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 construction of 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.