Four years ago Yevgeny Chichvarkin was the king of Russia’s retail market. A backstreet kid with a knack for sales, Mr Chichvarkin co-founded Yevroset, a mobile phone store, in 1997 at the age of 22. With just $5,000 (€3,862, £3,227) in start-up capital, he soon turned it into Russia’s biggest handset retailer.
An entrepreneur who dressed like a rock star, and was treated like one by his employees, Mr Chichvarkin made few friends among the police’s economic crimes department, which balked when he pushed to stamp out corruption in Russia’s grey phone market.
Mr Chichvarkin’s closest partner at the time was Motorola. Neither came out of the ordeal well.
The 35-year-old businessman is now awaiting an August 2 extradition trial in London on five-year-old charges of kidnapping and extortion, while Motorola has been forced to reduce its Russian operations after losing $2m there in a single day and fighting health claims put forward by the Russian interior ministry.
The case is just one example of the problems besetting retail and manufacturing businesses in Russia as they battle opponents ranging from small-town bureaucrats and customs officials to former collective farmers.
While investors say Russia’s retail sector is likely to be the chief beneficiary of its petrodollars over the next decade, many western multinationals are questioning how big they can afford to be in Russia given the risk of corruption. The problem makes Russia a less appealing place to work, as do related issues of bureaucracy that contribute to time and cost overruns.
Ikea, a titan of the Russian retail market, has repeatedly frozen its investments in the country over the past couple of years while battling a wave of corruption scandals and court cases. Daimler, the carmaker, and Siemens, the industrial group, have both been rocked by allegations of bribery in Russia.
Meanwhile, Kimberly-Clark, the health and hygiene group, is reeling from its initial investment experience in Russia after building its first factory there. The company was forced to change the property boundaries for its plant twice, the second time after a group of collective farmers declared part of the land theirs.
“Many multinationals are thinking long and hard about how big their company in Russia ought to be – the bigger the company, the bigger the risk,” says Paul Melling, a partner at Baker & McKenzie and founder of the law firm’s Moscow office.
In the past decade, companies say they have seen vast improvements in the quality of talent they are able to recruit and even a more solicitous attitude on the part of the Kremlin, which realised the value of foreign investment when capital outflows quickly reached $130bn in late 2008.
President Dmitry Medvedev has promised to ramp up the fight against corruption and has taken action with a decree demanding senior officials to declare their income and properties. Yet just this month the president acknowledged his campaign had not met any “meaningful successes” and western businesses say any real changes will have to occur at the local, as well as federal, level.
The president understands the problem of corruption, says Mr Melling. But, he adds, ultimately “it only takes one little bureaucrat out in Rostov to demand a bribe from a big retailer and that retailer will decide not to invest in Russia. That $200 bribe will cost the country millions of dollars in investments.”
For many western businesses, the case of Mr Chichvarkin and Motorola is a reminder of the risks they and their peers continue to face in Russia.
While Mr Chichvarkin is being charged with being complicit in the kidnap of a former Yevroset employee who stole $1m worth of phones from the company, and retrieving the money by force, his lawyers claim the case is a hangover from Mr Chichvarkin’s previous dealings with Department K, the interior ministry’s economic crimes division.
Former industry colleagues of Mr Chichvarkin say he angered the department when he refused to pay bribes to interior ministry members in 2006, in order to clean up company practices in preparation for an initial public offering of the company in London. Shortly after, Department K seized a $20m shipment of Motorola phones heading for Yevroset stores, declaring them contraband, then counterfeit, then a health hazard. The London flotation was postponed.
Department K did not respond to written request for comment.
People close to Motorola say the multinational, like Yevroset, is continuing to feel the repercussions of the case and has been forced to readjust its strategy.
“In one day, Motorola became a risky brand. If you wanted to trade with Motorola it could mean punishment from government structures,” says Eldar Murtazin, a writer for Mobile Review and an industry analyst at the time.
In addition, retail customers turned their back on Motorola because of health hazard claims made by the interior ministry and the company saw its market share drop from 20 per cent to less than 1 per cent over the next four years, says Mr Murtazin.
The experience outraged Motorola executives in the US, but ultimately they decided the company could not afford to pull out, a person close to Motorola says. The company declined to be interviewed for this article.
Motorola is one of several manufacturers that have decided to remain in Russia in spite of significant problems, says Kristina Montgomery, a consultant at Frontier Strategy, a corporate advisory firm focused on emerging markets. While countries such as Indonesia and Mexico are becoming more attractive than Russia because they offer better demographics and less risk, Russia remains too big a market for most to ignore.
“Russia remains very lucrative in terms of size and very lucrative in terms of the population. The fruit is still too tempting,” explains Ms Montgomery.
When Candy, the Italian home appliances maker, acquired its first plant in Russia five years ago, it knew it would have to invest a lot more money in the factory than the business it would get out of it. Yet it had no choice but to do so as higher tariffs started to make importing unprofitable, says Aldo Fumagalli, the group’s chief executive: “The advantage of manufacturing in Russia is one you just can’t avoid …We are trying to protect the market share we’ve been building up over the past 30 years and [these days] if you do not produce locally [and invest in the Russian economy], you cannot sell locally.
“In the regions you can have a problem every day. If you have a good relationship with the local authorities, you solve them. If you don’t, you don’t solve them.”
All companies hope to learn from Ikea, the company whose experience has become the example of everything that can go wrong in Russia.
“Ikea made a lot of announcements before going into Russia [in 2000] that it was not going to change its business practices. One of the first things that the Russian authorities did was shut off the power at its grand opening …There’s this feeling of us versus them,” Ms Montgomery says.
In the years since, the company has had to contend with a host of scandals. Earlier this year, the company admitted that members of its top management in Russia had permitted the bribery of state executives by one of its contractors; previously, Ikea delayed the opening of a retail location in Samara for more than a year after local officials claimed the building failed to meet safety regulations.
Ikea says it is reshuffling its top management in Russia and so declined to comment until the new management is in place.
When companies start talking about expanding into Russia, says Mr Melling, Ikea’s experience is usually cited. “One story, one company’s bad experience can have an enormous knock-on effect,” he says. Most companies do not fare quite so badly, he adds: “A lot of it’s luck …a lot of it’s misfortune.”
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