After six months of protests and controversy, Republic of Daghestan head Ramazan Abdulatipov has been constrained to abandon his stated intention of privatizing (reportedly at a knockdown price) one of the region’s flagship enterprises and largest tax-payers, the Kizlyar Brandy Distillery. On August 28, Russian Prime Minister Dmitry Medvedev signed a decree transferring the distillery to federal ownership, meaning that Moscow, not Makhachkala, will take the decision on its fate at some point in the next two years.
The planned privatization encountered one obstacle after another. Not only did the distillery’s 300+ work-force take to the streets to protest and formally appeal to Russian President Vladimir Putin; they also filed a formal complaint against Abdulatipov with the Russian Prosecutor-General’s Office after he asserted in an interview with the internet portal Kavpolit.com that for the past two decades distillery employees have systematically stolen part of the output.
Meanwhile, the republican Prosecutor –General’s office challenged the legality of the parliament’s December 2013 decision to privatize the distillery and secured from a Makhachkala district court a ruling that the Agriculture Ministry’s dismissal in April of the distillery’s director since 2008, Yevgeny Druzhinin, was in violation of labor law. Druzhinin had said late last year that he enjoys Abdulatipov’s “full support.”
And Umakhan Umakhanov, a State Duma deputy from Daghestan whom at least one observer regards as a possible successor to Abdulatipov, asked the federal prosecutor’s office to rule on whether the proposed privatization is legal.
Located in the lowlands of northern Daghestan, the Kizlyar Brandy Distillery was founded in 1885 and until very recently its output was prized as being of the highest quality. Its employees, like the population of the town of Kizlyar, are overwhelmingly Russians or Cossacks. (It was the heads of two local Cossack regiments, Vladimir Starchak and Nikolai Spirin, who solicited Umakhanov’s help in the campaign to thwart the planned privatization.)
Abdulatipov first expounded his vision of the distillery’s future at a press conference in Moscow in early February, several weeks after the National Assembly had approved a list of enterprises up for privatization in the next few years in which it was included. He advocated transforming the distillery into a joint-stock company by September 2014, and then privatizing it, mentioning a minimum price of 4 billion rubles ($112.2 million).
Abdulatipov also said Magomed Sadulayev, whom he described as one of Daghestan’s leading experts on viticulture, had been named to the newly created post of general director of the Kizlyar distillery to oversee the privatization process. Abdulatipov apparently failed to mention on that occasion that Sadulayev is the owner and general director of the Derbent Sparkling Wines Plant, the republic’s second-largest producer of alcoholic beverages. Analysts in Daghestan swiftly inferred that Sadulayev was the likely purchaser of the Kizlyar distillery which, they say, is worth a minimum of 10 billion rubles, possibly 20 billion. But in light of the controversy surrounding the planned privatization, Sadulayev declined the post.
Abdulatipov for his part was apparently not prepared for the backlash his announcement triggered. Having agreed, and then failed, to meet with the workforce to discuss the situation, he then changed tack, offering new and not entirely convincing explanations why the distillery should be privatized. He claimed that the distillery failed in 2013 to pay 1 billion rubles to the local and republican budget; that it had “stopped planting its own vineyards”; and that it had purchased substandard spirits at a cost of 1.5 billion rubles.
In fact, as Daghestan’s Deputy Agriculture Minister Gaydar Shuaybov has pointed out, the distillery’s current legal status as a state-owned unitary enterprise (GUP) precludes applying for government subsidies to plant vineyards to replace those destroyed 25 years ago at the time of then Soviet leader Mikhail Gorbachev’s anti-alcohol campaign -- a campaign which, according to Druzhinin, inflicted “irreparable damage” on Daghestan’s viticulture sector.
Once the distillery is transformed into a joint-stock company, Shuaybov explained, it will be eligible for such subsidies. Meanwhile, it is obliged to purchase either grapes or grape-based alcohol from elsewhere in Daghestan. Abdulatipov claimed that in 2012 the distillery purchased surrogate alcohol of dubious quality from construction material enterprises in Kabardino-Balkaria that had no access to vineyards.
At the same time, Shuaybov echoed Abdulatipov’s complaints about the distillery’s performance. He said that over the past three years, as a result of what he termed the management’s lack of professionalism, the quality of the product has declined, along with the profits. One Daghestani expert, however, claims that the distillery posted a profit in 2012 of half a billion rubles ($13.5 million), making it the third most profitable enterprise in the entire North Caucasus.
Abdulatipov finally told the newspaper “Novoye delo” last month that it had been decided to hand over ownership of the distillery to the federal government in order the remove any grounds for speculation about the legality of the planned privatization that could reflect negatively on himself, because “I value the trust of the president and the people.” Whether that decision was in fact taken because of the republican prosecutor’s intervention or, as seems more probable, under pressure from Moscow to yield to the demands of Kizlyar’s predominantly Russian and Cossack population, is not clear.