Affairs

Management

Where honesty is not always the best policy— Moscow

Preface

Is it possible to do business in Russia without paying bribes? The story of IKEA suggests it probably isn’t.

Business, IKEA

12 March 2010

Is it possible to do business in Russia without paying bribes? The story of IKEA suggests it probably isn’t. The furniture giant, which has been a roaring success in Russia, has always made a very public stand against corruption in the country.

But lately things have been going wrong. IKEA has previously delayed store openings to fix problems with electricity, suppliers and so on when it might have been easier to just pay bribes. Last year, the company froze all its investments in the country in protest at the atmosphere of graft.

And yet, despite all this, the Swedish company had to fire two top officials last month – including its overall director for Central and Eastern Europe – for turning a blind eye to corruption.

Every small-business owner knows that greasing palms in Russia is obligatory if you want to get by. But what is perhaps more surprising is the expectancy that big western companies will also “go local” and pay bribes to survive and prosper in the Russian market.

“They all say they don’t pay bribes, which is usually technically true,” says a high-level western lawyer in the Russian capital. “However, most foreign firms have ‘consultancy agreements’ with various fixers who effectively deal with all the dodgy paperwork and bribes and then charge a ‘consultancy fee’.”

This is what appears to have happened in the case of IKEA. The company says it received information that a bribe had been paid by a contractor company in St Petersburg to ensure electricity supplies to its stores there were uninterrupted. To the company’s credit, instead of trying to cover up the incident, IKEA acted swiftly and ruthlessly, firing two top executives.

The Swedish company’s first director of Russian operations, Lennart Dahlgren, who left the company several years ago, is about to release a book detailing many of the challenges that he faced in the early years.

Excerpts of the book published in the Russian press provide a whole array of fascinating insights into attempted corruption, security service pressure and blackmail. His most damaging allegation involves Elena Baturina, the wife of Moscow’s powerful mayor, Yury Luzhkov. Baturina, a property and construction magnate, is the richest woman in Russia but has repeatedly denied that her fortunes are linked to her husband’s post.

IKEA was looking at one of her furniture factories as a potential supplier, says Dahlgren, and at one meeting, Baturina herself showed up.

“She burst into the room in the middle of a discussion, and without introducing herself said that if we want to buy from one of her factories, it must be on her conditions. The conditions turned out to be absurd and completely unacceptable. After, we were told that this disagreement put a stop to our negotiations with her husband to build an IKEA on Kutuzovsky Avenue.”

If true, this would confirm the widely held belief that corruption permeates Russian life from small-time officials right up to the very top. The Moscow mayor’s office claims the Kutuzovsky plans were rejected so as not to spoil the road’s architectural ensemble – not something that the mayoralty has traditionally been too bothered about.

The IKEA story goes to show that companies that make a stand against corruption in Russia have a very hard time of things, and explains why many companies prefer to take the “when in Rome” strategy.

“Not paying bribes puts you at a massive competitive disadvantage. In most sectors, it’s virtually impossible to do business here without them,” says the lawyer. “Most companies are more than happy to put profits over principle.”

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