28 November 2006

Is Moscow Really That Expensive

Dmitry Polikanov of The PBN Company has something new about the Cost of Living in Moscow:

Is Moscow Really That Expensive?

In recent years, Moscow has regularly been named one of the most expensive cities in the world. This spring, Moscow finally topped the list, beating Tokyo, Seoul, Hong Kong, London, and New York, and was named the word’s most expensive place to live by Mercer Investment Consulting.

Although the Mercer Index is aimed at expatriates, it would be wrong to say that the ratings are completely biased, as many Moscow officials would like to claim. Mercer’s methodology is balanced, and evaluates prices not only at Moscow’s high-end venues, such as Cafe? Pushkin, but also at supermarkets and fast food restaurants.

However, Mercer is only one of several companies producing these estimates. The 2006 UBS Prices and Earnings report named Moscow as the world’s 41st most expensive city based on the cost of a basket of 122 goods and services most often purchased by Western European consumers (excluding rent). At the same time, it named the Russian capital 48th in terms of wage comparison and 46th in terms of domestic purchasing power, which is a ratio of the first two indicators. To buy a Big Mac, the average Muscovite will have to work 25 minutes- nearly the same amount as a resident of Dubai, Lyon, Singapore or Riga - but a citizen of Los Angeles would have to toil only 11 minutes.

According to the Moscow Statistics Committee, the minimal amount required to live each month is 5,829 rubles ($220). Of that amount, 1,800 rubles ($68) is the minimum amount necessary for food. Approximately 17 percent of Muscovites (1,772,600 citizens) earn less than that minimal amount. Additionally, since the average pension is 3,427 rubles a month ($130), most of Moscow’s 2.4 million pensioners find themselves below the subsistence level. As a comparison, in July 2006 the Committee found that the average salary in Moscow amounted to 19,290 rubles a month ($730) - a sharp rise from 13,688 rubles ($520) in September 2005. COMCON Marketing and Research’s TGI-Russia survey indicates that in 2005, the average monthly income per household member in Moscow was 8,201 rubles ($310).

Despite these gloomy figures, Muscovites are relatively optimistic about life. According to COMCON, only 11 percent of the population considers themselves poor - down from 26 percent in 2001; 19 percent identifies themselves as relatively poor, 43 percent as middle class and another 28 percent believe they are well off. The real situation may actually be somewhat better, however, since people tend to give polltakers a lower estimate of their income.

According to the Levada Center, 48 percent of Moscow’s citizens are pretty satisfied with their lives, although 52 percent maintained, “it is difficult but possible to live.” More than two-thirds of Muscovites believe that the financial situation in their family is good (18 percent) or average (54 percent).

There are several reasons for these optimistic sentiments. First of all, standards of living in general are improving. Additionally, Muscovites have more purchasing power and a greater selection of things to buy. Moscow residents are acquiring Western habits, including an increasing obsession with consumer culture. Several VTsIOM surveys on values, for example, have indicated that Muscovites are much closer to the European way of life than to the rest of Russia. And Russians generally share this viewpoint.

According to ROMIR Monitoring, 33 percent of Muscovites participate in sports (compared with 21 percent in 2004) and nearly half of them visit various fitness clubs for this purpose. Thirty-seven percent of respondents use plastic bankcards and 60 percent of those received the cards in the past three years.

Fifty-one percent shop more than once a week and more than half of Muscovites buy food from a supermarket rather than from large outdoor markets, individuals or kiosks. Among people aged 18-34, this figure goes up to 72-75 percent. One-third of Muscovites go to nightclubs or the movies at least once in a three-month period and 44 percent eat out at non-fast-food restaurants at least once every three months. Fifty-seven percent go to fast food restaurants, and two-thirds of them prefer McDonalds.

Moscow’s relative prosperity engenders a sense of loyalty to the city. Eighty-four percent of respondents in a ROMIR Monitoring survey declared that they would not trade Moscow for another city or town in Russia, and 77 percent would rather live in Moscow than anywhere else in the world. Even among people in the 18-34 age group, this number remains a high 59 percent. A similar COMCON survey gives an even higher figure for those wanting to stay in MoscowС91 percent. In comparison, only 76 percent of New Yorkers would rather live there than anywhere else.

Although Moscow may be generally prosperous, a large number of Muscovites live very close to the subsistence threshold. In a COMCON survey, 39 percent of respondents answered that they have enough money only to buy food and clothes; another 16 percent said they could afford food, clothes and home appliances. Only 7 percent maintained that they could buy everything they wanted except real estate and only 2 percent reported no financial limits at all.

Muscovites are also adopting other consumer trends that make it difficult to save money. For example, only 40 percent of Moscow residents make a list of purchases before going to the store and every second respondent tries to keep up with the pace of technological novelties and buys the newest models of home appliances and electronics.

Those most tempted by the increasing number of products available belong to Moscow’s growing, albeit still fragile, middle class. Confronted with tales of the buying power of expats living on corporate hardship packages, the oligarchs living on Rublyovskoye Shosse, or the excesses of corrupt officials and movie stars, they often attempt to live beyond their means. At the same time, the middle class seems worse off than the poorest class of Muscovites who receive some benefits from the Moscow city government, which devotes the majority of its budget to social programs including transportation discounts for pensioners and students and cash payments to large families and pregnant women.

Currently about 15 percent of Moscow’s population can be considered middle class. According to COMCON, the middle class is made up primarily of people aged between 30-35 who earn about $1,000 per month and have managerial-level jobs. They also maintain a certain modest but contemporary lifestyle, own a range of home appliances and electronics, including washing machines, mobile phones and MP3 players. They try to find a balance between the dueling philosophies of saving and consumerism.

Moscow’s middle class works hard to maintain its lifestyle, trying to keep up with the latest trends, but these young people also save money for continuing their education, renovating their apartments, vacationing abroad, and buying cars. Only 8 percent of Moscow’s middle class rent their living space, having either inherited an apartment given to a family member during the Soviet era or purchased it while real estate was still relatively affordable during the privatization of the 1990s.

Although much has been written about the importance of developing a middle class in Russia, achieving a middle class lifestyle in Moscow seems only to be getting harder. Inflation in Russia continues to hover around 10 percent, causing costs to rise compared to income. Food prices are rising. Even the most basic loaf of bread costs 40 percent more now than it did three years ago. Muscovites can expect to pay 30 percent more than Western Europeans for similar clothes. For those who don’t already own an apartment, buying one is a dream that will never come true. At the same time, demand for all kinds of consumer products is growing.

Moscow’s middle class now consists mainly of workaholics; 58 percent of them do not take time off when they are sick, and 53 percent agree that they do not take preventive measures to take care of themselves, such as regular checkups or flu shots because they are too busy. This phenomenon seems to be an extension of the Russian paradox, confirmed repeatedly by the World Bank: in Russia, the poor are not unemployed; rather they work long hours for little money.

Moscow’s population seems mostly satisfied with the current economic situation and is relatively optimistic in forecasts about household development. But prices and demands are growing all the time and salaries cannot keep up with them. And the group affected most by this situation is the middle class. In addition to support for the extremely poor and pensioners, the government needs to develop plans to help the middle class succeed in the most expensive city in the world.

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