Belarus: a cautionary tale for investors

Minsk residents looking for a fast-food lunch were surprised at what they found recently at one downtown restaurant chain. Belarus State University, next door to a McDonald's restaurant, had fenced off the building to make way for the construction of a new university building, forcing the outlet to shut down temporarily.

At the heart of the controversy is a disagreement over the terms of the lease and property belonging to McDonald's, which also houses the Minsk bureau of Radio Free Europe's Belarusian Service.

McDonald's says it signed a long-term lease with city authorities. But Minsk officials now say the university, not the city, is the real owner of the land.

Now the university wants to build there and Rector Alyaksandr Kozulin says McDonald's has refused an offer to exchange that property for another. The dispute, Kozulin told the daily Narodnaya volya, remains unresolved because McDonald's is "only interested in profit."

McDonald's, which has invested some $14 million in building its six restaurants in Minsk, doesn't see it that way. Spokeswoman Olga Trojan told Radio Free Europe's Belarusian Service this week that the university construction project was illegal and that McDonald's had appealed to the Minsk Economic Court against the activity of the university and its contractors.

The Foreign Ministry played down the incident, calling it an economic dispute between two specific parties and said it was not characteristic of how investors are treated in Belarus.

But several observers disagree.

Mark Horton, the International Monetary Fund's representative for Belarus, also says the case is disappointingly typical.

"During the first half of this year, there was a fairly well-known and widely reported dispute with (the Russian company) Baltika, which is buying the largest brewery in Belarus, and there were disputes over Baltika's investment in the company. There was also a long-running dispute with MTS, which is a Russian cellular-phone subscriber, which bought a second license, in getting its operations going," Horton said.

It's not the first time McDonald's has had run-ins with Belarusian authorities, either. Earlier this year, Minsk city officials suggested the chain should be barred from buying property because of "health concerns," and there have been skirmishes over demands that the outlets use domestically produced food.

This latest dispute comes as the government has made several moves to raise levels of foreign investment, which remain among the lowest in Eastern Europe. According to IMF figures, foreign investment in 2000 came to just $90 million. Neighboring Lithuania, with just a fraction of the population, attracted some $380 million that same year, while the Czech Republic drew nearly $5 billion.

President Aleksandr Luka-shenko recently urged ministers to do more to draw foreign money. A new investment code has been adopted, giving new safeguards for domestic and foreign investment.

But Stuart Hensel, an analyst at the Economist Intelligence Unit in London, said he doubted the government would have much success mainly because of the unpredictability of doing business in Belarus, something McDonald's hs discovered the hard way.

Hensel said the government's real objective may be to woo Russian rather than Western investors.

"I think the few investors who are thinking of entering the Belarusian market are Russians," Hensel said. "They think the experience that McDonald's and other Western investors have had in Belarus is not really an indication of how they will be received, given their own good political connections and their powerful backing from the government in Moscow." o

Kathleen Knox originally wrote this piece for Radio Free Europe.