Russian vodka, home of the world's number one spirit Stolichnaya, is plagued by divisions and claims of corruption. Chris Brook-Carter reports on the drama at the Moscow Distillery Cristall that encapsulates the struggle for vodka's soul.

Although its complexities are consistently misunderstood, even by those within it, one adage about the Russian vodka industry is undeniably true: "He who controls the vodka, controls the power".

The farce that has been played out in front of the world's press in the last two weeks is merely a violent manifestation of this old Russian truism. Two rival board members of the country's premier distillery, the Cristall distillery in Moscow, are camped at opposite ends of the plant, each backed by gangs of Kalashnikov-wielding bodyguards.

In its very simplest form, the dispute is over who controls this distillery. The struggle for control began in May, when the popular and long-time general director Mr Yermilov was ousted in a controversial boardroom coup on the grounds of mishandling shares. Alexander Romanov was appointed director by the same board but was greeted by hostile factories employees who refused to allow him entry to the building.

Bed stricken: Mr Yermilov, ex-director of Cristall

In the meantime, hit by the shock of his dismissal, Yermilov was rushed to hospital with a heart attack. From his bed he appointed his chief accountant Vladimir Svirsky to perform the duties of director general.

Romanov eventually gained access to the building when he followed in behind an armed tax police raid. The police confiscated a few tax documents and Romanov settled in the director's office. Within 24 hours Svirsky returned and quickly took up position on the factory floor, only 100m from Romanov's armed guards.

At the moment Romanov remains theoretically in charge, but because he cannot get at the distillery itself and does not have the support of the union, he has nothing to do. Svirsky meanwhile, continues to oversee production. Things are set to continue like this until 1 September when the courts will rule on the matter.

One source close to the distillery told "Throughout the summer the Cristall Distillery works in the normal regime, the orders are executed promptly and we have no difficulties with shipments."

The Cristall distillery released its first half profits earlier this week. It increased net profits by 484% to R146.6m ($5.2m) for the first six months, while sales of liquor for the same period increased to 34.3m litres compared to 29.4m litres for the same period last year. As the distillery source said: "These revenues make the distillery so profitable and desirable to control."

But this dispute is about much more than control of a single distillery and its implications are far wider reaching than who gains from the increasing distillery revenues. The situation at Cristall Moscow is a snapshot of, and just as complicated, as the situation within the Russian vodka industry as a whole.

Plant life: Despite being the scene of an armed stand-off production at the Cristall distillery has continued as normal

The problem with dissecting the rights and wrongs of the situation at Cristall is that no one really knows who is behind each man vying for power, or indeed who really owns shares in the company.

Who controls the Russian vodka industry is equally baffling. Ownership of all Russia's vodkas was vested in the monopoly SoiuzPlodoImport, which licensed production to Russia's 180 legal distillers and handled exports. However in 1992, Boris Yeltsin privatised the company and by 1997 it had gone bankrupt. A private firm SoiuzPlodImport (SPI) (without the o) controversially was given the rights to 49 vodka brands including the country's biggest brand Stolichnaya.

It has never been proven, but Russian sources believe that media tycoon Boris Berezovsky secretly controls SPI. He was once a Yeltsin confidant and is now a target of Putin's crackdown regime.

This May the government took its most decisive step towards regaining control of the vodka industry, and the massive revenues it brings, when it set up a new spirits monopoly, Rosspirtprom, to control all its vodka interests. Local alcohol barons stand to lose their shares in the vodka producers and SPI has already been raided by the Interior Ministry's Anti Economic Crimes Directorate, which is investigating its purchase of the vodka brands.

The drama at Cristall is a small but significant part of this struggle. Ownership of the country's distilleries differs between each individual distillery. Minsk Krystall for example is 100% state owned. Cristall Moscow is only 51% owned by the state, made more complicated because this share is split between federal and Moscow city powers.

The source explained: "When Cristall was privatised, 51% became state owned (until recently the stake was managed by the Mayor of Moscow's Office) and 49% went to the distillery's employees. In 1997 the board of directors made a decision to buy shares from the employees. Late last year it looked as if the blocking stake appeared to be owned by several Cyprus offshore companies."

The Russian News Service Interfax, when reporting Cristall's half-year results earlier this week seemed to support this premise. It said: "The company's shares are distributed as follows: State - 51%; Cypriot offshore companies - 19.46%; Technogres - 5.11%; SoyuzPlodImport - 0.31% and Kristall trading house - 0.31%."

Exactly who these Cypriot offshore companies are is difficult to say. However, with offices and warehouses in Cyprus, speculation surrounds SoiuzPlodImport as to whether one of its affiliated companies controls at least a 5% stake in Cristall.

Tension over ownership was increased further with the creation of Rosspirtprom. As the source said: "Mr Yermilov offered the Moscow government a further 12% for $6m and the decision was met favourably. But in May when the new spirits monopoly Rosspirtprom was created, the State decided to take control back into its own hands. The shares are due to be transferred from the Moscow government to Rosspirtprom."

The race for control of the Cristall distillery could be at least a three-way affair between the state, city legislature and private enterprise in the form of SPI. In a recent statement Yevgeny Pantelev, chairman of the board and an official of the Moscow city government said the conflict was connected with the desire of the city government to appoint its own man, Romanov, as head of the plant.

"The whole conflict is connected with the position of general director. We want him to be one of us. We have made our decision and nothing will change it," he said.

Stolichnaya as one of Cristall's primary products (it produces the brand on behalf of SPI) and the world's biggest selling spirits brand (53m nine-litre cases) has been inextricably linked to the dispute by the world's press. On an international level this is unfair.

As the source explains: "Until 1996 the vast majority of exported Stolichnaya and Moscovskya were made at Cristall in Moscow. However since SPI bought a controlling stake in the Caliningrad distillery the orders for the Western markets are now placed there. It is economically more feasible as Caliningrad is a seaport and Cristall vodkas are quite expensive."

But there are of course international ramifications from the dispute. Firstly Cristall produces a premium vodka of its own known simply as Cristall or on some markets Cristall Stolichnaya. Watershed, which imports the brand into the UK, says: "The dispute will not damage the reputation. It's the opposite it proves that if Russians are fighting for Cristall so much, the legend of Cristall's vodka quality and reputation is true."

Frank Pesce International who import Cristall products into the US said: "It doesn't affect us. Our contract is with the distillery not a person." But despite the protestations it is hard to believe that the presence of over 30 armed thugs struggling for ownership of a distillery does not have some business ramifications on the company that relies on Cristall products for its livelihood.

The international reputation of Stolichnaya has also been wrapped up in this. One industry source described what a struggle it has been for international import companies to convince SPI to invest in brand building, as this was not the general practice in Russia. In Russia Stolichnaya is a cheap product, where the high royalties distillers pay SPI to produce the brand deters them from investing in its image.

Interestingly though this source believed that the conflict has been good for the brand. "The coverage has been amazing," he said. "Stoli is the alternative Russian vodka. Its personality is of chaos and the underworld, this reinforces the brands image, it has a positive effect."

In the short term maybe this is true. But this conflict and the wider implications it has, also send out signals to international investors. In his last annual report former director Yermilov said: "Our vodkas are very popular all over the world. They help to form a positive image of Russia as a big manufacturer and a reliable business partner."

This has been proved by recent events to be blatantly untrue. Diageo has already dropped the UK distribution of Stolichnaya two years ago and it is believed that its US distribution is now under review. The utter confusion about whom any distributor will be dealing with is a mess any major multinational will want answering before entering into a long term partnership.

But as the Cristall source points out the conflict may be the beginning of the end. "This conflict shows the willingness of the new Russian Presidential administration to re-establish the control in all spheres of business activity and the liquor industry is to be one of the first."

And the source goes on to point to an interesting solution to Russia's problems, quoting the opinion of a leading figure in the industry. "The opinion of the director of 100% state-owned Minsk Kryshtall can be of interest to us. Mr Belko believes that it should not be the matter of ownership control that the State needs to seek. He thinks, that as happens in the West, the main functions of the State should be to collect the excise duties."

Chris Brook-Carter