As the US and European countries scramble to find a diplomatic solution to the stand-off with Russia over Ukraine, the world has grown increasingly concerned about a potential military escalation of the conflict. Heightened tensions between Russia and the West are also rattling investors on global stock markets.

The crisis remains on a knife edge as senior officials representing US president Joe Biden said last week that claims made by Russian president Vladimir Putin that he was withdrawing some of the troops amassed on the Russian side of the border with Ukraine were “false.” So long as western leaders contend there is an “imminent” threat of Russia invading Ukraine, economic sanctions will continue to loom over Russia.

In both Ukraine and Russia, fashion industry leaders have cautioned against panic in recent weeks over the latest chapter in the protracted Russo-Ukrainian war. Some seem as concerned about the escalation of rhetoric surrounding the conflict as they are about the conflict itself.

After enduring years of hardship, Kyiv’s designer fraternity are feeling a mixture of anxiety and calm and, earlier this month, the latest edition of Ukrainian Fashion Week went ahead as planned. In Moscow, organisers of Mercedes-Benz Fashion Week Russia do not foresee any potential development related to the current conflict derailing the next edition of that event scheduled for Mar. 16 to 20.

Though some business leaders in Russia have responded with stoicism, the threat of sanctions is causing concern among others including those in the local fashion industry, a sector that is already facing declining consumer confidence stemming from inflation, the pandemic and the volatility of the rouble.

“Of course, the imposition of [new] sanctions would be a blow to the economy, causing a reduction in international projects and investments, threatening a weakening of the rouble, which leads to a subsequent decline in living standards and purchasing power,” says Anna Lebsak-Kleimans, chief executive of the Moscow-based Fashion Consulting Group.

Similar effects were experienced by the Russian economy and, subsequently, Russian consumers in 2015, following the first wave of sanctions imposed by the US in 2014 over Russia’s invasion and annexation of Ukraine’s Crimea region.

The Link Between Sanctions and Fashion

Overall, Russia’s fashion market recovered slightly in 2021, but remains well below 2019 levels. According to Euromonitor International data, the value of the apparel and footwear market in Russia in 2021 was $38.93 billion, up 4 percent year-on-year but still more than 15 percent below pre-pandemic levels. It is difficult to unpick how much of the recent decline is attributed to the economic impact of Covid-19 and how much is linked to the lingering effects of sanctions in the second half of the 2010s.

The country’s luxury sector, however, is “championing” among European markets “thanks to strong repatriation” of consumer spending back to Russia, according to a summary by Claudia D’Arpizio and Federica Levato, authors of Bain & Company’s 2021 luxury report. It would appear that both the pandemic and previous sanctions against some of Russia’s wealthiest citizens haven’t done much — or anything — to dent the luxury segment of the market.

While the precise scope and likely impact of any potential new sanctions remain unclear, the general direction of travel of the luxury sector isn’t likely to change any time soon, regardless. According to Euromonitor data, the value of Russia’s personal luxury goods market in 2021, at $6.77 billion, exceeded that of pre-pandemic 2019 levels by 1.6 percent. The research firm estimates the market will grow marginally, by 0.65 percent this year, and another 3 percent on top of that by 2024.

The firm paints a less than rosy picture for the broader Russian fashion market though, estimating a projected decline in value this year of almost 1 percent. By 2025, it predicts the value will have dropped 2.7 percent below 2021 levels. Two important caveats are that Euromonitor estimates were calculated before the current geopolitical crisis at the Ukrainian border reached its current fever pitch and that all figures are based on fixed 2021 prices and exchange rates.

Views on the relationship between sanctions and the local fashion market and indeed on the overall performance of the sector are slightly different within Russia.

Sergey Suverov, an investment strategist and economist at Russian asset management firm Arikapital, believes that if there are new sanctions imposed on Russian banks, then there will be a “decrease in people’s incomes” overall but “there won’t [otherwise] be a direct impact on the fashion sector.” Citing effects from previous Western sanctions, he adds that “there were no bans or pauses in deliveries from western brands.”

“The sanctions of 2014 did have some impact on the industry because the economy went down and people’s purchasing power decreased [but] according to data from [some] Russian retail companies there was growth in turnover and revenue [as] the sanctions caused inflation and prices to also increase in the fashion sector,” Suverov says.

[After the previous round of sanctions, most Russian] consumers tended to choose less expensive categories [but] the number of wealthy people buying fashion has only increased.

“[Most] consumers tended to choose less expensive categories [but] the number of wealthy people buying fashion has only increased. The richest still buy luxury goods and are feeling good, but retailers in the mass market like Melon Fashion Group tend to change their target more and diversify their range of brands,” Suverov added.

Lebsak-Kleimans suggests that past experiences of dealing with sanctions may work to boost the Russian fashion industry’s resilience to further sanctions in the future. “Since [the first sanctions], numerous local brands have appeared and strengthened [their position] on the market, thanks to [the growth of e-commerce] marketplaces which [give] them the opportunity to be sold both locally and cross-border,” she said.

Some economists for international institutions also point to the recent resilience of the Russian consumer. In a note from Feb. 10, forecasting firm Oxford Economics’ lead emerging market economist Tatiana Orlova wrote that “although consumer sentiment suffered during the recent Covid waves, demand has remained resilient and supported retail sales”. Retail sales in Russia rose 5.4 percent year-on-year in December 2021, the most recent data available at the time of writing.

This more optimistic view is supported by data indicating that some global fashion players also strengthened their position in the Russian market since earlier sanctions were imposed in 2014.

According to Euromonitor data, Russian sales for H&M increased by 280 percent from 2014 to 2021, Zara has seen an increase of 85 percent for the same period and Tommy Hilfiger’s sales have risen 26 percent. At the top-end of the market, Gucci and Valentino have increased sales in Russia by 638 percent and 96 percent respectively since 2014.

Several major Russian retailers, including luxury department store group Tsum, declined to comment on the potential impact of new sanctions, with some citing political sensitivities surrounding the issue.

The flurry of speculation around new sanctions — often as if they are a foregone conclusion — has left some industry leaders in Moscow feeling frustrated. “Let’s not forget that no [new] restrictions have happened and a lack of such measures is a quite possible scenario,” says Alexander Shumsky, president of the Russian Fashion Council and Mercedes-Benz Fashion Week Russia.

Indeed, in an Oxford Economics’ report entitled “Russia-Ukraine Tensions: Asset Market Scenarios,” released on Jan. 27, analysts state that their “base case scenario is that the crisis is resolved by diplomatic means.”

The firm’s economist Tatiana Orlova told BoF at the time that, “in our main scenario, the current standoff between Russia and NATO is going to be resolved by diplomatic means. The markets will gradually calm down, and there will be little or no impact on discretionary consumer product categories.” The firm has not provided an update on its position since then.

Despite the latest escalation of tensions as reported in the Western media, some industry leaders in Moscow — and in Ukraine and elsewhere — remain hopeful that a peaceful resolution can be reached which would avert renewed military conflict and avoid the imposition of sanctions altogether.

What Type of Sanctions are on the Table?

The US and the European Union now have close to a decade of experience when it comes to levying sanctions on Russia, and this time around (in contrast with the situation in 2014) there is plenty of warning about a possible invasion, giving them time to consider what might be the most effective measures.

US officials have indicated in recent weeks that they are considering cutting off major Russian banks from global financial networks and employing new export controls to ban the sale of global technology that relies on American software and equipment to Russian companies operating in key sectors such as aerospace, maritime and artificial intelligence.

Such export controls would likely look similar to those levied by former US President Trump against Chinese telecommunications firm Huawei, except they would be levied at entire sectors, rather than a single company.

One of the toughest options on the table is to cut off major state-owned Russian banks — such as Sberbank, VTB or Gazprombank — from the American financial system by putting them on the US Treasury Department’s Specially Designated Nationals (SDN) list or banning them from making transactions in US dollars and therefore making it impossible for much of the world to transact with them.

The outcome could be similar to that of sanctions levied against Iranian banks. Sanctions implemented in 2014 against Russia already cover some smaller Russian banks, but the largest Russian banks not currently in scope are much bigger than their Iranian peers and they are more connected with financial institutions throughout Europe, meaning European allies would not necessarily support this move from the US.

Other hard-hitting options include cutting Russia out of the worldwide Swift financial system, another move that would effectively prohibit Russia from engaging in many routine international financial transactions.

Approximately half of Russia’s trade is currently conducted in US dollars, according to a report in The Moscow Times, down from 80 percent prior to 2014. For global fashion brands exporting to the country accustomed to trading in dollars, these sanctions would likely require a shift in how they conduct business.

“Such blacklisting could have a devastating impact on the Russian economy,” Caroline Brown, partner at law firm Crowell & Moring who advises on economic sanctions compliance and enforcement told S&P Global Market Intelligence.

Targeted Russian banks could also be cut off from using Visa and Mastercard services, which are currently utilised by millions of Russian consumers, though a local payments service Mir, developed by Russia’s Central Bank, is becoming increasingly competitive. Consumers on major e-commerce platforms, such as fashion player Wildberries, have been encouraged to take up local payment options with zero percent commission offers (Visa and Mastercard transactions on the platform carry a 2 percent levy).

But even with such hedges against the impact of sanctions, some Russian economists are concerned about the impact on ordinary Russians.

When applying severe measures, one should always think twice and also be aware of the consequences.

“Many Russians still keep their savings in dollars, and a ban on that might instigate panic,” Yevgeny Gontmakher, an economist and former Russian official told the Christian Science Monitor. “Most of our trade, even with China, is still conducted in dollars. This could lead to severe shortages, even of foodstuffs, and people will rush to get their money out of banks while they can. People will be angry, and this would be a danger to authorities.”

Klaas Knot, chair of the Financial Stability Board and head of the Dutch central bank told the Financial Times that suspending Russia’s access to the Swift international payments system, in particular, would result in a “severe disruption in payment flows”. He also warned that “when applying severe measures, one should always think twice and also be aware of the consequences.”

Indeed, beyond the question of how much sanctions might hurt the Russian economy, questions remain about the damage sanctions could do to the countries imposing them.

Many European nations already depend on Russia for energy but sanctions could further increase their dependence on the oil-rich country once gas supplies from the recently constructed Nordstream 2 pipeline from Russia to Germany are fully up and running. Last month, German chancellor Olaf Scholz, indicated that the pipeline could be halted if Russia were to attack Ukraine.

Europe’s energy security is not the only thing tangled up in the current conflict over Ukraine. The interruption of Russia’s energy supply caused by war or sanctions would likely drive up global oil and gas prices even higher than their current levels, thereby impacting the fashion industries of other countries in other ways.

In addition to the possibility of broad sanctions levied at Russia’s finance and technology sectors, further sanctions targeting individuals close to Russian President Vladimir Putin have also been flagged.

Citing data from the Office of Foreign Assets Control, The Associated Press reports that 735 Russian individuals are already subject to US sanctions, many of them since Russia’s annexation of Crimea in 2014. These sanctions include the blocking of assets of individuals that are subject to US jurisdiction; limiting their access to the US financial system; and denial of entry into the United States.

Many of these individuals are among Russia’s wealthiest and the US and British governments have again threatened to sanction the country’s elite if it again invades Ukraine. However, fashion industry leaders in Russia believe that such sanctions would, once again, have little effect on the local luxury market.

The Broader Context of Russian Market Trends

Rather than panicking over an unknown impact of potential new sanctions, most fashion company leaders in Moscow appear to be preoccupied with other issues. Russia’s broader consumer trends “are still dictated by the pandemic consequences more than day-to-day politics,” Shumsky said, which is good news for international premium and luxury segment players.

The ‘vibe’ for Russian consumers in general stays the same... customers are focusing on the here and now, rather than long-term plans.

Curbs on international travel have led to an increase in reshored spending on luxury goods that might previously have been purchased on shopping trips to Paris, London, Dubai or New York. In some cases, travel budgets have been reallocated to discretionary spending categories like fashion, beauty and luxury.

“The ‘vibe’ for Russian consumers in general stays the same — people want to invest more into their wardrobe after spending so much time in pyjamas; the so-called ‘revenge buying’ [is prevalent],” Shumsky explained, adding that, because of the pandemic and, to a lesser extent the current geopolitical climate, “customers are focusing on the here and now, rather than long-term plans.”

As for the question of retaliatory measures Russia might take to counter western sanctions that could impact European or American retailers doing business in Russia, Shumsky is dismissive of the idea, saying that Russia contemplated such a move seven years ago, but decided against measures that specifically targeted foreign fashion products.

A bigger problem for international brands selling to Russian consumers within Russia may be a broader shift towards local brands, a trend that has been accelerated by social media campaigns urging Russians to “support local” brands in recent years.

“It is too early to talk about dominance of local brands at the domestic market, but for the first time in years, Russian designers have a say in the market. Consumers recognise and often prefer them,” Shumsky said,

However, Russia’s luxury sector, which consists mostly of rarefied and heritage brands from abroad, is less likely to see local brands increase market share than its mass market fashion segment. The same is true in markets like China.

In the case of sanctions leading to the further devaluation of the rouble, however, it might make more sense for some wholesale players to buy more local than international brands in the mass, premium and perhaps even accessible luxury segments.

Either way, Shumsky says, “the maybe-possible-maybe-not economic sanctions won’t play the biggest role in it.”

That may be so, but it is clear that if Russia’s economy takes a significant hit — due to sanctions or other related factors — the fashion market as a whole won’t be exempt from its impact.