Issues of Investing in Russia: IKEA, Skolkovo, Kaluga

This week IKEA Russia’s new chief Per Wendschlag announced that IKEA would “focus on existing stores” and that it the Swedish company was halting construction of a $1 billion mall near Moscow (Europe’s would-be largest shopping mall), which was just announced in April 2010 (right after the corruption scandal in February).  At first glance, this seems like a prudent strategy – some of IKEA’s problems have arisen from its previous balls out expansion strategy.  The resulting construction has at times been shoddy and has caused accidents.

At the same time, IKEA’s decision is clearly Russia-specific.  There, onerous and unpredictable building regulations actually have the opposite of their ‘intended’ effect.  On the books, Russia should be home to some of the safest architecture in the world.  In reality, the unreasonable regulations and bribe-craving officials who enforce them encourage and reward companies that cut corners (and if you can hire a third party to cut those corners, all the better for Swedish sensibilities).

Why is this a big deal?  Because IKEA is the single largest foreign direct investor in Russia, having thrown approximately $4 billion into the country since the first store opened in 1999.  This is roughly equal to all the investments made by all foreign enterprises into Russia’s Kaluga business parks over a similar time period.  Even the planned ‘Russian Silicon Valley’ at Skolkovo will only receive $2 billion over the next three years.  That’s right, IKEA has spent more on shopping malls in Russia over the past 9 years than Russia plans to spend on its silver bullet solution to modernization and the innovation economy.

http://therussiamonitor.com/2010/10/08/truth-or-consequences-ikea-as-a-case-study-of-russias-miserable-investment-climate/

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Kaluga Industrial Park

Project Description

The proposed project involves financing to build and operate a Class A built-to-suit industrial facility of 28,700 sq.m. near the Volkswagen plant in Kaluga Region to be let to Volkswagen and its 3 automotive parts suppliers.

Transition Impact

  • Increased competition in the Project sector
    “A-Park” will be the first Class A industrial/logistics project in the region as such premises currently do not exist in Kaluga. By providing 28,700 sq.m. of Class A space, the Project thus will materially contribute to the development of the local logistics/industrial property market. Competition will be stimulated since the existing suppliers of logistics space in the Kaluga region will be forced to either increase the quality of their services (e.g., through an upgrade of their facilities) or reduce their rental rates.
    The completion of the first Class A industrial-logistics facility in Kaluga region designed and built in accordance with international standards of best practice (including quality, environmental, health and safety standards) will also set a benchmark for future developments of modern warehouse/logistics properties in regional Russian cities.
  • Market expansion in the automotive parts suppliers’ sector
    The development of the independent automotive suppliers industry in Russia is still at a very early stage. By facilitating the entry of three of the world’s leading auto parts suppliers into the Russian market, the Project will address this structural lag in the development of automotive suppliers industry in Russia. This investment is expected to encourage other auto suppliers to follow suit with further developments projected on the site for up to 100,000 sq.m. of industrial automotive suppliers cluster.
    Therefore, through forward linkages, the Project will enable foreign automotive suppliers to enter the local retail market, where previously they had been deterred by the lack of appropriate industrial infrastructure. The Project is also expected to have a positive demonstration effect on the benefits of outsourcing – Russian car manufacturers remain vertically integrated unlike their western counterparts. Like VW, the automotive suppliers themselves are also required to source at least part of their inputs locally. VW suppliers will therefore contribute to the development of a market for domestic inputs thus creating further backward linkages into the Russian economy.
  • Transfer and dispersion of skills to local suppliers and improved business standards
    In the automotive sector, the entry of FDI is expected to improve local skills for production of components and setting standards for technical quality and transparency. These FDI inflows are a key channel to narrow the technological gap with Western Europe and a key source for the transfer of know-how, managerial, marketing and other professional skills in the Russian automotive sector, which currently lags behind the Western standards.
    The Project will employ a notable range of energy efficient technologies and practices, which are expected to be replicated in the Russian automotive and industrial/logistics sectors.

The Client

OOO A-Park, a special purpose limited liability company incorporated in Russia. The Borrower is jointly owned by a pool of private investors from Russia, Greece and Portugal who have previous experience in development of logistics parks in Russia, as well as by OAO Kaluga Regional Development Corporation founded by the government of Kaluga Region, Black Sea Trade Development Bank and EBRD.

Project Cost

EUR 22.2 million


Last updated 29 June 2010

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