The Russian invasion of Ukraine has posed difficult questions for governments and private entities, alike, which have been forced to face “uncomfortable questions about just how willing they are to cut off the flow of Russian cash” – and in some cases, access to Russian commodities. While export-blocking sanctions on things like luxury goods have not been enacted by the European Union, which means that companies have been able to serve the consumption habits of deep-pocketed Russia consumers without interruption, continued business could raise issues from an Environmental, Social, and Governance (“ESG”) perspective with investors that may not look kindly on a business-as-usual approach as Russia escalates its attack on Ukraine.
The Russian-led war on Ukraine comes as investors across the globe are increasingly considering ESG factors alongside a company’s financial performance in order to identify growth opportunities and material risks, and demanding that companies disclose a rising amount of ESG-related information. This overarching focus has presumably impacted Western companies, a growing number of which have announced plans to divest from their Russian ventures.
BP revealed on Sunday, for instance, that it will exit its nearly 20 percent stake in Russian state oil company Rosneft, slamming Russia’s attack on Ukraine as “an act of aggression which is having tragic consequences across the region.” Shell similarly confirmed on Monday that it will exit its joint ventures in Russia, with CEO Ben van Beurden saying, “We cannot and we will not stand by” in light of Russia’s “senseless act of military aggression.” Meanwhile, Norwegian petroleum refining company Equinor stated that it intends to exit its Russian JVs, and Mercedes-Benz Group is reportedly exploring options to quickly divest its 15 percent stake in Russian auto manufacturer Kamaz.
Elsewhere in the market, companies are suspending their operations in Russia. Shipping titans FedEx and UPS, for instance, have put a stop to shipments to Russia, as have automakers General Motors, Volvo, Volkswagen, and Daimler Truck. Delta announced that it has suspended its alliance with Russian-carrier Aeroflot as a result of Russia’s invasion of Ukraine, and American Airlines has voluntarily stopped its partnerships with Russian carriers Aeroflot and S7 Airlines indefinitely. Adidas stated on Tuesday that it has suspended its partnership with the Russian Football Union, and finally, British asset management firm ABRDN revealed on Tuesday that it is walking back on investments in both Russia and Belarus “for the foreseeable future,” with CEO Stephen Bird citing ESG as a reason for doing so.
Such moves – paired with reports that Russian entities are slated to be removed from banks’ ESG indexes – will likely put pressure on competitors to take similar action. Although it is worth noting, as Axios does, that “announcing plans to divest is very different than actually divesting, particularly when Russia’s central bank is severely limiting the sale of Russian equities by nonresidents, and the U.S. is blocking that bank from engaging in dollar-denominated transactions.”
What About Luxury Brands?
In addition to weighing the impacts of sanctions (even ones that would only affect them indirectly), as well as seemingly inevitable supply chain-specific disruptions, efforts by companies to distance themselves from Russia almost certainly take ESG elements into consideration. In an attempt to avoid investor pushback of their own, luxury brands are likely taking a close look at their current operations in the Vladimir Putin-led nation. With limited exposure compared to the likes of energy giants, moves to bring business to a halt could be accomplished with potentially limited downsides for luxury brands, given that they generate only a relatively small portion of their global revenues from Russia, where the market for personal luxury goods amounted to roughly $6.75 billion in 2021.
Publicly-traded brands should also consider the potential for stock-drop litigation in the event that they promote themselves as observing ESG elements in their operations but continue to do business in Russia in the wake of the conflict in something of the same way as companies are increasingly being named in shareholder-initiated cases over their failure to live up to ESG mandates.
There certainly have been rising public calls among consumers (and potentially, some quieter ones from investors) for luxury brands to close up shop in Russia, particularly in the wake of reports that European leaders were seeking carveout from Russia-focused sanctions for luxury goods industries. Vogue Business reported this week that on February 24, Cartier owner Richemont “decided to temporarily close all its stores in Russia, but reopened them [two days later].”
At the same time, there have been reports – including from European Institute director Adam Tooze – that “panic buying of luxury goods that may have high resale value” was underway over the weekend in Moscow in anticipation of a plummet of the Ruble. (The value of Russia’s currency fell about 30 percent against the dollar Monday, making it worth less than 1 U.S. cent.)
As for which luxury players stand to be harmed the most from a revenue perspective in light of the conflict, Bernstein analyst Luca Solca wrote in a note that “groups that operate in the high end (e.g. Richemont) are likely going to be more exposed – all else being equal.” Meanwhile, Solca stated that “groups that primarily address the aspirational middle class (e.g. LVMH, Kering) are likely going to be less exposed – all else being equal,” given that “demand is going to be driven by a relatively small group of very rich individuals, rather than by a large group of middle-class consumers.”
He noted that “direct exposure to” Russian and Ukrainian demand by the luxury segment today is “probably close to 4-5 percent as a whole.”
And in terms of consumers, seventy-five percent of Americans said that they support companies’ plans to cut ties with Russia and stop the sale of products and services in the country, according to a new Morning Consult survey. The Washington, DC-headquartered business intelligence consultancy found that consumers expressed “broad support, regardless of political party” for efforts by companies to dissociate with Russian entities, which makes for “a rare example of wide bipartisan support.”
UPDATED (March 2, 2022): Nike, ASOS, Harley-Davidson, Apple, BMW, Jaguar Land Rover, and Aston Martin are among the companies that have announced that they are ceasing operations in Russia, with many citing solidarity with Ukraine and/or difficulties from a supply and logistics perspective. In a statement on Tuesday, for example, Nike confirmed that it was putting a stop to online sales because it “cannot guarantee delivery of goods to customers in Russia.” Apple, on the other hand, pointed to its “deep concern about the Russian invasion of Ukraine,” with a spokesman stating, “We are supporting humanitarian efforts, providing aid for the unfolding refugee crisis, and doing all we can to support our teams in the region.”
While some luxury fashion groups, such as Gucci-owner Kering and the charitable arm of Diesel-owner OTB Group, have pledged to provide humanitarian aid in connection with the conflict, few – if any – have announced that they will halt operations in Russia even though current conditions are expected to make business difficult to carry out from a supply and logistics perspective, particularly as shipping giants like UPS and FedEx have stopped their services for the time being.
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