TheChek News Flow

Trade routes through the region are increasingly important to Moscow’s efforts to thwart Western sanctions

SINGAPORE—Two years after the invasion of Ukraine, drones and U.S.-made computer chips are increasingly flowing to Russia from China through Central Asian trade routes, showing the difficulty of strangling supplies to Moscow’s war effort.

Trade routes snaking through former Soviet republics Kazakhstan and Kyrgyzstan are among the many paths into Russia for so-called dual-use goods—singled out by the U.S. and its allies because they can be used on the battlefield.

Despite their efforts, Central Asia is a growing pipeline for Russia, made possible by thousands of miles of open borders, opaque trade practices and opportunistic middlemen. The goods often originate in China, where they are manufactured in some cases by major U.S. companies, which say the items are being imported by Russia without their permission.

“The Central Asian trade route is especially important because it feeds a high concentration of Western-produced goods into Russia. It is a key route for microelectronics, car parts, luxury goods—items both used on the battlefield in Ukraine and for personal consumption,” said Natalie Simpson, a Russia analyst at C4ADS, a Washington-based nonprofit research firm that specializes in national security.

The U.S. and its allies maintain a list of dual-use goods targeted by sanctions, including computer chips, routers and ball bearings used in tanks. There were 45 items on the list last year, with another five added in February.

Chinese exports of dual-use goods to Kazakhstan and Kyrgyzstan have surged since February 2022, when the war began, according to China’s customs data. Exports of the 45 targeted goods rose to $1.3 billion in 2023, up 64% over 2022 levels. Many of these goods were then sent to Russia, according to trade records shared by C4ADS.

The two Central Asian nations aren’t the only source of dual-use goods to Russia. Goods are also flowing through countries such as the United Arab Emirates and Turkey. China, the largest source, exported $4.5 billion of such goods directly to Russia last year.

“Chinese companies shipping their own products can take the direct route across the border, but those who are transshipping Western goods often look for an extra degree of obfuscation,” said Simpson. “They can find this in Central Asia.”

Drones, which aren’t on the list of sanctioned goods, have become an essential tool of war. In the two years before the war, China didn’t report exporting a single drone to Kazakhstan.

But in 2023, Kazakhstan bought $5.9 million worth of unmanned aircraft from China and exported $2.7 million worth of such products to Russia, according to Kazakhstan and Chinese trade data. Kazakhstan isn’t a major producer of drones.

Diverted trade originating from China and traveling through Central Asia has only risen in importance as U.S. and European Union regulators have clamped down on their own chip exports. In 2022, the first year of the war, millions of dollars worth of U.S. and EU chips exports ended up in Russia via Kazakhstan, Kyrgyzstan and Armenia. But in 2023, U.S. and EU chip exports to those countries fell by 28% to about $22 million.

U.S. and European officials have pressed these nations and China to clamp down on gray-market trade with Russia.

Kazakhstan and Kyrgyzstan didn’t reply to requests for comment. China’s Foreign Ministry said that Russia was an important trading partner and that it had nothing to hide. “China always handles export of military items in a prudent and responsible manner, and has followed relevant laws and regulations when it comes to the export controls of dual-use items,” it said.

China is already the largest official source of Moscow’s imports, with bilateral trade roughly doubling to $200 billion in 2023 over the past five years, according to Chinese trade data. China sells computer chips, jet-fighter parts and jamming technology to Russian defense companies, The Wall Street Journal has reported. China has said it doesn’t send lethal weapons to parties involved in conflicts, and the U.S. hasn’t accused it of doing so.

Still, shipments of battlefield items, even if nonlethal, threaten to become a sticking point between U.S., Chinese and European leaders. U.S. trade officials have raised concerns with Beijing about Chinese companies violating export controls by transshipping U.S. items to Russia.

Russia managed to import $8.8 billion worth of dual-use goods from around the world in the first 10 months of 2023, just 10% lower than in the pre-sanctions period, according to a January report by the Kyiv School of Economics.

Russia stopped publishing detailed trade data after the invasion and resumed releasing some data a year later. Using commercially available Russian customs records, C4ADS said it was able to track about $64 million of goods exported to Russia from Kazakhstan and Kyrgyzstan during the first seven months of 2023, although it cautioned the data set it was working with may not reflect the full extent of the transactions.

Many of the goods that are originating in China are made by U.S. companies, according to a review of customs databases. For example, seven shipments of “computing machine devices” that are considered dual-use goods were made in June 2023 from a Chinese subsidiary of International Business Machines to a trader in the Kyrgyz capital of Bishkek. Those shipments, worth $3,700, ended up at OOO BSO, a Russian business on a Treasury Department blacklist.

IBM said it doesn’t do business with those companies and is conducting an internal review. “Any diversion of IBM products to Russia is happening in direct violation of our company’s policies and internal controls,” an IBM spokeswoman said.

In another instance around the same time, a shipment of transistors left the Chinese factory of Vishay Intertechnology, an electronics company based in Malvern, Pa. The Vishay components were sold to a Kazakh company, which then resold them to a Russian electronics wholesaler, according to customs data.

A database run by Ukraine’s Foreign Ministry shows transistors made by Vishay turning up in Russian reconnaissance drones and satellite communication stations on the battlefront. Vishay didn’t respond to requests for comment.

The Kazakh company involved in the transaction, Elem Group, was added to the U.S. Commerce Department’s trade blacklist in December for its potential role in the diversion of export-controlled items. Elem Group exported at least $1.15 million worth of products to Russia between March and August 2023, according to U.S.-based trade-data aggregator ImportGenius.

They included electronic items produced by U.S. companies, including Texas Instruments, based in Dallas, and Analog Devices, based in Wilmington, Mass. China was the largest supplier to Elem Group in the same period, the data shows, providing about 35% of its imports.

Analog Devices said that it has ceased business activities in Russia and Russian-backed regions of Ukraine in compliance with U.S. sanctions. “Any post-sanctions shipment into these regions is a direct violation of our policy and the result of an unauthorized resale or diversion of ADI products,” it said.

A Texas Instruments spokesperson said that the company stopped selling products to buyers in Russia in February 2022 and that any shipments of its chips into Russia were illicit and unauthorized. TI said it strongly opposed the use of its chips in Russian military equipment and the illicit diversion of its products to Russia.

Elem Group, which was founded less than a month after Russia’s invasion of Ukraine by a Russian businessman, had fewer than five employees and made an estimated $14.5 million in revenues in 2022, according to corporate database Statsnet. In March 2023, ownership was transferred to a Kazakh national. Elem Group didn’t respond to requests for comment.

The German beauty retailer could go public as early as this month and targets an equity contribution of around 1.1 billion euros from the transaction.

IPOs are heating up in the European beauty market, with Puig and reportedly Galderma mulling public offers

“The proceeds are expected to be used to continue deleveraging the Douglas Group’s balance sheet,” the company said.

At the end of the first quarter, the group’s net financial debt was 3.06 billion euros.

“The remaining debt position is expected to be refinanced at better terms in connection with the IPO,” the company continued. “The IPO would accelerate the debt reduction and decrease the interest expenses of the company, thus enlarging the financial flexibility of the Douglas Group and its further value creation.”

Following the IPO, CVC Capital Partners will maintain an indirect majority interest in Douglas Group, and the Kreke family is to remain an indirect shareholder in it. Neither will sell any shares at the IPO.

“With our strong performing omnichannel business model we cater to customers in our stores and e-com business and have successfully set the course for long-term future growth with our strategy ‘Let it Bloom – Douglas 2026,’” said Sander van der Laan, chief executive officer of Douglas Group, in the statement. “Our IPO is the logical next step for us to leverage our full potential in the future as a publicly listed company.

“Driven by our highly motivated team, Douglas Group is ideally positioned to further capitalize on the large, resilient and growing European premium beauty market, where our customers are attracted by our comprehensive beauty offering and value our broad and distinctive range of brands,” he continued, referring to a market that is expected to increase by around 5.4 percent at a compound annual growth rate, or CAGR, to 24.2 billion euros by 2028.

“We are very proud of the development of Douglas Group in recent years – the group has successfully transformed into the number-one omnichannel premium beauty destination in Europe,” added Henning Kreke, chairman of the supervisory board of Douglas Group, speaking of the retailer’s five largest European countries: Germany, France, Italy, the Netherlands and Poland, according to OC&C analysis.

“Our family sees itself as a passionate and committed shareholder, and looks forward to continuing to accompany the Douglas Group on its journey in the future,” he said.

The company said it is on track to reach its mid-term target to grow group net sales at a CAGR of around 7 percent and achieve an adjusted earnings before interest, taxes, depreciation and amortization margin of around 18.5 percent.

In the company’s first-quarter 2024, sales gained 8 percent in reported terms to 1.56 billion euros, while on a like-for-like basis, they advanced 7.5 percent. Omnichannel growth was robust, with net store sales and e-commerce sales rising 6.7 and10.7 percent, respectively.

In the period, Douglas Group’s net income grew 10.6 percent to 125.2 million euros.

Chinese EV maker launches first full-electric model, MEGA, at a slightly higher price than analysts expected

Li Auto’s LI -5.10%decrease; red down pointing triangle shares dropped sharply on Monday, with analysts attributing the selloff to profit-taking after big gains last week and some consumer disappointment with the Chinese electric-vehicle maker’s newest model.

Shares were 13% lower at 156.20 Hong Kong dollars (US$19.95) by midday, on track for their largest one-day percentage drop since October 2022. The loss, the biggest among Hang Seng Index constituents, trimmed year-to-date gains to 6.1%.

The decline came after Li Auto, a plug-in hybrid electric-vehicle specialist, on Friday launched its first full-electric model, MEGA, at 559,800 yuan (US$77,785), slightly higher than analysts expected.

“Investors’ feedback on the MEGA launch event are polarized in terms of pricing and interior design,” CCB International 601939 -0.43%decrease; red down pointing triangle equity analyst Ke Qu said.

Hanyang Wang, a senior analyst at 86 Research, said that order numbers over the weekend are likely to be weaker than expected.

Li Auto also said late Friday that it delivered 20,251 vehicles in February, up 22% from a year earlier but far below January numbers. Meanwhile, its Huawei-backed competitor Seres, which competes in the SUV market in the same hybrid space, outsold Li Auto for the second straight month.

Li Auto has guided for sales of 50,000 vehicles in March, and investors are waiting on MEGA’s orders to see whether the goal is in reach.

Some of the share-price drop was to be expected, analysts said, after a run-up in shares last week. On Tuesday, after Li Auto provided a solid plan for 2024 in its fourth-quarter earnings report and call, shares rose 25%, their most in nearly two years.

Until Monday’s drop, shares had gained for nine consecutive trading sessions, adding 44%.

Gucci owner Kering has emerged as a strong bidder for Marcolin in a deal that could value the Italian eyewear maker at up to €1.3 billion, several sources with first-hand knowledge of the matter have said. The potential transaction marks a return of M&A in the luxury industry as interest rates are set to drop in key markets such as the United States and access to cash becomes easier.

Other bidders include industry giant EssilorLuxottica, Safilo and Marchon, a major U.S. eyewear producer that belongs to the optical insurance company VSP Vision. It’s possible that Kering is working with Marchon. “I know that Kering is talking to Marchon,” one senior industry source said. Kering may be interested in selling Marchon the licenses held by Marcolin with mass-market brands it does not want keep.

If Kering succeeded in acquiring Marcolin it would be a great win for the French group, which is in need of positive news flow after posting the worst results in the industry for a group of this size last month. The underperformance of Gucci, Saint Laurent and Balenciaga, compared to their peers, led investors to wonder whether the group had the right strategy and management in place, as Miss Tweed reported.

Kering Eyewear is the group’s only business that is growing and its main success story right now. Launched in 2014, the unit has been built up through acquisitions. Kering Eyewear snapped up Denmark’s Lindberg in September 2021 and Hawaii’s Maui Jim in March 2022. Now it’s eyeing Marcolin.

Eyewear is one of the fastest growing product categories in the so-called “accessible luxury” space. Sunglasses and regular spectacles, together with perfume, scarves and small leather goods, allow aspiring customers to wear a prestigious luxury brand without having to part ways with several thousand euros.

In 2023, the revenue of every major Kering fashion brand declined but sales from the group’s eyewear unit rose 10 percent on a comparable basis, reaching a record €1.5 billion. Kering has said in the past that it aimed to grow eyewear revenue to €2 billion. If it bought Marcolin, it would reach that target immediately.

MARCOLIN

Marcolin has not yet published results for 2023. In 2022, it generated net sales of €547.4 million, and in the nine months to Oct. 31, sales reached €421.6, up 3 percent against the same period in 2022. The company employs around 2,000 staff.

Marcolin’s controlling shareholder, the private equity firm PAI Partners, has retained Goldman Sachs as advisers for the sale of their stake, which is understood to be around 80 percent. Marcolin and PAI would not confirm the size of the holding. Kering and PAI declined to comment.

“There are only strategic bidders interested in Marcolin,” one person with knowledge of the talks said. The source said that due diligence had already been conducted and that indicative bids had had to be sent to PAI Partners by the end of February.

Kering arch-rival LVMH is not very interested in Marcolin, several industry sources said. The owner of Dior and Louis Vuitton harbors big ambitions in eyewear but it has enough production capacity with its brand-new state-of-the-art plant Thélios. Also, last year it acquired an eyewear factory from rival Safilo,located in Longarone in the province of Belluno, north of Venice, where today most eyewear producers are located.

In 2021, LVMH bought back the 49 percent stake it owned in the Thélios joint venture it had formed with Marcolin in 2017. Built from scratch and inaugurated in 2018, Thélios is based in the Italian eyewear cluster of Belluno.

In September 2023, Thélios acquired French high-end sunglass brand Vuarnet from NEO Investment Partners without disclosing any financial details. It marked the first acquisition for Thélios, which designs, produces and distributes sunglasses and optical frames for many of the group’s brands including as Dior, Fendi and Givenchy. Thélios took back the Dior and Fendi licenses from Safilo a few years ago to better control the brands’ image in eyewear.

Safilo has held informal merger talks with Marcolin many times in recent years, but a deal never materialized. Safilo makes eyewear for brands whose appeal has waned. These include Kate Spade, Tommy Hilfiger and Fossil. It’s not surprising that in 2023, Safilo’s net sales were down 2.4 percent at €1.02 billion. That’s also why the company is keen to acquire Marcolin.

MARCHON

Marchon is a sturdy rival. Like Safilo, Marchon generates around $1 billion in annual turnover. Marchon has a production unit in Puos d’Alpago, in Italy’s eyewear making cluster of Belluno, and a global network of distributors. The U.S. eyewear company works with brands such as Calvin Klein, Lacoste, Paul Smith and Ferragamo.

“Marchon is not to be discounted even though it may difficult for it to compete against Kering,” one source with knowledge of the talks said. But three other sources said that Kering was talking to Marchon about the possibility of doing a deal together and would let Marchon acquire the licenses Kering does not want keep. “It’s not obvious to obtain the approval from other smaller licenses to move from Marcolin to Marchon,” a senior industry source said.

The sale of Tom Ford in 2022 to the Estée Lauder Companies torpedoed Marchon’s acquisition of Marcolin at the last minute, as Miss Tweed was first to report.Tom Ford, the high-end brand started up by the eponymous designer turned filmmaker, represents more than 50 percent of Marcolin’s revenue. Tom Ford is one of the world’s biggest eyewear lines for men. It would nicely complement Kering’s portfolio, which is predominantly for women with brands such as Gucci, Balenciaga, Saint Laurent and Bottega Veneta.

Unlike Marcolin, LVHM’s Thélios and industry giant Luxottica, Kering does not have one main production center but a central logistics hub in Italy that has been operational since 2019. Kering also owns a majority stake in Italian eyewear manufacturer Trenti and works with more than 40 different external manufacturing partners, mainly in Europe.

Kering launched an eyewear joint-venture with Richemont group in 2017. It started with Cartier and now works with several other Richemont brands such as Chloé, Dunhill and Montblanc. Kering produces Cartier eyewear at the Manufacture Kering Eyewear in Sucy-en-Brie, not far from Paris and Orly airport.

A year ago, Kering acquired the French eyewear maker UNT (Usinage & Nouvelles Technologies), a key player in the manufacturing of high-precision metal and mechanical components located in the Upper Jura, France’s historical hub for eyewear and micro-technical production.

LICENSE AGREEMENTS

In license agreements, it is customary to include a provision stating that a change of ownership of the licensee allows a contract to be ended. It is not clear what will happen to Marcolin’s licenses if Kering or another competitor buys the company. In the past six months,Marcolin has renewed a number of licenses up to the end of 2030, including that of Zegna. Any change to Marcolin’s ownership would allow Zegna to renegotiate its license or to terminate it, but there would be a notice period, a source close to the company said.

The one license that is secure is Marcolin’s Tom Ford license, its main asset. At the end of 2022, Marcolin paid a whopping $250 million to The Estée Lauder Companies, the new owners of the Tom Ford brand, to secure the perpetual license for the Tom Ford brand. The deal was funded by a combination of cash and a capital increase by PAI Partners of $50 million.

It’s possible that if Kering acquires Marcolin, it would been keen to let go of many of the licenses that Marcolin has with brands that are too mass-market for the luxury group. These include Kenneth Cole, Adidas, Skechers and Timberland. The Marcolin licenses Kering would likely be interested in are Tom Ford,Zegna, Tod’s and Christian Louboutin, which the Italian company signed last month. Marcolin also has a license to produce eyewear for Pucci, which belongs to LVMH, until the end of 2030.

Zegna’s Thom Browne menswear fashion brand bought back the eyewear license over a year ago. Its eyewear business and production are now handled internally.

Marcolin last year acquired IC! Berlin, a small independent eyewear manufacturer which employs 140 people and was founded in Berlin in 1996. Financial terms were not disclosed. Marcolin also owns the brand Web Eyewear.

In 2023, recurring operating income generated by Kering Eyewear rose to €276 million from €203 million in 2022, “reflecting Maui Jim’s contribution and the Eyewear division’s newly acquired scale,” the group said. Taking into account Kering Beauté and corporate costs, the “Kering Eyewear & Corporate segment” posted a recurring operating loss of €7 million for 2023, an improvement from the loss of €88 million in 2022. The figure is revealing of the size of the investments Kering has made to build up its beauty unit and the group’s “corporate” expenses.

Should Kering buy Marcolin, its net debt would likely rise. The group’s net debt stood at €8.5 billion at the end of 2023, up from €2.3 billion at the end of 2022. The increase was partly due to the €3.8 billion bond Kering issued in August 2023 to help finance its €3.5 billion acquisition of the French fragrance label Creed, one of the most expensive deals in perfume in recent history. The group said: “Creed’s high level of profitability offset start-up costs at Kering Beauté.”

Another brand that could come on the market soon but is much smaller is Britain’s Linda Farrow, according to boss Simon Jablon. Founded in 1970 by designer Linda Farrow, it is now run by her son Jablon. The upmarket British eyewear brand is profitable and makes £10-15 million in annual sales. Last month, it unveiled a collection for French brand Jacquemus.

Linda Farrow has done collaborations with fashion brands such as Y/project and Dries Van Noten. After being hit hard by the pandemic, Jablon took Linda Farrow off the market, refusing offers it considered too low. As business rebounded, Jablon told Miss Tweed in 2022 that he was not actively looking for external investors, but was not closed to the idea.