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Russian Orthodox Christmas fails to boost January spend

Russians were not encouraged to travel or shop overseas in large numbers in January despite Orthodox Christmas holidays, with Global Blue data showing Russian spend on Tax Free Shopping (TFS) fell -22% in the month.

This was accompanied by a -23% drop in the number of transactions year-on-year (YoY) as Russians continue to be deterred from travel amid continuing economic uncertainty and sanctions, travel restrictions, and a falling ruble that makes any international travel expensive.

However, Russians remain significant contributors to TFS globally and are consistently in the top three of globe shopper nationalities after travellers from China and the Middle East.

Top three destinations for the month were Germany (spend down -36%), France (-35%) and Finland (-8%).

Spain is now cementing its position as a top five destination for Russian globe shoppers. In December TFS spend by Russians increased +18%, followed by a January increase of +3%. The uplift follows a change in the travel patterns of Russian travellers, especially among the middle class, as access to traditional winter hotspots is stopped.

In November flights between Russia and Egypt were suspended following the Russian plane crash over the Sinai desert. Tourist flows shifted initially to Turkey, according to Russian newspaper Gazeta, where Russian tourist numbers increased by 37% in November. Souring relations between the two countries have since resulted in an end to the sale of tours to Turkey.

Alena Koryakina, head of tourist service Rambler Travels, says Spain offers a good alternative for Russian travellers while the sale of tours to Egypt and Turkey is suspended. ‘The Spanish coast is more expensive than in Turkey and Egypt, but Spanish resort price increases are not expected as all contracts for the summer of 2016 have been concluded. Many European hotels have started to offer all-inclusive packages, which are preferred by Russians.’


Growth predictions

TFS spending by Russians is unlikely to return to significant growth any time soon. Economic uncertainty, a weak currency and geopolitics are creating a new reality for Russian consumers and the luxury brands they buy.

Russia’s energy-dependent economy has had a turbulent start to 2016. Oil prices and currency exchange rates against the dollar dropped to record lows in January, following a year of falling prices, contraction of GDP by nearly -4%, and inflation running at almost 13%.

Oil prices are yet to stabilise. Hopes earlier in February of a deal among oil-producing countries to freeze production levels boosted the ruble’s value. This was short-lived, as major player Iran decided not to participate, prompting the ruble to fall again.

Despite the uncertainty, January data on retail sales, real wages and industrial production was better than expected, encouraging analysts from Capital Economics and Barclays to note that the worst may be over for the Russian economy. According to the Reuters report, retail sales in January fell -7.3% year-on-year and real wages were down -6.1%. This is an improvement on previous declines.

‘Encouragingly, there are early signs that falling inflation is starting to ease pressure on households' real incomes,’ says Capital Economics economist Liza Ermolenko. ‘All in all, [the January] data supports the view that the acute phase of Russia's recession is starting to ease.’

For 2016 the IMF predicts the economy will contract by -1%. Marginal growth of just 0.5% will return to the market in 2017, according to Capital Economics.

Russian consumer sentiment is in line with analyst predictions. According to a Deloitte survey, more than half (54%) of Russians believe the country is in recession, but are also cautiously optimistic about 2017. Nearly a fifth (19%) expect growth to return to 2012-2013 levels.


Middle-class shoppers

The weakening ruble has had the greatest impact on middle-class Russians, changing their travel and purchasing habits.

Over the course of 2015, the value of the ruble against the dollar fell by -20%, on top of a fall in value of the currency during the second half of 2014.

‘Decreasing disposable income and the soaring costs of overseas travel has impacted outbound travel, giving domestic tourism a boost as middle-class Russians found themselves unable to afford travel-related expenses in foreign currencies,’ says Fflur Roberts, head of luxury goods at market research firm Euromonitor International.

International travel among middle-class Russians is not expected to rise again until 2017, with numbers making slow gains of +1% to +2%, according to the firm’s research.

In terms of spend, Roberts adds: ‘Middle-class consumers reduced their spending overall on luxury goods [in 2015] due to decreased disposable incomes and increased unit prices.  While some middle-class consumers abandoned their luxury purchases completely, others switched to less expensive goods in 2015.’


Resilient HNWIs

According to data from Euromonitor International, a quarter of a million Russian households have an annual disposable income of more than 300,000 US dollars. These High Net Worth Individuals (HNWIs) are proving immune to recession so far, to the benefit of higher-end luxury goods brands.

This is translating into greater consideration when buying luxury goods. It has also encouraged an investment mentality among wealthy consumers that is driving the purchase of absolute luxury goods, such as high-end luxury bags, jewellery, luxury timepieces and luxury cars, according to Bloomberg.


Global Blue takeouts:

  • Russian TFS spend is being driven by a smaller number of resilient HNW globe shoppers who are not feeling the impact of economic uncertainty.
  • High-end luxury goods are seen as a good investment among this group. 
  • A weak currency, reduced disposable income and geopolitical tensions between Russia and the popular destination markets of Egypt and Turkey has resulted in a significant drop-off in middle-class travellers.
  • Spain is bucking the negative trend as those Russians who continue to travel to resort locations turn to this destination as an alternative.
  • The combined effect of currency, sanctions and economic uncertainty outweighed any benefit of Orthodox Christmas on Russian TFS spend, highlighting a new reality for merchants who can no longer depend on seasonal events to boost sales.