Bottled up: why Coke stands accused of being too cosy with the Karimovs

Financial Times

June 14, 2006

By Edward Alden

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 $100m (£54m, ?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.