By Lisa Klein, Luxury Portfolio International
Russia’s invasion of Ukraine has been devastating for the European nation and its consequences are being felt the world over.
A group of panelists discussed the potential impacts of the ongoing crisis on the world economy, luxury market and beyond during a Luxury Daily webcast earlier this month.
“Russia as a nation is quite integrated with the rest of the world,” said Astrid Wendlandt, founder and editor of luxury news site Miss Tweed and author of How Luxury Conquered the World. “The prospect of the Iron Curtain falling again is beyond words.”
The webinar was hosted by Mickey Alam Khan, editor in chief of Luxury Daily.
Countries across the globe have responded to Russia’s actions with a flurry of sanctions against it and its ally, Belarus.
“The sanctions that have been imposed have probably been the most significant in history,” said Robert M. Appleton, a partner at New York-based legal firm Olshan Frome Wolosky LLP. “The most important one has been the SWIFT sanction banning Russia from the SWIFT system.”
SWIFT is a global organization that sends secure financial transmissions. All global economies belong to and use the system, with the U.S. dollar as the reserve currency.
With Russia and its citizens effectively cut off from any cross-border financial activity, the country’s economy has shut down.
In addition, a wave of companies has also cut Russia off, with many shutting down their stores and restaurants there.
“I’ve been surprised to see that there are the official sanctions, and then there’s what the rest of the world is doing on top of that,” said Marci Rossell, chief economist for Leading Real Estate Companies of the World®.
“You have brands saying, ‘We don’t want anything to do with Russia, sanctions or no sanctions,’” she said. “And that’s a really different story for the world than anything we’ve seen before.”
While Russia, and its civilians in particular, will likely not be permanently shunned from the rest of the world, the sanctions and other actions against it may have a ripple effect on certain aspects of geopolitics.
“Long term, my sense is that this is going to spur real innovation with currency and cross-border financing,” Mr. Appleton said. “Looking at unintended consequences, I think the biggest risk and the biggest potential here is the Chinese.”
For years, China has been looking to get away from the SWIFT system and the U.S. dollar as reserve currency, as that leaves it vulnerable to global sanctions itself. It is closely watching the Russian situation unfold, potentially giving an extra push to make an exit.
The sanctions have hit the world economy as well – Russia is second only to Saudi Arabia in oil exports – with oil prices crossing $100 per barrel. Global inflation could reach 6 percent in the next few months, impacting the stock market, assets and discretionary spending.
“Everything is impacted by higher prices of oil and gas,” said Marie Driscoll, managing director for luxury and retail at data and advisory firm Coresight Research.
“We came into this year, before we were concerned about Ukraine, worried about inflation,” she said. “Prices are being raised across the board, and now you have this whammo effect of $100-a-barrel oil, and then the impact on our collective psyche.”
While higher costs affect lower income and “aspirational buyers” more than the affluent, it does at least cause some short-term concerns for the well-to-do.
“The bigger risk is that global luxury consumer really depends on a stable global economic market,” said Omar Saad, senior managing director and head of soft lines for the luxury and department stores team at Evercore ISI, a research and advisory firm. “Wealthy people want stability as much as anything.”
In the near-term, even luxury brands will take a hit, as consumers are less likely to buy when they feel uncomfortable – something magnified at the beginnings of the COVID-19 pandemic.
“I think the growth that we predicted coming into the year will be muted,” Ms. Driscoll said. “What we thought 2022 was going to be – getting COVID behind us, returning to travel, international growth, and spending – all that may be truncated.”
Numerous luxury brands have joined the retail and hospitality throngs and closed up shop in Russia for the time being, a move heralded by many global consumers.
“Companies as diverse as T.J. Maxx to Gucci are standing in solidarity with the Ukrainians,” Ms. Driscoll said. “I think luxury brands have responded as they should. These are brands that we personify, we have relationships with them.”
One consumer, however, has maybe been left out of the discussion – the Russian buyer, who in luxury spends on real estate, yachts, jewelry, spirits and other goods.
“There’s a lot of anti-Russian sentiment around the world,” Ms. Wendlant said. “And that’s very interesting because for a lot of luxury brands Russians were some of the best, most favorite customers. I mean, these are people who love to spend millions. The Russians love to show off, they love to buy, they love luxury goods.”
The panelists agreed that the average Russian citizen seems to be against the invasion and is unfortunately facing penalties meant for their leaders.
“There is a lot of repression right now, and the Russian people are thinking, ‘When will we just be allowed to live?” Ms. Wendlandt, who has covered the country extensively as a journalist, said. “They want to live normal lives.”
IN THE LONG TERM, the luxury market should come through fairly unscathed.
“I think still there’s too many degrees of separation to have any meaningful impact,” Mr. Saad said. “I tend to take a skeptical view that this is really going to change anything for the luxury consumer other than a temporary blip.
“Luxury real estate is one of the safer long-term bets, as is luxury in general,” he said. “You know, our entire society is designed to create wealth, war or no war.”