The rich are crying again. Sanctions hit the luxury segment in Russia painfully

In March, the fashion conglomerates LVMH (owner of the brands 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 were also not available. When placing an order, the leading foreign marketplaces Matchesfashion, Farfetch and the platform of the YOOX Net-a-Porter group report that "due to the current situation, orders are temporarily not delivered to Russia."

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

In addition to independent brand decisions, official sanctions on luxury introduced by the United States and the European Union were added. On March 13, the US Department of Commerce banned the export to Russia of luxury goods — including clothing, shoes and accessories — that cost more than $1,000 per item. A similar package of sanctions was adopted in the European Union, where goods over €300 per unit fell under export restrictions.

The ban also applies to personal purchases abroad. Russians will not be able to buy a bag in a foreign boutique of a conditional Christian Dior if its value exceeds the established limit. In an official press release from the European Union, the imposition of sanctions on luxury was called "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 European Union called the imposition of sanctions on luxury "a direct blow to the Russian elite"

Some luxury fans felt the impact of the sanctions in April, when they were refused to sell Chanel items in the brand's Dubai boutique. One of the first to report this was blogger Lisa Litvin. They agreed to sell the bag to her on the condition that Litvin signed a document according to which he would not import and wear Chanel items in Russia. According to Chanel representatives, such restrictions for Russians were introduced due to sanctions, and the company is working to improve the procedure, but the offended Russian luxury audience was unstoppable.

Chanel was accused of Russophobia and launched a challenge on the Internet to destroy the bags of the fashion house. TV presenter Marina Ermoshkina recorded a video in which she cut the brand's bag with scissors with the words "Not a single thing and not a single brand is worth my love for the Motherland and my respect for myself." She was supported by other Russian women, and Olga Buzova demanded that Chanel return the money for her purchases and promised that the bags of the fashion house “would not be a success even at Sadovod”.

The rise and fall of luxury in Russia

Before the start of the war in Ukraine, the luxury market in Russia was on the rise. Individual brands have successfully weathered the COVID-19 pandemic and have been able to increase domestic sales. According to RBC, in 2020, Christian Dior Couture Stoleshnikov LLC, a subsidiary of Christian Dior Couture, increased its revenue by 1.7 billion rubles. A year later, the brand's revenue in Russia grew by 3.3 billion rubles, and Chanel's revenue increased by 6.4 billion rubles.

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

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

In the wardrobe of Vladimir Putin there is a down jacket of a fashion house for 1.4 million rubles, in which he appeared at a concert-rally in Luzhniki this spring. The head of Rosneft, Igor Sechin, also prefers Loro Piana - he wore the jacket of the fashion house in 2019 during a trip to Valaam. In 2017, Rosneft planned to purchase 12 blankets from the fashion house for more than 100,000 rubles a piece, which Alexei Navalny drew attention to. After his publication about the company's upcoming expenses - the purchase of blankets, cutlery and other interior items in the amount of 5 million rubles - the purchase was canceled .

Putin in a Loro Piana kurta for 1,445,000 rubles
Sechin in a Loro Piana jacket for 244,000 rubles
Putin in a Loro Piana cardigan for 103,789 rubles

According to the estimates of the InfoLine-Analytics agency, in 2021 the segment of luxury clothing, footwear and accessories in Russia was estimated at 320 billion rubles. Exiting the Russian market will have little effect on companies' profits - according to Sanford C. Bernstein, Russia accounts for 5% of global luxury market sales. A far greater loss for foreign fashion corporations will be the exit from Asia. If in Russia LVMH receives 2% of total revenue, then Asian countries, mostly China, account for 40%.

Vasilisa Karelina (daughter of State Duma deputy and member of the Federation Council Alexander Karelin) with an 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 their favorite brands. According to Vladimir Evladov, the founder of the Luxxy luxury clothing marketplace, sales growth was caused by consumer panic. In the same way, with the beginning of the “special operation,” one part of the Russians bought sugar, while another, more wealthy, bought equipment, cars and clothes.

“Those with a lot of money bought luxury brand products. These are not essential goods, but people wanted to protect their lifestyle and habitual consumption levels. Not all such purchases are investments. These include limited editions or rare models of certain brands. A Chanel Boy bag is an investment, and a model that came out a year ago or this season is a dubious investment. You don't know if she'll gain popularity or not."

In the spring, there was no tangible shortage of luxury - retailers sold stock and spring-summer collections, which they managed to purchase before February 24th. According to the head of the Fashion Law Bureau, Anastasia Dorofeev, it is difficult to predict how much inventory will last and whether they will continue to bring sales:

“The fashion industry is, first of all, turnover. It is not known whether retailers will be able to sell old items in the new season, when new collections should start.”

According to Olga Sumishevskaya, a partner at the One Story consulting company, new collections (autumn-winter 2022 season) were in short supply due to lack of receipts. According to stylist and buyer Ruslan Egiyants, many luxury retailers managed to purchase next season’s collections or make an advance payment, but faced problems with importing products into the country:

“Someone has cars with goods along the borders and they are not allowed to pass, some foreign brands simply froze their accounts, someone refuses to cooperate on principle, despite the prepaid order.”

The Russian government urged luxury consumers and sellers not to lose heart. Speaking at a meeting of the Eurasian Economic Forum on May 26, Putin promised that “luxus-class” goods would be brought to Russia, although it would cost “a little more.”

Parallel luxury import

The authorities plan to provide the Russians with the products of the departed companies through parallel imports. The list of goods and brands that are allowed to be imported into Russia without the consent of manufacturers was published by the Ministry of Industry and Trade on May 6. Later, the ministry assured that the new mechanism applies to "luxury goods."

The main obstacle to the parallel import of luxury remains the ban on the import of products worth more than €300 per unit. According to Anastasia Dorofeeva, sellers will be able to circumvent the ban by creating "spacing companies" in foreign jurisdictions where restrictions do not apply:

“For example, the purchase can be carried out through Europe to Kazakhstan, and from there the goods will be resold to a Russian company and imported to Russia. This will affect both the increase in terms and the length of the supply chain, and the final price of products.”

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

Concerns concern not only prices, but also counterfeit products that may flood the market with the legalization of parallel imports. Now Sumishevskaya estimates the share of counterfeit goods in the Russian fashion segment at 85%:

“With parallel imports, there will be many supply channels. These are flows that are hard for brands to control, so it is better and easier for luxury manufacturers to lead the parallel import race themselves. Understand what distributors they work with and who imports their products.”

Anastasia Dorofeeva holds a different point of view on the connection between counterfeit and parallel imports. According to her, the Federal Customs Service will continue to check luxury products and will be able to ban their import into Russia if there are doubts about the originality. In addition, luxury manufacturers reserve the rights to protect trademarks:

“They can protect themselves from counterfeit goods in Russia. File lawsuits, demand the removal of fakes from circulation and compensation for the illegal use of trademarks.

Damage to reputation

Russian online marketplaces are already mastering parallel imports, but so far they are limited to mass-market and middle-segment brands. Products from the departed brands Stradivarius and Bershka appeared on Wildberries, and Zara clothing and accessories appeared on Ozon. According to Sergey Belyakov, Managing Director of Ozon, in the future, luxury brand products that were not presented on domestic online marketplaces due to manufacturers’ restrictions may well appear on the platform in the future. However, the parallel import procedure legalized in the spring, he says, makes it possible to avoid such restrictions on the part of brands and, first of all, to expand such a range with the help of sellers.

Elena Perminova (wife of the ex-deputy of the State Duma, now Chairman of the Board of Directors of CJSC National Reserve Corporation and Alexander Lebedev, Member of the Council on Foreign and Defense Policy) with a Dior Vibe bag (300,000 rubles)

At the same time, domestic luxury retail does not plan to resort to a new procurement mechanism. So in the KM20 concept store, parallel imports are not considered so as not to spoil relations with foreign designers, notes Olga Steinberg, communications expert, fashion analyst and author of the Fashion Pumping Telegram channel:

“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 ignoring all the rules and agreements with brands. It could kill their reputation in the bud."

Parallel imports can destroy the reputation of distributors

The analyst also suggests that luxury manufacturers will not want to take the risk either. According to Steinberg, today it is unofficially known that a number of Italian companies want to work with Russia, but they are under pressure from the state, the prospect of fines and reputational risks. This is confirmed in an interview with Kommersant by businesswoman Olga Karput. Its KM20 concept store features independent foreign brands, many of which receive government subsidies.

“In connection with recent events, the European Federation of Clothing Manufacturers sent them letters stating that a fine of €30,000 should be imposed for continuing cooperation with Russian companies.”

According to Anna Savenko, a premium retail real estate consultant, the parallel import of luxury will be of an amateur nature: “It may appear in the form of separate multi-brand stores that existed in the early 2000s.”

Luxury perspectives

It is not worth burying the luxury segment in Russia. According to Vladimir Evladov, this market suffers the least during crises: "It may shrink and not grow by 3-7% per year, but it will not disappear." Ruslan Egiyants adds that the luxury audience will find where to buy products from their favorite brands. For example, with the help of buyers who are already approached to buy luxury clothing and accessories abroad:

“My requests for luxury have grown, customers are no longer afraid of the extra charge and delivery times. Now in Russia there are few products available, but people will always want to buy a new thing.”

The luxury audience will find where to buy products of their favorite brands. For example, with the help of buyers

Olga Sumishevskaya predicts an increase in demand for shopping tours, similar to tours for coronavirus vaccinations and bank cards. Today, Russian entrepreneurs organize tours for Zara and Massimo Dutti clothes, so in the future there will be options for luxury connoisseurs. The routes available to Russians are the UAE, Turkey and the CIS countries. According to the Kazakh edition of Karavan, the luxury retailer Esentai Mall in Almaty has confirmed the possibility of exporting premium clothing and footwear to Russia from Kazakhstan. There is one condition: it is allowed to bring no more than $10,000 in cash into the country.

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

“There was a rush in March, everyone was buying up, sellers changed prices up every day, but in April and May the market calmed down. Demand has returned to pre-March volumes and prices have declined.”

A promising niche is already occupied by local online marketplaces. In June, a section with used Louis Vuitton, Prada and Gucci bags appeared on Yandex.Market.

If we talk about Russian designers, then in the near future they are unlikely to be able to replace the departed luxury brands, Olga Steinberg believes:

“In fact, there is no Russian luxury. There are designer brands, but they have a different assortment and marketing. Building something from scratch is not a matter of one year.”

According to Anastasia Dorofeeva, domestic brands have every chance to move into the luxury segment, but difficulties may arise. First of all, this concerns raw materials - it will take time for the Russian industry to create materials for luxury products and reach the world level.

“The second aspect is reputational, marketing and legal efforts. They are associated with the registration of trademarks, patenting of unique designs. We need to create a strong brand identity, develop their DNA and back everything up with legal steps so that it leads to great results.”

In the future, they plan to replace the departed companies with other foreign brands - less well-known luxury manufacturers that will agree to work with Russia. Retailers are looking for alternatives, but it is not certain that they will be in demand like Chanel and Dior, says Anna Savenko:

“We are still a very young audience for the global luxury market. We did not have time to cultivate in ourselves expensive simplicity and that very “chic of old money”. Therefore, big names and flashy, easily recognizable labels are our favorites.”

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