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Belarus: McDonald's A Cautionary Tale For Foreign Investors

The McDonald's fast-food chain is locked in a dispute with Belarus's state university after one of its Minsk restaurants was temporarily closed during construction of a university building next door. Belarusian officials say it is a simple economic dispute between two distinct parties, but observers, including the U.S. ambassador, say it's typical of how authorities in Belarus treat foreign investors.

Prague, 8 August 2002 (RFE/RL) -- Minsk residents looking for a fast-food lunch were surprised at what they found last week at one downtown restaurant chain. Belarus State University, located 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 RFE/RL's Belarusian Service.

McDonald's says it signed a long-term lease with city authorities. But Minsk officials later said the university, not the city, was 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 RFE/RL's Belarusian Service this week that the university construction project is illegal and that McDonald's has appealed to the Minsk Economic Court against the activity of the university and its contractors. It's still waiting for its court application to be heard.

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

But several observers disagree. The Associated Press quoted U.S. Ambassador Michael Kozak as saying the incident shows it is not safe to invest money in Belarus. 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, the Krynitsa brewery in Minsk, 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 the second license, in getting its operations going. One can go on with this list -- it's rather long," 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, however, 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 in investment.

Last week, President Alyaksandr Lukashenka urged his ministers to do more to draw foreign money into the country. And at the end of last year, a new investment code was adopted, giving new safeguards for domestic and foreign investment.

Horton says this, along with some other limited economic reforms, has helped improve the business environment to a certain extent. "I think in the past two years the authorities have done things like remove the system for multiple exchange rates that existed up to September 2000, which has made the economic-policy environment there more transparent and more stable. They have tried to pursue a long-running policy of [harmonizing] their legislation with Russia's. [So,] to the extent that investors have success working in Russia and appreciate the investment environment and legislation there, then the Belarusians have tried to give the sense that that's where they're headed [also]. So that should give some predictability and perhaps more stability," Horton said. "On the other hand, I think the environment continues to be rather characterized by capriciousness. It has been unpredictable, it's seen as being too much under the control and influence of administrative decisions. Things like new investment codes probably help to a certain extent, to indicate the authorities' thinking on legislation. But until those codes are implemented and administered in a clear and consistent, transparent way, investors will remain cautious."

Stuart Hensel, an analyst at the Economist Intelligence Unit in London, is also doubtful the Belarusian government can achieve its goal of increasing investment.

It's not Lukashenka's authoritarian style of government that puts people off, he says. More problematic is the unpredictability of doing business there, typified by the McDonald's experience. "On the one hand, [Belarus] says it's open for foreign investment. On the other hand, it's very interested in keeping the private [sector] of the economy down to the bare minimum, and it's interested in ensuring that the state remains the dominant player economically. So for foreign investors and any private-sector actor in Belarus, this has led to extreme changes in legislation, it's very difficult [for investors] to get through the judicial system. Basically, [there are] a lot of considerations that are antithetical to somebody trying to set up [a business] in Belarus," Hensel said.

Hensel said that while the McDonald's incident won't help the Belarusian government in its aims to draw foreign investment, it may not necessarily make things worse. "I don't think it will deter [investors] in that I don't think that many people were thinking of following in [the footsteps of McDonald's in the first place]. I think for most people, this will merely confirm what they saw as an anti-investment climate in Belarus. And I think the few investors who are thinking of entering the Belarusian market are [Russians], for instance. I think they think the experience that McDonald's and other Western investors have had in Belarus is not really [an] indication of how they [themselves] will be received, given their own good political connections and their powerful backing from the government in Moscow," Hensel said.

He said the government would be happy to get a few of these "favored, well-connected" Russian investors, rather than seriously attempt to boost investment from the West.