With the war in Ukraine continuing, Svetlana Melnichenko, president of the Saint Petersburg-based Chambers of Textile and Fashion, noted that Russians were not in the mood to buy new clothes: “It’s spring. It’s time for a usual wardrobe update. But it’s now really quiet at the stores of our small local brands,” she said.
With sanctions biting, she added: “Light industry is all about demand. […] Clothes are not the first necessity, and people during such [hard] times always tend to save money and buy only the most important things.”
She continued: “We can do anything, but if people don’t have money to buy, the demand will fall,” and warned job losses in the industry may follow.
The sourcing countries supporting Russia’s clothing supply chains
For the time being, at least, supply is unlikely to be a problem as 70% of imported fabrics and clothes sold in Russia are imported from China, while Vietnam and Bangladesh remain important sources and it also has close links to Asia and Turkey which are expected to reduce the impact.
“Those [Russian] enterprises which worked with the Chinese market, have already switched to yuan, and they are now rewriting contracts,” explained Melnichenko, which means payments can be made direct in local currencies rather than paying in US dollars or other international currencies through SWIFT – which is now largely excluding Russia. The Bangladesh government said on 4 March, it was prepared to receive payments in Chinese currency from Russia.
Melnichenko added that local Russian brands which have produced T-shirts and other informal clothing would also replace imports of such goods, easing the pressure of sanctions. Plus, Russian producers who make uniforms, including school uniforms, would not be severely affected by the sanctions because these manufacturers are supplied by Russia-based fabric and yarn producers.
Problems for Russia’s luxury clothing supply chains
It is a different story for the luxury end of the textiles and clothing industry, which will experience disruption. The EU has now banned the export of luxury apparel worth more than €300 a piece to Russia and “all premium class fabrics are from Italy”, pointed out Melnichenko. She said this would force Russian premium apparel brands who usually source from Western fabric suppliers (such as Italian exporters), to look for alternative suppliers, maybe in China and Turkey, whose companies have been eyeing the Russian market.
Melnichenko said one prominent Turkish supplier recently sent an offer to the members of her association offering good deals for Russian buyers. “The payment is still in dollars, […] and with today’s exchange rate, the prices have almost doubled. But [this supplier] sent his proposal with reduced prices by a few percent.’’
Given that financial sanctions will impede such payments, Melnichenko pointed out that as a short-term measure, the association will support its members by signing guarantee letters to suppliers, and asking them to postpone receipt of payments. Melnichenko explained these tactics have yielded success, with partners, even some in western Europe, making concessions.
Will cryptocurrency become the norm in Russia?
Melnichenko dismissed suggestions that in the longer term her members would consider using cryptocurrency for payments, saying association companies think this will not be necessary, predicting sanctions on Russia will end because western European partners are as interested in the Russian market as Russian businesses are interested in international suppliers.
Melnichenko recalled that Spain’s Inditex had signed contracts with “dozens of factories” in Russia since 2018 (after Russia’s annexation of Crimea from Ukraine) – although since this year’s invasion, Inditex was quick to quit the Russian market, leaving many Russian factories without work. It is not the only major to quit Russia over the military action – Sweden’s IKEA, a major textile purchaser, has also left the Russian market. Its Russian manufacturing partners not only produced finishing products for IKEA stores but used the resulting capacity to sell fabrics worldwide – a door that is now closed.
The software and retail companies exiting Russia
Another problem for Russian producers and brands is that major software companies have quit Russia, such as Adobe and CLO Virtual Fashion. “These things are unpleasant, but on the other hand, I think maybe this will encourage the development of our own software,” said Melnichenko, although she accepted such development might take time and slow down design processes.
Her prediction that Russia will look to China to keep its clothing industry operating was supported up by Paul Alger, international business director at the UK Fashion & Textile Association.
“The Russian invasion of Ukraine is likely to have lasting effects which even President Vladimir Putin may not have thought of,” he told Just Style.
“In the short term, most UK companies have already stopped their immediate orders to Russia on a business-to-business and business-to-consumer basis as there is no easy way to send goods at present,” he said. “Others have taken a unilateral decision not to sell to Russia for the time being.”
The export outlook is also bleak as far as Belarus and Ukraine is concerned, he said, and there could be “indirect restrictions on other countries in a customs union with Russia”, such as Kazakhstan and Armenia.
Despite sanctions and the lack of flights – with few or none at all between the US, EU, UK and Russia, goods from India and China can still enter Russia, explained Alger: “It is likely Russia will look to China for more and more goods as it becomes more dependent on China for its oil and gas sales as well as imports of food and consumer goods. China will likely encourage and facilitate this, as it is a win-win for China.”
He believes blocked SWIFT payments will harm the Russian textile industry and market as it makes it “extremely difficult (if not impossible) for Russian businesses and individuals to make/receive payments in the short term, but it is highly likely that Russian banks will start to use Alipay and other Chinese payment platforms or create their own”.
He also said using crypto is very unlikely as “crypto is untried and untested”.
In the long term, “if Russian retailers cannot pay for goods, they will not receive them”, Alger explained: “Russians are very good at putting orders on hold and taking the goods when they are able to pay – even years down the line.” He recalled seeing this in the early 1990s, noting that while most Russian businesses have non-Russian bank accounts, “they are unlikely to want to pay for goods if they cannot get them over the border or sell them”. One question, he noted, was “whether Russian consumers will even want (or be allowed to want) Western goods moving forward?”
Mike Flanagan, CEO of market intelligence company Clothessource, predicts that if Russian clothing sellers cannot pay overseas suppliers, they will “use Russian factories – eventually, and then develop direct payment systems, outside SWIFT, from Russia to its silent supporters,” including China, Bangladesh and India.
After all, he says, Inditex and H&M will not be rushing back to Russia “because they think this will damage their business far more than any trivial benefit they might get in return”, he told Just Style.
This article originally appeared in Just Style was written by Irina Korobkova in Moscow and Liz Newmark in Brussels.