Economic Insights

The Kremlin Encourages Big Fashion Brands to Produce in Russia

For several years, the government has been trying to make the main fashion world leaders produce part of their production in Russia. They offer tax facilities and advantages. It seems that 2017 can see the light some projects.

Abel Amón. 20/04/2017

Russian trading authorities have had ongoing talks with global giants such as Inditex, Uniqlo, Nike, Decathlon … The economic situation of a weak ruble (although recently has been recovering) along with the aforementioned tax advantages, make Russia a country more competitive than other emerging markets, such as China where labor costs, unlike those in Russia, are constantly increasing.

Russia is a country more competitive than other emerging markets

Contact with Inditex
Sources from the Russian government, in particular the deputy industry minister Viktor Evtukhov, revealed to the local press that Inditex has accepted the collaboration of the Russian government to accelerate the localization of its production in Russia: «We agreed to establish a team project, in Cooperation with the management of Inditex, to help in the search of reliable Russian partners, which will make it possible to carry out the accelerated localization of the production of garments and of Zara and products of Zara Home». We did not find sources of the Galician company to reveal the specific terms of these contacts and when a hypothetical production would begin on Russian territory.

Tom Tailor is one of the top 10 German fashion manufacturers

Tom Tailor
On the other hand, Tom Tailor, one of the top 10 German fashion manufacturers, whose group makes about € 1 billion a year, plans to manufacture part of its products in Russia as early as 2017, according to its director general in Russia and The CIS, Sofia Kaufmann. The company would be in talks with one of the Russian factories, without clarifying the concrete location.

Local production is expected to start as early as 2017, the first Russian products will be on sale in the fall-winter collection, according to Kaufmann who specified that only one type of clothing was transported at the moment, but in the long run, production Can reach up to 20% in Tom Tailor stores. Another of the multinationals in talks with the Russian government to produce in Russia is Decathlon. Specifically, it had proposals some time ago to invest in the factory of local «S-Tep» of the region of Novosibirsk, to make there the production of sports shoes.

The Swedish company IKEA has been cooperating successfully with Russian manufacturers for a long time

The example of IKEA
There are already some examples of successful integration between global businesses and the Russian consumer goods industry. The Swedish company IKEA, which as the clothing retailers has received an invitation from the country’s authorities, has been cooperating successfully with Russian manufacturers for a long time. «By increasing the amount of purchases from local suppliers, it is possible to significantly reduce costs, mainly transportation costs and customs duties,» the company’s source explained. 

Currently, the Swedish retailer supplies its products from some 60 Russian factories. Russian manufacturers are fully integrated into the global production and distribution chain: Russian products can be found in IKEA stores in Europe, America and Asia. In addition, IKEA owns four factories in Russia and is planning to launch a fifth soon.

The devaluation of the ruble of the last years has brought with it a fall of the Russian labor costs

Advantages of producing in Russia
The devaluation of the ruble of the last years along with a pronounced economic recession has brought with it a fall of the Russian labor costs with respect to other emerging economies. In the same way, the cost of the square meter measured in currency of the industrial lands have fallen significantly. We are in a period suitable to acquire production facilities at a good price. The interest shown by the Russian Ministry of Industry with tax deductions for foreign investment in this sector of fashion make attractive the bet by Russia as a country where produce fashion. Finally, there are significant savings in transport costs and customs costs.

There are significant savings in transport costs and customs costs

Disadvantages
They are the same ones that have weighted the investments in Russia during the last decades. Excessive bureaucracy, corruption, although in the case of projects of major international fashion companies would be supervised by high levels of the Kremlin seems to avoid the unnecessary costs caused by these traditional problems of the Russian economy, avoiding certain problems that had, for example IKEA, When it came to implanting in the country.

The Kremlin seems to be focused on stimulating foreign investment in Russia

The continuous changes in legal and tax matters also make it difficult for long-term projects. The sanctions imposed by the US and the EU, and answered by Russia, are a major obstacle at the moment. Although Russian authorities have seen opportunities for development In an import substitution industry, these sanctions create difficulties in the areas of financing, the ability to receive certain components that fall into the category of prohibited.

Moreover, we do not know whether these mutual sanctions will increase,  depending on the situation of the geopolitical relations between the two antagonists. In short, the Kremlin seems to be focused on stimulating foreign investment in Russia. Let us hope that the circumstances will arise for this investment to increase and so will the standard of living of Russian citizens.

Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text has been written freely expressing their own ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.

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