Retailers Cut Prices in Moscow as Sales Tax Ends

Published February 1, 2004

Russia’s largest retail chains plan to lower prices 5 percent in response to the government’s decision to drop the sales tax in 2004, according to the Moscow Times.

“All members of the Association of Retail Trade Companies, including such chains as Kopeika, Perekryostok, Paterson, Petrovsky, M.Video and Mir, agreed to cut prices on January 1,” said Oleg Sazanov, the association’s managing director. “Some companies will lower prices for their entire range of goods, others for specific items. But all of them will keep their promise,” he said.

According to Gateway to Russia, a Web site developed in collaboration with the Financial Times to bring information on Russia’s economy to the world, “This temporary tax was introduced in the summer of 1998 in order to make up for regional budget losses due to the 5 percent reduction in the VAT. In addition, the sales tax replaced 16 various local taxes and duties that existed previously.”

In May 2003, according to the Moscow Times, Russia’s largest retailers called a joint press conference and promised to cut their prices “by 5 percent if the government agreed to do away with the sales tax [in 2004].”

In December, Deputy Prime Minister Alexei Kudrin reminded retailers of their promise to cut prices, and the retail association officially confirmed its members would do so. Konstantin Mauergauz, chairman of Paterson, said “the chain had already lowered prices in its regional branches by 5 to 7 percent” in the waning days of 2003. “We would have done it in Moscow as well had it not been for technical difficulties–adjustments to our database, changing price tags. It will take about 10 additional days,” he said.

Even retailers that did not sign the joint statement in May said they will lower prices.

According to the Times, “Metro Cash & Carry will no longer charge a 5 percent surcharge starting January 1.” The company also announced it would lower prices to accommodate the decrease of the value-added tax from 20 percent to 18 percent in 2004. “The change of prices will be done through a unified, transparent, and fully automated system, and prices for all categories of items will drop in accordance with the change in legislation,” the company said in a statement.

But Alexei Krivoshapko, a retail analyst with UFG, said the move made very little sense from an economic point of view and is unlikely to lead to better sales. “For the vast majority of consumers, the 5 percent price drop is unlikely to become a determining factor in a decision to buy,” he said. “What are people going to do? Buy more condensed milk if it is [30 kopeks] cheaper?”

The move could affect low-income customers, Krivoshapko acknowledged. But since those consumers often prefer cheaper traditional markets to western-style supermarkets, the price drop may go unnoticed, especially by more well-to-do consumers.

U.S. Nobel laureate economist Milton Friedman disagreed with the Russian analyst and applauded the tax cuts, primarily on the grounds that they help rein in growth of government spending.

“The only way to cut government down to size is through tax cuts,” noted Friedman.”Tax cuts that increase incentives to produce and that eliminate distortions in the price system–supply-side tax cuts–both restrain government spending and increase future income and current wealth.”

According to Gateway to Russia, the sales tax had a negative effect on the market for goods and services. Retailers were forced to raise prices and as a result lost customers. “After the sales tax was introduced everyone raised their prices and sales declined, as consumers moved to wholesale-retail markets where prices stayed the same,” representatives of Tekhnosila Company reported on the Gateway site.

The temporary sales tax had a particularly substantial effect on those making and selling food products. “After the sales tax was introduced, the number of loyal customers stayed the same but the overall amount of an individual purchase in bedroom communities fell,” noted representatives of Russian food retailer Sedmoi Kontinent.

Retailers targeting less-wealthy consumers were also hard hit by the tax. “When the tax was introduced, we were focusing on rather price-sensitive market segments, the mid- and lower-mid price range, which meant that higher prices led to a reduction in demand of 10-15 percent,” recalled Valeri Pokornyak, general director of Altan, a manufacturer of flour and pasta products.

John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].