Economic sanctions may do little to bolster the valiant efforts of Ukrainians on the ground defending their country against Russia’s increasingly brutal invading tactics. Still, a Western governing coalition that includes members of NATO and the European Union continues efforts to curb trade with the Russian Federation, which could have long-term repercussions for many industries like fashion.
Analyst Luca Solca of Wall Street brokerage firm Bernstein told the BBC that luxury fashion in Russia accounts for only about 2 percent of global sales for most companies. But Russians are avid luxury consumers and valuable to businesses around the world. However, the war in Ukraine could mean doing business in that part of the world prove untenable – especially if it leads to a severing of diplomatic ties and a reinstatement of the Iron Curtain between East and West. Drawing on expert opinions from a Luxury Daily panel discussion on the subject earlier this month, here we take a look at the current sanctions and how they will affect the luxury goods business in the short- and long-term, and compare the impacts of each Tragedy with those of the pandemic.
Luxury goods exports from US, UK and EU to Russia officially banned
The US, UK and EU have pledged sanctions to ban exports of luxury goods to Russia – from fashion to cars to watches. The leading western economic powers, the Group of Seven (G7) and the EU, are also stripping Russia of most-favoured-nation status in trade, meaning Russia must pay significantly higher tariffs on imports that are not already completely banned. The export bans on luxury goods are intended to disadvantage the Russian elites, as stated in the EU’s announcement of the new measures. While a precise list of brands or goods that cannot be exported has not yet been determined, the EU has set a minimum threshold of €300 to serve as a guideline for companies exporting clothing and accessories.
The minimum price was set with the intention of allowing the civilian population of Russia to meet their basic needs, which include clothing. But numerous parent companies, from fast fashion and off-price retailers like TJ Maxx to luxury brands like Gucci, have voluntarily ceased doing business with and in Russia. Fast Retailing, the Japanese retail conglomerate that owns Uniqlo, originally announced on March 9 that it would continue operations in Russia. The company’s founder, Tadashi Yanai, stated, “Clothes are a necessity of life. The people of Russia have the same right to live as we do”. However, after strong reactions, the company changed course the next day, citing operational difficulties as the reason for ceasing operations. Fast Retailing announced a donation worth US$10 million dollars and clothing for the United Nations High Commissioner for Refugees (UNHCR), noting in his statement that the company’s European employees are helping deliver clothing to affected people fleeing Ukraine.
Possible short-term effects of inflation
“This conflict is impacting multiple industries, starting with energy,” said Mickey Alam Khan, Chairman and Editor-in-Chief of Luxury Daily, who moderated the panel discussion Brent crude has at times topped $134 a barrel The EU is considering joining the US on a Russian oil embargo, adding to inflation already fueled by supply chain problems stemming from the pandemic continue to impact consumer spending in the short-term as prices of essential goods from food to fuel rise.
Marie Driscoll, managing director of luxury and retail at Coresight Research, a data company specializing in retail and technology innovation, admitted: “In the short term, luxury will take a hit like everything else. Earlier this year, before we worried about Ukraine, we were worried about inflation and how it’s affecting consumers more broadly,” she said. “Luxury brands are raising prices, prices will generally increased, and now we’ve got this insane effect of $100 in oil, maybe for three or four months, maybe longer, if that doesn’t resolve itself within a month or two, the growth that we started with of the year will be muted in my opinion.”
Driscoll also pointed to the collective psyche as an important factor; the tragic nature of the war and the resulting uncertainty could lead to more conservative buying behavior. Omar Saad, consumer and luxury goods analyst at Evercore ISI, an investment banking consultancy, was skeptical that the luxury businesses would feel the effects of change. “Local spending in Europe is likely to fluctuate in the short term because it’s so much closer to home,” he said. But he also noted that any restraint will be more of a temporary phenomenon as the war unfolds over a longer period of time “If you look at the direct deals of the companies we cover – whether they are luxury companies or sports companies like Adidas and Nike – then the actual direct exposure to Ukraine and Russia is less than five percent and is more like two or three percent at most.”
Saad pointed to the interesting near-term development that Russians are panicking about buying luxury goods, particularly jewelry, to invest in a safety net while their currency weakens. “It’s an easy way to preserve part of the value of the ruble, which has already depreciated so much. Of course, this is only the stock that is there, and it will be quickly depleted. According to the law of unintended consequences, luxury goods became a currency”. Bulgari reported that sales at its Russian stores had skyrocketed since the war began, but parent company LVMH eventually decided to close stores of all of its brands in the country.
The consequences of the pandemic and the sanctions
The moderator of the discussion, Khan, also questioned the assumption that luxury goods companies would feel any negative effects as people still spent heavily on luxury goods during the pandemic, when economic pressures were far greater. “LVMH, Richemont, Kering – they have achieved record results in the midst of the global misery,” he said.
“Luxury is the best experience when there’s nothing else to experience,” explained Driscoll. “I think once we got past the first few months of Covid it was like, ok, what do I want to buy? There was so much money, that wasn’t being spent on experiences, that consumers who had jobs were pouring their money into luxury goods – things they might not normally buy. The luxury shopper was there, and then there were new prospects”. The US government also handed out several stimulus packages, which likely helped boost luxury buying. “People who shouldn’t be buying $300 sunglasses suddenly bought $300 sunglasses.”
Marci Rossell, chief economist at Luxury Portfolio International, a network of luxury real estate brokers, believes that in the absence of stimulus packages and high inflation, this will be reflected in company results. “The energy markets and commodity markets are having the greatest impact. If these things get more expensive, it will have less of an impact on luxury shoppers, but it will impact discerning consumers. If it costs you $10 more to fill up your gas tank every day for a month, that’s $300 you’re not spending on expensive sunglasses.”
Long-term implications and the unknown China
“China is an energy-intensive economy, and while the country may ultimately remain the only buyer of Russian oil and gas, high energy prices will continue to weigh on the Chinese economy,” Rossell said. CNBC reported in January that consumers Mainland China spent almost $74 billion on domestic-made luxury goods in 2021, although still below pre-pandemic levels.Leather goods were the fastest-growing category, but even that was not immune to a spending slump in the country second half of the year due to further Covid outbreaks.
Astrid Wendlandt, a former European luxury goods reporter for Reuters and former Moscow correspondent for the Financial Times, spoke about the geopolitical impact of the Russian war on the Western alliance’s relations with China, which has so far avoided using its influence to secure a to achieve a ceasefire. “What if China uses this as an opportunity to invade Taiwan while the West is busy with Ukraine and Russia?” Wendlandt speculates The ones who spend the most are the Chinese, which is high on the agenda for luxury goods investors.”
Khan noted that the Chinese are more pragmatic, have stronger economic ties with the West and may be less willing to jeopardize the stability of their economy over a Taiwan takeover. But that’s all speculative. The US continues to warn China not to help Russia circumvent sanctions or provide military support to Russia – any sign of this would strain relations with Washington even more. Rossell added: “The worst case scenario is a world where in a few years Russia has only China as a partner and the world rebuilds the east-west divide of thirty years ago that we all forgot. From a brand perspective, we have to get used to the idea that there is a world that used to be that we could return to, regardless of what governments do about sanctions.”
But for now, the long-term outlook, especially for the big luxury fashion brands, is positive. “This industry is resilient. It has weathered wars, depressions and recessions for three centuries – it will weather this too,” Khan said. “Luxury is one of the safest long-term bets,” Saad added. “Our entire global society is designed to create wealth, war or not. We have seen many wars. I’ve been through a lot of wars in my stock market career. There’s a fixed number of luxury brands — it doesn’t matter what you say about Chinese luxury brands — there just aren’t any new luxury brands, and that’s the whole thesis of LVMH’s Bernard Arnault: Unlimited demand over time and limited supply. We know that the shopping experience, especially in the luxury sector, is very important and that is why stores will not disappear even in the age of e-commerce and digitization.”
But Khan concluded with words of caution. “I hope that someday this will give us something to think about. I hate to say this, I’m a die-hard capitalist, but at some point you have to be careful about the deals you do. China is watching. And if China does something like that, we won’t be so optimistic about the future of luxury.”
This translated post previously appeared on FashionUnited.uk.