IKEA to Russia: Drop Dead!

The Russia Monitor reports:

Earlier this year I wrote about IKEA’s corruption problems in Russia.  Two senior managers were fired after Swedish media reported that the managers had approved a bribe payment by their general contractor in order to obtain electricity service for a St. Petersburg Mega-Mall.  IKEA had been powering the mall with rented generators, but changed its approach once it found that an employee allegedly received kickbacks from the generator company in exchange for paying inflated rental rates. As we now know, Plan B did not work out so well.

This week IKEA Russia’s new chief Per Wendschlag announced that IKEA would “focus on existing stores” and that it the Swedish company was halting constructionof a $1 billion mall near Moscow (Europe’s would-be largest shopping mall), which was just announced in April 2010 (right after the corruption scandal in February).  At first glance, this seems like a prudent strategy – some of IKEA’s problems have arisen from its previous balls out expansion strategy.  The resulting construction has at times been shoddy and has caused accidents.

At the same time, IKEA’s decision is clearly Russia-specific.  There, onerous and unpredictable building regulations actually have the opposite of their ‘intended’ effect.  On the books, Russia should be home to some of the safest architecture in the world.  In reality, the unreasonable regulations and bribe-craving officials who enforce them encourage and reward companies that cut corners (and if you can hire a third party to cut those corners, all the better for Swedish sensibilities).

Why is this a big deal?  Because IKEA is the single largest foreign direct investor in Russia, having thrown approximately $4 billion into the country since the first store opened in 1999.  This is roughly equal to all the investments made by all foreign enterprises into Russia’s Kaluga business parks over a similar time period.  Even the planned ‘Russian Silicon Valley’ at Skolkovo will only receive $2 billion over the next three years.  That’s right, IKEA has spent more on shopping malls in Russia over the past 9 years than Russia plans to spend on its silver bullet solution to modernization and the innovation economy.

Indeed, with its consumer goods-starved post-Soviet population and a per capita GDP more than double that of BRIC rival China, the retail sector is ‘low-hanging fruit’ for foreign investors.  This is why it is the number one sector recipient of foreign direct investment.  It should be easy….

…but it’s not, as IKEA’s troubles demonstrate.  In this way, IKEA is the metaphorical ‘canary in the coal mine’.  If IKEA cannot succeed in Russia, even after investing massive amounts that Russian leaders could only dream of receiving in high-tech industries, how can other prospective foreign investors expect to do well?  The victims in this case are not only foreign investors.  Russians also are left with less options for disposing of those rising incomes that their leaders are so fond of mentioning.

19 responses to “IKEA to Russia: Drop Dead!

  1. Pingback: Weekly Russia Blog Roundup, 15 October 2010 | Siberian Light

  2. Pingback: Official Russia | Weekly Russia Blog Roundup, 15 October 2010

  3. Rupert Murdoch could have advised them..

    “The more I read about investments in Russia, the less I like the feel of it,” Murdoch was quoted as saying at the time. “The more successful we’d have been, the more vulnerable we’d be to having it stolen from us. Better we sell now.”

    http://en.rian.ru/business/20100121/157635193.html

  4. And how does the author know that IKEA invested $4bn in Russia? Did someone see IKEA’s balance sheet. I challenge anyone who reads this blog to provide any link to any IKEA’s publicly disclosed financial accounts.

    • Oh, but they just confused Russia with Georgia and Latvia, AT:)

      You know, they thought they were investing in the “Saakashvili Khartvel democracy”, and “Latvian national flowering project” – and just misread the name of the nation.

      Georgia, Latvia, Russia – all sound so similar. And those IKEA guys just can’t read properly…

      :D

      • Those IKEA guys have more real estate in Russia than elsewhere. In fact, Russia is the only country where IKEA decided to enter the real estate business. As far as public announcements and brinkmanship with authorities is concerned — that’s a well-tested business practice, which proved to be effective in Russia. As far as the amount of money invested in and taken out by IKEA from Russia, its a great mystery, as well as most facts about one of the world’s most closed businesses.

    • Well AT, they have used the number enough in statements, as have the media:

      Why IKEA Is Fed Up with Russia
      Bureaucracy and red tape have the Swedish furniture giant holding back on further investment

      It’s a remarkable about-face for Ikea. The company—among Russia’s largest foreign investors—has plowed some $4 billion into the country since opening its first store in 2000. Samara is its 12th outlet, each anchoring a mall with hundreds of other tenants. The retailer has become such an icon of Russia’s boom that today’s yuppies are called “the Ikea Generation.”

      While Ikea hasn’t said so directly, company officials have implied they’re tired of corruption in Russia. Samara regional authorities, they say, are creating artificial obstacles, such as a requirement that the mall be able to withstand near-hurricane force winds, even though there’s no history of such weather conditions there. In an interview with the German paper Handelsblatt, Kaufmann said a Samara official had suggested a particular local construction company could “quickly help” fix the alleged deficiencies.

      http://www.businessweek.com/magazine/content/09_28/b4139033326721.htm

    • MOSCOW — Ikea said Tuesday that it was suspending further investment in Russia, apparently because of pervasive corruption and demands for bribes.

      The announcement came after a rare statement by Ikea’s 83-year-old founder in a radio interview that Ikea had decided not to solve problems by slipping money under the table.

      Russian President Dmitri A. Medvedev has acknowledged that corruption is a national problem, and curbing official corruption is one of the goals of his tenure.

      Mr. Medvedev has signed a law prohibiting surprise inspections from fire and health authorities of the type often used to extort companies, and has required bureaucrats to disclose not only their own income and assets but their spouses’, a once common conduit for bribes. Beyond embarrassing Mr. Medvedev’s administration, the Swedish retailer’s public stance could mark an economic turning point if it leads to more Western businesses speaking out against corruption here.

      The decision is particularly damning for Russia because Ikea runs outlets in dozens of countries around the world and is hardly thin-skinned when it comes to dealing with bureaucracies.

      “We all support the anticorruption policies of President Medvedev,” Elena A. Panfilova, Russia director of Transparency International, the anticorruption group, said in a telephone interview. “But people need to see real results. And if companies like Ikea don’t see results in their daily business practices, it’s sad news for Russia.”

      In a statement, Ikea’s Russia director cited the “unpredictability of administrative processes” in Russia as the basis of the decision. Outside experts said that was the company’s way of describing a pattern of bribe-taking and shakedowns by Russian officials that had become intolerable.

      “Ikea as a major shopping center developer wishes to invest in Russia to serve our customers and bring jobs and growth,” the director, Per Kaufmann, said in the statement. “Yet, as long as the principal issues being crucial for Ikea development in Russia remain pending, we have to put all new investment plans on hold.”

      Ikea’s announcement came after a series of public complaints, including from the company’s founder, the secretive billionaire Ingvar Kamprad, who went on Swedish radio to complain that the company had been cheated out of millions of dollars by overcharging for electricity. Mr. Kamprad linked the problems to Ikea’s decision not to pay bribes in Russia.

      Western business executives have complained privately for decades that bribery is an integral part of Russian business culture, often tolerated or silently rebuffed. In fact, foreign companies retain legions of lawyers so they can adhere scrupulously to regulations in hopes of avoiding providing an opening for bribe-seeking officials.

      Russia has fared badly on the group’s corruption perception index, tying with Bangladesh, Kenya and Syria for 147th place, out of 180 countries.

      The traffic police routinely take cash bribes, and in popular lore, their large motorcycle gloves are especially designed to store wads of bills.

      However, it is the next level of official venality, so-called administrative corruption, that is most harmful to business as fire, sanitary, tax, customs and other authorities with the power to halt business activity demand bribes.

      “It becomes a choice of businesses either to pay or get involved in years and years of paperwork exchange,” Ms. Panfilova said.

      Ikea operates both as a furniture retailer and a developer of malls in Russia, with its stores as anchor clients. Since the first store opened in 2000, the company said it had become the target for corrupt officials in Moscow and the provincial towns where it operated.

      In a recent interview, Mr. Kaufmann, the Russia director, told The Associated Press that the inspectoral assault sometimes gave him the feeling that “someone somewhere does not like us.”

      The company had been growing more vocal about its troubles this spring. Mr. Kaufmann went public with a threat to halt investment throughout Russia — the decision taken Tuesday — unless authorities allowed a store in the southern Russian city of Samara completed some months ago to open. Inspectors had said that the building was not sturdy enough to withstand hurricane-force winds; Ikea pointed to historical records showing that such winds have never occurred in central Russia.

      Regional officials in Samara have said they were ensuring the safety of the store, and that Ikea’s public statements were attempts to pressure inspectors.

      This dispute at the Samara store fits a pattern. Authorities have consistently blocked openings at the last moment, when a company is most vulnerable to delays because of the capital it has already invested.

      Days before the first opening of an Ikea store on the outskirts of Moscow, authorities declined to connect the electricity; Ikea resorted to renting generators, and since then has made a practice of having them on hand.

      In 2004, officials halted an opening ceremony at a separate Moscow store minutes before it was to begin, saying the parking lot was too close to a natural gas pipeline.

      An outlet in Nizhny Novgorod was closed for its opening holiday season in 2006 on the grounds of fire-code violations; the opening of an outlet in Novosibirsk was postponed over demands to rebuild a road.

      In his statement, Mr. Kaufmann said Ikea would complete stores already under construction in Omsk, Ufa and the Moscow region but suspend future investment.

      The central government in Moscow has made no comment.

      http://www.nytimes.com/2009/06/24/business/global/24ruble.html?_r=1

      • You have read the “Andrew news” issue for this night.

      • Andrew, this does not look like a financial document to me…

        • Now AT, I know you are a hypocritical racist little wanker, but be honest, even if the President of Ikea gave you an interview and made these statement s to your face, you would be too stupid or dogmatic to listen.

          • erm… if you were a less stupid racist little wanker, you would know there are many ways to present information and to make statements… not to draw comparison, but Enron’s and many other presidents made statements to my and many other listeners’ faces. In matters concering money and invesments I tend to trust figures more than statements. And very few people on this planet have ever seen a meaningful financial statement of IKEA…

            • Really, there is no use in wasting Presidents’ time if everything can be clarified based on a simple set of documents prepared by lowly accountants.

  5. You’re bobbing around like a Mars bar in the ocean AT…

  6. So what’s your argument AT? That corruption in Russia is not a big deal if IKEA has only invested $3 billion? 2?

    Or are you aruing that the retail sector in Russia is not begging for development and that there is no way IKEA could have invested that much?

    Where are you trying to go with the numbers you keep asking for?

    The author of the orginal piece seems to be saying that Russia should be bending over backwards to accomodate IKEA since the Swedes are pumping in such remarkable amounts of money. But the opposite is true, IKEA is left to fend for itself in the morass of corruption that is Russia.

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