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How Will Russian/Ukrainian Crisis Affect the Retail Industry?

Retailers all over the world are anxiously wondering how the political chaos in the Ukraine will affect their business. The initial catalyst for the citizen uprising was a trade-related issue–the former Ukrainian president’s unpopular decision to reject a free trade agreement with the European Union (E.U.)–and the consequences of the unrest could significantly impact the textile and apparel industries in the near future.

Unnamed officials in the Obama administration have been quoted all over the mainstream press warning that the Ukrainian predicament, now devolving into civil war, “will have an enormous cost for the Russian economy” and that U.S. government is “looking at a broad menu of options to curtail our trade and economic relationship.”

Legislators from both sides of the political aisle angrily denounced Russia’s incursion into Crimea, under the pretense of protecting its own citizens from spillover violence. Some have demanded that Russia’s membership in the G8 group and the World Trade Organization be revoked. Others have suggested that outstanding negotiations with Russia regarding an impending bilateral free trade agreement be suspended. Secretary of State John Kerry warned that “American businesses may well want to start thinking twice about whether they want to do business with a country that behaves like this.”

The notable retail brands most vulnerable to political turmoil in Russian and Ukrainian markets are Tiffany, Lancel, Louis Vuitton, Hermes, Gucci, Loro Piana, Stefano Ricci and Swatch, all of which maintain a significant presence in Russia.

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Nevertheless, many experts remain optimistic that the fallout will be minimal. Alexis Rodzianko, president of the American Chamber of Commerce, said, “Retail businesses have done very well in Russia, they’ve grown faster than the economy has grown…I don’t think anybody, at least our members, are in the mood to leave or stop doing business. They think Russia is a very important market and will continue to be. As the middle class in Russia grows, the appetite for luxury goods grows as well, and I think it will continue to.”

The global markets have remained impressively resilient. The S&P Retailing Industry Group was up 8.83 points as of the close of business Tuesday, a 1 percent uptick to 941.46. The Dow Jones Industrial Average also stood its ground and then some, rising 1.4%, or 227.34 points, to 16,385.37.

The real issue, according to Rodzianko, is the status of the typically brisk shopping of the Russian consumer. He said, “The growth rate last year was predicted to be close to 3 percent and turned out to be less than 2 percent. The result is consumers are being more cautious, and I think that that trend was expected to carry into 2014. To some extent, people adjust their spending to their mood and expectations.”

Also, Russian retailers are expected to take a substantial hit since the ruble has already tumbled against the U.S. dollar, shedding 16 percent of its value in the last year. Some experts estimate that this has sent the average price of retail goods in Russia careening up as much as 19 percent, contracting gross margins and, ultimately, shuttering stores in usually crowded malls.

Additionally, it is still unclear what effect the brewing political discord will have on the price of natural gas in Europe, especially if a prolonged and potentially destructive military engagement leads to supply disruptions. Already, the global benchmark price of oil, as well as wheat and corn, all major exports from the Ukraine, have skyrocketed. Richard Mallinson, an analyst at Energy Aspects, said, “If there was a prolonged disruption to gas supplies (say three-four weeks), then concerns would certainly start to build about supplies and the availability of gas to refill storage through the summer, which could translate into higher prices for 2014 summer contracts and 2014/15 contracts.”

Given the unpredictability of the situation, all forecasts regarding the imprint Ukrainian unrest will have on retail remain speculative. Many major retailers with a substantial interest in Russia, like Ikea, insist they will continue to invest there, undaunted by the current tumult. Still, how dire, or benign, the consequences of the political crisis will be hinges on whether a resolution is swiftly brokered or all-out war ensues.