The crisis of recent years has led to major changes in Russian patterns of consumption. Caroline Dufy, lecturer at Sciences Po Bordeaux and Russia watcher, takes an up-close look at a consumer society in flux.
Russia: a market in crisis
Caroline argues that you need to go back three decades to understand today’s Russia, saying that “although Russia has steadily moved towards a market economy since the Cold War ended, the transformation has not been plain sailing”. Since 1990 and the collapse of the Soviet Empire, the country has lurched from expansion to contraction, taking off in the 1990s, defaulting on its external debt in 1998, which triggered a recession, enjoying a growth revival in the early 2000s as oil prices firmed, before being hit by the international crisis in 2008.
“While the market softened with the 2008 international crisis, 2011 marked the true start of Russia’s economic crisis”, explains Caroline. It was certainly a year of contrasts, for it was also in 2011 that Russia joined the World Trade Organisation. What caused the economic meltdown? The collapse in the oil price, followed by a fall in the ruble exchange rate and 15% inflation. Russia found itself locked in a vicious spiral. “Then in 2014, international sanctions against Russia were a sledgehammer blow to the economy”, says Caroline, who is downbeat on the market’s near-term outlook, pointing out that real incomes fell by 10% between 2014 and 2015, and consumption declined by 10%-15%.
Russian consumers know how to adapt
Even so, Caroline remains optimistic: “Russian consumers have always managed to weather the crises that have plagued Russia. Over time, they have learned to adapt”. When their incomes go down, they pick up odd jobs to see them through to the end of the month. She also notes that the informal economy has ballooned since 2011. Moreover, despite the crisis, an upper middle class of approximately 30 million people seems to be taking shape and should continue to drive growth, even if, as Caroline points out, saving is also on the rise.
What are these crisis-hardened Russians buying? According to Caroline, “Russian consumers tend to prefer local items, particularly when it comes to food, where they like to fly the national flag”. The most heavily consumed foreign products are those that are considered to be “reliable”, such as medicines and cosmetics. “French cosmetics are an interesting case”, says Caroline. “They are extremely well regarded in Russia. This goes back to Soviet times, when the few Russians who got the chance to travel to Europe brought French perfumes back. These products have been associated with sophistication and elegance ever since.” Caroline adds that with the crisis, Russian women are turning to beauty for its “safe haven” qualities. Citing the large number of beauty salons across the country, she explains: “In times of crisis, we often see a transfer in spending away from services such as tourism and into less costly pampering items such as nail polish or nail care”.
Foreign business in Russia
If consumer patterns are specific to Russia, so is the market structure. Caroline says that competition is weak owing to oligopolistic conditions, relatively unstructured logistics, high entry barriers, red tape and private conflicts, which are on the rise. “Because of all this, the market is more favourable to multinationals such as L’Oréal, which wield serious bargaining power, than it is to smaller firms”, she says.
Which sectors are foreign businesses thriving in? “Not food, that’s for sure”, says Caroline. In retaliation for the 2014 economic sanctions, Russia slapped restrictions on imports of food products: “camemberts made in France have been kicked out of Russia”. Outside the energy, oil and gas sectors, cosmetics firms and major retailers are currently the best performers. Retail networks are consolidating and firms such as Auchan and Leroy Merlin are hanging onto their market positions despite the crisis. To shield themselves against currency fluctuations and get round customs barriers, multinationals are setting up locally. As Caroline explains: “Special economic zones have been created to attract foreign investors, as in the south-western Kaluga region, which is home to many auto manufacturers, and also to L’Oréal’s latest plant”. Watch for this trend to gain momentum if growth resumes.