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Political, Economic Uncertainty Weigh on Russian Consumer Spending

Improvements are expected starting in 2017, according to Fondazione Altagamma.

MILAN — Political uncertainty and economic fragility have been weighing on Russian consumer spending locally and abroad since the beginning of the year, but improvements are expected starting in 2017, according to Fondazione Altagamma.

This story first appeared in the July 9, 2014 issue of WWD.  Subscribe Today.

“The structural fragilities of the Russian economy, rather than the political crisis, which is destined to pass, will condition luxury consumer spending for many years to come,” said Armando Branchini, vice chairman of the Italian luxury goods association, during the summit “The uncertainties of the Russian luxury market” held by Altagamma here on Tuesday. Branchini said he expected 2017 to show signs of a pickup, as custom duties on most of the luxury products will be reduced that year. “The current base of shoppers of luxury goods is not expected to reduce its spending power, but will the pool of Russian consumers expand or not?” queried Branchini.

Standing at 5.8 billion euros, or $7.6 billion at average exchange, the Russian luxury goods market is the 10th largest in the world and the fifth in Europe, according to the 2013 Altagamma Worldwide Markets Monitor. It grew 5 percent compared with 2012, but is expected to decrease between 4 and 6 percent in 2014. The political tensions between Russia and the West in light of Russia’s annexation of the Ukrainian peninsula of Crimea in March, and a structural fragility in an economy mainly dependent on oil and gas, have triggered a 5 percent drop in consumer spending in Russia since the beginning of the year.

Branchini noted that Russia in 2014 expects a high inflation (6.5 percent) and a flat gross domestic product growth, in addition to a weaker ruble, and a more significant export of capital.

In terms of luxury goods consumer spending, Moscow ranks as the first city in Russia, accounting for 59 percent, followed by Saint Petersburg, representing 16 percent. The Russian government’s new restrictions on online purchases from abroad, whereby the duty-free level will be lowered to 150 euros, or $204 at current exchange, from 1,000 euros, or $1,360, is expected to favor local consumer spending in the immediate future, said Branchini.

According to Global Blue, the number of Russian shoppers in the European Union in the first five months of 2014 dropped 12.8 percent in Italy and France, 15.8 percent in Germany and 20.1 percent in the U.K. This was particularly taxing for Italy, where Russians are the top spenders.

Paolo Magri, executive vice president of ISPI (Institute for the Studies of International Politics), said Russia, compared with other BRIC nations (Brazil, India and China), is weaker on more fronts. He sees a “dangerous” demographic decline, as the country in 30 years will have 30 million people less. In 2015, Russia is expected to have drawn 17 million immigrants. “Russians are extremely xenophobic and this will lead to more social instability,” contended Magri. Echoing Branchini, he said that growth is slowing down, with a 0 percent gross domestic product growth forecast for 2014 and contracting provisions, while direct investments are not picking up in a country that “is too dependent on oil and gas. How many Russian brands do we know? Which is Italy’s good fortune, as Russia needs to import almost everything.”

Regina Von Flemming, chief executive officer of Axel Springer Russia and publisher of Forbes and Forbes Online Russia, said Russians “love” to shop, but their spending is more understated now.

Brunello Cucinelli commercial director Fabio Gnocchi concurred, saying that Russians are “looking more at the product rather than the brand. They are keeping a low profile.” That said, the high-end range of the market is suffering less in the country.

Russia accounted for 8.5 percent of the company’s total sales in 2013. Gnocchi said the impact of Russians in European boutiques “was stable, actually even slightly positive,” and that, in Russia, the most important boutiques, in cities such as Moscow and Saint Petersburg, showed signs of growth.

Moschino’s ceo Alessandro Varisco said the signature brand and the Love Moschino collections are holding up, compared with the Cheap & Chic line. With the help of Moschino’s new creative director, Jeremy Scott, the company has seen a “big increase” of Russians in its markets, “even though the growth of Russians is smaller than that of other nationalities,” said Varisco.