By James Schofield in Moscow

From the outside, the crumbling soviet-era housing estates of Moscow look as drab and grey as ever.

Yet booming sales at IKEA show that like people around the world, Muscovites are embracing the new cappuccino-Chic lifestyle embodied by the Swedish furniture giant.

Sales in Russia topped $100m during the first year of operation alone in 2000, putting it among the company's top ten grossing stores worldwide.

A second outlet has since opened and sales from both have doubled in the last 12 months, Lennart Dahlgren, Russia country manager for IKEA, said last week.

Production plans

But it's not just Russia's potentially huge market of aspiring consumers that the company is interested in.

IKEA also hopes it will become a significant production centre and supplier of goods to its global network.

Worldwide demand for IKEA merchandise roughly doubles every fours years, and maintaining supply volumes has become a serious challenge for the company.

In the last two years there has been a major change for the better in terms of interference of bureaucracy in business

Seppo Remes, Chairman of the European Business Club, Moscow

Rich in natural resources, Russia is well-placed to help satisfy the strong demand.

The country boasts an estimated 25% of the world's hard wood reserves, is a major supplier of petroleum products for plastics, and is a leading world producer of aluminium.

It also has developed textile and ceramic industries and dozens of mothballed soviet-era factories capable of producing in huge volumes.

"Today we order $50m of furniture here from Russian factories. In the future want to buy at least ten times that amount," said Dahlgren.

"People are surprised when I say it but Russian quality is far above many other countries."

Red tape obstacles

In April production is set to start at IKEA's first self-run Russian factory, near St. Petersburg. The facility cost about $15m and will employ 250 people.

IKEA will open a third store in 2003 and has brought forward projects to complete two more outlets after that. IKEA also plans to build a giant $40m warehouse near Moscow.

But business here has not all been plain sailing for Dahlgren. While production quality may have impressed him, punctuality has not.

"I would say time quality management here is catastrophic," says Dahlgren who complains that few producers deliver on time.

Ikea in Russia

2000 sales $100m Two stores, with a third planned in 2003 Furniture production worth $50m a year $40m warehouse plan

Punitive customs tariffs are another headache. Designed to protect Russia's low quality furniture industry from foreign competition, import duties run as high as 80%.

Russia's notorious red-tape has also caused problems. Commenting on bureaucracy and corruption Dahlgren said "I would say I have been frustrated, yes, surprised, yes."

"If you try to follow every step of the laws in this country nothing would be possible. So many laws here are contradictory, it's catch 22."

But though confusing legislation can cause delays, support from local officials can smooth out most difficulties.

"If you have a trusting relationship with authorities at local, regional or federal level then almost everything is very quickly possible here, more so than in many other countries in fact."

Breakthrough

And despite frequent cases of bureaucratic meddling, life for foreign business in Russia is becoming easier.

"In the last two years there has been a major change for the better in terms of interference of bureaucracy in business," said Seppo Remes, Chairman of the European Business Club in Moscow.

In the last year company registration has been streamlined and the number of officially required licences has been slashed from thousands to as little as 100.

Changes to the law are only part of the reason for the improvements though.

Remes believes that President Putin has made a clear effort to stamp out Russia's rampant bureaucratic corruption as part of his drive to rebuild the Russian economy.

"There may still be those bureaucrats who want to interfere but they are increasingly afraid about punishment and the message seems to be passing through to the whole of society."

There is however still a long way to go to liberalise the quagmire of officialdom suffocating business in Russia.

Popular with Russian kids too

Customs procedures for example remain extremely bureaucratic and corruption widespread. Rules to certify imported goods are often used simply to make money and promote local production rather than address legitimate concerns.

During the recent 'foot and mouth' scare in the UK, for example, Russian authorities banned British fish imports even though fish cannot carry the disease.

That, however, doesn't seem to be a concern for the thousands of Muscovites with their fashionable cappuccino sets in the capital's dreary tenement blocks.