Big brands face a dilemma on whether to continue selling their products in Russia

The Scene is a high-end fashion store in Florence. A cheerful middle-aged Russian couple have finished choosing their clothes and are ready to pay. The man pulls out a roll of freshly minted €100 notes and begins peeling them off one by one on the counter. Russians, even those with bank accounts abroad, cannot pay by card due to sanctions imposed by Britain, the EU and the United States in response to the Russian invasion of Ukraine.

‘How many of them can we accept?’ shouts the assistant as the crisp green notes pile up in front of her. Italy limits the amount of cash used to pay for a single transaction ‒ a cap imposed to combat tax evasion.

The manager appears and a solution is found. The man and woman split their purchases to stay within the €2,000 limit and left smiling with two bags stuffed full of elegant designer clothes.

An EU ordinance prohibits the export to Russia of luxury goods – anything on a long list of nearly 50 types of clothing with a price tag of more than €300. Illustration: Marcos Farina

These are tough times for the fashion industry. And nowhere more than in Italy where large swaths of the population depend on design for their livelihood.

An industry normally focused on turning taste into revenue has suddenly found itself grappling with Article 3h of European Council Regulation 833/2014 (an amendment of 428/2022). This is the EU ordinance that prohibits the export to Russia of luxury goods – anything on a long list of nearly 50 types of clothing with a price tag of over €300.

For most continental fashion houses, the sanction represents a ban on all shipments to Russia. But companies that make cheaper parts can continue to export without breaking regulations. Whether they are morally right to do so is another matter.

A department at Yale University in the United States has been diligently monitoring the corporate response to the invasion of Ukraine. Companies have a legal obligation to comply with the sanctions, but due to the way the regulations have been developed, some companies are not required to comply. Others who follow the sanctions to the letter may nevertheless find that their goods still end up on sale in Russia, having been diverted from a third country to which they were legally exported.

Benetton has decided to continue its business activities in Russia

Opponents of Vladimir Putin’s war who have fled abroad say their friends in Russia can still buy many luxury items that were available before the invasion through Russian online retailers. “The only difference is that they have to wait seven days for the clothes or shoes to be delivered,” said a dissident who asked not to be named for fear of reprisal.

Yale’s team of 29 researchers ranks companies from A (“companies ceasing Russian engagements or leaving Russia altogether”) to F (“companies continuing business as usual in Russia”).

Many luxury Italian brands – Moncler, Salvatore Ferragamo, Prada and Zegna – are rated B, the rating given to “companies temporarily reducing almost all operations while keeping return options open”. Many French and German competitors are in the same category.

A senior executive at one of Italy’s major fashion houses said that since the luxury goods embargo came into force in March, “we haven’t shipped a single tie to Russia.”

In the short term, the ban will cost his businesses and similar businesses surprisingly little. The figures give the impression that Italian couturiers do not count on selling to the family of Russian oligarchs. Valentino revealed earlier this year that sales in Russia account for just three percent of its revenue. But that omits all the beautiful dresses, shoes and bags bought by Russian tourists abroad, whether in Rome, Portofino or in boutiques elsewhere such as London, Paris and New York. All these sales remain perfectly legal, as demonstrated by the Russian couple from Florence.

In the longer term, however, there may be a price to pay. Fashion houses risk being sued in Russian courts. Most do not own the stores where their wares are sold. They are operated by local franchisees with whom they have contracts. And, in many cases, the brands do not respect these contracts because they do not supply their Russian partners with goods, in particular those under €300 not subject to the embargo.

“This is an area where companies struggle to reconcile their legal obligations with the right thing to do,” says Tom Cummins, a partner at Ashurst, a London law firm that advises companies on sanctions. Added to the legal risks of cutting off supplies to Russia are the reputational dangers of exporting items that are not covered by the sanctions.

“Consumers may very well say, ‘I don’t want to buy your products anymore because you continue to profit from business in Russia,'” Cummins says. “Young people are particularly sensitive to ethical issues.

In fashion, the further down one goes into the market where products cost less than €300 and where young consumers are in the majority, the more delicate the balance becomes.

Yoox, the Milan-based global online retail giant, is an example of a company that could have continued working with Russia but decided not to. Its website offers many products under 300 €. But a few days after the invasion, it suspended all its activities in Russia, posting a message in Russian on its website which read: “Due to the current situation, we are unable to process new orders in your country. country”.

According to Yale, however, four of the best-known names in Italian fashion have taken a different approach. Armani, Benetton, Diesel and Calzedonia have all been relegated to the “trash can” with the lowest possible rating, accused of pretending nothing has happened.

The most surprising is Armani, since it hardly belongs to the bargain price segment, even if its Emporio Armani stores appeal to a young clientele. When asked to comment, the Armani Group released a statement saying it “does not operate directly in Russia and stores operating in the country with the group’s brands are run by independent franchisees.” He added that Armani “adheres in strict compliance with the sanctions regime issued by the EU”.

A spokesperson said the group had suspended online sales, but did not answer when asked whether it exported products under 300 euros to stores operating under its brand.

Diesel said it shut down its online business. She stressed that she did not have her own stores in Russia and that she respected the sanctions while specifying that they did not apply to products sold for less than 300 euros.

Calzedonia simply refused to discuss the matter. As for Benetton, a company that for decades has linked its products to the notions of diversity and racial equality, its website states: “Social responsibility is intrinsic to the Benetton group and has always been expressed through a way of “doing business” based on principles of respect for the environment and people ‒ at all levels ‒ and on campaigns for the defense of human rights.

True to these fine principles, following the invasion, “Benetton Group immediately expressed its deepest concern over the dramatic ongoing humanitarian crisis,” according to a statement provided to YOU. “In this context, the company has decided to suspend all its development business plans in Russia, affecting its business investments in favor of humanitarian aid to the Ukrainian people supported by the Italian Red Cross.”

The Italian conglomerate has “also donated clothing to Ukrainian refugees and provides protection and support to Ukrainian refugees in Italy,” the statement said. But donating clothes and money is one thing, and under the current circumstances suspending future investments might even be seen as a smart business move. But what about stopping business in Russia to argue that invading another sovereign nation does not correspond to respect for people “at all levels”, let alone “defend the rights of the human being”. ‘man ” ?

No dice. “Benetton Group,” the statement continued, “has decided to continue its commercial activities in Russia, based on long-standing relationships with commercial and logistics partners and on a network of stores employing more than 600 families.”

For some fashion houses, expressing their solidarity with Ukraine does not mean stopping business operations in Russia. But whether customers understand this and whether it will influence their choices as consumers remains to be seen.

  • John Hooper is Italy correspondent for The Economist

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