Ukraine leaves Estonian investors with empty hands

23.04.2012, 14:26

Estonian investors who have for ten years been developing wine business in Ukraine state wine company have suddenly found that Ukraine does not honor the contract they signed in 1999 and plans to keep all the profit it had earned, writes Äripäev.

The dispute became public when seven Estonian MPs wrote a letter to Estonian minister of foreign affairs Urmas Paet in which they asked Paet to take measures to protect investments made in Ukraine.

Poor business climate, fraud, disrespect for law and corruption are key concerns for Estonian businessmen doing business in Ukraine.

The Estonian investors who invested in the Ukrainian wine business were Aleksandr Dulushkov, Igor Lavrinjov and Peter Kiudma. The three own an Estonian company that in 1999 signed a cooperation contract with Magarach, the Ukrainian state grape and wine institute to start producing wines in Ukraine.

Estonians agreed to invest in the winery that belonged to the Ukrainian state institute that at that time did not have money to pay out salaries to employees.
The total investment agreed was 100,000 US dollars of which Estonians were to contribute 49 percent, with the Ukrainian institute coming up with the rest.
All in all, Estonians invested up to 400,000 US dollars in the business, according to Dushkov.

The cooperation contract stated that Estonian investors have the right to get 49 percent of the profit of the project and can use the Magarach name that dates back to 1828.

The name issue became the main problem between the contracting partners.
Because Magarach was a Ukrainian state enterprise, Estonians were not actually given a holding in the business, but in exchange of investments, Dulushkov and Lavrinjov became deputy managers, received a salary from the Ukrainian company and managed the project.

According to Duluskov, the project became a success and wines were marketed in Ukraine and Russia. The company was making profit every year and in ten years increased production volume 26 times to 1.5 million bottles a year.

The cooperation came to a stop at the end of last year when the Estonian investors asked Ukrainians to share the profit that the company had made in ten years.

In January 2011 also shareholders of Magarach general meeting of shareholders decided that Estonians were eligible to receive 49 percent of the profit in the amount of 262,000 euros and stated that it would be paid out in ten days.

The money was never transferred since the Ukrainian side changed their mind and decided to keep it.

When Estonians went to court against Magarach, the two lower-instance courts ruled in favour of Estonian investors, but the third court sent it back to first-intance court. Estonians fear that since Ukraine courts are under political influence of the state, they may never see their money again.

“What is going on is the Ukraine state attacking foreign investors. It started after the presidential elections in 2010. Before, the country’s business climate was better,” says Dulushkov, adding that many foreign investors had similar negative experiences in Ukraine.

Dulushkov said that the Ukrainians are now trying to regain the rights to the Magarach brand name that they gave Estonians in 2002 because it is much more valuable than equipment.

Ukrainians have sued Estonian investors over the brand-name in court claiming that Estonians got the rights by illegal means.

“Cooperation with Estonians was a bad experience,” says Nikolai Bezuglyi, first vice president of the Ukrainian Academy of Agricultural Sciences that manages the Institute.

Representatives of the Magarach Institute did not comment.

Also the Ukraine government has expressed its anger over the fact that a state institute had sold Estonians rights to the Magarach name.

Nikolai Prisjaznuk, minister of agricultural policy of Ukraine, said that he was shocked to learn what the institute’s managers had done.

Other Ukraine government officials claim that the cooperation with Estonians has wiped out the 200-year-old history of the Magarach wine industry.

Estonian foreign minister Urmas Paet said in comment that it was not only Estonian businessmen who were having problems in Ukraine, but also businessmen of other EU countries.

Paet said that Ukraine’s business climate has been worsening in recent years. He said the issue has been discussed between EU countries and with Ukrainian authorities, but, unfortunately, there had been no positive developments in this regard.