The Luxury Sector Outlook: Russia in 2016

In a previous article we analyzed the economic situation of China with some concern. Much greater it is the difficulty of the Russian economy and, therefore, its luxury sector in 2016. To improve should give two circumstances that today are far from clear. The first is the elimination of sanction between the West and Russia, for it must give convincing Russia to pacify the rebel territories in Ukraine supporting steps. A recent meeting between Putin and US Secretary of State John Kerry seems that at least in the Syrian conflict both countries have a consensus view.

The second factor to be given to an improvement in the Russian economy is a growth in the price of raw materials and especially of oil. The Russian Finance Ministry has released a forecast that expected move the Brent oil price levels 50USD (now is around 36 USD), also hopes that with this price of oil, the ruble to appreciate slightly. Both goals seem overly optimistic although it is true that there is that possibility. However, rising oil prices is necessary but not sufficient.

The sector with the highest purchasing power, such as the oligarchs and those whose disposable income exceeds EUR 250 000, which are nearly a quarter of a million Russians, have seen virtually unchanged their consumption patterns in recession time, except in cases of some businessmen close to politics, which can be affected by US sanctions and the EU that limits their access to banking account and to other assets.

It affects the devaluation of the ruble and the general economic situation of the middle class, upper middle class and the ability of the Russians to travel abroad and to buy imported goods. The state is particularly acute in the automotive sector, which in November last suffered a contraction of 43% on the figure for that month in 2014.

The year ends with the closure of two tourist destinations in Turkey and Egypt. The Russian government claims that Crimea is an alternative destination. Spain must be alert to a rebound in Russian tourism, especially the ruble stabilizes and the closure of Turkey and Egypt for Russian tourists continues. Of course, as the issue of the possible fall in the number of wealthy Chinese tourists, the weak ruble also means that the middle class in Russia is going to travel abroad less over the next year.

The state of multinationals in Russia has not been easy. One of the more traditional large chain stores such as premium Stockman, One of the first foreign companies to settle in Russia after the fall of communism, is looking for seller. We hope that while improving the external environment, will face reforms, reduce bureaucracy and corruption to attract capital, which in recent years have only just come out.

In 2015 it was ranked as the biggest market for 11 of the 32 markets luxury goods covered by research from Euromonitor International, but with its current path of economic and political decline, it seems that will continue to lose positions. The Russian situation is affecting luxury producers  especially those in Western countries that saw not too long ago in Russia a country where more experienced and potential growth sector.

With the backdrop of sanctions and deteriorating relations with the West, business and consumer confidence in the economy has collapsed to a point. On the side of consumers falling real wages, and uncertainty to keep the workplace they have contributed to a decline in luxury spending; and on the side of business is evident a need for investment, among other things curbing capital outflows. At the risk of an escalation of geopolitical tensions that weigh on the economy, it seems clear that consumer confidence is likely to remain fragile.

Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text was written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.