Ikea goes to Belarus, not Russia, to supply Russia

 

Belarus rarely attracts foreign capital so the €76m that a Lithuanian company has decided to invest in a wood processing hub in the country is a very big deal.

Lithuania’s Vakaru Medienos Group has won support from Ikea for the project that will transform Mogilev, Belarus’ third biggest city, into a major furniture cluster supplying the Swedish flat-pack furnishings company’s bustling stores in Russia.

But why can’t Ikea source affordable furnishing products in Russia, one of the fastest growing markets for its finished goods? Russia has far more forests and lumberjacks than Belarus and is looking for foreign investors to modernise its wood processing industries.

The explanation could lie in the difficulties Ikea has experienced in Russia where it has invested more than $4bn in a network of a dozen malls and stores since 2000.

Ikea is just the kind of foreign investor Russia needs, filling a gaping hole in supplies of stylish, affordable furniture and supporting local manufacturing ventures that boost employment in the impoverished regions.

But like many other investors in Russia, Ikea has been discouraged by widespread Russian corruption and graft that has slowed its expansion in the country and challenged its commitment to best business practices.

In some cases it appears that Russian officials, rather than encouraging Ikea to invest, have plumbed the depths of their imaginations to ensure it does not. Take for instance the rigorous inspectors in Samara, an oil town on the Volga, who blocked the opening of Ikea’s new mall in 2008, warning the building could not withstand hurricane winds. Hurricanes are not known on the Volga but perhaps the authorities judged it best not to open the store just to be on the safe side.

Russian investors often overcome bureaucratic hurdles like these by passing money under the table but going native is risky for foreign investors with reputations to uphold.

Ingvar Kamprad, Ikea’s founder, was reported to have shed tears of despair after the company was forced to dismiss two of its top managers in Russia caught passing bribes to secure electricity supplies to a St Petersburg mall. “I sat in my old arm chair and I cried. I wept like a child because I was so sad,” he said, according to the Swedish newspaper Expressen.

Ikea said this week it was already sourcing more than €300m worth of goods in Russia for its stores and would like to increase cooperation with Russian suppliers.

But for now it appears the benefit of new Ikea orders will go to Belarus. “There is a good supply of wood in Belarus and import from Belarus to Russia is free from import duties that would otherwise increase the price of Ikea furniture,” Ikea said in an emailed statement this week. “The factory in Belarus will increase our production capacity and enable affordable home furnishing products for the Russian market.”

At least 900 new jobs will be created in Mogilev as the new furniture cluster starts humming, according to the European Bank for Reconstruction and Development, which is supporting the venture with a €26m loan. The project should also raise industrial standards, enforcing strict codes of conduct and high environmental and social regulations demanded by the EBRD.

Maintaining high standards may be a challenge in Belarus, which landed 127th place in Transparency International’s latest listing of 178 countries ranked in order of perceived corruption. But Russia fared even worse, coming in at 154th place between Papua New Guinea and Tajikistan.

According to Financial Times (www.ft.com