Swedish flatpack furniture giant Ikea is doubling down on its investment in Russia but their ambitious plans could be derailed by an obscure Soviet-era farming cooperative.
In a David vs Goliath matchup, the furniture empire plans to send the cooperative packing, but the underdog claims to have a serious ally in tow.
Russia's all-powerful Investigative Committee on June 20 blocked any attempt by by Ikea to sell its headquarters in Moscow, an adjacent office building and a 21-hectare land plot. The move is part of a long-running dispute between the retailer and the Khimki Collective Agricultural Enterprise [KSKhP], which was gloriously known as the "Path to Communism" state farm in the Soviet period. The recent legal freeze bars Ikea from selling the buildings, the land, or further developing it.
Natalia Veselnitskaya, a lawyer representing KSXhP, told bne IntelliNews that Ikea "fraudulently misappropriated" valuable agricultural lands using forged documents and support of local officials.
The cooperative, which started its case in 2012, accuses the Swedish company of using faked documents required to obtain the land on Leningrad Highway, which leads from the city centre to Moscow's main airport. They claim the business park was built on land of the state-owned "Path to Communism" farm and was illegally seized in 1993 by the Khimki district administration. The land was sold to Ikea in 2011, after the company already built its business park there in 2007.
"We are currently working on the case, which I think in the near future will reveal the true methods of Ikea's Moscow office," Veselnitskaya told bne IntelliNews. "In an attempt to complicate the task of restoring the real events of the past years, Ikea, at the stage of litigation and verification by law enforcement agencies, attempted to sell the lands, but the court seized them."
Ikea said nobody has tried to contest the ownership title for 18 years, but that "a number of claims" came out of the woodwork as soon as Ikea bought the land.
"There have been no claims since 1993," Ikea's press service in Moscow told bne IntelliNews in a statement. "Nobody has tried to contest the ownership title for 18 years, but as soon as Ikea bought it out, a number of claims arose that tried to question Ikea's right."
The company said there is no dispute with the Investigative Committee, but there was a dispute between Ikea and a private company that was resolved by the Supreme Court in favour of Ikea.
Vasilevskaya declined to say how much the cooperative is seeking nor how much the land was worth then and now. Ikea bought the land for RUB105mn ($3.5mn) while Kommersant newspaper reported in April that the Interior Ministry now puts the current market value at RUB1bn ($15.8mn).
Ikea built the two office towers on the plot of land in question in 2007 to 2008. The sleek steel and glass 15-story buildings houses not only Ikea's headquarters in Russia, but also corporate offices for companies including Ford, Volvo, DHL and BNP Paribas.
The first Ikea store opened in Russia in 2000. But as early as in the 1990s, the company had opened an office in Russia to buy local production and sell it abroad. Today, there are now 14 stores in the country and plans for more.
"Do as the Romans"
Despite the company's much-vaunted corporate social responsibility, Ikea has had several awkward situations in Russia. In 2009, former Ikea executive Yuri Volkov was accused of taking millions of dollars in kickbacks from a company that leased diesel generators to the first store but was later cleared.
Per Kaufmann and Stefan Gross, Swedish nationals in charge of Ikea in Russia, were fired in 2010 for giving the go-ahead for a contractor to pay a bribe.
Ingvar Kamprad, the founder of Ikea, told journalists at the time he was "heartbroken" about colleagues of 20 years deceiving him in the company's worst corporate scandal in history. A former director of Ikea in Russia, Lennart Dahlgren, wrote a book about the incident titled, "Despite Absurdity: How I Conquered Russia While It Conquered Me".
"Ikea is clearly quite successful in Russia but in the early days when they entered the market they took the expression 'do as the Romans do' too literally," Alexei Slesar, head of capital markets at Cushman & Wakefield, told bne IntelliNews. "They were trying to exploit first-mover advantage and may have let their due diligence and corporate governance standards slip by cutting corners."
"Ikea today is a much different company to how it was before," said Slesar. "The current management have the highest standards and follow the rules but that wasn't the case when they arrived, when they were too focused purely on trying to capture market share."
Shadow on expansion plans
Despite Russia's slumping economy, its largest shopping centre operator, Ikea Centers Russia, is investing at least $2.1bn to upgrade and expand its current portfolio of 14 locations across the country, the Wall Street Journal reported on June 22.
In Russia, where the company's shopping centres are known as Mega malls, the vacancy rate of its portfolio is now around 1.4%. Mega centres have an average of 200 stores and bring in 275mn visitors a year, Ikea said.
In spring 2015, Ikea confirmed plans to invest an additional $2bn Russia by 2020. The company said Russia has one of the biggest potentials for development. The company's fifteenth store in Russia is planned to open in 2018 in Mytishchi in the Moscow Region.
Meanwhile, though, the Investigative Committee, also known as SledCom, will now try to establish whether Ikea gained ownership of the property unlawfully.
When challenged in court to demonstrate it was the legal owner of the land, Ikea produced a copy of minutes from an August 23, 1993, meeting of the KSKhP board showing a unanimous vote to hand over the land to the Khimki regional authorities at no cost, and a copy of a contract dated September 13, 1993, between city authorities and Ikea granting the company a long-term lease on the land.
However, SledCom determined these documents are forgeries, and poorly done ones at that, referring erroneously to the Land Code of the Russian Federation and to company names that did not yet exist in 1993.
For their part, Ikea said the investigation is in respect to an alleged forgery from a document dated 1992 and issued by KSKhP.
"That extracted contained a consent of KSKhP for the state ownership of the land plot," Ikea said in the statement. "However, Ikea got its lease rights to that land not under the document but under a separate decree of the city authorities that has not been contested and the respective limitation period expired long ago."
The next hearing of the lawsuit against Ikea, claiming the company does not have lawful ownership of the land, is expected to take place in Russia's federal Supreme Court within the next two months.
Ikea insists it has no plans to sell the land plot so the "freeze" of the land plot doesn’t affect business operations. "We would like to stress once again that the Supreme Court ruled in favour of Ikea confirming Ikea having all legal rights to the landplot," said Ikea.
The proceedings come at an already difficult time for the country as it grinds through a two-year economic slump due to low oil global prices and Western sanctions imposed over Russia's actions in Ukraine. Slesar said he was cynical about the "uncanny timing" of Ikea's recent expansion plans considering the state of the economy and increasing competition.
"At this stage, I think a settlement would be logical for a company with a significant presence in Russia, which is its second best performer in EMEA [Europe, Middle East and Africa], to settle the discrepancies of the past in a commercial way," he added.