Santiago Corredor A1 Written Paper Assignment

Working in Emerging Markets - GLO 355 – BOS 1

A1 Written Paper Assignment

Carlsberg Breweries A/S: Facing Political Risk in Russia
https://www.thecasecentre.org/products/view?id=185346

Course: Global Business Law

Professor: Robert Ginsburg
Assignment Name: A2 Legal Research Paper
Submission Type: Persuasive Writing Paper
Date: 16/12/2022
Word Count: 1526
Name: Santiago Corredor
Contents
Abstract:...........................................................................................................................................4
Carlsberg Breweries and the Risk in Russia....................................................................................5
USSR and previous conditions....................................................................................................5
Fall of the Berlin Wall and New Lights.......................................................................................7
Russia’s Emerging Economy.......................................................................................................8
Present and Conclusion..............................................................................................................10
References......................................................................................................................................12
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1

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Carlsberg Breweries A/S: Facing Political Risk in Russia
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Abstract:
In the midst of a dynamically evolving economy and considering the rapidly changing

environment in Soviet society due to the newly elected party leader Mikhail Gorbachev, major

changes were on its way. In this paper we are going to analyze how a slowly declining economy

that was losing control over its financial assets turned into a modern society that would become

one of the major economical players of our generation. As many of the changes implemented and

proposed by Gorbachev not only affected the Soviet Union, turning it into what we know today

as Russia, but also generated opportunities and dilemmas for many players around the world,

such as the situation faced by Carlsberg Breweries A/S, which still holds many assets in the

country and faces uncertainty of what may happen in the region.

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1

Carlsberg Breweries and the Risk in Russia

As of today, Carlsberg is still struggling with the decision made by its head leaders back

in 2004. Many of the situations and problematics faced by the company aren’t resolved as of

today and leave many stakeholders with no answer as for the future of the operations in the

region. To understand how and why Carlsberg joined the Russian market it is important to

understand the changes this country went through that made it such an interesting FDI 1

opportunity for the company.

USSR and previous conditions

Back in 1989 the world would be able to live through one of the most impactful situations

in decades. The wall of Berlin would finally tumble, giving end to years of conflict and tension

between two of the major superpowers of the world – The USSR and the US – but also creating

major social and political changes for the years to come. This represented an opportunity not

only for the people who lived terrorized under the constant tension between these two countries,

but also gave a major opportunity for anyone and everyone who could find ways to use these

major geopolitical changes to their favor.

These changes proposed a light of hope for the former USSR – as previously it had a very

complicated set of rules. – These changes would be started by the selected leader Gorbachev, but

it is possible to observe a decaying nation before these changes were established. One of the

major reasons the system was failing is because of the nature of the laws and rules that operated

in the USSR. These laws were established after the civil revolution against the Romanov dynasty

in 1922. This revolution gave foot to a totalitarian party with full control and the objective of

1
Foreign Direct Investment: refers to an investment made by a company or individual from one country into a
business or entity located in another country. It involves the acquisition of a lasting interest in an enterprise
operating outside of the economy of the investor

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1
establishing a command economy2 with the hopes of the creation of a communist society. While

this initially created an opportunity for the previously rural country to have exponential growth

based on industrialization, the truth was that having one leading party control the supply and

economy of such a vast region was a major challenge. This combined with the political tensions

and the creation of the historically known “iron curtain”3 prevented the republic from reaching

out to other countries and ruling parties to supply the goods its economy wasn’t able to produce.

This aspect would bring extreme poverty and shortage of consumer goods to certain areas, which

in return would force the USSR to use forced labor of its citizens, creating then more social and

political instability. With the added capacity of the leading party to rule without questioning and

favor their own interest, it was possible to observe a highly corrupt and inefficient region

incapable of sustaining itself under its circumstances (as it is shown by Fig. 1, with the decline of

productivity of the economy)

Fig. 1, “Growth of the Soviet Union's national income, industrial output and agricultural output in select five year
periods between 1966 and 1985” (Statista, 1993)

Fall of the Berlin Wall and New Lights

2
A command economy is a type of economic system in which the government or a central authority has significant
control over the production, distribution, and pricing of goods and services
3
The term “Iron Curtain” was used to describe the ideological and physical division between communist Eastern
Europe and the democratic Western European countries during the Cold War.

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1

With the fall of the wall of Berlin the USSR would go through major changes itself. It

would go forward with the separation of the head party into many different states, independent of

each other and capable of generating specific policies for their own objectives. Initially pushed

by the recently elected leader Gorbachev, Russia would become the largest state to separate from

the former USSR. Hosting the first democratic elections in decades, Russia would begin major

changes that would affect both its economical and geopolitical relationships with many countries

around the world.

For starters, Russia recognized its incapability of producing every product it was needed

for its market as many countries had better access to specific resources and geographical

locations, creating a comparative advantage when compared to Russia. Because of this and many

more reasons Russia decided to take a more open policy approach when relating to other

countries, therefore allowing the trade when it came down to specific products. It was also

possible to observe how the Russian government decided to apply parts of the theory of

economies of scale by allowing the privatization of some of its production lines, creating

auctions and allowing the best and most specialized players to create the products the economy

might demand. Taking a big economical and logistical load off the government and distributing

parts of the administrative and economic powers of the government. While most of the industries

went into the hands of a very selected group of people, creating then oligarchs we can observe

today, this was a chance for many specialized players who could come into a vast economy that

had an exponential growth for industrialization and a large population seeking to acquire new

products coming from around the world.

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1
This new approaches to the way the market was operating combined with a bigger sense

of stability as the country was now involved in many international organizations while keeping a

multilateral diplomacy gave a sense of confidence for many international players such as

Carlsberg that found an opportunity in this “emerging economy” and the country’s potential.

Russia’s Emerging Economy

While the changes took time and the newly adapted hybrid economy started to adapt to

itself, (Fig. 2) it will be possible to observe how these changes had a positive impact in a

declining economy. The economy had a shy beginning but had a strong change in just 10 years.

Being one of the biggest changes the amount of FDI’s present in the country. It is also possible

to observe the creation of new rules and laws that facilitated the trade among nations as well as

the reduction in barriers that could create more political or economical complications for the

international involvement of the nation.

Fig. 2 “GDP per capita in regions of Europe in select years between 1989 and 1998” (Statista, 2006)

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1
It is possible to observe an increase in the GDP of more than 300% in a time span of 10

years (Fig. 3). Boosting even further the confidence of outside players in investing in this

country and allowing bolder and larger resources and strategies to be placed in Russia.

Fig. 3 “Russia: Gross domestic product (GDP) in current prices from 1997 to 2028” (Statista, 2023)

It is possible to observe an increasing trend towards the end of the 90’s and beginning of

the years 2000’s (Fig. 4). This is the exact time where Carlsberg decided to become a major

player in the market. They decided to become investors in the year 2000 by acquiring stock

representing 50% of the value of a major brewer (“Orkla”) already present in Russia. This

strategy would prove efficient as the company was able to grow massively around these years.

Deciding to acquire Orkla finally fully by the year 2004 and being able to boost the global

market share of the company to 6.1% – Compared the 1.7% in the year 2000 – By investing a

large amount of resources and taking a risky bet considering the recent creation of this new state

Carlsberg was able to generate an exponential growth rarely seeing in many traditional industries

such as the alcoholic beverages.

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1

Fig. 4 “FDI in Russia” (UNCTAD, 2008)

Present and Conclusion

With a rapidly expanding state such as Russia, it is to be expected to find many

problematics along the way. As it has been traditionally demonstrated Russia has a long story

with conflict and international tensions. While the country was trying to change this after their

first democratic elections, it is bold to ignore their traditions and the fact that the generation in

power is still heavily connected to what was once an authoritarian ruling. It is also important to

understand the true distribution of power, this is mentioned because while the country did change

itself into a more democratic country, it is possible to find many of the powers of the state in

hands of a few selected that can rapidly change the ruling and government law in their favor.

It is possible to see the vast growth generated by Carlsberg, but it also comes as no surprise that

the company finds itself adrift in a country that finds itself now under heavy pressure from its

international former partners as it has taken hostile actions against Ukraine. The company is not

able to sell nor use any of the assets currently located in Russia and they have a very high chance

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1
of being expropriated due to the leaders’ political interests. Proving the worst nightmare of any

company that involves itself in any FDI as well as potentially damaging its brand value because

of the negative connotations that are generated by being involved in a country in conflict.

Therefore proving how Russia was able to become a major power by changing or

creating new policies that referred to their economy and their global involvement. Bringing value

to those companies who decided to join the exponential growth experienced by the country; but

that now face some consequences as the country creates more uncertainty for those players who

once bet on the country and won the lottery of investment.

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Carlsberg Breweries A/S: Facing Political Risk in Russia
Santiago Corredor A1 Written Paper Assignment
Working in Emerging Markets – GLO 355 – BOS 1

References
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d38367f69ff5

Milestones: 1989–1992 - Office of the Historian. (n.d.). https://history.state.gov/milestones/1989-

1992/collapse-soviet-union#:~:text=Gorbachev's%20decision%20to%20loosen

%20the,Communist%20rule%20throughout%20Eastern%20Europe.

Soviet Union - Countries, Cold War & Collapse | HISTORY. (2017, September 1). HISTORY.

https://www.history.com/topics/european-history/history-of-the-soviet-union

Statista. (2022a, June 21). Economic growth of the Soviet Union in select periods 1966-1985.

https://www.statista.com/statistics/1076291/soviet-change-economic-growth-period-

1966-1985/

Statista. (2022b, June 21). GDP per capita in select regions of Europe 1989-1998.

https://www.statista.com/statistics/575220/gdp-per-capita-by-region-europe-1990s/

Statista. (2022c, June 21). Populations of the United States and Soviet Union during the Cold

War 1970-1990. https://www.statista.com/statistics/1072400/population-us-ussr-cold-

war/

Statista. (2023, August 30). Gross domestic product (GDP) in Russia 2028.

https://www.statista.com/statistics/263772/gross-domestic-product-gdp-in-russia/

Vinhas De Souza, L. V. S. (2008). Foreign Direct Investment: Russia and the EU. In

https://www.oecd.org/investment/investmentfordevelopment/.

https://www.oecd.org/investment/investmentfordevelopment/40578459.pdf

Wikipedia contributors. (2023, October 18). Dissolution of the Soviet Union - Wikipedia.

https://en.wikipedia.org/wiki/Dissolution_of_the_Soviet_Union

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