The rich are crying again. Russia's luxury segment hit painfully by sanctions

Luxury manufacturers, among other companies, stopped working with Russia after the start of the war in Ukraine. The decisions of private brand owners were supported by official sanctions imposed by the West. In particular, Exports of luxury goods priced higher than $1,000 per unit to Russia were banned by the US, and higher than €300 per unit by the EU. The idea is that the Russian elite, which massively supports Putin's military aggression, will suffer. Suppliers are coming up with schemes involving proxy companies, and the prices, which were already high, have become sensitive even for Russia's corrupt government officials.

ALL CARDS

• The rise and fall of luxury in Russia

• Parallel import of luxury items

• Reputational damage

• Prospects of luxury

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In March, fashion conglomerates LVMH (owner of Christian Dior, Fendi, Louis Vuitton), Kerring (Balenciaga, Gucci, Saint Laurent), and Richemont (Cartier, Chloe, Montblanc) announced the suspension of activities in Russia. They were also supported by private brands: fashion houses Chanel, Burberry, Hermes and Jacquemus. Online purchases from abroad also became unavailable. Leading foreign marketplaces Matchesfashion, Farfetch and the YOOX Net-a-Porter group platforms report that due to the current situation they temporarily do not deliver orders to Russia.

Ksenia Lugovaya (wife of LDPR deputy Andrei Lugovoi) in a Gucci jacket (142,600 rubles) and Gucci pants ($1,300)

The brands' independent decisions were supported by the official sanctions on luxury goods imposed by the U.S. and the European Union. On March 13, the U.S. Department of Commerce banned exports of luxury goods to Russia - including clothing, shoes and accessories - whose value exceeds $1,000 per unit. A similar set of sanctions was adopted in the European Union, where export restrictions apply to goods priced over €300 per unit.

The ban also applies to personal purchases abroad. Russians will not be able to buy a bag in a foreign boutique of Christian Dior if its value exceeds the limit. The official press release of the European Union called the imposition of sanctions on luxury items “a direct blow to the Russian elite. The report said that “those who support Putin's war machine should no longer be able to enjoy their luxurious lifestyle.”

The EU called the imposition of luxury sanctions a “direct blow to the Russian elite”

The effect of the sanctions was felt by individual luxury fans in April when the Chanel boutique in Dubai refused to sell them Chanel items. The blogger Liza Litvin was one of the first to report about it. They agreed to sell her a handbag but made her sign a document according to which she agreed not to import Chanel items or wear them in Russia. According to Chanel representatives, such restrictions for Russians were imposed because of the sanctions, and the company is working to improve the procedure, but the offended Russian luxury audience was undeterred.

They accused Chanel of Russophobia and launched an online challenge to destroy the fashion house's handbags. TV host Marina Yermoshkina recorded a video in which she cut a Chanel branded purse with scissors saying: “No things or brands mean more to me than my love for the motherland and my self-respect”. Other Russian women supported her, and Olga Buzova demanded that Chanel refund her money for her purchases and promised that the fashion house's purses “will no longer be a success even on the Sadovod market.”

The rise and fall of luxury in Russia

Prior to the war in Ukraine, the luxury market in Russia was on the rise. Certain brands successfully survived the COVID-19 pandemic and managed to increase their sales in the country. According to RBC, in 2020 Christian Dior Couture Stoleshnikov LLC, a subsidiary of Christian Dior Couture, increased its revenue by 1.7 billion rubles. Next year, the brand's revenue in Russia increased by 3.3 billion rubles, and Chanel's by 6.4 billion rubles.

Lisa Peskova with a Prada Re-Edition bag (worth 155,000 rubles)

According to the consulting firm BCG, in 2021 Chanel and Christian Dior were among Russia's top ten most popular brands along with Gucci, Louis Vuitton, Prada, Dolce & Gabbana, Giorgio Armani, Versace, Hermes and Hugo Boss. Loro Piana from the LVMH portfolio is not on the list, but it is no less loved in Russia, especially by politicians and top managers.

Vladimir Putin has in his wardrobe a down jacket from the fashion house worth 1.4 million rubles, which he wore at the rally in Luzhniki this spring. Also, Loro Piana is preferred by the head of Rosneft Igor Sechin - he wore the fashion house's jacket in 2019 during a trip to Valaam. In 2017, Rosneft planned to buy 12 plaids by the fashion house worth over 100,000 rubles apiece, as pointed out by Alexei Navalny. After his publication about the company's forthcoming expenditure – the purchase of plaids, cutlery and other interior items worth 5 million rubles – it was cancelled.

Putin wearing a Loro Piana jacket costing 1,445,000 rubles

According to estimates of the InfoLine-Analytics agency in 2021 the luxury clothing, footwear and accessories segment in Russia was estimated at 320 billion rubles. Leaving the Russian market will have little effect on the companies' profits - according to calculations by Sanford C. Bernstein, Russia accounts for 5% of global luxury market sales. A much bigger loss for foreign fashion corporations would be a withdrawal from Asia. While Russia accounts for 2% of LVMH's total revenues, the Asian countries, for the most part China, account for 40%.

Vassilisa Karelina (daughter of State Duma deputy and Federation Council member Alexander Karelin) with her Off-White 1.4 Jitney bag (82,600 rubles)

In March, when fashion houses announced they were suspending operations in Russia, local luxury consumers rushed to buy up their favorite brands' products. According to Vladimir Yevladov, founder of Luxxy, a luxury clothing marketplace, the surge in sales was caused by consumer panic. Likewise, when the “special operation” began, ordinary Russians rushed to buy sugar, while the more affluent bought appliances, cars and clothes.

“Those who have a lot of money bought luxury items. These are not essential goods, but people wanted to protect their lifestyle and customary level of consumption. Not all such purchases are investments. They include limited edition products or rare models of certain brands. A Chanel Boy bag is an investment, but a model that came out a year ago or in the current season is a questionable investment. You don't know if it will gain popularity or not.”

In the spring there was no noticeable shortage of luxury items – retailers were selling stocks and spring-summer collections, which they managed to purchase before February 24. According to the head of the Fashion Law Bureau, Anastasia Dorofeeva, it is difficult to predict how much longer the stocks will last and whether they will continue to bring in sales:

“The fashion industry is first and foremost about change. It is not clear whether retailers will be able to sell old items in the new season, when new collections should appear”.

According to Olga Sumishevskaya, a partner at consulting company One Story, new collections (autumn-winter 2022) are in short supply because of the lack of supplies. Stylist and buyer Ruslan Yegiyants says many luxury retailers managed to purchase next season's collections or make advance payments, but faced problems importing products into the country:

“Some have trucks with goods waiting at the borders, but they are not allowed through, some foreign brands simply froze their bank accounts, some refused to cooperate on principle, despite the prepaid orders.”

The Russian government urged consumers and luxury retailers not to be discouraged. Speaking at the May 26 session of the Eurasian Economic Forum, Putin promised that “luxury goods” would be available in Russia - but will cost “a little bit more”.

Parallel import of luxury items

The authorities plan to provide Russians with goods of the departed companies with the help of parallel import. The list of goods and brands allowed to be imported into Russia without the manufacturers' consent was published by the Ministry of Industry and Trade on May 6. Later the Ministry assured that the new mechanism also applied to “luxury goods”.

The main obstacle for the parallel import of luxury goods is the ban on imports of products priced over €300 apiece. According to Anastasia Dorofeeva, sellers will be able to circumvent the ban by creating “shell companies” in foreign jurisdictions where restrictions do not apply:

“For example, a purchase can be made via Europe to Kazakhstan, and from there the goods will be resold to a Russian company and brought into Russia. That will affect both the time and length of the supply chain and the final price of the product.

Olga Sumishevskaya adds that the cost of supplies, which usually accounts for 30-50% of the cost of goods, may increase by 5-50%.

There are concerns not only about prices, but also about counterfeit goods, which may flood the market with the legalization of parallel imports. Sumishevskaya estimates the percentage of knockoffs in the Russian fashion segment at 85%:

“With parallel imports, a lot of supply channels may emerge. Those flows of goods are difficult to manage, so it is better and easier for luxury producers to lead the race of parallel imports themselves to get a clear view of the importers and distributors they are working with”.

Anastasia Dorofeeva has a different point of view about the connection between knockoffs and parallel imports. According to her, the Federal customs service will continue to check luxury items and will be able to stop their imports in Russia if there is any doubt about their authenticity. Besides, the producers of luxury goods reserve the right to protect their trademarks:

“They can defend themselves against knockoffs in Russia. They can file lawsuits and demand removal of knockoffs from circulation and compensation for illegal use of trademarks.”

Reputational damage

Russian online marketplaces are already mastering parallel imports, but so far they have been limited to mass-market and middle-segment brands. Wildberries sells goods from the departed brands Stradivarius and Bershka, and Ozon sells Zara clothing and accessories. According to the managing director of Ozon Sergey Belyakov, the platform may well sell products of luxury brands in the future, which were not available online in Russia due to manufacturers' restrictions. He says that the parallel import procedure legalized in spring makes it possible to avoid such restrictions and to expand the range of products primarily through the efforts of retailers.

Elena Perminova (wife of Alexander Lebedev, a former State Duma deputy and currently Chairman of the Board of Directors of National Reserve Corporation and a member of the Foreign and Defense Policy Council) with a Dior Vibe bag (300 000 rubles)

However, the domestic luxury retailer does not plan to resort to the new procurement mechanism. Thus, the concept-store KM20 has refrained from parallel imports to maintain good relations with foreign designers, says Olga Shteinberg, expert on communications, fashion analyst and owner of the Telegram channel Pimping Up Fashion:

“The largest distributors in Russia, such as Mercury and Bosco di Ciliegi, have been building relationships with luxury manufacturers for years. For them doing parallel imports now means neglecting all the rules and agreements with the brands. It can nip their reputation in the bud.”

Parallel imports can kill a distributor's reputation

The analyst also assumes that the manufacturers of luxury goods are not willing to take risks either. According to Shteinberg, it is unofficially known today that a number of Italian companies are willing to work with Russia, but they are under pressure from their government, the prospect of fines and reputational risks. This has been confirmed by businesswoman Olga Karput in an interview with Kommersant. Her KM20 concept store sells goods made by independent foreign brands, many of which receive government subsidies.

“In connection with the recent events, the European Federation of Clothing Manufacturers has sent them letters saying there is a €30,000 fine for continuing cooperation with Russian companies.”

According to Anna Savenko, a premium retail real estate consultant, parallel imports of luxury items will be amateurish: “They may appear in the form of individual multi-brand stores, which existed in the early 2000s.”

Prospects of luxury

It's too early to say goodbye to Russia's luxury segment. According to Vladimir Yevladov, this market tends to suffer least during crises: “It may shrink and stop growing by 3-7% annually, but it won't disappear”. Ruslan Yegiyants adds that luxury customers will find a place to buy their favorite brands. For example, with the help of buyers, who are already being approached with requests for buying luxury clothing and accessories abroad:

“I have an increased number of requests for luxury items, clients are no longer intimidated by markups or delivery times. There are few products available in Russia now, but people will always have a desire to buy a new item.”

Luxury customers will find where to buy goods made by their favorite brands. For example, with the help of buyers

Olga Sumishevskaya predicts an increase in demand for shopping tours, similar to coronavirus vaccination and bank card tours. Today Russian entrepreneurs organize tours for Zara and Massimo Dutti apparel, so in the future there will be options for luxury connoisseurs. Available routes for Russians are the UAE, Turkey, and the CIS countries. According to Kazakhstan's Karavan publication, luxury retailer Esentai Mall in Almaty has confirmed the possibility of exporting premium clothing and footwear to Russia from Kazakhstan. There is one condition: no more than $10,000 in cash can be brought into the country.

Another option for buying luxury items is resale. According to Oskelly, a reseller for branded items, the number of users who made purchases through the platform increased by 46% in March. Vladimir Evladov, owner of the Luxxy service, also notes the growth:

“In March, there was a rush, everything was being bought up, sellers were rising prices every day, but in April and May the market calmed down. Demand returned to its pre-March levels and prices went down.”

A promising niche has already been occupied by local online marketplaces. In June, a web store selling used Louis Vuitton, Prada and Gucci bags appeared on Yandex.Market.

When it comes to Russian designers, it is unlikely they will be able to replace the departed luxury brands in the near future, Olga Shteinberg says.

“In fact, there is no Russian luxury goods. There are designer brands, but they have a different product range and marketing strategy. It will take more than a year to build something from scratch”.

According to Anastasia Dorofeeva, domestic brands have every chance to enter the luxury segment, but there may be some difficulties. First of all, with raw materials - it will take time for the Russian industry to create materials for luxury products and reach the global level.

“The second aspect is reputational, marketing and legal efforts. They are connected with trademark registration and patenting of unique designs. We need to create strong brand identities, develop their DNA and back everything up legally to get strong results.”

In the future, it is planned to replace the departed companies with other foreign brands - less famous manufacturers of luxury goods, which will agree to work with Russia. Retailers are looking for alternatives, but there's no guarantee that they will be in as great demand as Chanel or Dior, says Anna Savenko.

“We are still a very young audience for the global luxury market. We did not have enough time for perfecting expensive simplicity or “chic of old money.” That's why we are so fond of big names and recognizable labels.”

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