Thursday, June 25, 2009

• IKEA’s Complaint Of Russian Mob Rule

“The withdrawal of such a large foreign investor from the Russian market may cause considerable damage to the image of the country.” This is an understatement published this week in Pravda, Putin’s personal PR machine, relating a major, and far-reaching decision by Ikea.

Ingvar Kamprad, Ikea’s founder, has revealed that his company had been swindled of $190 million by Russian authorities. Many businesses have pulled out of Russia in the past couple of years, but to have one of the wealthiest individuals in the world make such an emphatic declaration against a country, is a powerful signal that warns others who might venture into the corrupted climate ruled by Putin.

Ikea is one of the largest privately held companies in the world with approximately 300 stores across 40 countries, and it employs over 127,000 people. Its more than $31 billion in annual sales give Ikea a broad reach and clout, yet, it could not find the ceiling of the graft that was required to be paid as it attempted for almost 2 years to open its most recent store in Samara, Russia. Now that 130,000 meter facility will never open. A pioneer in the Russian market has slammed on the parking brake.

Kamprad’s very sarcastic characterization of Russia’s business landscape, “the unpredictable character of administrative procedures,” while almost humorous, is very telling. Businesses and investors know that doing business in Russia means you will very likely deal with either remnants of the KGB, or the mob. Dealing with the KGB provides more powerful and far-reaching influence than buying support from the mob. With the former KGB, you get protection from the highest levels of government.

For giant corporations such as Ikea, size means that the price extracted for doing business becomes an impossible number to cap. The money extraction process is insidious, and because the corporate coffers are enormous, the blood money has no ceiling. Kamprad has finally cried, “uncle.” More importantly, he has done so very publicly. Since 2009 he had made Ikea’s entry into Russia a very personal project. It is entirely possible that this declaration is a temporary stance by Ikea, intended to shake up Putin and his friends into putting a ceiling on the graft payments. Either way, there are no indications that the underlying corruption throughout the system has any hope of finding much-needed repair. Perception of Russia’s corruption levels, as published by Transparency International, equals that of Bangladesh, Kenya and Syria, so it cannot get much worse. Ikea found that, “blackmail, sabotage and pressure for bribes,” as well as disrespect for contracts, became too much.

These are economically difficult times for Russia, as with most other countries. Russia can ill afford declarations the likes of those made by Ikea and its boss. Such news, of course, means that for the foreseeable future, America will continue to be the safe haven for the world’s cash.

1 comment:

  1. Thank you for this information. But I also would like to propose a view from the opposite perspective. It appears that IKEA Russia is making huge profits, but underpaids its Russian employees (e.g. cashiers) for the same value created (as expressed in, say, USD) compared to its US and EU employees.

    Here is my post at

    IKEA Moscow: same stuff, same price, how about profit/salary
    » Wed Nov 04, 2009 11:36 pm

    Disclaimer: I am just an unbiased consumer.

    IKEA is best. I guess, that's true in any country.
    In Moscow there are three IKEA stores. Like nowhere in the world, I think.
    (Do you know any other metro area in the world that hosts at least two IKEA's?)
    On weekdays, these stores are 'busy', and on weekends - outright jammed. Crisis? - What crisis?

    Now, even 'best' can be improved. Or, rather, crying begs to be improved!
    These customers who stay in endless lines, jamming all the area up to the stock aisles, and pay the full international sticker price - they deserve prompt and courteous service.

    It is quite possible that IKEA Russia is pulling the company's entire world operations, judging by the number of people on the line. If someone would mention their revenue by region, that would be very interesting.

    But the endless lines of shoppers are just one half of this 'success story'.
    The other half is operating cost cutting.
    IKEA (as refers to stake holding madams and sirs):
    - didn't you make significant headcount cuts (layoffs) in IKEA Moscow this year?
    - do you pay the same salary (or same profit share, or even whichever is less) to your personnel worldwide (specifically, in Russia compared to EU and US staff)?
    - how much do you pay those miserable cleaners from Central Asia who can't speak Russian and don't want to move, with mice sitting under tables in the IKEA Cafe.
    - And then, would you expect IKEA Russia staff be as courteous as in other regions? (Well, most of them are, no matter the salary disparity).