Case #2: Tobacco Troubles

Background:

On July 29, 2005 (directly following the post-revolution elections), Dimon was cited by the Department of Antimonopoly Policy for having market share in excess of 35%. As a result of this citation, Dimon was labeled a monopolist, allowing the government to set a floor price which Dimon must pay farmers in order to purchase their tobacco.

Dimon contended that this floor price was too high for it to pay and still operate profitably in Kyrgyzstan.

Additionally, Dimon argued that the government calculation of the company’s market share was not carried out in accordance with Kyrgyz law. Using the legal standard outlined in current Kyrgyz regulations, Dimon’s true market share should be only 31% (which puts it below the monopoly threshold). Dimon appealed the government’s monopoly citation in court, but realized that this appeal didn't have a great deal of chance for success as the Kyrgyz legal system lacks transparency and equal application of the law.

If Dimon lost its appeal, the company was prepared to close its operations in Kyrgyzstan, and in the process lose approximately 2 million USD in investments. Additionally, this would cost Kyrgyzstan up to 2% of GDP, more than 1000 jobs, and the resulting fall in tobacco prices would adversely affect 20,000 local farmers.

Dimon’s regional financial head planned to arrive in Kyrgyzstan on October 4, 2005 to begin a thorough review of this situation and consider exit strategies.

AmCham Advocacy Step 1: Investigation

Dimon At a Glance

100% American owned company operating in Kyrgyzstan since 1996

Annual revenues make up 2% of total Kyrgyz GDP

Directly employs 1000 people

Invests $12 million annually in Kyrgyzstan

Buys $6 million of tobacco every year from over 20,000 local farmers

Applicable Kyrgyz Law

According to The Department for Antimonopoly Policy’s calculation, Dimon crossed the 35% monopoly threshold because it purchased approximately 43% of the total tobacco produced in Kyrgyzstan in 2004. However, according to the Metodicheskie Rekomendatsiya po apredelenuyu dominuyushego pomojenia khozyastvuyushego subyekta na tobarnom rinke, Chapter 2, Section 11, the formula for calculating market share is as follows:

(Volume Produced – Volume Exported)

Domestic Sales

AmCham Advocacy Step #2: Building the Case

If Dimon’s market share is calculated thus, it is only 31% (and safely under the monopoly threshold). The calculation being used in the government’s monopoly accusation, however, did not account for the fact that Dimon exports most of the tobacco that it buys. Thus the government was grossly overestimating Dimon’s market share and illegally setting a floor price at which Dimon must purchase tobacco.

Dimon was not cited as a monopoly on the government list released January 2005 (i.e. before the post-revolution elections). The July listing (on which they were cited) is based on the same data as the January list. Between January and July, the numbers didn’t change, just the people looking at the numbers.

AmCham Advocacy Step #3: Finding the Stakeholders

In this case, the Minister of the Economy agreed that Dimon should not be considered a monopoly, but he also claimed that there was nothing he could do about it.

Unfortunately, this is an all too common notion in the developing world: everybody is guilty, but nobody is responsible.

The Department for Antimonopoly Policy used to be under the jurisdiction of the Economic Ministry, but due to the instability following the Tulip Revolution, its status at the time was unclear, and most ministers preferred to wait for the dust to settle before committing to anything that might turn out to be unpopular later.

Further investigation showed that it might be possible that The Department for Antimonopoly Policy may fall under the Office of the President. If this is indeed the case, a simple conversation with the President may be all that is needed to clear up the situation.

Other authorities that might be involved in using the Department for Antimonopoly Policy as a tool to go after Dimon included the Ministry of Agriculture and the local government of Osh (especially the governor).

Other evidence suggested that Dimon's monopoly listing was based on political pandering (i.e. some who gained power in the south after the March Revolution promised to raise tobacco prices) and nepotism (the son-in-law of the Agriculture Minister owns a competing tobacco company that would stand to profit if Dimon were to leave Kyrgyzstan).

If Dimon was found to be a monopoly, it would be forced to discontinue all operations in Kyrgyzstan and suffer a loss of around 2 million USD in fixed assets and 250,000 USD in credit advances already given to tobacco growers.

If Dimon is removed from the monopoly list, however, it will buy approximately 2 million USD over contract in 2005. Dimon had the support of local farmers’ groups, who were petitioning the government to allow Dimon to purchase their crops at the originally agreed upon prices (their crops, already 2 months old were sitting in warehouses waiting to be purchased). For subsistence farmers like many of those in the south of Kyrgyzstan, 2 months can mean the difference between whether or not their families have enough money for food.

AmCham Advocacy Step #4: Planning the Strategy

The head of the Department for Antimonopoly Policy was Akyk Kazakovich Aitbayev and his Deputy was Dair Kenekeyev. Our investigation left us with the belief that their anti-monopoly case was a rogue action brought against an innocent company for personal gain. The Department of Antimonopoly Policy may or may not be operating on behalf of a third party, but either way, they were taking advantage of the confusion following the March Revolution in order to take control of a branch of a major agricultural producer when they thought nobody was watching.

The lynchpin in the whole operation looked to be the fact that the President's Office didn't seem to be aware of what the Department of Antimonopoly Policy was doing. The President had just recently taken power following an internationally covered revolution. We believed that to solve the problem, we might try a simple letter to the President's office, alerting him to the situation and what Dimon's exodus would mean to the Kyrgyz economy.

AmCham Advocacy Step #5: Working the Plan

2 Weeks after we began investigating this case, the following letter was sent to the Office of the President:
President Kurmanbek Bakiev

Chui 205 Bishkek, Kyrgyz Republic

Dear Mr. President:

We the American Chamber of Commerce of the Kyrgyz Republic, on behalf of Dimon International and it’s publicly traded American parent corporation Alliance One, do respectfully petition for a formal review of the circumstances surrounding the 29, July 2005 decision by the Department for Antimonopoly Policy to declare Dimon International a monopoly in the Kyrgyz leaf tobacco market.

Dimon International has maintained, in good faith, substantial operations in the Kyrgyz Republic since 1996, during which time it has provided agronomy expertise and financing for the growing of leaf tobacco to over 20,000 local farmers annually. This American owned corporation invests $12 million each year in the Kyrgyz Republic and represents a full 2% of total Kyrgyz GDP.

Yet the recent monopoly declaration by the Department for Antimonopoly Policy and the imposition of excessive floor prices violate both Dimon’s contractually set price levels for leaf tobacco and Kyrgyz law, leaving Dimon International no choice but to take steps to close its operations in this country and promptly remove itself from the Kyrgyz Republic. Such a decision by a leading multinational exporter would ripple through the international community and instill doubt in the minds of those who had previously viewed this country as a beacon of transparency and free market values in Central Asia.

We believe that the Department for Antimonopoly Policy in their independent attack on Dimon International is acting in violation of the jurisdiction of the Office of The President of the Kyrgyz Republic as well as the will of the Kyrgyz people. To request a review of the Department for Antimonopoly Policy and these irresponsible actions, would be to send a message to the world that the Kyrgyz Republic is a business friendly nation which believes in the spirit of free market competition and the power of transparency and Foreign Direct Investment to build a robust economy and a prosperous citizenry.

With the greatest respect and the highest regard,

David Larson, Executive Director

American Chamber of Commerce Kyrgyz Republic

Outcome

Approximately 2 weeks later, the inter-regional court decided to amend its earlier considerations and delivered a favorable outcome. 20,000 jobs were saved, 2% of GDP for the country was saved, and the AmCham Kyrgyz Republic branch opened a $2 bottle of Moldovan Champagne to celebrate our first victory.

Below is an English-language translation of the court's decision.

ON BEHALF OF THE KYRGYZ REPUBLIC

Inter-regional court of the City Bishkek

DECISION

Case № ЭД-683/05МБс8

Bishkek

October 27, 2005

The judge of Bishkek inter-regional court is Baitikova E.T in the presence of the court session secretary Amankulova M. having examined in the open court session the case of the suit of “DIMON International (Kyrgyzstan)” LTD against State antimonopoly Policy Department under the Ministry of economical development, industry and trade of the Kyrgyz Republic (National Agency of the KR on antimonopoly policy and development of competition) about declaration of the Order № 105 dated July 29, 2005 with the participation of the claimant: Akmatova Z.J on the basis of the attorney letter dated September 30, 2005

HAVE CONCLUDED:

                “DIMON International (Kyrgyzstan)” LTD (further on “DIMON” LTD) has applied the court with the suit about declaration of the Order of State Antimonopoly Policy Department under the Ministry of economical development, industry and trade of the Kyrgyz Republic (National Agency of the KR on antimonopoly policy and development of competition) (further on SDAP) № 105 dated July 29, 2005 invalid.

                SDAP has informed DIMON LTD that, according to point 9 of the Law of the Kyrgyz Republic “About natural and legal monopolies in the KR” the enterprise is included to the Register of natural and legal monopolies by the letter dated 08.08.2005 outgoing number # 04/№1228.

               DIMON LTD has not agreed with the decision of SDAP and several times has requested SDAP to exclude DIMON LTD from the Register. But, the requests of DIMON LTD were not satisfied.
               During the court examinations, the representative of the claimant has supported the suit and has required to declare in valid the Order of SDAP №105 dated 29.07.2005, where DIMON LTD was included into the register of monopolists on the basis of the following bases.

                In according to the Article 1 of the Law of the KR “About natural and legal monopolies in the KR”, “the purpose of the mentioned Law is to guarantee the balance of the interests of Customers and the subjects of natural and legal monopolies with the help of state regulation and control of the economical activities of the natural and legal monopolies that insures the availability of sold goods, services rendered for the Customers…

                 Article 3 of the Law “About natural and legal monopolies in the KR” gives the definition of the natural and legal monopolies. So, the “subject of the natural and legal monopolies - is the economic entity (legal entity), engaged in the industry (sales) in the conditions of natural and legal monopolies”

                In such a way, Law of the KR “About natural and legal monopolies in the KR” regulates the activity of the subjects of natural and legal monopolies that are occupied in the sales of goods or rendering services, i.e. is applicable for the entities who produce and sell goods, and the purchase of the goods is not under the regulation of the mentioned Law. Accordingly, DIMON LTD as a purchaser and is not the monopolist and can not be included into the register of the monopolists.

                In accordance with the point 3 of the Regulations “About state register of the subjects of natural and legal monopolies of the KR”, the calculation of the dominant position of the economic entity is carried out on the basis of the Methodological recommendations on determining dominant position of the economic entity in the commodity market.

                Accordingly, point 11 of the Section 2 of the Methodological recommendations on determining dominant position, “during the determination of the position of economic entity it is necessary to consider its portion in the appropriate commodity market. Portion of the economic entity in the appropriate market is determined as a percentage of the supplied or purchased goods by the economic entity to the volume of supply and purchase (of the current) goods by all economic entities acting in the same commodity market on the basis of the formula:

D = Vxc – V export.xc

V market

Where:

D – portion of the economic entity in the appropriate commodity market

Vxc – volume of the supply or the purchase of the goods by economic entity

Vexport.xc – volume of the exported goods by economic entity out of the territory of investigated market

Vmarket- volume of the commodity market

I.e. 5.66 thousand tons (portion of DIMON LTD) – 3.4 thousand tons (volume of the exported goods for the crop year) / 12.99 thousand tons (total volume of the market) = 17%.

According to the abovementioned formula, the portion of DIMON LTD is 17% taking into consideration the volume of the export for the crop year. But SDAP, violating antimonopoly legislation, instead of abovementioned formula uses different formula, which is not contained neither in the Methodological recommendations on determining dominant position nor in other Methodological recommendations:

Portion of the economic entity

Total volume of the market * 100%

I.e. 5.66 thousand tons (portion of DIMON LTD)/13 thousand tons (total volume of the market) *100% = 43.5%

According to point 6, Section 1 of the Regulations “About state register of the subjects of natural and legal monopolies of the KR”, “confirmed State register should be printed annually at mass media as of January 1^st”. Besides that, in accordance with the article 13 of the Law “About natural and legal monopolies in the KR”, “antimonopoly body should inform via mass media about including into the State register of the subjects of natural and legal monopolies or about excluding from the register…”.But, in violation of the point 6 of the Regulations and the article 13 of antimonopoly legislation, Order SDAP dated 29.07.2005 # 105 was not published in the mass media.

Besides that, the Order of the SDAP dated 29.07.2005 # 105 was issued on the 29^th of July 2005, i.e. in the middle of the year, after the fact of DIMON LTD in the spring of 2005 has completed the signing of the contracts for the purchase of the tobacco.

Illegally including DIMON LTD into the register of monopolists has happened in 2001 also. In the result of appeal of the Order of SDAP, DIMON was excluded from the register by SDAP itself.

During the court examinations, the representative of the claimant has presented additionally two legal conclusions (legal department of the Government of the KR and legal company “Kalikova and Associates”)on the basis of them the lawyers had provided independent expertise on the subject of the correspondence of the Order of SDAP to the legislation. Legal expertise also has recovered discrepancy of the Order of SDAP to the norms of acting antimonopoly legislation of the KR.

The representative of the claimant is requesting to satisfy the suit.

The Defendant (Respondent) have not show up at the court session, even though it was informed in a proper way, in accordance with the point 4 of the article 168 of the Code of civil conduct of the Kyrgyz Republic is considering that it is possible to provide a legal investigation in the absence of the (Respondent) Defendant.

Having listened to the explanation of the representative of the Claimant, having leant the materials of the suit, the court decides that the suit is subjected to be satisfied according to the following bases.

SDAP, has included DIMONLTD into the register of the monopolists by the Order dated 29.07.2005 # 105 in accordance with Law of the KR “About natural and legal monopolies of the KR” violating the articles 1,3 of the mentioned Law, according to which says that the Law regulates the activity of the subjects of the monopoly that are the producers and sellers, but not buyers. In such a way, the court came to conclusion that the Law “About natural and legal monopolies of the KR” can not be used towards DIMON LTD, because DIMON LTD is the buyer.

In accordance with the point 3 of the Regulations “About state register of the subjects of natural and legal monopolies of the KR”, calculation of the dominant position of the economic entity is held on the basis of the Methodological recommendations on determining the dominant position of the economic entity in the commodity market. As per the point 11 of the Section 2 of abovementioned Methodological recommendations, “the portion of the economic entity in the market is determined as a percentage of the supplied or purchased goods by the economic entity to the volume of the supplies or purchase (of the definite)of goods by all economic entities, acting in the same commodity market according to the formula:

D = Vxc – V export.xc

V market

From the materials of the suit, namely from the “Analyses of the market” and “The calculation of the dominant position of the economic entities, acting in the republican market of purchase of the tobacco for the year of 2004” prepared by SDAP, it can be seen, that SDAP uses the different formula:

Portion of the economic entity

Total volume of the market * 100%

From abovementioned, it is necessary to state that Methodological recommendations on determining the dominant position does not contain last formula, then using it contradicts the legislation and including DIMON LTD into the register on the basis of such calculations is illegal.

Point 6 of the Section 1 of the Regulations and the point 13 of the Law of the KR “About natural and legal monopolies of the KR” provides obligatory publishment of the Orders of the SDAP about including into the register of the monopolists in the mass media. Order of the SDAP dated 29.07.2005 # 105 was not published in the mass media. In such a way, SDAP has violated the norms of the acting legislation of the Kyrgyz Republic.

In the materials of the suit there are two additional legal conclusions presented by the representative of the claimant. The conclusion of those expertises show that SDAP has violated the legislation by issuing the Order #105 dated 29.07.2005

On the basis of above stated and basing on the articles1, 3, 13 of the Law of the Kyrgyz Republic “About natural and legal monopolies of the KR”, point 3 of the Section 2, point 6 of the Section 1 of the Regulations “About state register of the subjects of natural and legal monopolies of the KR”, point 11 of the Section 2 of the Methodological recommendations on determining the dominant position, articles 168,197-201, 205 of the Code of civil codex of the Kyrgyz Republic, the court

DECIDED:

To satisfy - Suit of DIMON LTD about the declaration of the Order #105 of the SDAP dated 29.07.2005 (National Agency of the Kyrgyz Republic on antimonopoly policy and development of competition) in valid.

To declare in valid the Order #105 of the SDAP dated 29.07.2005 (National Agency of the Kyrgyz Republic on antimonopoly policy and development of competition).

To collect from National Agency of the Kyrgyz Republic on antimonopoly policy and development of competition state fees in the amount of 1 000 som and post expenses in the amount of 100 som.

The decision can be appealed within 30 days to the appeal instances of Bishkek city court.

The judge: Baitikova T.