Russia’s new taxation on luxury could signal major slow down

Following the Chinese policy on the crack down on corruption through gifting of luxury branded goods, Russian President Vladimir Putin approved in July 2013 a bill setting higher transportation tax rates on luxury cars.Cars that cost between 5 million and 10 million rubles ($155,000 and $315,000) and are not more than five years old will be taxed at double the rate.Cars that cost 10 million to 15 million rubles and are not more than 10 years old as well as cars that cost over 15 million rubles and are not more than 20 years old will be taxed at a triple rate.

In April, Russian opposition blogger Alexei Navalny proposed a bill banning state and government officials from buying cars worth more than 1.5 million rubles ($45,500). By mid-July, the bill gained the required 100,000 online votes, enabling it to be submitted to the government for discussion, reported at the time.

Already 20 to 25% more expensive that in Milan or Paris, luxury branded fashion, watches and accessories goods have seen a gradual decline in sales since 2009, according to a research by CPP Luxury Industry Management Consultants Ltd. The return to power for Vladimir Putin sent a strong signal for many oligarhs seeking ways to boost their fortunes.

However, there have been no concrete signs of an ease in corruption, most international luxury brands directly operating in Russia telling CPP-LUXURY.COM that ”there is not one single day that an official does not pass through our door for an apparent check, which eventually results in fines, offset by overtly demanded bribes”

Two other important factors which has been having a direct contribution to the price increases and therefore a slow down in sales, are the fact that more wealthy Russians have had to become more discreet with their display of wealth therefore opting to shop abroad and secondly the painful and costly transition of many international luxury brands from franchised operations by one of the two monopoly holders, to direct operations.

This has meant not only setting up local offices and but also an important increase in operational costs. Experiences luxury industry professionals are rare and consequently their pay has been on the increase, not to mention the astronomic costs of expats relocating and working in Russia. The most resounding example was a top international luxury fashion house which inaugurated its new flagship store in Moscow last year, with over half of its stock held in customs for more than a month. Mention should be made that the opening marked the official switch to direct operations by the respective brand in Russia.

Expansion in second and third tier cities has been stagnating, the only city which saw an important influx of new luxury brands (hotels and retail) has been St Petersburg. Ironically, despite being recognized as Russia’s number 1 tourism destination, St Petersburg commands a much smaller per capital HNWI segment, while foreign tourists hardly come to St Petersburg for luxury shopping. Third tier cities such as Yekaterinburg saw a dramatic 2012-2013 with the closure of several flagship mono-brand stores such as Chanel and Dior, as well as dealerships of Ferrari and Maserati.

Other third tier cities such as Kazan or Ufa, have remained, despite their potential, dominated by wholesale in retail, most international luxury fashion brands being present in multi-brand stores. Luxury hospitality is absent from these cities, due to a lack in demand by both domestic and foreign travellers.

The luxury store closures in Yekaterinburg and the sluggish development of luxury retail in second and third tier cities in Russia is also being directly affected by an increase in direct flights from these cities to Dubai, a favourite shopping and holiday destination for Russian. Ease of obtaining UAE visas, Russian speaking staff both in hotels and shops have been crucial to developing tourism from Russian. Another important factor to take into consideration has been the increase in purchases of residential real estate by Russians in Dubai.

The most recent vivid blow to luxury was the order to remove by local authorities of Louis Vuitton’s gigantic trunk set up in December in the Red Square in Moscow. This was certainly more of a PR exercise, beyond the controversy, authorities showing a clear anti-luxury conviction.

Even the least affected luxury sectors such as cars and watches are likely to suffer in 2014, even if no formal regulations or legislation is introduced specifically banning or restricting purchase of these goods for either gifting or personal use by corrupt officials. Such ”silent” rules will most likely have a direct effect on travel, both domestic and outgoing by Russian officials, local media, especially online reporting on lavish trips by executives of state owned companies.

Oliver Petcu

Prada store Moscow