Almost half of Ukrainians say they desire Ikea products more than any other global brand, yet the largest home-furnishings retailer hasn’t been able to crack the market in a decade of trying. The reason: it won’t pay a bribe.
As Prime Minister Arseniy Yatsenyuk’s government rushes to fend off Russia’s expansion and raise the $35 billion it says it needs to avoid default, the country of 45 million faces the more basic problem of rampant graft that no leader has been able to tackle in 23 years of independence.
Stuck between the European Union and its former imperial master Russia, Ukraine has emerged as the most corrupt country on the continent, according to Transparency International. That and “incompetent” leadership are the reason a nation endowed with most of the ingredients needed to create a vibrant economy fell so far behind its peers, according to analysts including Erik Nielsen, chief global economist at UniCredit SpA in London.
“Even before this latest crisis, Ukraine was a mess beyond description,” Nielsen said in a research note. Successive governments “must take collective responsibility for what has been one of the worst-managed countries in modern history,” Nielsen said, adding that many officials and their family members “became immensely wealthy along the way.”
Customers are seen outside an Ikea store at the MEGA Belaya Dacha shopping complex in Moscow, Russia. (Bloomberg)
Case in point is Oleksandr Yanukovych, 40, son of deposed President Viktor Yanukovych. The younger Yanukovych, who’s in hiding after his father fled to Russia, went from being a dentist to a businessman with a net worth of $510 million after his father came to power in 2010, according to Forbes Ukraine.
Yatsenyuk told lawmakers in Kiev last month that Yanukovych and his allies had moved $70 billion into offshore accounts, leaving state coffers “empty and robbed.” That’s an amount equal to about 40 percent of gross domestic product. Swiss prosecutors opened a probe into Yanukovych and his son last month for possible “aggravated money laundering” and raided a company registered to the younger Yanukovych.
Compared with Ukraine, Russia, the most corrupt major economy, “is whiter than snow,” Lennart Dahlgren, the retired Ikea executive who spearheaded the company’s entry into Russia, said in an interview with Russkiy Reporter magazine in 2010. Dahlgren said he met with every Ukrainian president and prime minister since 2004 and all of them said they wanted to help Ikea enter the market.
“But we weren’t able to make a deal because Ikea’s system didn’t have any money for bribes,” Dahlgren told the magazine.
After the Soviet Union collapsed in 1991, most former Warsaw Pact nations, including Ukraine and its neighbors Poland and Russia, had GDP per capita of about $5,000, adjusted for purchasing power, according to UniCredit. While Poland and Russia have more than quadrupled their wealth since, Ukraine’s has risen to just $7,000.
The poorest EU states, Bulgaria and Romania, and even authoritarian Belarus are all now twice as rich as Ukraine, where total output is about the same as New Zealand, a country of 4.4 million people.
The country’s new leadership, in office since Yanukovych’s ouster in an uprising last month that left more than 100 dead, has the immediate task of securing a financial lifeline.
Whoever wins the presidency in May will face longer-term challenges such as cleaning up the courts and putting in place checks and balances that will help eradicate corruption and attract the likes of Ikea, according to Lilit Gevorgyan, senior analyst at IHS Global Insight in London.
“A consistent policy of building institutions is the only way out,” Gevorgyan said by email. “The byproduct of the lack of these institutions has been corruption, poor protection of business rights and overall a weak business environment. The trouble is that it takes time, which is something Ukraine does not have. The IMF can wire loans but not institutions.”
The country has yet to recover from 2009, when output in current dollars plunged a record 35 percent from its $180 billion peak the year before, World Bank data show. The government expects GDP to shrink another 3 percent this year in real terms, as it cuts spending, begins overhauling state companies and Russia imposes trade restrictions.
Yatsenyuk began his premiership pledging to implement unpopular measures, shunned by previous administrations, to obtain emergency funding and avert default, describing his task as a “kamikaze” mission. The IMF has urged Ukraine for years to allow a flexible exchange rate, reduce the budget deficit and raise household gas prices to phase out subsidies it estimates equal 7.5 percent of the economy. (Bloomberg)
