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Ikea expansion in Russia stalled

The Ikea northwest Moscow store in Russia is pictured May 29. The company may halt its expansion into Russia after running into red tape.   AP Photo by Mikhail Metzel

The Ikea northwest Moscow store in Russia is pictured May 29. The company may halt its expansion into Russia after running into red tape. AP Photo by Mikhail Metzel

Nataliya Vasilyeva
AP Business Writer

Moscow (AP) — In just nine years, Swedish furniture retailer Ikea has opened 11 of its huge stores in Russia in hopes of capitalizing on Russia’s nascent middle class. Now the company says it may halt its expansion drive after running into trouble with the government’s powerful reach.

But some observers say the economic crisis may be as much of a factor in Ikea’s fortunes as the local bureaucracy.

Ikea hit a bump when officials in Samara in the Volga River region demanded a planned store be able to withstand near-hurricane-force winds, although such violent weather is rare.

The strongest recorded winds never exceeded 17 meters per second, a little more than half the 30-meter-per-second standard set by local government.

Back in April, Ikea said the store in Samara was tentatively scheduled to open May 11. More than a month later, the store has not opened yet, and Ikea said it cannot give even a tentative timeline.

But another blow came last month when Russia’s anti-trust watchdog began investigating the Swedish furniture maker for allegedly urging tenants at its mall outside Moscow to use services of selected companies — an accusation Ikea denies.

“Every time there is some kind of inspection, there are new points coming up, so one gets a feeling that someone somewhere does not like us,” said Per Kaufmann, Ikea Russia’s director general.

“The Russian board today questions whether it’s worthwhile to expand further. First we need to open up in Samara, then we will see. The question has not been answered yet.”

Regulators and bureaucrats frustrate entrepreneurs everywhere, but Russia’s multilayered government has proven especially difficult for businesses to negotiate. And in addition to red tape, sometimes there’s corruption.

President Dmitry Medvedev last year declared corruption a key threat to his country’s modernization and social stability and pushed through anti-corruption legislation, but little progress has been made.

In the early part of the decade, Ikea was vocal about corruption, asserting it were subjected to blackmail, sabotage and pressure for bribes. As the company gained a foothold, the rhetoric vanished and Ikea executives now shun the words “bribe” or “corruption” and prefer phrases like “gray areas” to account for their troubles with the officialdom. While other companies also confront such issues, Ikea has been among the most vocal.

“The biggest challenge is not on the commercial side, but is on the administrative side — what you actually do to come through to get necessary permits, be able to open. … We don’t really know what we can do,” Kaufmann said. “Shall we stay quiet and say it’s OK? We keep our people and we’ll never open? That’s not possible.”

The Samara administration said it wants to ensure safety for shoppers.

“Ikea has not provided all the documents we need, they still have not received all permits for construction,” an administration official said on condition of anonymity as he was not authorized to speak to the news media. “The faults we pointed to still have not been rectified. So far they are merely trying to push through this decision. What Ikea is doing is just blackmail.”

Russia’s weaker economy may be another factor in throttling back the retailer’s growth plans.

“The main motivation now is the uncertainty of where the economy is going,” said Chris Weafer, chief strategist at Uralsib investment bank. “Corruption, bureaucracy and red tape have never put them off before.”

The discretionary income of Russians has declined, people are holding off on buying apartments and doing renovations, and, as a consequence, are buying less furniture.

“They need GDP growth to help them expand, and that’s reversed,” said James Fenkner, head of Moscow-based Red Star Asset Management.

Privately held Ikea does not disclose its profits, but Ikea’s Kaufmann says the company has “positive accumulated sales” in 10 out of 11 Russian stores with “double digit growth” for Russia on average. Ikea previously said it had invested more than $3 billion in Russia and was planning to open four stores this year.
Ikea employs 7,000 people across Russia.

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