Red Tape May Force IKEA to Cut Expansion Plans

APPer Kauffman, the head of IKEA's Russian division, showing off a pillow at the retailer's Khimki location in April.��
In just nine years, Swedish furniture retailer IKEA has opened 11 of its huge stores in Russia in hopes of capitalizing on the country's middle class. Now, the company says it may halt its expansion drive after running into trouble with unpredictable officialdom.

Some observers say, however, that the recession may be as much of a factor in IKEA's fortunes as the local bureaucracy.

IKEA hit a bump when officials in Samara demanded that a planned store be able to withstand winds of near hurricane force, even though such violent weather is rare to the region. The strongest recorded winds have 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 Samara store was tentatively scheduled to open on May 11. More than a month later, the store has not opened yet, and IKEA says it cannot give even a tentative timeline now.

But another blow came last month, when the country's anti-monopoly watchdog began investigating the Swedish furniture maker for allegedly urging tenants at its mall outside Moscow to use the 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.

"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 government has proven especially difficult for businesses to negotiate. And in addition to red tape, sometimes there's simple corruption. Transparency International ranks Russia 147th out of 180 countries -- on the same level with Syria, Kenya and Bangladesh -- in its corruption perception index.

President Dmitry Medvedev last year declared corruption a key threat to the 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 that they 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 officialdom. While other companies also confront such issues, IKEA has been among the most vocal in talking about them.

"The biggest challenge is not on the commercial side but 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.

The Samara administration says it only wants to ensure shoppers' safety.

"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. "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."

The 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. "Corruption, bureaucracy and red tape have never put them off before."

Discretionary income has declined, people are not buying apartments and doing renovations, and as a consequence they are buying less furniture.

"They need GDP growth to help them expand, and that's reversed," said James Fenkner, head of Red Star Asset Management.

Privately held IKEA does not disclose its profits, but IKEA's Kaufmann said 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 opened its first store in Russia outside Moscow in 2000, and it currently employs 7,000 people across the country.

IKEA founder Ingvar Kamprad said last week that the company had been "cheated" out of 1.5 billion kronor ($190 million) in gas and electricity bills in Russia.

Kamprad said Russian suppliers have failed to fulfill their contractual obligations to provide electricity at IKEA's 11 Russian stores, forcing the company to buy its own generators and shoulder a significant increase in operating costs.