From the Financial Times

“At the heart of the case is the question of what obligations a multinational faces in operating in countries where human rights abuses are common and there are few legal protections.”

By EDWARD ALDEN and ANDREW WARD

14 June 2006

For nearly a decade, Coca-Cola’s bottling plant in Uzbekistan was a shining example of the successful strategy that has seen the company expand into more than 200 countries around the world.

The plant on the outskirts of the capital Tashkent, set up in 1992 and run under a joint venture with ties to the family of Islam Karimov, the Uzbek strongman, was twice selected as Coke’s “bottler of the year” in its Eurasia and Middle East region and was highly profitable, with volume growth of about 10 per cent annually.

But all that began to unravel five years ago, when the marriage between Mansur Maqsudi, Coke’s main partner in the plant, and Gulnora Karimova, the president’s Harvard-educated daughter, fell apart – in recriminations that are still being felt by the couple, their children and the Coca-Cola company.

Mr Maqsudi last week filed for binding arbitration at an Austrian

tribunal, under a provision of the original joint-venture agreement

with Coke, seeking more than Dollars 100m (Pounds 54m, Euros 79m) in

damages from the company. He alleges that it “undertook to conspire

with Uzbekistan” to strip him of his share in the plant. Coke

insists it did not collaborate with the government, saying the

arbitration will vindicate that.

At the heart of the case is the question of what obligations a

multinational faces in operating in countries where human rights

abuses are common and there are few legal protections. The issue of

what Coke should or should not have done in Uzbekistan will also

focus fresh scrutiny on the company’s conduct around the world and

provide new ammunition for its numerous critics.

Coke is already facing a US lawsuit brought by labour rights groups

over allegations that it turned a blind eye to the murder of union

leaders at its bottling plants in Colombia by rightwing

paramilitaries. A similar case was filed last year in Turkey

involving the alleged intimidation and beating of union activists

at a Coke bottling plant.

The company denies wrong-doing in both cases but the allegations,

together with claims of environmental abuses in India, have fuelled

a student boycott against Coke in the US and Europe. New York

University and Rutgers in New Jersey are among several campuses

where Coke products have been banned.

The suit comes at an awkward time, when Coke is seeking to improve

its image by rebutting allegations of wrongdoing more strongly and

trumpeting initiatives to make it a better corporate citizen. In

March, the company signed up to the United Nations Global Compact,

a voluntary code of conduct for international businesses, designed

to promote human rights, protect the environment and tackle

corruption. “This is a natural evolution of our company’s long-held

commitment to responsible corporate citizenship,” said Neville

Isdell, Coke’s chief executive.

The Maqsudi story is one the company would rather went away. The son

of a wealthy Afghan family of Uzbek descent, Mr Maqsudi is a

naturalised US citizen. The family had business and political

connections in Uzbeki’ -stan, cemented by his 1991 marriage to Ms

Karimova, and he was a logical partner for Coca-Cola as it eyed

markets in the former Soviet Union.

But in August 2001, it all went badly awry after the marriage

disintegrated and Ms Karimova returned to Uzbekistan from the US

with the couple’s two children. In a telephone interview Mr Maqsudi

said that, despite winning a custody order from courts in New

Jersey, where he lives, he has not seen his children again.

The arbitration claim alleges that following the separation “Ms

Karimova and her father directed the full power of the government

of the Republic of Uzbekistan at destroying Mr Maqsudi’s investment

in Uzbekistan”, particularly his majority stake in the Coke bottling

operation. Within 10 months of the relationship breaking up, the

Uzbek courts confiscated Mr Maqsudi’s share in the plant, to

liquidate debts allegedly owed by Roz Trading, his Cayman Islands

company that held 55 per cent of the bottling operation. Much of

that stake would later end up in the hands of companies with close

ties to Ms Karimova, who has built a business empire since her

return.

Coke endured an 18-month shutdown of the plant that ended only last

year but, despite attempts by the Uzbek government to gain control

of its share as well, the company has managed to retain its stake

in the operation. The filing alleges that, rather than coming to

the aid of its joint-venture partner, the company collaborated with

the Uzbek government and discouraged US authorities from intervening

on Mr Maqsudi’s behalf.

“Coke made a corporate decision that they were going to save their

interests in Uzbekistan,” says Stuart Newberger of Crowell &

Moring, the lead lawyer on the case. Allan Gerson, a Washington

lawyer who led the first suit against Libya on behalf of victims of

the Lockerbie bombing and is also counsel on the case, says the

company should have helped Mr Maqsudi. “Coca-Cola fully understood

this was vengeance,” he adds.

Coca-Cola denies those charges and says in a statement that “there

was no collaboration and we are confident this will be upheld in

any court or arbitration proceedings”. Throughout the dispute,

Coca-Cola Export Corporation, its export arm, has been a minority

shareholder and “is not responsible for the dispute between Roz

Trading and the government of Uzbekistan”.

The Uzbek government, the third shareholder in the plant, is also

named as a party to the arbitration claim. It did not respond to

calls to its embassy in Washington. In a response last month to

notification that a claim might be filed at the Vienna tribunal,

the Uzbek government told Mr Maqsudi’s lawyers: “Your statement

that your client’s participation in management was effectively

impeded and also that any actions against your client have been

performed illegally was a surprise for us.”

Mr Karimov, a former Communist party boss, has ruled Uzbekistan

since 1991. Human Rights Watch has called the regime’s record

“disastrous”, citing torture and crackdowns on human rights groups.

In the aftermath of the September 11 attacks, the US government

overlooked that record because Mr Karimov was seen as an important

ally. He allowed the US to use an air base in the country as a

staging ground for the war in Afghanistan. But relations have

deteriorated since the government suppressed an uprising in the

town of Anizhan last year, killing hundreds. Mr Karimov recently

banned many western non-governmental organisations and expelled

some US troops.

Coke says in its statement that it has “a strict Code of Business

Conduct that is applicable everywhere we do business”, adding that

it “adheres to the local laws and regulations of each country as

well as applicable US laws”.

The case alleges that the company, while it may have obeyed local

laws, violated its joint-venture obligations to Mr Maqsudi in order

to protect its investment. Mr Newberger says he believes the

decision was made at the highest levels of Coke’s management in

Atlanta.

A 2004 US Supreme Court decision in a case involving Intel opened

the door to plaintiffs demanding documents from the headquarters of

American companies for cases involving foreign proceedings. Mr

Maqsudi’s lawyers may thus be able to get their hands on minutes of

directors’ meetings and other internal correspondence to try to

demonstrate Coke’s complicity.

One key to making that case will be an exchange of letters in

September 2001, which appears to show that top management and

directors at Coke were well aware of the dispute. Farid Maqsudi,

Mansur’s older brother and partner in Roz Trading, wrote to Douglas

Daft, then Coke’s chairman and chief executive, following a raid on

the plant that came just days after Ms Kari’ -mova returned home.

The letter said that agents of the Uzbekistan government

“systematically detained, harassed, interrogated and terrorised the

management and employees” at the Coke bottling operation. Nick

Evangelopolous, the plant’s general manager at the time, was held

for 24 hours by the police and later said he had fled the country

in fear of his life.

In the letter to Mr Daft, Farid Maqsudi pleaded for the company to

weigh in against the abuses, saying that “for the Coca-Cola company

to sit by and permit these police-state tactics to victimise the

employees of CCBU, let alone collaborate with the perpetrators, is

to betray the business principles that have made Coca-Cola one of

the world’s most respected brands”.

Two weeks later, Mr Daft wrote back expressing regret and saying

that the Maqsudis’ personal turmoil was “undoubtedly disheartening.

. . However, I believe it is conducive to our long-term business

interests to separate the issues”. In a later letter, the company

called the dispute “a family matter in which we are not involved

and do not wish to become involved”. The Maqsudis’ efforts to

enlist Coke directors of the time, such as Warren Buffett, were

similarly rebuffed.

Much of the case could turn on events shortly after the August 2001

raid on the plant. The suit includes a letter that appears to show

that Coke, instead of challenging the raid and questioning the

legitimacy of the tax audit, told the US embassy in Tashkent that

the audit was legitimate. That reassurance helped to keep the US

government from intervening at a time when, Mr Maqsudi says,

pressure on the Karimov government might have been effective.

Coke is likely to argue that it was caught in the middle of a

dispute between the Maqsudis and the Uzbek government. Like many of

Coke’s bottling plants around the world, the Tashkent plant bought

concentrate from Coca-Cola but largely managed its own affairs. The

company also points out that it, too, suffered significant losses

because of the shutdown of the bottling facility.

Sonya Soutus, vice-president of Coca-Cola International, says the

group’s reputation is being sullied by an affair over which it had

little control. “Taking into account the difficulty of our

situation, there is quite a bit of evidence that proves we did

everything we possibly could in the best interests of our

stakeholders and the business in Uzbekistan.”

Yet whatever its outcome, as Coke seeks to present itself globally

as a good corporate citizen, the dispute is likely to serve as a

reminder to it and other multinationals of the perils of doing

business with autocrats.