Welcome to Wednesday snacks. We’re here ignoring all our meetings to bring you interesting tidbits that help you reinforce your social/intellectual currency at work.

Let this be your monthly break from energy implications surrounding the Russia/Ukraine war. We’re talking Russian sanctions, and luxury goods.

This week in Explainers: Ukraine/Russia and Luxury

Back in 2022, there was a bunch of reporting around sanctions and how it was going to hurt small luxury houses throughout Europe. We’re gonna cover that, but also the Italian-Russian connection, because there’s a lot there that we haven’t read in the States.

How it started:

1. Italian luxury goods exports to Russia amount to ~ €1.2 billion annually.

2. Footwear districts in the Marche and Veneto regions and knitwear makers in Umbria and Emilia-Romagna have become heavily reliant on the Russian market.

3. While acknowledging ethical concerns, industry officials emphasize the need to consider market realities and the livelihood of workers in the fashion industry.

4. They also highlight the difficulty of finding quick long-term replacements for the Russian market.

How it’s going:

1. Western sanctions have not crippled Russia's economy, and a network of middlemen is facilitating the import of coveted Western goods for Russian elites.

2. The UAE has been identified as a hub for products shipped to Russia in violation of sanctions, particularly electronics with chips that can be repurposed for military use.

3. Russian car bloggers and journalists have entered the import business themselves, importing cars and car parts via parallel channels.

4. Turkey, China, Armenia, and Kazakhstan are countries redirecting Western goods to Russia, enabling Russia to source microchips for weapons used against Ukraine.

Well, what about the small luxury goods producers?

The grey market and parallel imports have also emerged as avenues for luxury goods to enter Russia. Western luxury brands have withdrawn from the Russian market, but their goods still find their way into the country through various channels. The availability of these goods serves as a signal to the wealthy Russians that their lifestyle is unaffected by the war and that Russia can still provide access to luxury products.

Further reading:

Giorgia Meloni: Italy's far-right wins election and vows to govern for all

ECB urges banks in Russia to leave quickly

What to make of all this:

Looking farther out than luxury goods and sanction-circumventing, the Italian dilemma seems to be the most interesting story.

There’s a lot of big factors at play here. Here are 3 of them:

1. The ultra-right government in power

2. Energy concerns (new deals with African countries instead of continuing existing relationships)

3. Availability of Credit in Russia

With the closure of western banks in Russia, Italian banks like Unicredit are still there. Trying to sell its Russian presence is proving to be difficult, as government intervention would force any outside bank to sell assets at a much lower price than desired.

As for sanctions, well, they’re affecting Italian industry, and Russia has been able to count on Italy’s friendship in the past (it served as a commercial home to Russian businesses after the Soviet Union fell).

There’s an interesting thing that’s happening here, though.

While Italy’s right wing government in power has historically shown support for Putin, PM Giorgia Meloni has taken a position to align with Ukraine. So it remains a mystery (to us) as to what happens next. The FT has an amazing video covering this.

What AI made this week

Red Scare collection ‘23,anyone? We would buy this in a heartbeat.

Have a great week!

Ahmed and Peter