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. Last Updated: 07/27/2016

Dahlgren Sees Profit for IKEA in Soviet Debt

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Swedish furniture giant IKEA is the first Western holding to support a plan to pay off part of the Paris Club debts with the shares of Russian enterprises.

The so-called debt-for-shares scheme was first aired in December last year during Prime Minister Mikhail Kasyanov's visit to Germany. Since then, in addition to IKEA the Ferrosthal and Deutz companies have expressed their willingness to receive shares of Russian enterprises and in exchange repay a portion of the debt owed by Russia to the German government.

A Russian-German strategic planning group is due to meet in mid-March, when investors will decide the procedure for participating in the scheme to repay Soviet-era debt. This will be the last time the two sides meet before April, when President Vladimir Putin and German Chancellor Gerhard Schr?der will hold talks in St. Petersburg.

The Russian government will present its proposals to German investors this week. IKEA invests all its funds in Russia via its German representative office.

Ferrosthal, Deutz and IKEA had earlier announced that they were prepared to invest a total of $2 billion in Russia, and it is possible that this amount will be used under the debt-for-shares scheme.

Lennart Dahlgren, the head of IKEA Russia, does not know yet what kind of offer the Russian government will make to investors, though he is confident that it will suit the Swedish furniture giant, for which 35 local companies are already working.

"And if Russia provides us with the right conditions, then other companies will come to work under this scheme," Dahlgren said in a recent interview.

The IKEA group was incorporated in Sweden and belongs to the Dutch Stichting Ingka Foundation. The main company in the group, Ingka Holding BV, is based in the Netherlands. The IKEA group owns 157 stores in 29 countries. Its turnover last year was about $9 billion, 80 percent of which came from the European region. IKEA sells most of its goods — about 22 percent — in Germany.

IKEA opened its first store in Russia a year ago in the Khimki area of the Moscow region, and in February it began construction of a second, also in the Moscow region. The furniture colossus has started building its own furniture factory in the Tikhvinsky district of the Leningrad region. To date, IKEA has invested about $200 million in Russia.

Q:
IKEA is the first Western investor to announce that it would be willing to work under the debt-for-shares scheme. Have you decided how much you will invest and in which projects?
A:
So far, IKEA has no concrete agreements with the Russian and German authorities. But I don't know exactly what the Russian government will propose.

Q:
What will IKEA offer?
A:
We don't plan to offer anything. We're coming to this meeting with the intention of hearing out their offers.

Q:
Could a situation arise whereby you would refuse to work under this scheme?
A:
It's unlikely. The Russian government is well aware of our long-term investment plans and what IKEA needs to bring them to life. We plan to invest money in Russia up until 2050. Beneficial agreements would in no way hinder us nor the authorities of this country, and the amount of money IKEA invests in Russia depends on this to a large extent.

Q:
Are you referring to a reduction in the customs tariffs for IKEA?
A:
This is a fundamental question. We are doing a lot of work on this at present through the Russian-German strategic planning group, which is developing the most suitable conditions for German companies on the territory of Russia.

'IKEA in Russia is working at a loss. We should start to make a profit once we open our third store.'
— Lennart Dahlgren
Q:
Two years ago, IKEA managed to reduce the customs duties for furniture. How was this achieved?
A:
We convinced them by providing evidence to show how unfair it was for IKEA to import furniture with two types of customs charges: namely by percentage and by weight. Our products are cheap, but heavy. The customs officials chose the highest duty when deciding what payment to take for import — either they use a percentage of the value of the item or they apply a euro per kilogram.

It works out that the duty for importing a single item is often as high as 200 percent.

Under these conditions, we wouldn't be able to work in Russia.

The government tried to convince us that we should increase the prices at our stores. But this would run contrary to the very concept of the company. Therefore, reducing the duty to a more or less appropriate amount was one of the principal conditions of our move to the Russian market.

Q:
How were you able to convince the officials? Who personally helped you?
A:
It is difficult to say. The members of the committees involved in questions of investment were changing constantly. Our idea got through to Viktor Khristenko most of all. He monitored this necessary process, at first when he was the first deputy minister for finance and then when he became the first deputy prime minister in [Prime Minister Sergei] Stepashin's government.

The rates were set down to about 30 percent of the value of the product — for all importers, not just ourselves. But it happens that the duty for a single product can go as high as 100 percent, which doesn't suit us so well. Ideally we would like to achieve a rate of 5 percent, which would be an international standard. But so far, it only makes sense to fight for 20 percent as a first step.

IKEA in Russia is working at a loss. We should start to make a profit once we open our third store. But we fear that with duties this high and without tax breaks, our plans will not be realized.

The IKEA concept is identical in all countries and is extremely harsh since it is oriented toward buyers with average and low incomes. We aren't about attracting the wealthy. When we open a store we first establish the prices that our clients can pay, and then we calculate the result. In so doing, our prices should be lower than those of regular stores and in some cases even lower than at trade fairs. But naturally we have no intention of putting up with long-term losses, so we are always trying to get all costs, including duties and taxes, reduced to a level that makes the low price possible.

Q:
But don't you think that you may fail to achieve the desired level of tariff reductions from the government?
A:
The Russian furniture producers' lobby could hinder us in the short run. Naturally, it makes sense for them to keep the import duties high. But we can create a balance. The Russian Association of Furniture Manufacturers agreed with us that if the duty is left very high, then local production will go dormant.

Q:
If you don't achieve the desired result, does this mean that IKEA in Russia will never make a profit?
A:
It will make it much harder. It's possible to achieve by dint of huge sales. The higher the sales, the simpler for IKEA to buy up locally produced goods and increase orders with suppliers. At present, domestically manufactured goods account for only 10 percent of the products offered in our Khimki store. We could be profitable if with three stores, 30 percent of the goods were made on the territory of Russia. So far, less than 1 percent of what is sold by IKEA internationally is made in Russia. Seventy-five percent of our goods are bought in Europe, mostly in Scandinavia, while 22 percent are made in Asia. The volume of IKEA production on the territory of Russia is about $50 million yearly. … And we want to buy goods here for many times more.

Q:
Returning to the so-called debt scheme. A month ago you said that purchasing state stakes in companies — stakes in your Russian suppliers — was one of the ways for IKEA to implement this scheme.
A:
Suggestions of this kind could come from the Russian government, and we will study them closely. Furthermore, we're just talking about shares in companies with which we are or will be working with.

Q:
What companies are those?
A:
I don't know. … The first condition IKEA sets is that the company must be capable of becoming our supplier. Otherwise, it is of no interest for us to invest funds in it. Next, it is important that we know who runs this company, whether it is transparent, what kind of equipment they have, as well as the state of the surrounding ecology, etc.

Q:
How big are the stakes we are talking about?
A:
I'm not sure about that either. Normally, we own a company 100 percent. But what is a law if you can't make exceptions. True, based on our experience it is often cheaper to build a new factory than to bring an old Russian one up to IKEA's requirements.

Q:
Was the creation of a new 100 percent owned factory discussed at the same time as the possibility to have shares in Russian companies were under consideration?
A:
The feasibility of this was discussed, though it doesn't automatically exclude the acquisition of companies' shares. As far as the plans for organizing our own production are concerned, we are interested first and foremost in the land question.

Q:
Is IKEA participating in adopting the Land Code in any way?
A:
No. The question of land ownership is very important to us, but 50 people are involved in discussing the question that it makes no sense to offer the [State Duma] deputies our solution. As soon as the Land Code, with its mechanism for selling and purchasing land, is introduced, we will buy the plot we want immediately. And this is something that we will certainly take into consideration when negotiating with the Russian government. Owning one's own land plot where a shop or factory has been built is one of IKEA's main principles.