Consumer Behavior in Russia



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Consumer Behavior in Russia:

Do Russian Consumers Have Higher Levels of Conspicuous Consumption than Consumers of Other Nationalities?




Carolina Zelinski

Fall 2010









Introduction:

Russia’s history of shortage and consumer constraint during the Soviet Era, followed by the adoption of capitalism and economic free-for all, raises the question: how were consumer decisions influenced by these pivotal events? Although much popular literature is devoted to analyzing Russia’s relatively recent, yet booming luxury goods market and creating the “New Russian Man,” stereotype, this literature provides little empirical evidence.

Russia was a communist state from 1917 to 1991 and operated under a centrally planned economy. Through subsidization and the centrally planned market structure, prices and availability of goods became severely distorted. The pricing structure under the centrally planned economy was virtually unresponsive to consumer demand, which resulted in excess demand and chronic shortages of most consumer durable goods.1 With the fall of the Soviet Union in 1991, Russia adopted capitalism and moved towards a market economy.

From 1928 to 1991 all economic activity was guided by a series of Five-Year Plans as a means of boosting productivity. The state transformed the former USSR from a predominantly agrarian society to a top manufacturer of heavy industrial products and weaponry and a producer of natural resources.2 At the same time, the USSR lagged far behind in the output of consumer durable goods mostly because Soviet-type economic planning was insufficient in predicting demand because it was not a State priority.3 The Russian state focused activity on the development of heavy industry, neglecting to address demand for most consumer durable goods. Even after the collapse of the Soviet Union, it took several years for the luxury goods market to sprout roots in Russia. Olga Mamonova, Vice President of JamilCo, a limited holding company very active in the Russian luxury goods market, illustrated the condition of Russia’s luxury good market: “Until 1997, there was hardly anyone to build a business on.” 4 Mamonova goes on to observe the aftermath of the heavy industry-centric planning of the Soviet state, “No one knew what “brands” were. Levi’s were too expensive for the State and didn’t correspond with their priorities.”5

The transition period from communism to capitalism led to extreme wealth polarization. Rapid privatization allowed a handful of privileged Russians the opportunity to become very rich, very quickly. For the majority of Russians, however, income dropped drastically between 1990 and 1998. Amid great poverty, those who became millionaires overnight were dubbed as the stereotypical “New Russians.” According to European online lifestyle newspaper, Guardian, “In the mid 1990s Russia’s nouveaux rich gained a reputation for their fascination with diamonds, logos,” and the Rolex and Rolls Royce became “uniform and symbol for a generation of businessmen.”6 Russian consumers went from having virtually no access to luxury or brand name goods, to an influx of designer goods entering Russia’s newly established market economy. The “New Russian” stereotype became notorious for its flashiness and “head to toe…designer dressing.”7

Given the history of shortage and consumer constraint, we might expect consumers to respond to the drastic drop in Russia’s GDP per capita by sharply cutting back on all non-necessity expenditures. On the other hand, consumers may instead feel the need to emulate the “New Russians,” which would cause them to allocate more income towards visible goods and away from necessities. I want to test whether there is any empirical evidence that the average Russian consumer was influenced by the New Russian stereotype and how consumer behavior was affected at the macroeconomic level.



Literature Review

The topic of my research has been inspired by a variety of studies encompassing heterodox economic theory, psychological, anthropological, and sociological studies, empirical studies, and popular media articles about the atmosphere of consumerism in Russia. Thorstein Veblen’s Theory of the Leisure Class analyzes the habits, practices, and lifestyle of the affluent class. Veblen takes a heterodox point of view on economics and argues that conventional economic theory does not appropriately describe the reality of economic institutions and practices in society. According to Veblen, people are not super-rational beings looking to maximize benefits relative to costs; rather, humans are governed by instincts.

Veblen traces the origin of private property back to the seizure of female captives in barbaric times. The seizure of women from enemy tribes was the first instance of ownership. Women acted as trophies for the successful tribal conquerors and symbolized “predatory prowess,” meaning the level of dominance that a man had in his tribe. Veblen thus makes the point that ownership did not develop as a basic need for survival. Rather, “Ownership began and grew into a human institution on grounds unrelated to the subsistence minimum.”8 Property was adopted into society as trophy, which acted as a symbol of honor and success attached to wealth, rather than a means of survival. It was also Veblen who first coined the term “conspicuous consumption” which referred to the practice of using possessions as a means of signaling one’s status in society. “Conspicuous consumption,” became the modern-day equivalent of “predatory prowess.” As Veblen explains, “The utility of consumption as an evidence of wealth is to be classed as a derivative growth. It is an adaptation to a new end, by a selective process of a distinction previously existing and well established in men’s habits of thoughts.”9 Veblen’s social criticisms and terminology have provided the basis of discussion for psychological, sociological, and anthropological theorists. Although Veblen’s observations and criticisms are very thought provoking, he offers no replicable or empirical evidence for his theories.

Veblen’s theory of conspicuous consumption was applied in an empirical working paper by Charles, Hurst, and Roussanov (2007), titled “Conspicuous Consumption and Race.” The study explores the factors that contribute to disparities in spending on visible goods between races. The study, however, emphasizes a model of “status seeking,” in which spending on visible goods is the product of a household’s income position relative to a specific reference group. Ultimately, the authors’ find that race is not the sole determinant of visible consumption spending. Rather, a household will determine its visible consumption spending based on its economic position relative to a reference group. Only when controlling for gender and marital status did the racial difference remain large among sub samples of single men, single women, and married households.10

The data were collected from the 1986-2002 Consumer Expenditure Survey (CEX), which is an ongoing rotating panel dataset, in which the United States Department of Labor collects interviews from participating households up to five times at three month intervals.11 The sample included 48,758 households, consisting of 36,706 white households, 6,760 black households, and 5,292 Hispanic households.12 The relative status model predicts a negative relationship between visible expenditure and higher reference group income, which holds true among all white communities with different average incomes.

To model the consumption patterns by race in the CEX, the study used a regression on a sample of black, white, and Hispanic households. The following regression was used:

ln(visiblei)= β0 + β1Blacki+ β2Hispanici+ YIncomei+ φExpenditurei+ θ Xi+ ήi

Black and Hispanic were used as dummy variables. Total income included both labor and non-labor income earned by the family members. Expenditure measured total expenditure for the given household. The expenditure control was included as a proxy for the household’s permanent income on the basis of the permanent income hypothesis, which assumes that current levels of consumption depend on permanent income, rather than current income.13 The variable X controlled for demographics including age, education controls, household wealth, an indicator for the number of adults in the household, total number of family members, marital status, whether the household head is male, urbanicity, metropolitan statistic area (MSA) residence, and census region.

The study found that varying for race alone when holding income and all else held constant, blacks and Hispanics spent less than whites by 38 percent and 24 percent respectively. When race was held constant, the estimated coefficient on income was -0.017, which means that increasing mean state income by $1,000 would reduce visible consumption by 17%.14 These results suggest that there is a strong negative relationship between the propensity of white households to spend on visible goods and the mean income of white men in the state.15 In other words, the study finds evidence that a person’s reference group (determined by income level) most strongly influences visible consumption expenditures.

The study concludes that visible consumption declines as the income of the reference group increases. This conclusion is surprising because the wealth effect says that people will increase expenditures as their wealth increases. The study also shows that in order to make up for conspicuous spending, blacks and Hispanics spend less on education and health care. Within-race results are also consistent with the “status seeking” model. If the mean income of those of a person’s own race within their state increases, the person will spend less on visible consumption.16

“Conspicuous Consumption and Race” provides evidence supporting Veblen’s theory of conspicuous consumption on a micro level. Traditional economic theory suggests that consumption is solely a function of primary income and preferences, while Veblen suggests that consumption and ownership of goods is also a status signaling mechanism. While the study analyzes racial differences in visible expenditure under capitalist market structure, the focus here is on analyzing Russian consumers’ response to transitions in market structure. In order to observe this national phenomenon, macroeconomic data will be employed to analyze economic changes.

Serguei Alex Oushakine explores the psychological impact of Soviet era shortages and constrained access to consumer goods on the modern Russian’s interpretation of consumption in “The Quantity of Style: Imaginary Consumption in the New Russia.” Oushakine surveyed a group of young people, ages 18 to 24, who had no first-hand experience of the Soviet reality.17 During his interviews, Oushakine asked the students to describe their understanding of the “Soviet past” and the “post-Soviet reality.”18 The students’ responses shared a recurring theme of using elements of consumption to describe the different political regimes.19

The students’ observations echoed Veblen’s theories heavily. For example, Oushakine writes that “the gendered character of consumption depends on the position of consumption in the hierarchy of social activities; when display of consumption becomes important for production of dominant status, consumption is perceived as a male type of practice.”20 The students’ responses show that it was not novelty of the objects acquired by the New Russians that defined them, but it was the quantity of former status symbols that set them apart.21 Oushakine concludes, “the mindless quantity of things that the students use as the group’s marker: the number of rings…the weight of the neck chain…the price of the car, of a suit, or of a tie…” set the New Russians apart from the old Russians. 22 Thus, conspicuous consumption for new Russians manifested through excess and “quantity-driven” consumption and the “feature that distinguishes the new Russian man is the amount of stuff he manages to accumulate.”23 Oukashine’s study suggests that capitalism’s greatest influence was not the availability of new Western goods to the Russian consumer, but it was mere access to unconstrained quantities of any goods that produced the greatest impact on consumer culture in post-Soviet Russia.

This study employs a regression model similar to the one used by Rask and Rask in “Reaching Turning Points in Economic Transition: Adjustments to Distortions in Resource-based Consumption of Food,” (2004). Rask and Rask look at changes in food consumption for the transition economies of Central and Eastern Europe (CEECs) and the former Soviet Republics during their transition to market economies. Their model consists of separate regressions on total food consumption as a function of per capita income for transition and baseline market economies.24 The regression is repeated for the pre (1975 to 1989) and post (1990 to 1999) economic transition time period.25 Similarly, in this study conspicuous consumption (ie, visible consumption) is modeled as a function of GDP per capita for a group of formerly Soviet and non Soviet countries.

To demonstrate the changes in food consumption behavior during the transition period, Rask and Rask identify the differing market and non-market relationships, then add the transition paths followed by the individual transition economies during 1990-1999.26 By including the transition paths for the five countries, they identify three critical turning points for food consumption. The first was a drastic drop in consumption; the second was stabilization in food consumption at new, lower levels; the third was the achievement of food consumption patterns that resembled those of the market economies, where food consumption was consistent with that of market economies at comparable levels of real income.27 The study concluds that the pricing systems of non-market economies distorted demand for food consumption in pre-transition economies, which readjusted to market-based levels when the subsidies were dismantled.28 Reaching the market curve was interpreted as an indicator that market structures had been largely achieved.

Model

In order to model conspicuous consumption at the macro level, this study adapts the regression model used by Rask and Rask. Their model uses aggregate food consumption data measured in cereal equivalents as a function of GDP per capita, suggesting that GDP per capita is the most relevant continuous variable which can be used to explain consumption at the macroeconomic level. Due to data availability, conspicuous consumption cannot be measured directly, so nonfood expenditures are used as a proxy. The first regression tests whether Russians spend differently relative to consumers of other nationalities from 1989 to 2009:



  1. NonFoodi= β0 + β1GDPpercapi+  β2iDRussia*GDPpercapita+ β4 Dyears1989-2009

The second regression tests whether Russian consumers spend differently relative to consumers of other nationalities, adjusting for the unique changes that Russia’s economy underwent from 1989 to 2009 by including an interaction term between Russia and year dummy variables.

(2) NonFoodi= β0 + β1GDPpercapi+  β2+ β3DRussia*GDPpercapita+ β4DRussia*Dyears1989-2009

The time period 1989 to 2009 is significant for analyzing consumer behavior for former Soviet and non Soviet countries in the aftermath of the Soviet Union’s collapse. While the model used by Rask and Rask includes years 1975 to 1990, here the focus is specifically on the transition period itself, in order to understand how Russian consumer behavior differs from that of other consumers as a result of the transition to capitalism post 1991. The use of both regressions allows examination of two effects during the transition period. Regression (1), measures the Russian consumer’s additional spending on non-food expenditures, holding GDP per capita constant. Regression (2), measures how the Russian consumer response to the transition period evolved over time in addition to supplementary spending on non-food expenditures, holding GDP per capita constant.

Data

In order to measure conspicuous consumption, a variable for which data was not readily available at the macroeconomic level, “non-food consumption” was used as a proxy. While “conspicuous consumption” referred to explicitly visible goods only, food and non-food data can offer an initial glimpse into expenditure patterns. Following Veblen’s theory that “conspicuous consumption” encompasses all frivolous and non-essential expenditures, extracting food, which is a clearly necessary expense, allows the nonfood category to capture many non-essential purchases, some of which fall into the “conspicuous consumption” category.  

Non-food expenditure is calculated as the residual after subtracting food and is expressed as a percentage of total household expenditures. Using food expenditure data from the FAO Statistical Database (FAO STAT) merged with food expenditures listed in Britannica Book of the Year, an unbalanced panel data set is generated, consisting of 312 observations for ten formerly Soviet countries and ten non Soviet countries for the years 1989 to 2009.29,30 Missing data from FAO STAT are supplemented with Britannica Book of the Year information.

Although merging the two data sources increases the number of observations, some discrepancies are encountered between the numbers reported in FAO STAT and Britannica Book of the Year. The discrepancies result from inconsistencies in the measurement of items included in food expenditures. For example, some countries include hotel expenses as a portion of food expenditures, while others exclude alcoholic beverage expenditures. In order to minimize inconsistency, merging the data sources is done in a selective way. When the food expenditure numbers in either source are not comparable, a single source is chosen, without merging the data.

In order to account for the influence of income changes on expenditures, GDP per capita is included as an explanatory variable. GDP per capita is necessary because income fluctuations affect all consumer decisions in all countries, independent of the market transition process experienced by Russia. The ERS FDA International Macroeconomic Database provides historical GDP per capita data for the years 1989 to 2009. GDP per capita is adjusted for inflation and measured in real 2005 dollars.

Due to the specific interest in measuring Russian conspicuous consumption via non-food expenditures compared to the experience of other countries, a dummy variable for Russia is included. Variables for each year 1989 to 2009 are also included in order to account for yearly expenditure changes during transition. The use of panel data helps avoid some of the omitted variable bias resulting from measuring expenditures by country at the aggregate level. Because the dataset includes both formerly Soviet and non-Soviet countries, panel data allows us to control for some of the unique characteristics of each country included in the data set, such as level of economic development and culture.



Results

Regression results are fully summarized in Table 1 of the Appendix. Both regressions (1) and (2) have high R-squared values of 0.70 and 0.69 respectively, meaning that on average, the independent variables explain roughly 70 percent of variation in non-food expenditures around the mean non-food expenditure. Please note that robust White standard errors were used to adjust for the presence of heteroskedasticity.

Regression (1) measures the additional spending on non-food items incurred by Russian consumers (“Russia GDP per capita” variable) as well as the yearly differences in spending on non-food items by consumers of all countries in the sample (year dummy variables). The constant is statistically significant and has a value of 44. The GDP per capita coefficient is also statistically significant and has a value of 0.001. These results mean that on average, all else held constant, consumers of all nationalities within the sample spend 44 percent of their total household expenditures on non-food items and an additional $1,000 increase in their income will raise non-food expenditures by 1 percent. The different coefficients on the year dummy variables mean that non-food expenditures varied yearly. The coefficient on “Russia GDP per capita” is near zero and statistically insignificant, which suggests that Russian consumers do not deviate from others in their spending habits. I suspect that the effect of Russian consumer spending habits is inaccurately measured due to omitted variable bias. In particular, annual effects are ignored. In this first attempt, I did not adjust for the unique market transition that Russia experienced while changing to a capitalist market structure and simply included year dummy variables to measure yearly effects on non-food expenditures experienced by all countries within the sample. In regression (2), I adjust for the unique characteristics of Russia’s transition from communist to capitalist market structure by creating interaction terms between the dummy variable for Russia and each year dummy variable.

The constant coefficient of 52 is larger and more statistically significant in regression (2). The “GDP per capita” coefficient has remained at the same value and is still statistically significant. The most notable change is in the “Russia GDP per capita” variable, which now has the same coefficient value as “GDP per capita” of 0.001 and is very statistically significant. Now, the results can be interpreted as consumers of all nationalities within the sampling spend 52 percent of their total household expenditures on non-food items; an additional $1,000 of income will increase non-food expenditures for all consumers by 1 percent, but Russian consumers will increase non-food expenditures by additional 1 percent with the same $1,000 of extra income. In other words, increasing income by $1,000 for the Russian consumer will result in 54 percent non-food expenditures and only 53 percent non-food expenditures for consumers of all other nationalities within the sample. This extra 1 percent of non-food expenditures may be explained by the conspicuous consumption effect that Russian consumers experienced with the rise of the “New Russian” stereotype in spending. In other words, the emergence of the “New Russian” stereotype may have had an impact on the Russian consumer at the aggregate level because the same increase in income has a greater effect on Russian consumers’ non-food expenditures than on consumers of other nationalities.

Further support for the conspicuous consumption hypothesis can be seen in the Russia and dummy year variable interaction terms. All interaction terms are statistically significant, meaning that each year of Russia’s transition from communist to capitalist market structure adds explanatory power to non-food expenditures. Furthermore, in the years immediately after the Soviet Union was dismantled and capitalism was adopted, non-food expenditures in Russia are significantly higher than in other countries. In 1990 and 1991 non-food expenditures are 3 percent and 1 percent higher, respectively. This may be evidence of pent up demand because the switch to market economy may have radically increased the variety of goods available in stores, which triggered increased consumer spending.

The increasing trend in non-food expenditures is then reversed in 1992, when Russian consumers start spending below the level of other consumers. Non-food expenditures drop to the lowest level in 1995, when Russian consumers are spending an astonishing 15 percent below the 52 percent average spending on non-food items. By 1995 GDP per capita had dropped 60 percent from 1990 levels, bringing average income to a drastically new low.31 At this point, the average Russian consumer was struggling to make ends meet as devastating poverty gripped the country. As evidence of the country’s dire state, average life expectancy fell by 4 years between 1990 and 2000, from 69.2 to 65.3 years.32 From 1995 onward non-food expenditures become less negative. By 2006, non-food expenditures are just 2 percent below the average levels, which suggests that the market transition is largely complete and Russian consumers are back to very similar levels of spending compared to all other consumers. While loss of food subsidies contributed to some of the initial increase in non-food expenditures, the pattern of initial increase, followed by a drastic decrease and once again increasing trend in non-food expenditures suggests that food subsidies do not fully explain changes in Russian consumer spending. Food subsidies were dismantled after the fall of the Soviet Union in 1990 and prices on both food and non–food goods rose drastically.33 If withdrawal of food subsidies was the primary factor affecting consumer spending, we would expect to see one major adjustment in 1990 followed by non-food expenditures remaining constant at these new higher levels. However, these regression results reveal a smooth pattern of increasing, decreasing, and once again increasing non-food expenditures, which suggest that the fluctuations in spending are connected to yearly changes experienced by Russia’s economy in the time of transition.



Additional Analysis

In order to gain more insight into the effect of transitioning from centrally planned to market economy, GDP per capita and non-food expenditures are graphed over time (please refer to Table 3 of the Appendix). The graphs illustrate the relationship between GDP per capita and non-food expenditures for Russia, a group of former non-Soviet countries, a group of former Soviet countries from the data sample, and a group of former non-Soviet countries with GDP per capita levels similar to Russia’s during the transition period.34 These graphs show that both non-Soviet groups had very similar expenditure patterns, despite the difference in GDP per capita. On the other hand, the Soviet group had a very different expenditure pattern from the non-Soviet group. Russia’s expenditure path closely resembles that of the former Soviet group and deviates from the path of the non-Soviet group with similar GDP per capita levels. This suggests that undergoing a market transition has an additional impact on expenditures beyond relative level of income.

Please refer to the graphs that show expenditures for former Soviet countries, former non-Soviet countries, and former non-Soviet countries with GDP per capita levels similar to Russia’s. The former Soviet countries experienced fluctuations in expenditures of close to 40 percent. On the other hand, former non-Soviet with lower GDP per capita levels maintain consistent levels of expenditures once they reach 70 percent of total household expenditures in 1994. Some of this difference can be explained by the initial presence, and later removal of food subsidies in Soviet countries.

Referring to the graphs that compare non-food expenditures and GDP per capita for the former Soviet group and Russia, both groups follow a similar expenditures and GDP per capita trajectory. Expenditures steadily decline from 1990 to 1995, then bottom out from 1996 to 2000, and then steadily increase from 2001 to 2007. Around 2003, expenditures hit a plateau for both non-Soviet groups; meanwhile, expenditures continue to increase for the former Soviet group and Russia. This shows that Soviet countries are steadily increasing their non-food spending and conspicuous consumption may become increasingly more evident as Russia’s income rises.



Conclusion

The stereotypical spending habits of Russian consumers are so widespread that even the Economist has gone so far as to pose this provocative question: “Why do Russians who earn one-fifth as much as The Economist's Moscow correspondent buy clothes and mobile phones that are twice as expensive as his?”35 The article goes on to explain that Russians spend so much on visible goods because they prefer spending to saving, which hints at conspicuous consumption. This qualitative observation is yet another example of conspicuous consumption as a defining characteristic of the New Russian. Studies conducted by Oushakine and casual references such as the one made in the Economist provide strong evidence that it is widely believed that Russians of various economic classes prefer to spend heavily on visible goods.

In this study, I tested these assumptions at the macroeconomic level through regression analysis and found that Russian consumers do have a higher propensity to spend on non-food items than consumers of other nationalities. One possible explanation for Russian consumers’ spending habits is the influence of the “New Russian” stereotype, which emerged quickly after Russia adopted market economy reforms. While only a select group of individuals were initially able to acquire exorbitant amounts of wealth from privatization of Russia’s energy business, their image became iconic across the country. The desire to emulate the New Russian combined with pent up demand due to a history of chronic shortages under the Communist system fueled conspicuous consumption despite a significant loss of income.

Yearly changes in consumer spending also revealed three major turning points in the transition process. First, there was an immediate rise in non-food expenditures, followed by a drastic drop in non-food expenditures, followed by a gradual return to non-food expenditure levels similar to other countries in the sample group. The pattern in consumer spending suggests that Russia’s economy has, for the most part, fully undergone its transition to market economy. This study ultimately shows that Russian consumers have a higher propensity to spend on non-food items, but their levels of spending are converging with consumers of other nationalities.




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