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February 23, 2010: “CFBE Chair Matthew Murray Adds Insight to IKEA Case”, The Moscow News

IKEA Case Exposes Bribe Culture in Russia

From: http://www.mn.ru/news/20100223/55414629.html

The bribery scandal that erupted with the firing of Swedish furniture giant Ikea's top two managers in Russia has shone a spotlight on how foreign companies struggle to deal with the all-pervasive problem of corruption.

Per Kaufmann, Ikea's general director for Russia and Eastern Europe, and Stefan Gross, director for Ikea's shopping mall business in Russia, allowed bribes to be paid via a contractor to solve an electricity supply problem at its store in St. Petersburg, the company said in a statement after a Swedish tabloid newspaper broke the story, claiming it had e-mails detailing the bribes.


For Ikea, which has publicly stated time and time again that it has a zero-tolerance policy towards corruption, the news has come as a body blow to its clean-cut reputation.

How to reconcile tough anti-bribery corporate policies back home with the corrupt rules of the game in Russia is a nigh-impossible task, said anti-corruption experts.

"For foreign companies, the corruption risks in Russia can outweigh potential profits," said Kirill Kabanov, a former Federal Security Service official who heads the National Anti-Corruption Committee. "But they are also worried that zero tolerance to corruption will get them into a situation of unfair competition with those who agree to give bribes."

 

Turning a blind eye

In Transparency International's 2009 Bribe Payer Index, Russia was among the top five countries in the world where backhanders are likely to be paid, along with China, Mexico, India and Italy.

The head of Transparency International in Russia, Elena Panfilova, said that some foreign companies "allocate a budget for bribes in their budgets".

"Unfortunately not every foreign company is ready to combat corruption," said Kabanov, noting the 2008 case of a Siemens manager who was caught paying bribes to hospital directors in Yekaterinburg to get lucrative deals on X-ray machines.

And apart from direct bribe-paying, some companies "indirectly inspire corruption when they turn a blind eye and give up the fight in the courts," said Kabanov.

Motorola case

In one such example, in 2006 the Interior Ministry seized 167,000 "counterfeit" mobile phone handsets being imported by US mobile phone giant Motorola. A majority of the handsets were eventually returned, but not before the Interior Ministry made a public show of destroying thousands of phones. Nearly 50,000 were never returned, however.

"Instead of filing a claim against the state, Motorola preferred to stay quiet, because it did not want to lose other, more important contracts with the government, such as supplying radio services to law enforcement agencies," said Kabanov.

Motorola preferred to voice its complaint through government-to-government channels, asking US President George W. Bush to raise the issue with his counterpart, then-President Vladimir Putin, at the G8 summit in St. Petersburg Kabanov said.

The tone set by top managers is crucial if foreign companies are to maintain high anti-anticorruption standards, said Matthew Murray, who chairs the Center for Business Ethics and Corporate Governance, a Russia-based lobby group.

"It is quite possible for any company to avoid unethical practices in the Russian market in everyday business," Murray said. "A serious commitment from top management is required to accomplish this."

Patience can be key

Ian Colebourne, head of risk and compliance for KPMG in Russia and the CIS, said that patience was also a key ingredient for companies wishing to avoid corruption.

"To do business in Russia without corruption for foreign companies demands recognition and appropriate levels of expectation from head office that growth and returns will be slower and less spectacular but more sustainable in the long term," Colebourne said.

The case of Ikea exposed the tensions between aggressive growth and ethical practices, as the Swedish company erected 12 mega-malls with two more under construction, investing $4 billion, in the space of 10 years.

On several occasions, construction work or the opening of new Ikea stores has been delayed due to problems with various permits. Last year, Kaufman - one of the two managers fired last week - announced the company would halt all new investment in Russia until bureaucratic obstacles and corruption issues were resolved at its unopened store in Samara.

Contracting out

Andrei Zimovsky, an independent consultant who previously worked with construction groups Mirax and 21st Century, said that Ikea had probably contracted out the work of securing permits so they could avoid the appearance of paying bribes.

"It's too early to say before any court decision, but I assume that a local so-called ‘technical customer' construction company, which worked for Ikea, was in charge of legal permits and used cash for bribes," he said.

Such outsourcing of corruption is strictly banned for multinationals of some countries under the laws of their home countries.

"According to the legislation adopted by the OECD and the US Foreign Corrupt Practices Act it is strictly prohibited from allowing third parties to engage in corrupt practices in the name of, or on behalf of, a company," said Murray, of the Center for Business Ethics.

But Colebourne, of KPMG, acknowledged that the human factor could always undermine efforts to avoid corruption.

"People are people and there will always be temptations to short-cut bureaucracy or pressures to achieve sales targets or other performance indicators. In Russia, as in many countries, the path of least resistance to achieving [targets] can commonly involve a bribe or kickback," said Colebourne.

Panfilova, of Transparency International, said that she was frequently asked by foreign companies for advice on how to respond to requests for bribes.

Camouflaged Bribery

Often bribery comes in a more sophisticated form, camouflaged as corporate social responsibility activities, said Panfilova. One foreign company told her it had paid out such a donation, only to discover that the money was then used to host a private party for a local official.

"There are three strategies: reject bribery; use a middleman or government relations specialist; or play by the [corrupt] rules. Only big companies can afford the first strategy, as they have huge turnover and long-term plans. Smaller foreign businesses might play by the corrupt rules, but if something goes wrong, they [have to] leave the country immediately," said Panfilova.
Vladimir Rimsky, an expert with the anti-corruption think tank Indem, said Ikea was using the first strategy and trying to avoid adapting itself to local conditions.

"They are sending a message that they want to achieve success in Russia by legal ways," said Rimsky.