The black market economy in Russia is a huge industry,
estimated to be the equivalent of the GDP of Denmark – some US $300 billion. It is so rampant that many large Western firms are deciding to cut their losses and leave Russia for good, IKEA among them. This is just a tiny tip on an enormous iceberg…

Bribery and corruption are so rampant in Russia, according to Transparency International, that many large Western firms are deciding to leave Russia for good. The cost of the ‘dark’ side of doing business has soared. The price of a minor building contract saw Moscow government officials pocketing £40,000 in bribes, according to Rupert Wingfield-Hayes – the BBC’s Russia correspondent.

The IKEA Experience

Such has been the experience of IKEA, the Swedish furniture manufacturer, that they froze all their investments in Russia in 2009. With ambitious plans to build giant malls across the country, they undertook to never pay bribes. However, their first project saw them needing 300 different permits to build and they agreed with the local government to start building and to finalise the paperwork later. Towards the end of the project the officials had changed their minds, resulting in IKEA having to spend £3 million on local infrastructure and projects to become ‘official’ so they could open.

Repeated experiences of a similar kind tried IKEA’s patience and sense of propriety. Inevitably there would be a straw to break the camel’s back which happened on their project in a town called Samara. On completion of the mall, local officials said the store would not be able to open because it did not have a permit to say the building was hurricane proof. That was their last project.

How Much Does It Cost To See The Russian President?

Incidentally, when IKEA tried unsuccessfully to see the Russian President with a long list of grievances they were told, “IKEA won’t like to see the President. IKEA is known for liking not to pay too much and it would cost US $5-10m to meet the President” (source: IKEA’s first boss in Russia).

Western Anti-Corruption Legislation

Unfortunately, Western managers working in Russia face a huge dilemma. The ‘blat’ system, the term for ‘the informal exchange of favours,’ is grounded in personal relationships and in access to public resources – and has become all pervasive. However, the companies they work for and the countries they come from mostly make a strong stand against corruption. This year, in Germany, two Siemens’ executives were found guilty of paying bribes in Russia and Nigeria. In New York, in March, Daimler Benz was fined $185 billion after admitting to paying bribes in various countries including Russia.

The Anti-Corruption Taskforce

Bribery is one of the greatest hindering factors to Russia’s investment climate. Russian President Dmitry Medvedev pledged to fight corruption when he entered office in May 2008, highlighting the issue as one of the country’s most serious problems. The Russian Government is taking steps to clean up and the anti-corruption taskforce have prosecuted about 15,000 cases in the first few months of this year, 2000 of which were Government officials accepting bribes. This is just a tiny tip on an enormous iceberg. The average size of a bribe in Russia nearly tripled between 2008 and 2009, despite a weakened global economic climate, according to a Russian Interior Ministry report published in March.

See my blogs on:

Russia: Insights Into the ‘Blat’ Economy

 

Russia: Bribery, Corruption & the High Price Of Bad Business

 

Russia: Cost of A Bribe Nearly Triples In One Year

 

What’s Your Country’s Corruption Perception Index

Useful Links:

Book: “Russia’s Economy of Favours: blat, networking, and informal exchange” by Alena V. Ledneva.

 

Transparency International, the organisation that publishes the world Corruption Perception Index

Trace International, a non-profit organisation providing compliance solutions for multinational companies and their commercial intermediaries

Tags: blat, bribery & corruption, IKEA, Russia

This entry was posted on Monday, May 24th, 2010 at 1:33 am and is filed under cross-cultural differences, General, international business, Russia/Asia . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.