IKEA Masters Rules of Russian Business

Swedish retailer IKEA, the biggest owner of commercial real estate in Russia, has been beset by accusations of corruption.

Whether the accusations prove true is uncertain, but what is clear is that the Swedish company has adapted to the rules of Russian business better than Russians themselves.

The IKEA scandal broke out in February. The Swedish newspaper Expressen, citing an internal correspondence among employees of IKEA's Russian subsidiary, IKEA Mos, which owns and manages the Mega shopping centers, reported that IKEA Mos' management effectively approved a bribe to connect its Mega Parnas shopping center to Lenenergo's power grid.

IKEA Mos didn't give any bribes itself, Expressen wrote, but "it's completely clear that the construction firm Renaissance Construction [a general contractor for Mega Parnas and seven other Mega centers], which was responsible for connecting the center, will try to get permission from the authorities using illegal means, with the help of bribes," IKEA midlevel manager Joachem Virtanen told his managers, IKEA Mos CEO Stefan Gross and chairman Per Kauffman, in August 2009.

The warning didn't get Gross and Kauffman's attention. "We are approving the installation of electrical equipment in correspondence with our plans," Kauffman told Virtanen, Expressen reported. "I'm taking all responsibility for this decision."

IKEA wouldn't comment on the memo, but Kauffman and Gross were quickly fired and an internal investigation was opened. Of those involved in the story —? Gross, Kauffman, Virtanen, Renaissance Construction and IKEA itself —? only Renaissance has commented to Vedomosti. Sergei Yaroshevsky, a company spokesman, said it didn't deal with connecting buildings to the electrical grid.

An investigation carried out by Vedomosti was unable to get an answer to whether IKEA gave bribes. But it did show that the Swedish company often ends up in corruption-prone situations.

Cash Triumphs Over Evil

Lennart Dahlgren, the first director of IKEA Mos, told Vedomosti how everything started. To build a big shopping center like IKEA or Mega, it is necessary to get more than 300 separate permits, he said.

"If we had waited to receive them all, we would have lost years," he said. Therefore, he said, the company came to agreements with local authorities that it would begin construction and receive the permits "in the process." True, the risk was high — bureaucrats took advantage of the situation.

In 2003, IKEA built its first distribution center — a warehouse in the Moscow region town of Solnechnogorsk in which it invested $40 million. Dahlgren said he reached a verbal agreement on its construction with Solnechnogorsk district head Vladimir Popov. "The police unexpectedly showed up at the building site. They halted work, shut everything down, and we couldn't even go onto the territory," he said.

Dahlgren tried to get in touch with Popov, but he had disappeared. Eventually, he reappeared and promised to launch construction if IKEA paid 10 million rubles.

"I said, 'Fine, we'll pay. We have to build, but on my terms — that the money goes to houses for the elderly,'" Dahlgren said. "I had thought we had reached a deal, but a few days later, Popov arrived and said the deal was off — 10 million was too little, 30 million rubles was needed. Every day we lost thousands of dollars because of the lost work. It was cheaper to pay the 30 million."

IKEA transferred the money into a charity fund, "announced this to the entire city, to local journalists … and the police left and opened construction," he said.

A similar story happened a year later with Mega Khimki. The mall's opening, scheduled for December 2004, fell through. The regional construction regulator wouldn't allow the opening because the shopping center operated on reserve generators and a traffic interchange hadn't been built. IKEA had to build not only two bridges for $4 million (one of which was never launched) but to pledge $1 million for the development of children's sports.

By June 2006, when Dahlgren was transferred to another position, four Mega malls had been opened in Russia and another six were under construction —? not a bad result for three years of working in a new market.

Bombarded With Megas

But the coin has another side: Of the 14 Mega malls, only two opened on time and without any problems.

And the problems were similar everywhere. For example, in September 2006, construction on the Mega Rostov-on-Don shopping center, which was being carried out without permits, was halted for two months. A court fined IKEA Mos 12 days before the opening of its Mega Adygeya shopping center in 2008 for building without an approved plan, and the opening was delayed by a month.

Mega Ufa, construction on which was started in September 2007, has still not been opened. In May 2008, Bashkortostan's construction watchdog found that part of the work had been completed without the necessary permits.

In Novosibirsk, the construction watchdog found many defects before the opening of the Mega mall there. The agency's lead inspector, Vitaly Ivlyev, said the complex lacked a heating system, that IKEA had tried to connect the mall to reserve diesel generators and that it didn't build a traffic interchange, although this wasn't included in the technical specifications. On the official opening day, only a third of the Mega Novosibirsk complex was completed; the rest took another year to finish.

The situation became even farcical. In 2009, Tatarstan's construction watchdog suddenly found that IKEA had been working without a use permit — after four years.

In Samara, bureaucrats still won't let IKEA open a mall that was finished in November 2007. Deputy Economic Development Minister Stanislav Voskresensky dealt with IKEA's complaints and found that the mall had no permits whatsoever.

At the time, the Samara region administration worked out a plan with IKEA to "bring the Mega Samara family shopping center into accordance with current regulations and to facilitate its exploitation." In January 2010, IKEA received a confirmed city plan for its land, and in March it got a positive state appraisal of its planning documentation and a permit for construction.

IKEA didn't respond to any warnings, a representative of the Samara government said, and at the end of 2008, the construction watchdog refused to give a use permit, citing all the violations.

There were no problems, however, with the launch of Mega Belaya Dacha. Its co-owner is former Agriculture Minister and State Duma Deputy Viktor Semyonov.

Deals Are Made to Be Broken

Working without documents, IKEA learned how to get by without communicating, but it is also necessary to get connected to the electrical grid. The Swedes leased diesel generators from the company Autonomous Energy Supply Systems, or SAE, during construction and often afterward.

"Not a single IKEA complex in Russia would have been built without using our generators," SAE owner Konstantin Ponomarev said.

Generators are typically more expensive than hooking up to the grid, but it depends on the bureaucrats.

For Mega Parnas and Mega Dybenko in St. Petersburg, generator rentals lasted for years and ended up in court. IKEA couldn't conclude an agreement with Lenenergo in time, and both malls, which opened in 2006, operated on SAE generators.

In 2008, the partners began to fight.

Starting in July 2008, IKEA stopped paying, started accumulating debts and refused to return the generators, Ponomarev said indignantly. In August, SAE filed its first suit against IKEA Mos for 130 million rubles.

Ponomarev said he had already filed 10 suits, but wouldn't say the total amount of debt being sought. So far, according to information in the courts' databases, Ponomarev has won all the cases.

IKEA didn't stay in debt: In March 2009, Ingvar Kamprad accused Russian energy firms of cheating the company out of 135 million euros. IKEA also starting filing lawsuits, disputing the generator rental agreements on various grounds: sometimes because they were coerced into the deals, sometimes because electrical stations are immoveable property, meaning that the agreement should have been registered with the state. So far, according to information in the courts' databases, IKEA has lost all such cases.

Nevertheless, Ponomarev has received neither money nor his 112 generators. SAE filed a suit against IKEA requesting the return of its property and won, but IKEA is not hurrying to return the equipment. IKEA's lawyers have repeatedly requested clarification on the court's ruling: They ask, for example, what it means exactly to return property "in good working order," Ponomarev said.

IKEA is trying to get a court order for SAE to remove garbage from the territory of the Mega malls, but the "garbage" is containers with the very same generators that SAE wants to take away, all the while they refuse to give them to us, Ponomarev said.

IKEA refused to comment to Vedomosti on ongoing court cases.

Did Someone Call the Police?

In order to feel more confident on the Russian market, IKEA turned to British detective agencies.

One of them was Diligence, the newspaper Expressen said. This agency is well-known in Russia because of a certain project: In 2006, the IPOC fund (whose beneficiary is likely former Communications Minister Leonid Reiman) accused Diligence of obtaining the fund's confidential documents from KPMG at the request of Alfa Group. At the time, Alfa and IPOC were battling for a blocking stake in MegaFon.

It's possible that Diligence even worked against Alfa. On the agency's web site it says that at the request of a leading Western oil firm aiming to purchase a Russian competitor, Diligence investigated who the real owner of the Russian firm was and studied key employees to determine whether it was connected with criminals. After the investigation, the client successfully invested $7 billion.

Such a description could only mean one deal: In February 2003, British BP and Russian TNK, partly owned by Alfa, jointly created TNK-BP.

IKEA's inquiry was more modest, said a private detective familiar with the investigation. According to an agreement with IKEA, the detectives were to study all court materials and memos concerning the case with Ponomarev and to draw conclusions as to how well founded the judges decisions were.

According to Expressen, Diligence came to the conclusion that Ponomarev's complaints were legal, so the detectives developed a "criminal strategy" for IKEA against the owner of SAE, suggesting that the case be reclassified as criminal. The newspaper's site shows a photograph of a presentation of this strategy.

A representative of Diligence's London office said Expressen's information was "insinuation." "The tasks set out for Diligence pertained exclusively to the legal process and contained no assignment to collect compromising information about anybody," IKEA's legal department said.

The private detective, who asked to remain anonymous, told Vedomosti about another British agency working for IKEA — Alaco.

Ponomarev knew about Alaco, saying that when the problems between SAE and IKEA began, Alaco's cofounder Ambrose Carey pestered Ponomarev's partner, Harry Heikkila, to sell his 50 percent stake in SAE to IKEA. But Heikkila preferred to sell his stake to Ponomarev. (Heikkila and Carey wouldn't comment about their relationship with IKEA.)

Same as Anything Else

"Formally, IKEA hasn't always operated in a legal framework, and that's why it has had problems," Voskresensky said. "In some regions, the authorities support IKEA because of the new jobs and taxes, and in other places they don't — and that's where IKEA's problems started."

A source in IKEA gave a more blunt explanation. IKEA just didn't notice that Russian legislation has been tightened since 2005, when the City Planning Code was adopted. The company's employees tried to tell the management of violations in construction, but they were immediately fired, the source said. In 2008, when the company suddenly realized that the shopping centers were built in violation of current law, there was a scandal.

From that moment, IKEA has tried to find its way out of the situation, which it is in because of its own fault, the source said.

"The company is holding an inquiry in connection with accusations by fired employees against the former management of Mega shopping centers," an IKEA Mos spokesperson said. If any of the accusations are confirmed, the company will take measures to satisfy the corresponding complaints and ensure that similar situations don't happen again.

The IKEA example is significant from the point of view of changes that are needed to the city planning legislation, said Sergei Belyakov, a department head at the Economic Development Ministry.

"Because of the confused procedures of gathering documents, which has taken up to three years, investors are faced with a choice — either spend a lot of time on assessments and agreements and give up investment in Russia, or begin construction and worry about the documents later. The second route became widespread, and IKEA is no exception," he said.

"Before, many began to build before getting permits, intentionally made violations and paid the fines so as not to delay construction," said Andrei Zakrevsky, senior vice president at Knight Frank. "If everyone followed the construction legislation, then there would not yet be any IKEAs or other big projects in Russia."

"The requirements are so contradictory that if you follow all the rules, then no project will be possible to build. It simply doesn't harmonize," said Maxim Gasiyev, chief executive of Colliers International Russia. He added that the system of state regulation of the construction sector incites bribe taking.

No one asked by Vedomosti would go on the record to put a price tag on the amount of bribetaking in the sector. But the figures that were named were about the same: If a company builds without a permit, the kickback to officials for getting the right documents could reach 30 percent of the construction costs, and 20 percent to 30 percent for connection to the electrical grid. "No one gives cash bribes. Everything is documented as social support, or part of the work is given to contractors indicated by local officials," said an executive at Management Development Group.

IKEA's experience may show that officials' bribe requests are nevertheless lower. In Yekaterinburg, the local administration in 2004 required that IKEA give 10 percent of the estimated cost of construction ($150 million) to "voluntary funds" for the development of the city's infrastructure. The event was related on the web site of the former governor of the Sverdlovsk region, Eduard Rossel, whom IKEA manager Dan Shellgren complained about. Rossel then personally took control of the project, and the company didn't have to pay a dime.