LONDON — There’s a joke going around Russian circles in London that says if you are not someone on the Western nations’ sanctions list, then you are clearly not doing enough for Mother Russia.
This story first appeared in the March 31, 2014 issue of WWD. Subscribe Today.
While the full impact of sanctions for wealthy and prominent Russians has yet to take hold, the deteriorating relationship between Russia and the West is no laughing matter, and the mood among businesses with interests in Russia remains warily watchful.
Russian economic growth is slowing and the ruble has lost more than 10 percent of its value against the dollar over the past year. Last week, the World Bank warned that Russia could see a record amount of money — some $150 billion — flow out of the country if the crisis in Ukraine gets worse, while gross domestic product could contract 1.8 percent this year. For now, retail brands in Russia and the West say businesses are operating as usual, and most are forging ahead with their plans for 2014.
In the U.S. late last week, the Senate and House passed slightly different bills, authorizing $1 billion in loan guarantees to Ukraine and providing broader authority to President Obama to impose sanctions on Russia. The two bills must be reconciled before a final bill can be sent to Obama for his signature.
Both of the measures call for sanctions, including freezing assets and banning travel visas of Russian officials suspected of leading the invasion into the Ukrainian peninsula of Crimea. The legislation in both chambers essentially codifies sanctions that Obama announced on March 19 against 20 Russian government officials and a large Russian bank. Obama also threatened to target “key sectors” of the Russian economy, including financial services, energy, metals and mining, defense and engineering.
Also last week, Gian Giacomo Ferraris, chief executive officer of Gianni Versace, said that “fortunately,” the company is “not superpenetrated in Russia or Ukraine.” The firm does not have big investments in those areas, he said, and the existing ones are through partnerships. “I am more concerned about the Russian customers that travel. This embargo could have an impact in the long run,” noted Ferraris. “I hope the situation will clear soon.”
In late March, during Hermès’ full-year results presentation, chief executive officer Axel Dumas waved off a question about the brand’s Russian clientele, given the political crisis. He noted the nationality accounts for “well below 5 percent” of the firm’s business, and a company spokeswoman later added there had been “no impact” on sales so far. According to Luca Solca of Exane BNP Paribas, Hermès is one of the European luxury companies that is most exposed to the Russian domestic market.
On Tuesday, Harrods will unveil a grand-scale homage to Russian heritage and design in the form of a monthlong celebration of the former jeweler to the czars, Fabergé. The Russian socialite and digital media entrepreneur Miroslava Duma, founder of the online magazine Büro 24/7, will be hosting a breakfast at the store and unveiling a digital mirror that allows visitors to “try on” the Fabergé jewels.
The brand plans to decorate the store’s 20 windows facing Brompton Road; open a pop-up shop and Egg Bar, selling bejeweled gold pendants, and display one-of-a-kind high jewelry pieces designed for Fabergé by the artist-jeweler Frédéric Zaavy.
On the flip side, earlier this month, Fabergé closed its Kiev boutique due to “heightening security fears in Ukraine.” The store is not expected to reopen before June.
Other jewelry firms don’t see this situation impacting growth. In a telephone interview from Baselworld, the annual watch and jewelry show in Switzerland, Anastasia Webster, international p.r. director for the London-based jeweler Stephen Webster, said business is thriving. “There’s been a positive reaction to the collections and our customers — including the Russians — are ordering up.”
Webster’s Kiev store remains open for business as do its units in Moscow and Saint Petersburg. “We are also planning our 10-year anniversary event in Moscow for later this year,” Webster added.
According to the British property company Savills, Russian buyers’ share of prime sales in London — classed at properties valued over 3 million pounds, or $4.98 million, currently stands at two percent. That figure has remained constant since 2012, and has not changed as a result of the events in Ukraine or the sanctions on Russia, according to the company.
Edward Cowell, project director at Eventica, a communications company that specializes in Russian-related events, said while his team is monitoring the situation in Russia, there have been no changes to strategy. “Our work deals with business and cultural — rather than political or diplomatic — engagement,” he said.
Cowell added that Eventica is currently working closely with the British Council to organize events marking the 2014 U.K.-Russia year of culture, and plans are still in the works for the Russian Winter Festival, which will take place in December in London.
In Russia, many of the mass-market retailers interviewed said that sales remain steady. “So far we haven’t noticed any significant change in consumer demand,” said Regina Rodnyanskaya, a spokeswoman for M. Video, Russia’s largest consumer electronics chain by revenue.
A spokesman for Russia’s X5 Retail Group, Russia’s largest retailer in terms of sales, said: “Everything is normal. There’s an expected rise in prices on imports due to the current economic situation in Russia, namely the rise of the dollar against the ruble.…In addition, the ruble has started to improve, but it’s difficult to make predictions for the coming months.”
The ruble has fallen a little more than 12 percent against the dollar this year, and is currently trading at 2.8 cents.
Viktor Lukanin, vice president of commerce at Euroset, Russia’s largest mobile-phone retailer, said consumer activity has been steady so far. “What happens next depends on the Russian economy, and what happens with the dollar. Nothing has changed since last year: The main trends are a growing interest in smartphones and tablets, and a decrease in sales in other products such as cameras and DVD players.”
According to the latest global consumer tracker issued monthly by Bernstein Research, Russian consumption is slowing. January retail sales decreased to 7.7 percent from 9.6 percent, while the latest unemployment rate is flat at 5.6 percent.
Not all the mass-market retailers are holding steady: Earlier this month, Germany’s Metro Group, a cash-and-carry department store, hypermarket and electronics retail business, put its plan to float about 25 percent of its highly profitable Russian cash-and-carry business on ice due to the crisis. In late February, the company had suggested that an initial public offering in London could be in place before Easter.
Fashion, too, has felt the pain of shrinking demand and rising inflation. Anna Lebsak-Kleimans, head of Moscow’s Fashion Consulting Group, said the outlook for clothing and accessories isn’t exactly rosy.
“Retailers noticed the downshift in their sales during the post-Christmas sale period in January and in the beginning of February,” she said, blaming rising inflation and the falling ruble for price increases. “Over 80 percent of Russian fashion retail is imported product, and even apparel that is manufactured in Russia is still made of imported fabrics and furnishings. There will be price growth, as almost all raw materials are still imported,” she said.
Lebsak-Kleimans said the long-term story for Russian fashion could be very different: “This drastic political problem with Ukraine led to the growth of a national idea of consolidation. The whole idea of national spirit, national pride is very much in the air right now, so it’s really making people talk more about local designers, local fashion, local names.
“We have some designers who are able to interpret national ideas, someone like Alena Akhmadullina, or Vassa, who is having her seasonal runway show today. Her minimalistic shapes and bold, clear palettes are based on the idea of Russian Constructivism in art and design. Akhmadullina does Russian myths and folk stories interpreted in Russian design in a very interesting way. It’s global thinking with a local touch.”
Last week, Global Blue, which offers international tax-free shopping services for tourists, reported that tax-free spending by Russians visiting the U.K. had decreased 17 percent year-on-year for February.
Global Blue was quick to add that Russia remains one of the top global shopper markets in the U.K., with high net worth individuals drawn to its luxury brand offer. Shoppers pay an average of 669 pounds, or $1,102, per transaction.
Global Blue also said the long-term picture — for the U.K. at least — is not nearly as bleak as the February numbers. In a statement, it quoted the government tourism agency Visit Britain, which expects growth in spend by Russian shoppers to grow 75 percent by 2020. It also noted that many U.K. luxury retailers are introducing services to attract and accommodate the Russian shopper, including Russian-speaking staff and marketing materials.