Palm Beach Post
November 24

It sounded like a textbook recipe for international business success: Strike a partnership with a family member of a nation's leader to ensure government access, smooth the start-up process and gain quick market penetration.

Yet this strategy left Coca-Cola's business in Uzbekistan flat after the daughter of President Islam Karimov filed for divorce earlier this year from her husband, one of Coke's partners in its local bottling company. Then, last month, the government installed new management at the plant.

Call it a hostile takeover, soap-opera style.

Uzbekistan has long been regarded as unfriendly to foreign business. But the move to install new plant management has raised doubts among some Western business leaders in the region about whether the Florida-sized country, which borders Afghanistan, should be touted by Washington as a highly-prized ally in the war against terror.

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

The divorce drama between Gulnora Karimova and Mansur Maqsudi started last year as a quiet family dispute -- albeit one that involved the powerful first family of this former Soviet bastion. It quickly got nasty.

In apparent retaliation for the scorn and humiliation suffered by the first 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 at the same time that fighting raged last autumn 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 been living for much of the previous decade with the benefit of a green card.

As often happens in the rough-and-tumble economies of the former Soviet Union, personal revenge quickly spilled over into business. As word about the divorce hit the bustling street markets around the Uzbek capital of Tashkent, the government announced that Maqsudi owed $9 million in taxes -- an accusation that Maqsudi denied.

To satisfy the alleged debt, the government went after the divorced man's assets, including his minority stake in the Coca-Cola Bottlers of Uzbekistan. The Uzbek company's other two owners, which also held minority stakes, include Uzbekistan's government and Coca-Cola.

The power grab caused a four-month shutdown in production, in part because the Coca-Cola operation had difficulty functioning once Maqsudi, who managed the bottling plant, was forced out.

"Coke thought that they had the ultimate 'in.' They never figured that the president's daughter would divorce their man," said one Western diplomat based in Tashkent. "The scandal has been terrible PR for a country that already has a full plate of bad PR."

Coke spokesman Steve LeRoy refused to comment on issues related to Maqsudi. While acknowledging production problems, he expressed optimism about Coke's future performance 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," said LeRoy in a phone interview from his offices in Vienna, Austria.

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

Only the largest multinational companies even considered trying to crack Uzbekistan's insider business culture after the Soviet empire dissolved in 1991. Coca-Cola International jumped into the market, hoping that an extensive bottling and distribution system in Uzbekistan, the most populous Central Asian country with about 30 million people, 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, which also acted as management at the facility.

Uzbekistan was never considered a place to get rich easily. The International Monetary Fund and Western businessmen 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 helps Uzbek companies buy hard currency cheaply.

But the Sept. 11 attacks drastically changed Uzbekistan's international profile. A month after the terrorist attacks, 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 also to the U.S.

In July, during a trip to Tashkent to continue the cheerleading campaign for the new 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.

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.

Problems did not end there. Having confiscated Maqsudi's shares in the plant, the Uzbek government possessed a clear majority of shares. In September, after long negotiations with Coke, the Uzbeks installed new management at the plant, officers that were widely believed to have ties to business rivals of Maqsudi.

The new management would ensure "smooth sailing" for Coke in the future, Deputy Foreign Minister Sadyk Safayev said.

"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. Both Coke and the Uzbek government lost out because of these misdeeds. We are sure the new team will clear up these things," Safayev said. "We are doing our utmost to make sure Coke won't have any more problems."

U.S. Embassy officials in Tashkent 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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