Where is consumer purchasing power headed in Russia? A question raised in Vladimir Putin’s ‘Direct Line’ program on 20 June

One of the key subjects in Vladimir Putin’s 4 hour televised session of Q&A with the Russian public on 20 June was pay levels, family income and purchasing power.  The generalized perception judging by the phone-in and internet communications with the President’s call centers across the country was that living standards have been eroding for the past 3 years or more, with no end in sight.

In response, Putin cited official statistics indicating that real, inflation-adjusted pay and pensions have in fact been going up for more than a year, though due to rising consumer debt on credit cards and easily procured bank loans, disposable family income has been impacted negatively by monthly interest and capital repayment.

 

It would thus appear that the problem in the broad population is rising expectations meeting head on rather modest, almost imperceptible improvements, leading to the grumbling we heard on the Direct Line program. So far this has not translated into any political trends: the latest public opinion polls in fact show a small rise in the popularity of the President, to well over 60% approval ratings.

 

The reasons for the seeming political neutrality of the issue of where living standards are headed is that the situation is genuinely hard to read with any degree of certainty.  In Russia, as most everywhere else, statistics can easily be misleading. And in Russia, the likelihood of error is all the greater, given the vast size of the country and regional variations in cost of living and earning power. The only thing that is certain is that wages are still very low by European standards, and in particular in a country aiming to be the fifth largest economy of the world in just a few years

 

In what follows, I will set out some of the confusing indications on the present condition of purchasing power in Russia, with a focus on the geographical area that I visit regularly, namely St Petersburg and the surrounding countryside of the Leningrad Oblast forming an arc of 80 kilometers from the metropolis. To that, I add some observations relating to spending habits nationally and to the flow of new consumer products to market,  pointing to the degree of optimism among Russian producers of industry, services and agriculture in the future growth of disposable income and future spread of discerning taste and demand.

 

 

Though it is obviously anecdotal in nature, I begin this review with mention of what I consider to be reduced customer traffic in St Petersburg urban and suburban shopping centers over the past year.  This is matched by reduction in the number of cashiers that stores employ, with many cash registers left unmanned.  Is this an indicator of lower purchasing power?  It most certainly is.

 

Meanwhile, I see the counter-indicator of continued expansion of retailing, that is to say the opening of new supermarkets in top, middle and bottom sectors of the consumer market both within the city and extending out into the countryside. To be sure, the biggest change in the retailing landscape here is the proliferation of outlets of an economy level chain called “Fix Price” (written in English, by the way). They are now moving out into the Leningrad Oblast and penetrating towns of 10,000 or fewer inhabitants. This particular retailer offers leading Russian and international brand products at prices suggestive that they “fell off the back of the truck.”

 

In some supermarkets, I see that high value and perishable products like fresh fish have been discontinued; but in others, they are improved with investment into better display equipment to ensure longer salability, and the goods seem to move well.

 

What is most impressive is the continuous expansion of product assortment and upgrading. Allow me to be very specific.  In the past year, I have noted the appearance in supermarkets of locally produced grated parmesan cheese in plastic packets for use with pasta dishes, or rillettes of salmon, of mackerel and other fish in either piquant seasoning or creamy with capers and dried dill.  Without meaning to be condescending, I doubt the average American will know about the French appetizer “rillettes,” which usually comes in the form of a duck spread.  Russians seem to have caught on, however, and a modestly priced and excellent array of such products has been brought to market by a Moscow food producer, sold in chilled displays in supermarkets at about 1.50 euros for a 100 gram jar, and bear the name “rillettes” transliterated into Cyrillic.

 

Then a recent addition to the fresh fish offerings is gorbusha (pink or ‘humpback’) salmon caught in the northern seas by the Murmansk fleet.  These one-kilogram fish which originally grew in the Pacific but more recently are found in European waters are fairly lean, but not dry and make an excellent alternative to the large Scandinavian farmed salmon (entering the Russian market from the Faroe Islands). The whole fish is priced at half the 20 euros per kilogram that the Norwegian steaks now cost.

The Murmansk fishing industry is continuing its penetration of Petersburg and northwest Russia with less elite but high quality wild sea fish such as flounder at often ridiculously low prices.  Their ability to expand in what has traditionally been pork and sausage country comes from the quality and price advantages of their products.

In parallel the fish farming in nearby Russian Karelia provides the Northwest with a steady supply of excellent quality and affordable lake trout weighing between two and four kilograms, making them a festive main course for dinner parties. These may be found on sale even in small towns in the hinterland.  I know of no such comparable fish on West European markets.

The municipal markets here, which had long been controlled by Central Asian and Caucasian traders, have for more than a year shown great commercial flexibility in sourcing, with supply moving from south to north as the season progresses.  A visit to our Pushkin/Tsarsoye Selo market a couple of days ago provided us with a dinner opening with superb wild chanterelle mushrooms brought in from the forests about 150 km southeast of here, in Tikhvin, where composer Rimsky-Korsakov and other notables had their dachas in the late 19^th century.  And our meal progressed through baked Murmansk gorbusha, to mixed green salad coming from local greenhouses, to end with very fragrant strawberries coming from growers 100 km to the southwest of Petersburg, northern berries that put to shame the wonderful strawberries from Crimea that were on sale a couple of months ago.

 

The point about the municipal markets is that they are visited by the most discriminating consumers, not necessarily by the wealthiest.  Prices often are not very different from those in supermarkets, but the sourcing is often entirely different. The difference is clearly that the supermarkets are compelled to buy from large-scale suppliers who can fill their retailing networks, while the markets can choose from small-scale growers. And the continuing presence of their customers is another sign that the economic situation of the people on the ground is not really all that bad.

 

I complete this encouraging survey of new and high quality Russian food products put on offer notwithstanding the possibly stagnating purchasing power of the population, by a remark on beverages – on one beverage in particular, sparkling wine.  This category was always a favorite in Russia, firstly among women, but not only.

 

In the past week, I was surprised to discover a new premium Russian sparkling wine sold under the name “Lev Golitsyn” in a special “Coronation” edition and produced here in St Petersburg by the company Igristye Vina, one of the country’s largest and oldest manufacturers in this category. It is available in both Semi-Sweet and in Brut formulations. I bought the Brut and could not believe my good fortune:  this 7-euro wine has a floral fragrance and excellent balance, just as the label informs us (truth in advertising is not a strong point in Russia).  As a professional in the field from my 5 years serving as General Manager, Russia for two of the world’s largest international spirits corporations, I say with hand on heart that the product is superior to most French non-champagne sparkling wines, not to mention Spanish Cava and Italian Prosecco.

 

Why the name “Lev Golitsyn”?  Because that member of a princely Russian family, many of whose descendants ended up in France or in California, had created a champagne empire in the Crimea, at Novy Svet (New World) in the late 19^th century and won international prizes for his products before the Revolution.  Why “Coronation”?  This is surely a reference to the coronation of Nicholas II in 1895 and sets the date of origin of the tradition being cited by the producer.

 

The discovery of this new product brought to mind my own experience in 1997 as lead investigator and negotiator on behalf of Joseph Seagram & Sons in a project to conclude a contract with a local co-packer who would produce a premium sparkling wine to our specifications and for sale via our distribution channels. On that mission, I met with the managing directors of several of Russia’s top sparkling wine manufacturers, including the Igristye Vina factory in St Petersburg,

 

At the start of our talks, the manager of Igristye Vina was not interested in cooperation because his operations had fallen to less than 10% of capacity due to the problems handicapping the entire Russian wine industry at the time: the lack of domestic wine stock due to the barbarous destruction of vineyards carried out a decade earlier under the direction of Mikhail Gorbachev in his anti-alcohol campaign, and the massive entry into the market of cheap and untaxed sparkling wines coming across the border from the Ukraine and other former Soviet republics.  With less than 10% of his factory in production, unit costs were prohibitively expensive and the factory had no time for us.   However, at our second round of talks six months later, the refusal to partner with us resulted from the opposite circumstances: state measures to put a halt to untaxed imports and to ersatz, largely German bubbly products, resulted in full occupancy of Russian market players.  Running flat out to supply their loyal domestic customers, they had no time to waste with finicky foreigners who wanted to change the raw inputs and process parameters to produce a relatively small special order in time for Christmas.

 

Now it appears that Igristye Vina have achieved exactly what we were proposing to them in 1997 without Western involvement and in response to an ever more discerning Russian consumer who is ready to lay out twice the price of standard Sovietskoye Shampanskoye for a bottle of premium product that has none of the yeasty flavor and quick spoilage of the Soviet GOST standard product though it is clearly being produced on the Soviet-era continuous production line as opposed to French Champagne’s batch method.  The difference is the quality of the base wines used and the attention to biologicals, including advanced filtration to assure longer shelf life.

 

The label on this product says nothing about the source of the wine materials, which, I assume, are largely if not completely imported – perhaps from nearby, as in the case of Moldova, perhaps from South America or elsewhere in the world.

 

I have taken the time to feature this product, because it makes the contrarian case that Russian consumerism at working class, entrepreneurial and managerial levels is becoming more sophisticated and producers like the wine factory in St Petersburg are moving in to fill demand that may just be starting, but which they expect to grow in the near future. At seven euros, this product is not directed at the affluent who can pay 50 euros for the French original, but to aspirational middle classes.

 

Now let us direct attention to another good indicator of well-being:  vacation travel.  During his televised chat at the G-20 meeting in Osaka last weekend with Turkish President Recep Tayyip Erdogan, President Putin mentioned that over the past year more than six million Russians have traveled to Turkey on vacation, a new record, and they spent more than 5 billion dollars, meaning more than $900 per capita.  That is to just one tourist destination and it contradicts the notion of economic worries on the mind of the middle class Russian tourist who made that trip.

 

Meanwhile, the large majority of our intelligentsia friends in St Petersburg have this year and last foregone their traditional summer vacations in Western Europe – not because they lack the money but because this is their protest at the Russophobia they know predominates in EU countries today.  Instead they are taking their vacations within Russia, visiting the provincial towns that were long on their ‘to do’ lists. Their travels go well beyond the “Golden Triangle” of ancient Russian cities that foreigners know so well. They take in small towns on the Volga of great historical interest such as Uglich, distant monasteries that have been reclaimed by the faithful and manor houses on former noble estates that have been lovingly restored and often offer lodgings to visitors that vary in price from princely to modest depending on the importance of the given rooms.

Most of our friends come back very pleased with the improved, international level of accommodations and food catering they find in the Russian heartland.  However, some report that the new facilities are still under-utilized. That is to say, investors are pouring money into infrastructure for domestic tourism that is only beginning to gain traction.  This is a leap of faith on the part of investors and runs contrary to the notion of a stagnating or regressing economy.

 

In summation, the Russian economy and the standard of living of the broad population are very difficult to size up with any certainty. But one can say with certainty that there is some actionable optimism about improving conditions on the part of investors, manufacturers and service providers that contradicts the negative notes we all heard during Vladimir Putin’s Direct Line program on 20 June.

 

©Gilbert Doctorow, 2019