Graham Stack in Kyiv -

In Eastern Europe, the beer industry was amongst the first sectors to attract major foreign direct investment. Beer consumption, as a halfway house between refreshment drink and real alcohol, soared as retail and gastronomy expanded, and Soviet breweries lagged behind imports in terms of quality. Scottish & Newcastle's early 1990s investment in St Petersburg's Baltika brewery converted a generation of Russians to the virtues of the global economy. The experience was repeated across Russia and then Ukraine. Now its Belarus' turn.

In Belarus, beer is a cabinet-level matter, with the country's biggest brewery, Krinitsa in Minsk, and the smaller Brest brewery both owned by the state food-industry corporation, Belgospischeprom. But as a sign that Belarus is now serious about attracting investment, Renaissance Capital's Belarus subsidiary was awarded a three-fold investment mandate in October - as government partner, privatisation adviser to the State Property Fund and as investment agent for Belgospischeprom.

Renaissance's Belarus manager, Sergei Levin, is the former CEO of the Syabar brewery - a project launched in 2003 by the Russian-American investors Detroit Investment, former owners of Russian success story Ivan Taranov. The new production facilities were built on the site of a bankrupt and idle brewery in Bobruisk, and the project also involved the private sector wing of the World Bank, the International Finance Corporation. Detroit Investment exited the project in 2007, selling it to Heineken, and Syabar is now Belarus' third-largest brewery.

Thus it was no surprise when in December Belgospischeprom signed a deal with Detroit Investments to introduce a new production line at the Krinitsa brewery in Minsk. Detroit Investments and Krinitsa will now produce beer at the plant under the licence of Germany's largest beer sellers, Oettingen. At the launch, Detroit Investments manager, Andrei Kuryochkin, called the new investment "only the first stage in our partnership with Krinitsa."

According to insiders, sensitive negotiations are currently ongoing between Belgospischeprom and further potential international investors, with the world's second-largest brewer by volume SABMiller mentioned as one. In early 2009, talks were held between SABMiller and the Belarus government over a deal for the company to produce its brands at Krinitsa and Brest, though the economic crisis put any agreement on hold.

SABMiller declined to comment on whether the company is currently in negotiations with Belarus, though analysts note that SABMiller's main competitors, Carlsberg and Heineken, are both present in Belarus already and its Polish subsidiary Kompania Piwowarska has 45% of the Polish market, so expanding into Belarus would make strategic sense.

However, while Belarus' economy might've stabilized somewhat since the global economic crisis hit, the rigged presidential election in December and subsequent repression would make any international company think twice before striking any deal with President Alexander Lukashenko's regime. Since February, the EU has frozen the assets of top Belarus officials, and a new packet of sanctions is on the table for April, making major western foreign direct investment in Belarus difficult on both sides of the fence.

Import substitution

Apart from M&A interest around Krinitsa and Brest, in January Carlsberg, through Baltic Beverage Holdings, upped its stake in the successful Olivaria brewery from 47% to a controlling stake of 67.7%, with the European Bank of Reconstruction and Development holding a 21% stake in the company. Finnish beer company Olvi Group already in late 2009 increased its stake in its Lidskoe Pivo brewery, acquired in 2008, from 51% to 87%.

According to the head of Belgospischeprom, Ivan Danchenko, thanks to both state and foreign companies, the last five years have seen a total of $198m invested in the country's beer sector. Danchenko also says he is expecting the Belarusians to drink a good deal more beer in coming years; annual per-capita consumption in Belarus is still at only 49 litres compared with 150-160 litres in EU countries such as Germany and the Czech Republic.

While Danchenko welcomes the foreign investment in the beer sector, he's a lot less accommodating towards foreign beer imports. Imported beer has made steep inroads into the domestic market, now accounting for 29-30% of beer consumption. Danchenko wants that figure brought down to 5%.

This is bad news, especially for Ukrainian producers such as Obolon and Sun InBev Ukraine. With the cost of beer production in Ukraine substantially cheaper than in Belarus, imports of Ukrainian beer to Belarus have soared 500% since 2005, accelerating in particular since the 2008-2009 Ukrainian devaluation. This prompted Belarus to launch an anti-dumping action against Ukrainian beer producers in early 2010, and then halt imports altogether. Only in February did the two sides reach a settlement, with Obolon agreeing to raise prices. According to Obolon vice president Viktoria Alimovaya, "the agreement with the Belarusian side was a forced measure. We had to do everything possible in order not to lose the market completely, which is why we are raising prices for our Belarus partners."

Obolon has also agreed to set up licensed production of its beer at Brest brewery. However, Obolon stresses there is no moves toward acquiring the company.