Over the last few months, Russian consumers have discovered that the car they saved for is now $11,000 or even $12,000 instead of last year’s $9,000. Russians can barely dream of a week in Europe for only $600-700 this summer, and a small Italian sofa costs $2,500 instead of $2,000. Prices on the Russian consumer market have risen by 10-15% compared with last year, and in some sectors, such as tourism, cosmetics, footwear, and furniture, prices have risen by 20% or more.
Experts see the strong euro as the main reason behind the rise in prices. Many Russian importers and companies using imported raw materials have revised their pricing policy. However, those in the euro zone are not the only ones who have raised prices. Goods and services in the ruble zone have gradually followed suit.
As a result, things look quite chaotic at the moment. Each company is trying to find a balance between the economic necessity to increase prices and the chance to make some money. Market players are sounding out and evaluating potential changes in supply and demand. However, consumers’ reaction to the change in the price situation is already clear.
The market has responded to the rise in prices, and purchases have fallen noticeably in almost every industry. The downward trend in demand is evident even in expensive market segments, which react more sluggishly to price fluctuations, such as expensive footwear, perfumes and cosmetics, and cars. The middle segment of the consumer market responded most strongly to the change in prices.
Today’s situation on the Russian consumer market will likely remain unchanged until autumn. On one hand, buyers will have time to adapt to the new prices over the summer, and on the other hand, the time will come to conclude new annual contracts and business strategies will be finalized. However, many companies dealing in European goods have already announced that they have switched to the euro once and for all and do not intend to return to the dollar. Other companies’ policies will depend on the dollar and euro exchange rates as well as on the market reaction to price fluctuations. According to preliminary forecasts, if the euro continues to go up, the share of goods from the dollar and ruble zones on the Russian consumer market will begin to increase.

Asian dawn

The car market is seeing the most conspicuous changes linked with the strong euro. Consumers haven’t stopped buying cars but companies dealing in euros have seen a fall in sales growth rates, and the leaders in sales have changed dramatically. Today, cars with prices in dollars are in the top spots, mostly Japanese and Korean cars. As a representative of one Japanese companies mentioned to Expert, Moscow dealers have suddenly had a hard time keeping cars in stock. Thus, for example, in the last 5 months Honda has sold 2.5 times more cars than in the same period of 2002. Hyundai also reported that May was a record-breaking month for the company. Its monthly increase in sales amounted to 521%. As a result, Hyundai’s share in the Russian market increased by June from 5.03% to 6.94%.
The car companies themselves have different attitudes toward what’s going on. Thus, for example, Tatyana Natarova at Honda noted that currency fluctuations have always existed and just a year and a half ago the situation was quite the reverse due to a strong Japanese yen. As for growing demand, there are other factors as well, such as the stabilization of the Russian economy, increased household incomes, and the availability of high-quality models on the Russian market.
Yet, even dollar-pegged car makers are far from ecstatic about the current situation. “Exchange fluctuations in the currency market lead to the unpredictable development of the car market,” notes Sergei Kirillov, a marketing coordinator at Rolf-Holding, a Mitsubishi distributor. “As a result, there is a shortage of cars in showrooms and negative customer expectations.” Many European car makers have already faced the consequences. Losing their positions in the sales rating means a real loss of market share. This means not only lost profit but also lost future profits from car service and customer loyalty.

Retail works like this: the more a trade network depends on imports, and above all on European imports, and the more severe competition on the market, the more noticeable changes in prices and in consumers’ activity.
Household appliances, where imports from the euro zone have a substantial share and fierce competition doesn’t allow companies to increase prices in response to the exchange rate, is most indicative in this respect. According to available data, the demand for European appliances has dropped noticeably over the last few months.
“Goods from the euro zone in our stores make up 20-25%,” says Mikhail Kuchmet, marketing director at M. Video. “Suppliers’ prices have risen, which reduces their goods’ competitiveness as compared with, say, Korean products. But we haven’t increased prices so far, sacrificing profits, since we believe that the euro rise is a temporary market phenomenon. But if the trend continues, the market – and we with it – will redirect our efforts to goods from the dollar zone.” According to retailers, some European manufacturers of household appliances have already responded to the situation and lowered their prices by setting them in dollar equivalents.
Russian furniture importers are faring far worse as they traditionally operate in the expensive segment of the market. According to the market players, the rise in euro exchange rate has frozen this until recently fast-growing segment. Only in the last two to three years has the Russian middle class finally taken an interest in designer furniture. Since the furniture market is extremely sensitive to price anyway, the demand for imported furniture has dropped much faster than prices have risen.
Reduced consumer activity is noticeable in the fragrance and cosmetics market, too. “Our distributors’ pricing policies changed radically in late spring, and products got 10-15% more expensive,” says Elena Komissarova, a deputy general director of Arbat & Co., owner of the Arbat Prestizh chain. “This, naturally, has resulted in decline in consumer activity. As a result, our turnover has dropped by 10% versus last year. If the upward euro trend continues, the reduction will amount to as much as 30%.”
Most clothes retailers haven’t increased prices so far but experts link this with the season: June-July is a traditional sales period. However, companies in the expensive segment have already displayed new prices officially. The price increase hasn’t affected demand. Expensive imported goods as well as tourism are not very sensitive to price changes.
Companies in cheaper segments of the clothes market are facing a much more difficult situation. Most of them intend to maintain stable prices and encourage demand this summer via intense marketing efforts (for example, carefully planned sales) and new business strategies.

The service market, in general, reacts more slowly to fluctuations in exchange rates, but the trends typical of commodity markets are evident here as well. Only tourism is an exception: here the situation is very acute, since practically all summer tours are sold for euros this season.
According to Russian tour operators, the cost of their services began to increase as early as the beginning of this spring. The rise in transportation costs turned out to be the main component of the price increase. Because of military developments, prices for transport have risen by almost 10% as compared with last year.
As a result, only tour companies in the expensive segment of the market are in good shape this summer. This segment will see the fastest pace of growth, and demand is growing by 10-15% a year, whereas the demand for tourism overall only grows by 1-2% a year maximum. Those ready to pay a lot of money will never refuse a planned purchase, even if the tour package becomes considerably more expensive all of a sudden. Tour operators in the middle and low-end segments have already experienced a decline in turnover. The change in the demand is directly dependent on price fluctuations. As of today, a holiday tour in Europe has become more expensive by 15-20% on average versus last season, and the number of tourists has fallen by 5%. “If euro continues to rise further, we’ll have lost 15% by this autumn,” stated a manager at Kuda.ru.

Irina Kirichenko assisted in the preparation of this article.

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