Alaco

11.05.2016 | IKEA’s troubled history in Russia

The expansion problems faced by the retailer in Russia highlight the extent of petty and systematic corruption among local officials.

Ever since April 2000, when the Swedish furniture retailer IKEA opened its doors to its first Russian customers in the Moscow Region town of Khimki, the company has been a popular destination for Muscovites wishing to give their old Soviet-era flats a makeover in true European, or ‘EuroRemont’, fashion.  Now Russia, the retailer’s fastest growing market after China, is the home of fourteen IKEA ‘Mega’ shopping centres, spreading from St. Petersburg on the Baltic to Novosibirsk in south-western Siberia.  But while the company has successfully penetrated the Russian market, its expansion has not been smooth.

Last month, officers from the Moscow Region's Economic Crimes unit searched IKEA’s Russian headquarters in the Khimki business park.  IKEA’s lawyer, Semyon Shevchenko, said the raid was in connection with a recently opened criminal investigation into a long-running dispute over a plot of land.  The raid, reminiscent of the tactics employed in corporate battles over lucrative assets in the turbulent 1990s, is the latest in a series of obstacles the company has faced in its drive to increase its presence in the Russian regions.

In 2004 the opening of the company’s second Mega shopping centre, also in Khimki, was delayed for two weeks, ostensibly due to a disagreement with local authorities about the location of gas pipes running through the centre’s car park.  In 2006 IKEA was forced to halt the construction of a new Mega store in Rostov-on-Don due to problems obtaining the correct permit.  The same year saw the temporary closure of the Mega store in Nizhny Novgorod, after inspectors identified almost one thousand fire safety violations.  Shortly after, the prosecutor in Sverdlovsk Oblast launched a probe into the Mega store in Yekaterinburg over compliance with sanitary and fire safety standards.  The company has additionally experienced complications in opening Mega stores in Ufa, Samara, Novosibirsk and St. Petersburg, and in the construction of a distribution warehouse in the Moscow region town of Solnechnogorsk.

Many of IKEA’s problems appear to stem from its unyielding anti-corruption policy.  Back in 2004 Hans-Göran Stennert, then-Chairman of IKEA’s parent company Ingka Holding BV, said that maintaining ethical standards in dealings with Russian authorities had disadvantaged the firm.  Demands by local officials for backhanders prompted IKEA to announce in 2009 a halt to further expansion in Russia, notably putting on hold plans to invest $1 billion in Mega 4, the largest shopping centre in Europe, which was to be built in the Moscow Region town of Mytishchi.

The difficulties IKEA and many other Western companies have encountered underline the petty and systemic corruption prevalent at the local level, something Russian businesses have long resigned themselves to.  The rule of law in Russia is sometimes inconsistent and arbitrarily applied.  Weak governance and limited accountability mean the problem is particularly acute in metropolitan and provincial municipalities, where authorities frequently turn a blind eye to graft; some even regard it as a legitimate way for lower-level officials to supplement their meagre incomes.  Last year the Russian daily Izvestia reported that the average bribe paid to officials had more than doubled year-on-year.

Last month’s Khimki raid does not appear to be the work of avaricious officials, but bribery remains a significant hurdle for the company and other Western firms looking to expand their operations in Russia.  President Vladimir Putin talks a great deal about the need to clamp down on corruption and has launched numerous anti-graft campaigns and investigations targeting state-owned companies.  However, most observers have dismissed them as little more than political gestures.  If Russia wants to attract foreign investment, the government will have to do much more to tackle the widespread cultural acceptance of bribe-taking.  IKEA has been patient so far, but other foreign businesses may prefer to look elsewhere.