Maqsudi fled to the United States, where he had lived for much of the previous decade.

As often happens in the rough-and-tumble economies of the former Soviet republics, the personal dispute spilled over into business. As word of the divorce hit the bustling streets of the Uzbek capital of Tashkent, the government announced that Maqsudi owed $9 million in taxes.

Maqsudi denied it, but the government went after his assets, including his minority stake in the Coca-Cola Bottlers of Uzbekistan. The company's other two owners are Uzbekistan's government and Coca-Cola.

The power grab halted Coke production for months, partly because Maqsudi had managed the bottling operation and it had difficulty operating without him.

"Coke thought that they had the ultimate 'in,' " said a Western diplomat based in Tashkent. "They never figured that the president's daughter would divorce their man."

Coke spokesman Steve LeRoy refused to comment on the Maqsudi matter. While acknowledging production problems, he expressed optimism about Coke's future in Uzbekistan.

"We believe that if the Uzbek government opens up to the U.S., that will only create more transparency, a favorable business climate and create a more level playing field," LeRoy said in a phone interview from his offices in Vienna.

Closed business culture

Uzbekistan was shunned by businessmen and human rights groups alike for the past decade. Karimov, a former Communist Party boss, has run the country as a personal fiefdom since the days when it was part of the Soviet Union. He muscles opponents and critics at will.

Only the largest multinational companies even considered trying to crack Uzbekistan's business culture after the Soviet empire dissolved in 1991.

But Coca-Cola jumped into the market, hoping that an extensive bottling and distribution system in Uzbekistan - with about 30 million people, the most populous Central Asian country - could serve as a launching pad to neighboring countries.

The soft drink giant chose Karimov's son-in-law as a local partner, offering co-ownership in the bottling plant to the Uzbek government and Maqsudi's company, Roz Trading.

Uzbekistan was never considered a place to get rich easily. The International Monetary Fund and Western business leaders have routinely criticized Karimov for subsidizing favorite industries and enforcing a draconian foreign currency conversion law that penalizes international companies by making them keep profits in local currency.

But the Sept. 11 terrorist attacks drastically changed Uzbekistan's international profile. A month later, Karimov agreed to provide the Pentagon with a base from which to launch its military campaign and covert operations in neighboring Afghanistan. In return, the White House in May signed a mutual defense agreement with Karimov that said any threat to his regime would be met as a threat to the United States.

In July, during a trip to Tashkent to continue the cheerleading campaign for the new U.S. ally, Treasury Secretary Paul O'Neill praised Karimov for "turning the corner" on economic reform, despite the fact that a long-promised repeal of the foreign currency law had not been implemented.

One shutdown averted

At the time of O'Neill's visit, Coke had warned that another shutdown was possible because the currency laws were preventing it from importing materials it needed to manufacture more soft drinks.

The summer shutdown was averted, but only after intense discussions with the government, company officials said.

The problems did not end there.

Having confiscated Maqsudi's shares in the plant, the Uzbek government possessed a majority of the shares. In September, after long negotiations with Coke, the Uzbeks installed new management at the plant --- officers widely believed to have ties to business rivals of Maqsudi.

But the new management would ensure ''smooth sailing'' for Coke in the future, Deputy Foreign Minister Sadyk Safayev assured in a September interview.

"The previous management of Coke committed lots of misdeeds, like violations of tax law, violations in sales regulations and violations of human rights in the plant here," Safayev said. "Both Coke and the Uzbek government lost out because of these misdeeds. We are sure the new team will clear up these things. We are doing our utmost to make sure Coke won't have any more problems."

Coke spokesman LeRoy said Safayev's allegations of misdeeds are untrue.

U.S. Embassy officials in Tashkent, meanwhile, said that while they were concerned with the treatment of Coke in the past, they were confident that the enhanced U.S.-Uzbek relationship would help implement economic reforms in the country.

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