U.S. Retailers Spent the Past Year Rushing Into Russia. Now What? (The Sanctions Blowback)

By Kyle Stock, BloombergBW


Illustration by Steph Davidson

Tiffany & Co. (TIF) invaded Moscow nearly 10 months ago. The luxury jeweler set up a beachhead of bling on June 4, 2013, promising millions of potential customers dreamy diamonds—or at least a nice window view for an Audrey Hepburn-style doughnut breakfast. Now the 4,500 square-foot store is caught in an economic war zone as sanctions squeeze Russian payment pipelines and a rapidly escalating standoff with Western powers cripples the ruble.

Tiffany is just one of many U.S. retailers that recently bet big on Russia—both on its consumers and the stability of its markets. Over the past year, companies that belong to the Standard & Poor’s 500-stock index crowed about Russia at least 350 times during conference calls to discuss financial results, according to a Bloomberg analysis of transcripts. Russians have been driving demand for Apple (AAPL) iPhones, McDonald’s (MCD) burgers, Estee Lauder (EL) makeup,Fossil (FOSL) watches, andBeam (BEAM) bourbon, among other hot products.

At BorderFree (BRDR), a company that handles international e-commerce for such U.S. companies as J. Crew, Macy’s (M), and Williams-Sonoma (WSM), Russia is a top-five market, behind Canada, Australia and the United Kingdom. Just a few months ago, VF Corp (VFC), an apparel conglomerate, opened its first Moscow store to sell Van’s sneakers to would-be Russian surf rats. Mattel (MAT) reported a tripling of its Russian sales last year, which suggests that further U.S. sanctions abroad would threaten the sales of its American Girl dolls, surely an instrument of soft power.

Nike (NKE) has gushed about Russia for months, noting that business there has been sprinting along at a double-digit clip. “We are still the sports brand of choice in Russia and in Eastern Europe,” Trevor Edwards, president of the Nike brand, said in December.

MotionPoint, a Miami-based company that translates and optimizes websites for e-commerce companies expanding abroad, says its Russian business has doubled in the past year. “It’s just a really, really big country, and because of that it’s been pretty underserved,” says Charles Whiteman, senior vice president of client services.

The recent proliferation of broadband, in particular, has spurred sales. Many MotionPoint clients started building Cyrillic sites only after they noticed how many Russians were navigating their English-language sites.

As of now, U.S. sanctions on Russia are mostly confined to members of President Vladimir Putin’s inner circle and don’t stand in the way of iPads, Air Jordan high-tops, or the delicious bourbon pouring out of Kentucky distilleries. But it’s getting much harder for Russians to pay for them. Visa (V) and MasterCard (MA) stopped processing some Russian transactions in order to comply with new U.S. sanctions. And the ruble is getting crushed as investors worry about where the diplomatic standoff over Ukraine may lead.

Since Putin offered Ukraine a $15 billion stimulus package on Dec. 17, the value of the ruble against the U.S. dollar has slid by 25 percent. If Putin wants a pair of authentic University of Connecticut basketball shorts (go Huskies!), he’ll have to fork over 2,848 rubles, rather than the 2,640 he’d have paid in December. (Unless, that is, U.S. Secretary of State John Kerry throws him a pair as a peace offering.)

U.S. retailers that have watched the yen plummet in Japan know all too well how much that kind of exchange-rate turmoil weighs on commerce. The marketing choice is to watch transactions slow markedly or cut local prices just to keep people in stores or visiting websites.

For now, the Russian trade—like the standoff in Crimea—appears to be teetering on a brink of sorts. Elena Bychkovskikh, MotionPoint’s Russian specialist and a native of the country, says shoppers are in wait-and-see mode. “They just continue to monitor the situation,” she says. “But if they really need something, they’ll buy it.”

Nike, meanwhile, hopes those needs still include sportswear. Here’s Chief Executive Officer Mark Parker discussing the situation with analysts last week: “Obviously we’re hoping that a resolution comes to that situation peacefully,” he said. “And right now we’re focused on the things we can control, which is making sure we connect with our consumers.”

 

 

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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