The Swedes Have a Financial Stick Ready for Russia

30.06.2009 — Analysis

After the sensational announcement by the IKEA founder, Ingvar Kamprad, about the lawsuits against the Russian energy and gas suppliers, the Russian top management has finally commented on the issue. As Pavel Kober, RusBusinessNews reporter, has found out, IKEA intends to "hit Russia with rouble".

Swedish IKEA is freezing its investment programs in Russia. This was reported after Ingvar Kamprad, the IKEA founder, speaking live on R1 radio station on 20 June 2009, accused Russian gas and electricity suppliers of overbilling, which led to the company losing 136 million Euro. He also stated that IKEA filed lawsuits against the Russian companies for contract terms violation.

Per Kaufmann, Director General of IKEA Russia and CIS, has explained in an interview to RusBusinessNews that the cause for the IKEA investment program suspension "is an unpredictable character of the administrative procedures in several Russian regions, and in particular, a delay of the complete set of permits necessary to open IKEA and Mega store in Samara".

The Mega-IKEA trade and entertainment mall in Samara - total area 130 thousand square metres and total investments 8 billion rubles - was intended to open in May 2009. But due to permits having been unavailable, the launch was delayed for an unlimited period. The official data sheet presented to RusBusinessNews by IKEA no longer has the plan to launch the Samara mall in 2009.

Today 11 IKEA stores and Mega family shopping malls operate in Russia: three in Moscow suburbs, two in the Leningrad Oblast, and one in each of Kazan, Nizhny Novgorod, Ekaterinburg, Rostov-on-Don, Novosibirsk, and Adygeya Republic.

IKEA placed its first Russian production facilities in the Leningrad Oblast - the wood processing plant and Swedwood, a furniture components factory. In 2006, furniture factories in the Solnechnogorsky District (the Moscow Oblast) and Tikhvin (the Leningrad Oblast) were launched.

A Swedwood timber plant and a furniture component factory were launched in 2007 in Kostromuksha (Karelia). The Swedes are building a sawmill in Tyumen, and are going to build a production facility for furniture boards and components in the long term.

According to Per Kaufmann, IKEA is still interested in growing its business and continuing investments in the Russian regions, but on certain conditions.

"We are going to complete all projects for which we have already launched financing (Samara, Omsk, Ufa, the Moscow Oblast), and continue negotiations in Tomsk, Saratov, Voronezh, Tyumen and other regions. However, until the key issues that influence the IKEA ability to operate in Russia are resolved, further investments will be temporarily frozen," Mr. Kaufmann emphasized.

You can hardly impress anyone by suspending or completely shutting down investment projects in today's Russia which goes through the economic crisis with the rest of the world. But, should IKEA threats come true, this will most likely be the first case of large investments in Russia stopping not for economic reasons but due to the notorious administrative barriers and trivial corruption.

The Swedish "rouble hit" can be very painful. At the moment IKEA invested in Russia a total of around 4 billion US dollars. The company is one of the largest commercial real estate developers in the country.

Considering the fact that IKEA mainly works in the regions where the unemployment situation is especially tense, the launch of each of the three trade centres - in Omsk, Samara, and Ufa - can create 3 thousand workplaces each.

Moreover, the IKEA purchasing organization has been operating within the Russian Federation since 1990. Over the past financial year the purchase volume amounted to 230 million euro. As the purchased items are distributed to IKEA stores over the world, the company secures 40% of the Russian furniture export, whilst the share of domestic products in IKEA's Russian stores is 30% in money terms and about 50% in terms of volume.