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Russia: Procter And Gamble Tries Turning The Tide

Moscow, 10 October 1997 (RFE/RL) - "Head & Shoulders," the Procter & Gamble hair product, may be the best known, best selling shampoo in Russia today. But when it comes to managing their investment in Russian production of their goods, the last thing Procter & Gamble (P&G) executives want to be known for is knocking Russian heads, rather than soft-soaping them.

On the surface, P&G wants to do nothing more than downsize the plant where it produces its Tide and Ariel brands of home detergents, eliminating the division of the Soviet-era company that makes aerosol sprays, lacquers and paints -- a non-core business P&G says isn't profitable.

Since P&G has acquired roughly 95 percent of the shares in the Novomoskovskbytkhim company (NBKh), the Cincinnati-based multinational thinks it can do pretty much what it wants. It claims its investment so far in the NBKh plant comes to more than $64 million.

However, the P&G business plan, which calls for layoffs of 700 NBKh workers, a quarter of the current payroll, is opposed by the factory union; by the municipal administration of Novomoskovsk town, which is located about 125 miles east of Moscow; and by several powerful agencies in the capital itself.

So sharp is this conflict that the pro-American, pro-business "Moscow News" recently accused P&G of conspiring with Anatoly Chubais, First Deputy Prime Minister in charge of the economy, to rig its takeover bid, getting around Russia's privatization and anti-trust laws.

The news magazine also accused P&G of trying similar takeover tactics at the next largest Russian manufacturer of detergents, the Termos Public Joint-Stock Company of Perm, in the Ural mountains.

"If it gets its way," the journal reported, "Russia will be looking at an unlimited corporate dictatorship."

These are fighting words in the cleanser business. But P&G isn't answering them. When Durk Jager, who heads P&G's international operations was in Moscow in July, his aides were reluctant even to admit he was here. Jager refused to answer questions about the NBKh controversy.

It is difficult for P&G to limit its visibility in Russia, not least because it spends more than anyone else in the country, foreign or Russian, on promoting its name and its products. In 1996, according to one P&G official, the company spent $82.7 million on Russian television advertising alone. That is roughly three times more than the next most frequent advertiser on Russian television.

The significance of the NBKh case today is that the big-spending multinational looks to have used its influence with a powerful official who is under attack from political rivals inside the government, as well as inside the opposition-dominated parliament. A letter from P&G to Chubais has surfaced, as well as an order from Chubais clearing the way for P&G to do what Russia's independent state auditor now says was breaking the law.

Yury Meshalkin, an auditor with the Accounting Chamber (equivalent to the General Accounting Office in Washington), says P&G paid $14.6 million for shares to take over NBKh's plant, which had been equipped with modern Japanese machinery, and was worth $150 million. Charges that the transfer of the shares was illegal, that P&G's payments were illegal, and that its investment was much less than had been agreed have been turned over to the regional prosecutor's office in Tula.

"The only way we can keep our competitive edge is by increasing efficiency and cutting expenses," Steve Pitman, P&G's executive in charge of NBKh, has told a Moscow newspaper.

Russian industry analysts say P&G is doing more than sharpen its competitive position in the market. They claim it is eliminating Russian producers of components, replacing them with imports, and cornering the market in finished products.

"Everything we did," says P&G's Moscow spokesman, Yury Molozhatov, "right from the beginning, is fully in accordance with existing laws."

That invites the Russian courts, starting in the Tula region, to put P&G's business in Russia under the sort of scrutiny that is unprecedented.

Even Chubais, who celebrated this week the fifth anniversary of the privatization process he started in October 1991, is now admitting that mistakes were made.

"This should have been done differently," he now concedes.

One of Chubais's long-time deputies running Russia's privatization programs, Alfred Kokh, is currently facing investigation by Moscow prosecutors. They confirm they are investigating charges that a $100,000 advance Kokh received for writing a short manuscript on privatization, was in fact a concealed bribe. Kokh has said he favored none and broke no laws.