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Corruption in Russia: IKEA’s Expansion to the East Case Study

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Case Analysis

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The case analysis under discussion focuses on the opening of the first IKEA store in Russia. After the fall of the Iron Curtain, IKEA decided to enter Russian market and grab the attention of its newly emerged middle class. This decision was caused by the need of Russian people to have new, properly designed, and affordable furniture instead of the existing cumbersome cupboards and handmade items. However, the company encountered corruption and misunderstanding in Russia.

The first problem is associated with the improperly designed ad campaign that was perceived as immoral due to the fact that despite the dissolution of the Soviet Union, the local population preserved its mentality related to the taboo around sex. The second problem refers directly to corruption. In particular, several obstacles were created by Moscow officials to resist the store opening without paying a special service fee. For example, following its business model, IKEA was forced to build a new mall outside Moscow, namely in Khimki that is located three miles from the city. Furthermore, the construction of the special overpass that was expected to improve access to the store was blocked by Moscow, thus making the issue of traffic irresolvable. Finally, Russian representatives made an ultimatum, threatening to turn electricity off in case a service fee will not be paid.

From the above observations, it becomes evident that the core question of this case is whether to pay a fee or cancel the opening. It seems that the best strategy to resolve the identified problems is to continue expansion to the market with certain adjustments. First of all, it is necessary to change ad campaign calling people to share benefits of IKEA. This can be achieved through an in-depth exploration of Russian culture and mentality and subsequent conclusion. As for the ultimatum regarding electricity, it can be useful to implement diesel generators that are not dependant on it. The mentioned solution will eliminate one problem, yet it may give an opportunity to Russian officials to come up with another idea and also require paying the so-called service fee. In this connection, it is of great importance to resist local corruption on a global scale. In other words, it will be useful to apply for both national and global communities, attracting their attention to the problems. For instance, Anti-Corruption Agency identifies and controls corruption and bribery cases. Besides, it also seems to be important for IKEA to show Moscow the mutual benefits of their collaboration so that the latter can understand perspective opportunities.

The suggested solutions can be regarded as rather strong and relevant, especially the one that implies global collaboration in regards to corruption. A range of surveys initiated by international authorities can explore this case and identify potential threats as well. Speaking of the implementation of diesel generators to produce electricity, it seems appropriate to rent them from a foreign company and then transport to Russian mall. This can prevent the occurrence of similar situations in the future.

To conclude, it should be noted that the challenges faced by IKEA in Russia are quite difficult to resolve. Nevertheless, a set of well-organized decisions in the context of the comprehensively enhanced expansion strategy can improve the situation. At the same time, a contingency plan needs to be elaborated by IKEA CEOs, taking into account corruption issues, local culture, and Russian market strengths and weaknesses.

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IvyPanda. (2020, November 18). Corruption in Russia: IKEA’s Expansion to the East. https://ivypanda.com/essays/corruption-in-russia-ikeas-expansion-to-the-east/

"Corruption in Russia: IKEA’s Expansion to the East." IvyPanda , 18 Nov. 2020, ivypanda.com/essays/corruption-in-russia-ikeas-expansion-to-the-east/.

IvyPanda . (2020) 'Corruption in Russia: IKEA’s Expansion to the East'. 18 November.

IvyPanda . 2020. "Corruption in Russia: IKEA’s Expansion to the East." November 18, 2020. https://ivypanda.com/essays/corruption-in-russia-ikeas-expansion-to-the-east/.

1. IvyPanda . "Corruption in Russia: IKEA’s Expansion to the East." November 18, 2020. https://ivypanda.com/essays/corruption-in-russia-ikeas-expansion-to-the-east/.

Bibliography

IvyPanda . "Corruption in Russia: IKEA’s Expansion to the East." November 18, 2020. https://ivypanda.com/essays/corruption-in-russia-ikeas-expansion-to-the-east/.

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Losing the good fight: IKEA’s struggle to remain honest in Russia

IKEA's shopping mall in Khimki.

IKEA's shopping mall in Khimki.

In early August, searches were conducted in Swedish furniture giant IKEA’s Russian head office in Khimki (a town in the suburbs of Moscow where IKEA also has a shopping mall) in connection with an old land dispute. Two weeks later, a former IKEA manager, Joakim Virtanen, turned himself in to investigators, this time in connection with another controversy, related to the lease of electricity equipment. IKEA has been in litigation regarding these two disputes for over 10 years.

IKEA is an absolute champion in terms of the number of court cases it has had in Russia. The register of arbitration cases contains over 200 lawsuits against the Swedish concern, while the total number of court cases involving it has exceeded 560. All the other major retailers in Russia taken together would not have a tenth of this number of court cases between them.

The company itself is convinced that this is the result of its ambition to conduct honest business in the country and that other firms avoid such complications by paying bribes.

In 2010, Lennart Dahlgren, the former CEO of IKEA Russia, released a book called Despite Absurdity: How I Conquered Russia While It Conquered Me , in which he told the tale of what it costs to be true to one’s principles while surrounded by rampant corruption. The book named many people who obstructed its business, from the mayor of Khimki to the governor of the Moscow Region, and became a hit.

Lennart Dahlgren released a book called 'Despite Absurdity: How I Conquered Russia While It Conquered Me'/ Kommersant

Market players, however, say that it is hard to be a saint while doing business in Russia and gladly cite examples of IKEA’s blunders.

Lawyer for special meatballs

To begin with, there are questions about the lawyer whom IKEA has chosen to represent its interests. The Lawyers and Business firm has represented the company in many lawsuits for several years already. In 2015, its owner, Sergei Kovbasyuk, defended IKEA in a class action lawsuit over a case of poisoning in the IKEA café, famous for its meatballs. Market sources maintain that the lawyer’s functions go far beyond that.  

Kovbasyuk’s name became well-known in connection with a number of controversial cases. There were also media reports that Kovbasyuk used to work for the FSB (Russian Federal Security Service), hence his connections and astronomical fees. The lawyer himself has refused to talk to the press. Sources are convinced that his law firm renders services in so-called “special situations.” This euphemism usually implies corruption and corporate raiding as well as resolving “sensitive issues” with the authorities or other market players.

Sergei Kovbasyuk / Press photo

“When foreign companies do not understand the rules of the game in Russia, they hire intermediaries – legal and consulting groups or GR experts,” said Ilya Shumanov, deputy head of Transparency International – Russia. “These positions are highly corruptogenic and people who fill them are entrusted with resolving the most sensitive issues,”

Not furniture alone

Almost all the lawsuits are filed against the IKEA subsidiary that builds the company’s stores. In all countries, IKEA builds its shopping malls itself instead of renting premises. However, in Russia IKEA has come up against more problems than in other countries – primarily because it is hard to build things. (In the dealing with construction permits section of the Doing Business ranking, Russia is in 119th position out of 189.) This creates many opportunities for corruption.

China and Russia power record year for IKEA

The plots that IKEA was given for construction are mainly located on former collective farm land. “These plots have a tangled privatization history, with most cases being so old that it is often impossible to find all the related documents,” says the head of practice at the Infralex law firm, Sergei Shumilov.

For example, in Khimki the land was leased by the company, after which it was bought out, when suddenly in 2012 the former owner, while conducting inspections, discovered that it no longer had the land.

“Does this mean that no inventory was carried out for many years? And nobody knew or saw that this land is now the site of a major construction project that officials and the media are talking about. I personally find it strange, to say the least,” says Maxim Gladkikh-Rodionov, managing director of the Confidence audit firm.

It’s   hard   to   be   honest in Russia

In 2010, there was a corruption scandal in St. Petersburg involving Per Kaufmann, IKEA director for Central and Eastern Europe, and Stefan Gross, IKEA director for real estate in Russia. Both were sacked practically immediately. IKEA even decided to conduct an internal investigation to find out if any more of its employees were engaged in bribery directly or indirectly.

IKEA in St. Petersburg / PhotoXpress

It turned out that a bribe had been offered by a Russian contractor and the top managers were guilty of knowing it but not preventing the crime. In exchange for the bribe, officials agreed to sign a fake acceptance certificate for electricity equipment in an IKEA shopping mall. Furthermore, the project had not even been approved.

One way or another, all these stories prompt lawyers to suspect that the company may be being targeted by some influential corporate raiders. “One gets the impression that the company is simply being strongly encouraged to ‘be like everybody else’,” says Gladkikh-Rodionov.

Given that the Russian market is of great significance for IKEA (the 11-percent rise in the company’s sales in 2015 was largely due to Russia and China ), it would be justified to predict that the company will continue to have to resort widely to legal assistance. 

First published in Russian in Kommersant

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Please note you do not have access to teaching notes, corruption in russia: ikea’s expansion to the east (a-d).

Publication date: 18 June 2016

Teaching notes

Subject area.

Business ethics corruption governance and compliance integrity management international management intercultural and cross-cultural management internationalization corporate social responsibility (CSR).

Study level/applicability

The case has successfully been used with a wide range of audiences from masters/MBAs to Executives. It will also work with undergraduates.

Case overview

This four-part case series can be used to discuss business ethics, compliance/governance, integrity management, reacting to and preparing against corruption in the context of internationalization and allows to also briefly touching upon the issue of CSR. Case (A) describes a challenge IKEA was facing, while trying to enter Russia in 2000. The company was preparing to open its first flagship store on the outskirts of Moscow, only the first of several planned projects. After substantial investments in infrastructure and logistics, IKEA focused on marketing, but quickly faced a sudden complication. Its major ad campaign in the Moscow Metro with the slogan “[e]very 10th European was made in one of our beds” was labeled “tasteless”. IKEA had to stop the campaign because it “couldn’t prove” the claim. Soon Lennart Dahlgren, the first general manager of IKEA in Russia must have realized that the unsuccessful ad campaign was going to be the least of his problems: A few weeks before the planned opening, the local utility company decided not to provide their services for the store if IKEA did not pay a bribe. What should IKEA and Lennart Dahlgren do? Was there any alternative to playing the game the Russian way, and paying? The subsequent cases (B), (C) and (D) describe IKEA’s creative response to the challenges described in case (A), and then report about new challenges with alleged corruption within IKEA and in the legal environment, and finally raise the question whether IKEA can be considered to have a (corporate social) responsibility to fight corruption on a societal level to build the platform for its own operation in Russia.

Expected learning outcomes

Responding to a threatening corruption demand (here: responding to an outside demand for a bribe), avoiding corruption from the outside, cross-cultural differences in drawing the line for corruption, preventing corruption within the organization, (corporate social) responsibility of firms to improve the political/legal/social/moral environment in which they operate are the expected learning outcomes.

Supplementary materials

Teaching Notes are available for educators only. Please contact your library to gain login details or email [email protected] to request teaching notes.

Subject code

CSS 5: International Business

  • Business ethics
  • Corporate social responsibility
  • International business
  • Corporate values/philosophy
  • Governance guidelines

Acknowledgements

The author wishes to thank: Derek Abell for his support in the design of the case series and his attempt to collect additional information. Amanpret Singh, Daniel Rettich, Martha Ihlbrock and Tonisha Robinson for their support of researching, editing, translating and formatting of the case study, teaching note and supplementary material. A sanitized version of this case study series has previously been published in the Emerald Emerging Case Study Collection under the title “Corruption by design? L’Antimarché’s struggles in Russia (A-D)”.

Müller, U. (2016), "Corruption in Russia: IKEA’s expansion to the East (A-D)", , Vol. 6 No. 2. https://doi.org/10.1108/EEMCS-11-2015-0199

Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

You do not currently have access to these teaching notes. Teaching notes are available for teaching faculty at subscribing institutions. Teaching notes accompany case studies with suggested learning objectives, classroom methods and potential assignment questions. They support dynamic classroom discussion to help develop student's analytical skills.

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  • DOI: 10.1108/EEMCS-11-2015-0199
  • Corpus ID: 156939423

Corruption in Russia: IKEA’s expansion to the East (A-D)

  • Published 22 June 2016
  • Business, Political Science
  • Emerald Emerging Markets Case Studies

5 Citations

Framing of national image in a climate of socio-political uncertainty: a study of ikea and volvo car corporation in swedish and russian news media, russia's integration to the globalized automotive system: solutions adopted by multinationals and impact on the local industrial environment, amma unavagam: mitigating food insecurity through state sponsored food subsidisation programme, departmental stores in india: financial performance analysis, cultural sensemaking of corporate social responsibility: a dyadic view of russian–finnish business relationships, one reference, leading by design., related papers.

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  • IKEA scaling down in Russia and Belarus

The facade of an IKEA store.

Published 15 June 2022 • Inter IKEA newsroom

IKEA takes the next step to scale down in Russia and Belarus

The war in Ukraine has already had a terrible impact on so many people’s lives. It is a human tragedy that is continuing to affect people and communities.

On 3 March, Inter IKEA Group and Ingka Group announced the pausing of IKEA operations in Russia and Belarus as a consequence of the war in Ukraine. Since then it has been a priority to provide support and security to co-workers, and the groups of companies have been able to guarantee 6 months’ salary for all co-workers, as well as core benefits.

Unfortunately the circumstances have not improved and the devastating war continues. Businesses and supply chains across the world have been heavily impacted and we do not see that it is possible to resume operations any time soon.

As a consequence, Inter IKEA Group and Ingka Group have now each decided to enter a new phase to further scale down the IKEA business in Russia and Belarus.

  • The IKEA Retail business will remain stopped, and the workforce will be reduced, meaning that many co-workers will be affected. In order to support the scaling down process, Ingka Group plans to sell out its home furnishing inventory in Russia.
  • The Inter IKEA owned Industry business in Russia will reduce the workforce and start the process of finding new ownership for all four factories.
  • Import and export of IKEA products to and from Russia and Belarus will remain stopped. The two Inter IKEA owned purchase and logistics offices in Moscow and Minsk will close permanently.

This process is currently underway and all actions and decisions taken will be guided by the IKEA values and to support our people to the best of our ability.

IKEA offers well-designed, functional and affordable, high-quality home furnishing, produced with care for people and the environment. There are several companies with different owners, working under the IKEA Brand, all sharing the same vision: to create a better everyday life for the many people. IKEA was founded in Sweden in 1943.

About the IKEA franchise system

The IKEA retail business is operated through a franchise system with franchisees that are authorised to market and sell the IKEA product range within specified geographical territories. Inter IKEA Systems B.V. is the owner of the IKEA Concept and worldwide IKEA franchisor, who also assigns different IKEA companies to develop the product range, supply products and deliver communication solutions. Today, 12 different groups of companies have the right to own and operate IKEA sales channels under franchise agreements with Inter IKEA Systems B.V.

About Inter IKEA Group

Inter IKEA Group includes Inter IKEA Systems B.V., IKEA of Sweden AB, IKEA Supply AG and IKEA Industry AB related businesses. Inter IKEA Holding B.V. is the holding company for the Inter IKEA Group.

Range and Supply

For questions regarding the IKEA range: how we design and develop our products, including the IKEA food offer, and questions regarding how we source and distribute them, please contact us here:

[email protected]

+46732321300

11.05.2016 | IKEA’s troubled history in Russia

The expansion problems faced by the retailer in Russia highlight the extent of petty and systematic corruption among local officials.

Ever since April 2000, when the Swedish furniture retailer IKEA opened its doors to its first Russian customers in the Moscow Region town of Khimki, the company has been a popular destination for Muscovites wishing to give their old Soviet-era flats a makeover in true European, or ‘EuroRemont’, fashion.  Now Russia, the retailer’s fastest growing market after China, is the home of fourteen IKEA ‘Mega’ shopping centres, spreading from St. Petersburg on the Baltic to Novosibirsk in south-western Siberia.  But while the company has successfully penetrated the Russian market, its expansion has not been smooth.

Last month, officers from the Moscow Region's Economic Crimes unit searched IKEA’s Russian headquarters in the Khimki business park.  IKEA’s lawyer, Semyon Shevchenko, said the raid was in connection with a recently opened criminal investigation into a long-running dispute over a plot of land.  The raid, reminiscent of the tactics employed in corporate battles over lucrative assets in the turbulent 1990s, is the latest in a series of obstacles the company has faced in its drive to increase its presence in the Russian regions.

In 2004 the opening of the company’s second Mega shopping centre, also in Khimki, was delayed for two weeks, ostensibly due to a disagreement with local authorities about the location of gas pipes running through the centre’s car park.  In 2006 IKEA was forced to halt the construction of a new Mega store in Rostov-on-Don due to problems obtaining the correct permit.  The same year saw the temporary closure of the Mega store in Nizhny Novgorod, after inspectors identified almost one thousand fire safety violations.  Shortly after, the prosecutor in Sverdlovsk Oblast launched a probe into the Mega store in Yekaterinburg over compliance with sanitary and fire safety standards.  The company has additionally experienced complications in opening Mega stores in Ufa, Samara, Novosibirsk and St. Petersburg, and in the construction of a distribution warehouse in the Moscow region town of Solnechnogorsk.

Many of IKEA’s problems appear to stem from its unyielding anti-corruption policy.  Back in 2004 Hans-Göran Stennert, then-Chairman of IKEA’s parent company Ingka Holding BV, said that maintaining ethical standards in dealings with Russian authorities had disadvantaged the firm.  Demands by local officials for backhanders prompted IKEA to announce in 2009 a halt to further expansion in Russia, notably putting on hold plans to invest $1 billion in Mega 4, the largest shopping centre in Europe, which was to be built in the Moscow Region town of Mytishchi.

The difficulties IKEA and many other Western companies have encountered underline the petty and systemic corruption prevalent at the local level, something Russian businesses have long resigned themselves to.  The rule of law in Russia is sometimes inconsistent and arbitrarily applied.  Weak governance and limited accountability mean the problem is particularly acute in metropolitan and provincial municipalities, where authorities frequently turn a blind eye to graft; some even regard it as a legitimate way for lower-level officials to supplement their meagre incomes.  Last year the Russian daily Izvestia reported that the average bribe paid to officials had more than doubled year-on-year.

Last month’s Khimki raid does not appear to be the work of avaricious officials, but bribery remains a significant hurdle for the company and other Western firms looking to expand their operations in Russia.  President Vladimir Putin talks a great deal about the need to clamp down on corruption and has launched numerous anti-graft campaigns and investigations targeting state-owned companies.  However, most observers have dismissed them as little more than political gestures.  If Russia wants to attract foreign investment, the government will have to do much more to tackle the widespread cultural acceptance of bribe-taking.  IKEA has been patient so far, but other foreign businesses may prefer to look elsewhere.

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COMMENTS

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    The case analysis under discussion focuses on the opening of the first IKEA store in Russia. After the fall of the Iron Curtain, IKEA decided to enter Russian market and grab the attention of its newly emerged middle class. This decision was caused by the need of Russian people to have new, properly designed, and affordable furniture instead of ...

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  6. Corruption in Russia: IKEA's expansion to the East (A-D)

    This four-part case series can be used to discuss business ethics, compliance/governance, integrity management, reacting to and preparing against corruption in the context of internationalization and allows to also briefly touching upon the issue of CSR. Case (A) describes a challenge IKEA was facing, while trying to enter Russia in 2000.

  7. Corruption in Russia: IKEA's Expansion to the East (A)

    This four-part case series can be used to discuss business ethics, compliance/governance, integrity management, reacting to and preparing against corruption in the context of internationalization and allows to also briefly touch upon the issue of Corporate Social Responsibility (CSR). Case (A) describes a challenge IKEA was facing, while trying to enter Russia in 2000. The company was ...

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  10. Corruption in Russia: IKEA's expansion to the East (A-D)

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  14. Corruption in Russia : IKEA's Expansion to the East (A-D)

    This four-part case series can be used to discuss business ethics, compliance/governance, integrity management, reacting to and preparing against corruption in the context of internationalization and allows to also briefly touching upon the issue of Corporate Social Responsibility (CSR). Case (A) describes a challenge IKEA was facing, while trying to enter Russia in 2000.

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  16. IKEA takes the next step to scale down in Russia and Belarus

    The Inter IKEA owned Industry business in Russia will reduce the workforce and start the process of finding new ownership for all four factories. Import and export of IKEA products to and from Russia and Belarus will remain stopped. The two Inter IKEA owned purchase and logistics offices in Moscow and Minsk will close permanently.

  17. IKEA in Russia

    Abstract. The case "IKEA in Russia - Ethical Dilemmas" describes the efforts and tribulations of international furniture retail giant, IKEA while setting up and doing business in the emerging market of Russia. The case starts out with the efforts made by Lennart Dahlgren to set up IKEA's first store in Russia. It details the challenges faced by ...

  18. IKEA`s Challenges in Russia|Business Environment|Case Study|Case Studies

    IKEA`s Challenges in Russia. This case is about Sweden-based furniture retail giant IKEA Group's (IKEA) entry into and expansion in Russia. When IKEA entered this key emerging market as part of its international expansion strategy, it had to face several roadblocks when setting up stores, inaugurating them, and even while advertising them.

  19. Corruption in Russia: IKEA's Expansion to the East (B)

    Supplement to case ES1691. This four-part case series can be used to discuss business ethics, compliance/governance, integrity management, reacting to and preparing against corruption in the context of internationalization and allows to also briefly touching upon the issue of Corporate Social Responsibility (CSR). Case (A) describes a challenge IKEA was facing, while trying to enter Russia in ...

  20. IKEA's troubled history in Russia

    The expansion problems faced by the retailer in Russia highlight the extent of petty and systematic corruption among local officials. Ever since April 2000, when the Swedish furniture retailer IKEA opened its doors to its first Russian customers in the Moscow Region town of Khimki, the company has been a popular destination for Muscovites ...

  21. IKEA`s Challenges in Russia|Business Environment|Case Study|Case Studies

    By 2020, IKEA aimed to achieve a revenue growth of 1.5 times to €50 billion from €34.2 billion in the fiscal year ended 2015-2016. Commenting on its future goals, Walter Kadnar (Kadnar), the general director of the network in Russia, said, "Our goal is long-term investment.