IKEA in Russia – Light at the End of the Tunnel?

It has been six months since I last wrote on IKEA, and I thought it was time to check in on TRM’s favorite foreign investor in Russia.  In December, it appeared that IKEA’s problems were only getting worse.  The whole story started in Feb. 2010 when two top execs were fired over corruption allegations – that they authorized a subcontractor to pay off a city utility in St. Petersburg in order to get their Mega Mall connected to the power grid.  In late 2010, IKEA named a new director to its Russia business – Per Wendschlag – and announced a halt to any new investments in Russia.  The halt appeared to be tied to bureaucratic obstacles related to planned IKEA stores in Ufa and Samara, and problems with an existing store in Moscow.

What a Difference a Half-Year Makes

To TRM‘s surprise, IKEA seems to have made quite a bit of progress in Russia, and is resuming its planned investments in that country.  Last week, the State Construction Inspection Agency in Samara approved IKEA’s construction plans for its future mall “Mega-Samara.”  As I detailed earlier, IKEA’s administrative problems Ufa are long-standing and serious – so serious that the aforementioned fired execs felt the need to draft an “enemies list” for that province alone.  So this is a major obstacle overcome indeed.  And in Ufa, the two planned stores – and IKEA furniture outlet and Mega Mall – are slated to open at the end of next month.  IKEA has also resumed its expansion in the Moscow region, today announcing the purchase of large land tracts in the Khimki business park.  IKEA is even launching new business plans, such as its recent decision to open a bank in Russia.

High-Level Help to Turn Things Around

The turning-point for IKEA’s Russia business came in April, when the Ministry of Economic Development reached out to IKEA’s Russia leadership and convinced them to resume their business expansion in the country.  Indeed, Minister Elvira Nabiullina proudly announced that the Swedish retailer had agreed to not only resume its construction of new stores, but also to invest in Russia’s manufacturing capacity through localization initiatives (IKEA’s Swedwood business has had a few manufacturing plants in Russian since 2002).  Of course, this is not the first time that Russia has used its crappy investment climate to cajole strategic investors into making investments they otherwise would not make (see this post for more examples).  Still, given the size and predicted growth of the Russian consumer market, it is probably worth it for IKEA to manufacture a few more tables in Russia in exchange for federal protection of its retail outlets.

Whither the Corruption Investigation?

The one open question is on the status of the corruption investigation into IKEA’s St. Petersburg store.  Nabiullina made it pretty clear that there will not be an investigation or prosecution on the Russian side (no surprises there).  But what about the Swedes, who had previously indicated that an investigation was ongoing?  According to a Transparency International report that tracks anticorruption enforcement, IKEA is not one of the companies currently under investigation or prosecution by the Swedish authorities.  Nor is there any indication that the Dutch authorities are involved (IKEA’s holding company parent is headquartered in the Netherlands).  So has IKEA dodged a bullet?  Not necessarily.  The European law enforcement authorities are still relatively new to the anticorruption game, and are not so quick on the draw as the U.S. DOJ and SEC.

Lessons Learned?

Ironically, IKEA’s entire history in Russia – starting with the infamous Lennart Dahlgren, to the two fired expat execs, to the current leadership – represents a case study in how to succeed, then fail, then succeed in the Russian market.  In Dahlgren, we find a savvy expat who actually knows and appreciates Russian culture and business climate.  He used this knowledge and contacts to navigate the “wild 90s” and ensured IKEA’s place as the premiere foreign retailer in Russia.  The two failed execs – based on the news reports – encountered a difficult situation but responded on the basis of a very superficial understanding of Russia (i.e., drafting enemies lists, trying to bribe judges, cutting corners with subcontractors).  Finally, with Per Wendschlag we seem to be witnessing a resumption of the Dahlgren model, but with a Medvedev era twist (i.e., building relationships at the federal, rather than local level).

This entry was posted in bribery, bribes, bureaucracy, Business, compliance, corruption, Foreign direct investment, foreign investment, IKEA, Nabiullina, oecd, rule of law. Bookmark the permalink.

4 Responses to IKEA in Russia – Light at the End of the Tunnel?

  1. timmy says:

    Do you know if they are still planning to move their manufacturing to Belarus, taking advantage of the customs union (and less bureaucracy)? Maybe the manufacturing jobs that would be lost got their attention.

    If Ukraine joined, it would become a major threat to Russia’s domestic manufacturing. It would provide an incentive for more discipline, but it may be too difficult to overcome the cheap labor costs there.

    • jesseheath says:

      I have not heard of any plans to move any manufacturing to Belarus. I’m not sure about there being less bureaucracy, but certainly the lower wages would be an attraction. Still, I doubt such plans are in the works given the recent unrest in that country.

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  3. marknesop says:

    If Ukraine’s willingness to work cheap is a threat to Russian domestic manufacturing, what sort of rception would they be likely to receive as an applicant to join the European Union, with its protectionist policies and its heavily-subsidized industry? Where’s the demand for cheap Ukrainian labour there? Sounds like they would be better off joining in a customs union with Russia.

    Anyway, as of 2010 Ikea had “shelved” plans to move into Ukraine (I’m not sure if that was some kind of deep Swedish furniture pun), citing economic instability. For the record, I’d like to see them move ahead because I’d like to see Ukraine successful and prosperous – but that could work inside a customs union, too.

    http://en.retail.ru/news/43680/

    Meanwhile, in Russia, gross profit for Ikea Russia was up 11% year-over-year.

    http://en.retail.ru/news/44762/

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