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What Ikea’s decision to halt expansion in Russia says about corruption

July 6th, 2009Corporate governance 8 Comments

In my mind, there are at least two key messages which we can derive from Ikea’s recent decision to halt its expansion within Russia:

(a) that despite recent efforts, Russia has not done enough to tackle the problem of corruption; and
(b) that corruption has a real impact upon business decisions and upon the lives of ordinary citizens.

Ikea’s decision
Ikea announced on June 23 it’s intention to halt further expansion in Russia, citing the difficulties in terms of business operations caused by practices relating to corruption within the current administrative environment (refer article).

According to the announcement, the Swedish home furnishings retailer intends to continue to operate its stores in existence within the country and also to complete work associated with stores already under construction. Beyond that however, the company intends to suspend all future investment.

No doubt the decision was primarily driven by business-case considerations rather than any desire to make a stand based on moral grounds.

Nevertheless, the company’s decision is worthy of public applause. The problem of corruption at administrative levels in Russia will only be dealt with when companies take a stand. Hopefully, the sheer embarrassment from announcements like these will help to further stimulate existing efforts on the part of the government to eliminate these types of filthy practices.

Where the bribes apparently occur
The problems to which the company refers relate not so much to the government itself but more to the practices at the administrative level, such as when dealing with authorities relating to fire, health and safety, electricity, tax, customs and other related authorities.

‘Diligent’ officials in these areas have been known to particularly effective at discovering ‘problems’ with company operations. Such ‘problems,’ which would otherwise take a considerable time period and involve a significant level of administrative effort on the part of the company concerned in order to be resolved, are, from my understanding, typically considered to have been ‘rectified,’ after the authorities concerned receive some form of payment.

In Ikea’s case, these problems have been known to occur most frequently immediately prior to the opening of new stores, when the company is most vulnerable to any form of delay.

Examples described in the article referred to above include: (a)authorities declining to connect electricity days before the opening of one store in Moscow; (b)the halting of the opening ceremony at another Moscow store due to the parking lot being ‘too close’ to a natural gas pipeline; and (c)an outlet in Nizhny Nogorod being closed for its opening holiday season on the basis of ‘fire code violations’.

What the company’s decision says
As stated above, the company’s decision makes two clear statements about the problem of corruption within the Russian administrative environment.

• Dirty practices still exist despite cleanup efforts.

According to the article, the national government in Moscow has made considerable efforts in order to create the perception that corruption related problems are being dealt with, such as prohibiting surprise inspections by health and fire authorities and requiring the income and assets of their spouses as well as their own (spouses, apparently, are a common conduit for bribery related activity).

Whilst these types of measures no doubt represent a step in the right direction, Ikea’s decision clearly highlights the fact that not a great deal has changed in practice. Significant levels of corruption within the administrative environment, it would appear, still represent the reality which confronts firms who operate within Russia.

• Corruption affects ordinary citizens, not just individual target companies.

The halting of the company’s expansion in Russia means that job creation opportunities for ordinary citizens have gone begging.

So too have opportunities for consumers in some areas to experience the benefits in terms of convenience and price competitiveness typically associated with having a local Ikea store operating within their area.

I cannot help but wonder how many other foreign companies have either avoided operating in the country altogether or limited the scope of operations there partly out of concern about the prevalence of corruption related practices. I also cannot help but wonder how many opportunities for consumers, small businesses and workers have been lost as a result.

Bottom line – corruption affects real people in real communities, not just the immediate target companies.

8 Responses to “What Ikea’s decision to halt expansion in Russia says about corruption”

Karen Swim Says:
July 6th, 2009 at 10:43 pm
Andrew, corruption is unfortunately alive and well in the hearts of men across the globe. However, it is possible to erect barriers and to impose consequences when evil intentions are acted upon. The saddest part of this whole story is the impact on innocent citizens, as you pointed out. When companies invest in a region it creates jobs and stimulates the economy, not to mention creating new choices for consumers. I hope that other companies will follow Ikea’s lead and refuse to give in to bullies.

Karen Swims last blog post..All the Cool Kids are Doing It
Brad Shorr Says:
July 6th, 2009 at 11:11 pm
Andrew, as Karen says, corruption seems to be a cost of doing business in many companies, though Russia has a reputation that in itself deters foreign investment. I wonder how much of the chronic problems there are cultural.

Brad Shorrs last blog post..Happy Fourth of July!
Mikael @ Retire Rich Says:
July 7th, 2009 at 4:50 am
Like Karen and Brad has already said, the problem of corruption might be larger in Russia than in most other countries where Ikea operates but even in Europe (southern Europe in particular) corruption is just part of the everyday business life.

Not that I applaud it but like poverty it is not something that is easily changed.

Mikael

Mikael @ Retire Richs last blog post..To Retire Early You Will Have to Keep Focus
Mark Says:
July 7th, 2009 at 6:01 am
Ikea made the correct decision to stop expanding. Yes, this type of corruption is insidious and does impact people at all levels.

Marks last blog post..Are You At The End of Your Rope?
Fred H Schlegel Says:
July 7th, 2009 at 10:34 am
A constant battle. The problem with allowing wheels to be greased is that it only gets worse with time and infects every aspect of society. Unfortunately it is the rare business that feels it can stand-up to such graft until business becomes impossible to conduct.

Fred H Schlegels last blog post..Following Instructions
Bill Says:
July 7th, 2009 at 10:44 am
Don’t have the feel I might for how other economies operate – but what you have so effectively commented upon in Russia would seem to have a mirror image just south of Texas. Good on Ikea, particularly for reacting appropriately and not beyond what makes good business sense. Send the message but don’t drop the bomb.

Hey, Karen, “… MEN across the globe.”?
Andrew Says:
July 7th, 2009 at 4:12 pm
Hi Karen,

Let’s hope so.

Corruption is downright ugly, but unfortunately, it will only be eliminated when companies like Ikea take a stand.

Hi Brad,

Interesting question.

I suppose that attitudes (and subsequently common practices) regarding matters involving proper governance in terms of government administration and business management would vary to some degree, and that cultural factors, along with (potentially) religious factors, may certainly have a considerable degree of influence in this regard.

Hi Mikael,

Unfortunately, I would think that you would be right, and that practices at an administrative level of government will not be changed overnight.

Indeed, the elimination of these types of practices, particularly in Russia and any other countries where they have been an unfortunate part of the way business is done for such a long period of time, will only be eradicated by a sustained, long term effort on the part of the leaders of the country concerned.

Hi Mark,

I will agree with you there – if as a result of corruption related practices, it is not possible for firms like Ikea to earn a satisfactory return on investment without compromising on their basic ethical principles, then they should not pursue future expansion in the country.

Hi Fred,

Unfortunately, in the case of Russia, these types of ugly practices seem to have become entrenched and a most unfortunate part of business life.

I am glad that Ikea has stood up to it, but I would think that in the majority of cases, only very large multi-nationals, with a reputation to defend, would have the courage to stand up against these types of practices.

In Ikea’s case, I would certainly have thought that any benefit derived from paying bribes in terms of ease of doing business in Russia would have been more than offset by the costs of such an action in terms of global corporate reputation.

But unfortunately, I would imagine that cases like Ikea would prove to be the exception rather than the rule, and that few other businesses wishing to operate within Russia would have the courage to make such a stand in the face of corrupt practices.

Hi Bill,

I am surprised to hear that about Texas.

Not having ever been to America myself, I guess I am not really in a great position to make informed comment about business practices in your country. Nevertheless, I certainly would have thought that conditions within the business environment across the majority of areas in the United States would have been pretty good in this regard, and I am surprised to hear that this is obviously not the case in some areas.

Andrews last blog post..What Ikea’s decision to halt expansion in Russia says about corruption
isabella mori (@moritherapy) Says:
September 10th, 2009 at 11:27 pm
hi andrew, long time no comment

while i’m sure that, as you say, most of IKEA’s decision was related to purely economic considerations, i like to think that some of it was done on an ethical basis as well. every little bit of ethical behaviour on the part of multinationals needs to be applauded.