Monday, September 14, 2009

IKEA's latest difficulties illustrate Russia's corruption issue

by Brendan Smith

Two weeks ago, we posted about Russia's economic travails and the perception of it as a tough place to do business, and we included a link to an article about Swedish furniture giant IKEA's recent decision several months back to halt new investment in the country until the country's massive corruption problem improves. One of the biggest obstacles cited by the retailer and other foreign investors is the demand for bribes by Russian officials in order to secure approval for hookups to utilities such as electricity and gas.

The plot thickened late last week, when IKEA revealed to the New York Times that it had recently lost a court decision in Russia after it canceled the contract of the company providing generator rentals (IKEA's way of avoiding bribes was to install its own generators). It did this after learning that the executive managing the generator rental company relationship had taken kickbacks to inflate the price of the generators, costing IKEA $196 million over two years.

IKEA thought it could recoup some of the lost money in Russian civil court, but instead the court ruled in the rental company's favor and ordered IKEA to pay it $7.1 million, to be held in escrow until an appeal was heard. But a lower court ordered the judgment money be withdrawn from IKEA's Citibank account. IKEA officials and lawyers suspect corruption in the courts too, as opposing lawyers seemed to know the decision in advance.

IKEA released details of the case in order to use publicity to embarrass Russian authorities into action. But graft seems to be so pervasive in Russia (the country ranked 147th out of 180 in Transparency International's rankings of clean government) that the countries authorities may be incapable of embarrassment. The losers (other than IKEA) in all of this? The average Russian, who pays higher prices and gets less choice when companies, both foreign and domestic, have to pay a bribe in order to do business.

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