Saturday, September 12, 2009

Ikea discovers the hazards of courts that aren't judicial.

Ikea's troubles in Russia point up how crucial an efficient and fair judicial system is to the operation of a market economy. Ikea responded to the demand for a bribe from the local utility in return for electricity for its Moscow store by leasing generators. But Ikea allegedly discovered the company that leased the generators had fraudulently overcharged, and, therefore, Ikea canceled the contract and sued for damages. But, so far, the Russian courts have ruled for the defendant: "in rulings over the last two weeks, Ikea has lost another 5 million euros in damages that the judges awarded the generator rental company for breach of contract."

5 comments:

  1. There is definitely a risk doing business in other countries, espcially countries with a dissimilar court structure. Before a corporation enters into a foreign country they should research and become familiar with their business practices and their legal system.

    Diana Ray

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  2. "In Soviet Russia, court damages you!"

    Diana is right, and when looking at this in a Machiavellian sense, Ikea should have simply paid the bribe. If that's the cost of doing business in that economy, then they had better pay it. It might not be correct to pay the bribe from the standpoint of Western theories of justice, but, "when in Rome," as they say...

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  3. You’re absolutely right. I think this example speaks volumes about Russia's failure to thrive economically post-cold war. Without a definable and reliable rule of law and an unbiased judicial system, how can a country have any real hope of economic stability? A lot of businesses (like IKEA) have been enticed by the Russia’s potential and initial promises of a new, democratic, post-cold war free market, but they have quickly found their efforts thwarted by arbitrary interference by “government officials.” Russia seems to be stuck in an ideological paradox. I think nothing short of an overhaul of their entire political structure is in order, but that’s another debate entirely.

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  4. You know, from a structural perspective, the Russian government is really interesting. They (hastily) grabbed all the good parts of the American and English systems, leaving out most of the bad.

    Their problem has been, in large part, and obviously in my analysis, executing this system. The culture of corruption that exists is what is held over from the old Soviet state, and if that culture were to disappear then the system would function quite well.

    I think it goes to show that no matter how elegant of a system you construct, if you don't stick to the guidelines of it, then it's doomed to failure.

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