The transformation of consumer behavior: the effect of sanctions
The consumer behavior in terms of how much citizens of Russian Federation used to buy before sanctions and after them, thus the Index of Retail Trade Volume were taken as a dependent variable. Consumer Price Index. Shopping process’s dissatisfaction.
| Рубрика | Менеджмент и трудовые отношения |
| Вид | дипломная работа |
| Язык | английский |
| Дата добавления | 01.12.2019 |
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FEDERAL STATE EDUCATIONAL INSTITUTION
OF HIGHER EDUCATION
NATIONAL RESEARCH UNIVERSITY
HIGHER SCHOOL OF ECONOMICS
Saint Petersburg School of Economics and Management
Department of Management
Vasileva Olga
THE TRANSFORMATION OF CONSUMER BEHAVIOR: THE EFFECT OF SANCTIONS
Bachelor's thesis
In the field 38.03.02 `Management'
Educational programme `Management'
Reviewer
Senior Lecturer, PhD
V. V. Krakovich
Supervisor
Senior Lecturer, PhD
E. A. Zazdravnyh
Saint Petersburg
2019
Abstract
Russian-Ukrainian conflict of 2014 has caused significant consequences, including aggravation of relations between Russian Federation and the West (the EU, the USA). Disagreement with actions of Russian government has caused the imposition of sanctions against Russian Federation, which started from prohibitions on entry the USA against some governors and continued with severe financial sanctions. These events have led to sharp fall of oil prices, ruble devaluation and reciprocal sanctions from Russian side. Firstly, this study identifies if there was the structural break after sanctions in consumer behavior trend via testing linear regression, where consumption is represented in form of Retail trade volume index. Then his thesis is studying the effect of sanctions on consumer behavior via comparison of dissatisfaction of consumers before (2011) and after sanctions (2016). Probit models describes the likeliness of different demographic factors on dissatisfaction in three dimensions, which includes high prices, quality and assortment.
Key words: sanctions, consumer behavior, structural break, probit model
Table of contents
Introduction
Literature review
1 Consumer behavior.
2 Consumer behavior and crises.
3 Sanctions, crisis 2015 and consumers' reaction.
Statement of the research question
Methodology
1 Time series.
2 Cross sections.
Results
1 Time series.
2 Cross sections.
Conclusion
References
Appendecies
Introduction
sanctions сonsumer рrice trade russian
The purpose of this research is to study how consumer behavior has changed since the sanctions were imposed in 2014. It is important to mention that the whole conflict between Ukraine and Russia and further reaction of the European Union and the United States led to economic crisis. The thesis is analyzing the complex effect of crisis and sanctions on the consumers in Russia. This research problem is relevant because these recent events have caused significant drop in oil price, ruble devaluation, noticeable changes of goods' assortment (especially in food after embargo) and their prices, thus there are plenty of reasons to assume that consumer behavior of Russians were affected by all upper mentioned facts. Furthermore, the real income has been continuously declining since 2013 (to 2008 basic year). These events have occurred relatively recently, and they continue to evolve, therefore their impact can be perpetually analyzed until the new great fall or rise in economy. Moreover, the more time passes by, the fuller picture is seen. Each crisis has something in common with others, however, the effect of each can vary significantly. It is caused by differences in the preconditions, the mentality of the country, its life standards, the stage of economy (developing or developed), which were broadly discussed in studies since the topic of consumer behavior was raised [Sherman, H., 2011].
Consumer behavior has been studying since the middle of the 20th century for different reasons. At the beginning most of the researches were in marketing field, and the main purpose was to find out the motivation of consumers to buy, the factors which influence their decisions (such as time, place) and how to influence on them, but today this topic has already been widely studied. This paper is going to concentrate on the effect of exogenous economic and political factors on the consumers, focusing on the effect of sanctions, which was implemented after Russian-Ukrainian conflict in 2014. The next 2015 is famous for the reduction of economic activity among Russian households. Severe ruble depreciation, real income decreasing, inflation growth were the reality of that times. Due to these effects, it is one of the most illustrative cases which exemplifies the real behavior of the population on such unstable situation. How people react, how they cope with it and what they feel about the crisis. During the stable inflation rate, people always consider prices relatively to the presented income rather than to political instability. This indeed questions both the market they operate on and the political aspect of such instability. For instance, the majority of citizens feel uncomfortable with the prices increasing due to the fact that in other countries the prices have not changed significantly relatively to the currency (Berdysheva & Romanova, 2016). Crisis forced citizens to change the pattern of consumption. With the occurred conditions, there appear different concurrent strategies for budget optimization. For example, the popularity of discount stores, special applications of comparing prices, loyalty activities and various bonus systems has enhanced substantially It is crucial to understand the difference between total and selective economizing. The first concerns the lack of income and money itself, while the second deals with more attentive approach toward consumption [Berdysheva & Romanova, 2016].
This paper is studying consumer behavior in terms of how much citizens of Russian Federation used to buy before sanctions and after them, thus the Index of Retail Trade Volume were taken as a dependent variable. This index is not influenced by the inflation because it represents changes from year to year only in volumes of acquired goods. However, if products cost more and salaries depreciate, people can afford less. Thus, inflation has to be considered. Therefore, the Consumer Price Index were taken to explain the changes of consumer behavior. First of all, the hypothesis about structural break was tested to find out if there were any significant changes in trend of consumption in general. Secondly, the cross-sectional data about the population of Russian Federation was analyzed to prove that the consumer behavior has changed. The conducted analysis helped to identify which categories felt more pressure of changed situation. The starting point was the reason of shopping process's dissatisfaction. The representative questionnaire of Russian Federation population conducted by Federal State Statistic Service provide several options of dissatisfaction: quality of products, assortment of products, price of product and queues. Queues are not relevant to the topic of this study, because the number of queues is not connected with sanctions, while assortment, quality and price are straight forwardly affected. Thus, the more concrete purpose of this research is to identify what has changed in consumer behavior of different categories after the sanctions were imposed.
This quantitative study is based on econometrics methods, since the datasets are time series and cross sections. All observations are secondary data, which was derived from the Federal State Statistics Service website. The time series datasets are the upper mentioned Index of Retail Trade Volume and Consumer Price Index from January 2005 to March 2019. Both Indexes were collected for all goods, for food and nonfood categories. Time series were tested for stationarity to avoid biased estimates. The linear regression was built to specify the relation between consumption and inflation in Russia in this period of time and for further tests on structural break. The cross sections data consists of data about population and the reasons of its shopping dissatisfaction in 2011 and 2016, before and after imposition of sanctions respectively. This data was derived from the questionnaire of “Complex monitoring of living conditions of the population” collected by Federal State Statistics Service. The probit models were built to find out individuals of what gender, age, martial status, level of education, etc. are more dissatisfied and by which reason (quality, assortment or price) before and after sanctions.
The results of the analyses in this thesis can be useful for determining further researches about the consumer behavior of Russian citizens and evolve them in more concrete numbers, which will specify not only the most vulnerable categories of society. Thereby the new knowledge that this thesis is developing contributes to the scientific field and its further development, as it discovers new interconnections between consumers with certain characteristics and political/ economical changes in context of sanctions which were not fully studied yet.
The structure of the thesis is organized as followed. The literature review contains of examples of how consumer behavior was studied and preconditions for hypotheses of this study. Further there is a statement of research question specifying the research question and methods. In methodology pаrt the description of data, its sources, the instruments of analysis, the explanation how specific models and regressors were chosen are described. Before the description of actions sequence, the hypotheses are presented. Figures and tables represent the results of calculations with regressors in Stata, where all data was processed. Before describing the results, the limitations of used methods and data are discussed. Then in results section empirical analyses and interpretation of results are described, which are answering the research question. The summary of all done work is described in conclusion.
Literature review
The topic of the thesis consists of two wide terms “consumer behavior” and “sanctions”, which have been studied separately and together by scientific community quite broadly. The theoretical framework of this thesis is containing analysis of several subtopics, including analysis of researches about consumer behavior and how it is affected by crises, then about sanctions, and the opinions of experts about the consumer behavior reaction on sanctions in Russian Federation.
1 Consumer behavior
Since the 1950s, when first analytical researches of consumer behavior were written, scientists were interested how to influence on it, and what influence on the consumers, to make the advertising better, to increase sales, so these studies were at the intersection of marketing, sociology and psychology. At the beginning, scientists have evaluated customer behavior by generalizing and synthesizing observations into proposition inventories [Howard, 1963;May, 1965; Sheth, 1967]. The majority of researches about consumer behavior were based on hypothetical constructs, including perception [Haigh & Fiske, 1952; Pastore, 1949], personality [Brody & Cunningham, 1968; Evans, 1959], social class [Levy, 1966; Bauer, 1960], risk taking [May, 1965; Cunningham, 1966], and motivation [Dichter, 1960] and what Nicosia named “reduced-form” models. [Nicosia, 1966] However, those factors had a limited impact on the consumer behavior, which “is influenced by variety of factors interacting in complex ways” [Kollat, 1970, p.327]. This was caused by the novelty of the studied topic and its complexity. However, now we are more interested in current stage of this field development. Further section describes the most relative to the topic findings, because the whole field of consumer behavior analysis is too broad and at the same consists of researches with narrow, strictly defined topics.
Despite that more than half a century has passed since the topic of consumer behavior was arisen, debates about three fundamental issues about defining goals and frames of the field until 2010. Macinnis and Folkes (2010) answers on these three questions about the issues in the paper: is consumer behavior an independent discipline; what should and should not be included in consumer behavior and should this field be interdisciplinary? Their analysis of existing literature from the sociologists' perspective lead them to further conclusion and answers: “consumer behavior is not an independent discipline”; “consumer behavior is distinguished from other fields by its focus on a consumer role, emphasizing the acquisition, consumption, and disposal of marketplace products, services, and experiences”; “consumer behavior is not an interdisciplinary field” [MacInnis&Folkes, 2010, p. 899]. Authors defined consumer behavior as a multidisciplinary subfield of marketing, their model illustrating the marketing subfields and place of consumer behavior is represented in Appendix 1.
2 Consumer behavior and crises.
The economic crises significantly influence on the consumers' habits and behavior which was proved by the results of financial crisis in 2008. [Perriman, H. E., 2010, p.14] At that time consumerism and overconsumerism were replaced by the new mind state. The recession induced the consumers to become more economical, more responsible and more demanding. [Voinea, L., 2011, p.14] Examples of other crises give precondition to assume that the crisis of 2015 has also influenced on Russian consumers' behavior, but why is it needed to be studied?
The reason why it is important to study consumer behavior is described in following citation. “Decision makers seeking to obtain a proper assessment of the impact of the crisis on their business need to start by understanding the impact of crisis on their consumers' behavior”. [Dutt, P.,2011] Several studies highlight the importance of studying impact of crisis for decision makers [policy makers], because it can help to adjust the production, the price and to warn owners of the business and state about the upcoming changes or growth, or stagnation. [Perriman, H. E., 2010; Dutt, P.,2011; Kaytaz, M., 2014, Sherman, H., 2011]. Most of the papers are describing the financial crisis of 2008-2009, thus those papers are dated closer to 2010 rather than 2019, because that crisis has spilled over the whole world. However, the crises influence kind of the same on consumer behavior, thus, those researches are relevant.
The researchers have found that some consumer behavior patterns during and right after crises periods are temporary because people perceive them as unpleasant (e.g., reducing the number of purchases) and even harmful (switching to lower quality products), thus the crises are needed to be studied not only right after they have happened, but several years later. The experience of other countries and several consumer surveys suggest that many of crisis-current patterns of behavior preserve after it. In instable and uncertain situations people have learned to assess value of money more rationally. Moreover, changes in consumer behavior causes long-term changes in retail sector and in consumer goods production sector consequently. That is why many companies have to adjust their offer to reflect the changes of conditions [Kaytaz, M., 2014].
Dutt and Padmanabhan highlighted three possible flows of consumers' reaction to a crisis: alter the size of the wallet (changing the amount of money spent), alter combination of types or classes of goods and services of consumption expenditures or alter the expenditures across subcategories. Such division is based on different levels (intertemporal, intercategory, and intracategory) of consumption smoothing. As the paper analyzed many countries which were touched by the crisis, the authors were able to find the common features of reactions in developing and developed countries. In developing countries, the crisis had an instantaneous downward effect on consumption expenditures, which in most countries decreased more than income in crisis; and an independent effect was preserving for 4 years. However, the paper does not provide evidence of increasing motive to save money during the crisis. The case of consumption smoothing in Russian is elaborated in the next section.
3 Sanctions, crisis 2015 and consumers' reaction.
Firstly, the definition of crisis in context of this paper should be provided. Economic crisis can be “classified as banking and/ or currency crisis”. [Dutt, P.,2011] Currency crisis are characterized by the sharp fluctuations in exchange rates. The prerequisites for the crisis of 2015 appeared in January 2014 when the ruble's devaluation began to fasten. Thus, in this paper the crisis of 2015 will be attributed to currency crisis. The exchange rate of the ruble doubled against other currencies. The weakening of the ruble was one of the main factors in increasing inflation and as a result contributed to the reduction of real disposable income and consumer demand at crisis period. [Urunov, M.,2015] According to experts, the main causes of the crisis were not only the sanctions imposed by the West and the fall in oil prices, but also the systemic socio-technological and scientific transformations of modern business reality. [Popikov, A., 2016]
In the end of 2014 Russia faced the negative income situation due to the oil price's decreasing and other external factors. In order to stabilize the economy, there was a need of importing goods prices correction relatively to non-traded goods the under condition of decreasing currency inflow. The rise in import prices connected with the plummeting exchange rate of ruble led to overall prices increasing, which significantly influenced the real purchasing power of Russian households [Mamedli & Sinyakov, 2018] The effects of decreased real incomes were not only on the macrolevel. Consumption of households was the major engine of economic growth for the last few years. This component proved to be the most resistant to the crisis tendencies. However, the crisis period of 2014 led to the most significant decline in Russian household's consumption expenditures, almost 10 % in 2015 relative to 2014, according to Federal State Statistics Service. At the same time, the gap between real income dynamics and slower recovery of retail sales highlights the necessity of consumption sensitivity estimation to income fluctuations. During this time, Russian households chosen the strategy of consumption smoothing, in other words, mitigate it to adapt new circumstances. According to Mamedli & Sinyakov (2018), their estimation corresponds with the ones described in the literature of Russian income shocks in the late 1990s and early 2000s. Moreover, they indicate on the lower ability of consumption smoothing. Households were able to smooth only 50 % of income shocks. If this had not happened, the reduction in consumption would have been much stronger. It is quite complicated to assess whether the incomplete extent of smoothing depends financial system's restrictions or on the understanding of households that the character of changes is not temporary but most likely is permanent and that they need to adjust the consumption. Indirect evidence points out on both of these factors.
The Mamedli & Sinyakov's analysis of dissimilarity of the households' reactions on the income shocks represents the declining pattern of the marginal propensity of consuming goods (2018). It means that the more indigent is household, the more sensitive it is toward consumption and income changes and also a smaller number of opportunities for smoothing. Savings reduction could not be considered as significant strategy in response to income decline, although it is expected from a theoretical point of view. Indeed, the incomes of Russian households depend on the dynamics of volatile energy resource's prices. Rational behavior assumes accumulating savings in good times and spending them to maintain previous levels of consumption in bad times. As it was presented by surveys and confirmed by statistics, Russian households consider their liquid assets more as savings for a bad time. Consequently, the volatility of oil prices observed by households and the external shocks that reduce their incomes are not perceived by households as sufficient reason for using savings to consume. It is difficult to assess the rationality of such behavior unless it is determined whether households viewed income change as temporary or permanent. In three years since rapid decline of oil prices and the reduction of budget inflows, the first eventually became stronger, hence the price goes up. Thus, more flexible strategies of households' savings would enable them to overcome the crisis with less damage in terms of consumption expenditures. However, the main obstacle to resolve for implementation of such strategies is the requirement of increased trust in financial market instruments among households and their financial literacy. According to the statistics based on direct household loan's demand and data on the growth of debts households are not ready to increase the debt portion in order to support consumption during "bad" times. This might be partly due to the perception of income decline as permanent [Mamedli & Sinyakov, 2018].
The rapid and unpredictable fluctuations of consumer prices is always perceived as a disaster. This happens due to the nature of market economy, such shocking changes tend to make disruptions on the markets, which could influence the political and social stability [Kharas, 2011; McCormack, 2015]. If the situations, when nothing special happens and consumers rely on the common perception of prices suddenly changes and market prices influenced significantly, then consumers become more attentive and responsible, modifying their behavior to a reflexive attitude [Smith, 2011]. Berdysheva & Romanova (2016) argue that is the situations of instability, when the attitude of consumers changes, the independence of individual increases. The qualitative study about Moscow citizens has shown that nowadays people due to the economic circumstances change their consumer behavior in favor of demure spending. Respondents claim that the new economic crisis forced them to change the pattern of consumption and think of almost every ruble they spend, not really paying attention to the quality of goods and services. Individuals are looking for new ways to save money, by controlling them in recently appeared and very popular apps, which compares prices (such as Edadeal). Hence, such originality of people toward price selecting is just a response to the discompose of the economic stability. Moreover, people understand that they need to change the consumption patterns in order to withstand [Dalton, 2004]. The popularity of the joint wholesale purchases evidence this.
A consumer activity decrease, rather active savings behavior, the domestic demand decrease are causes for the decline in consumer spending. 4,6 times decrease in direct foreign investments in Russia in 2015 and 14,3 times in 2014 is a result of the unfavorable business environment and sanctions confrontation. Retail trade turnover decreased in January and February 2016, approaching the level of 2011.
In modern society, state authorities resolve social problems and involve in global investing. Paying attention to that fact it is worth noting that international sanctions (US, EU, and other) due to the conflict in eastern Ukraine and the Russian countersanctions lead to the "lock-in effect" [D. North, D. Wallis, B. Weingast, 2011]. It affects the consumer behavior of the Russian population: preference for imported products over domestically produced products. This fact is important due to a rising decrease in Russian goods quality. "The lock-in effect" affects retailers in the Russian Federation in all levels (domestic, global, federal, foreign). Thus, consumers prefer imported high-quality goods and defer purchases if import costs are rising. The deteriorating economic situation in Russia increases the number of Russians who aspire to save.
It is worth noting that the level of customer income affects the choice of trade format. The more often consumers durable products in self-service stores, the higher their income. The level of consumption in the market of retail declines simultaneously with the income increase. The level of volumes of the retail market in Russia and Western Europe can be compared. Nevertheless, spending on retail goods per person in Western Europe is higher than in Russia 2-3 times in general. Household spending structure in Russia is less progressive. Thus, the retail market is one of the most attractive for large trading organizations [V. Radaev, 2016]. This fact was shown in the review of developments in the market of retail research by Centre of the Institute of Statistical Studies and Economics of Knowledge of Higher School of Economics. HSE experts' conclusions were based on the result of 4 000 questionnaires of trade companies' heads from 82 Russian subjects. The survey of businessmen (01.-03.2016) has led the experts of HSE to the conclusion that entrepreneurs cannot stabilize and keep prices in the ruble devaluation conditions [V. Radaev, 2016].
The lowest Nielsen Consumer Confidence index values in the Russian Federation were achieved at the beginning of 2016. One fifth of the Russian population have no free money. 70% are sure that the situation will not improve. In in the first quarter of 2016 Nielsen index of consumer confidence in Russia reached 63 points, it fell by more than 15% in a year. After obligatory payments and basic goods spending about 80% of the Russian population rest with the free money. These indicators are even lower than during the 2008-2009 crisis. 76% of the Russian population aspired to savings at the beginning of 2016. Entertainment spending is not included in the list of expenses of 59% of Russians. 45% of respondents have decided to refuse to buy electronics, it increased by 2% compared to the previous year [Kostyrev A., Mertsalova A., 2016].
The main reasons for these trends are the unwillingness of the market in Russia for substitution of banned import of products, the sanctions confrontation, the economy of Russia dependence on fluctuations (sharp increases) of the currency. As noted above, consumers prefer a higher quality of western analogs to domestic goods. The relationship between market participants affects the manufacturing sector. Producers in Russia have to adapt to the economic and political conditions.
Trends which can be identified in the retail industry: retail trade turnover reduction, decrease in consumer spending, the decline in domestic demand. Political and economic issues, legislative problems, social factors which hinder Russian retail development were identified by the researchers. Consumer behavior model in Russia was changed due to sanctions and led to changes in the retailers' activity. Davydenko, Romashkina, and Nasyrova (2017) drew attention to the fact that imported goods (consumer properties/quality) are more valuable for Russian consumers than domestic ones. Moreover, the authors describe trends which affected the sales rates in the retail market over the last year. It can be explained by a decline in real incomes. A gradual increase in the average wage led to a rapid rise in household spending. Changes in the Russians consumer behavior model led to a slowdown in the pace of business activity (SME development) in the region. Small businesses are not ready to compete with the biggest retailers, which can survive an economic crisis because of economies of scale and the legal system imperfections. Thus, retail consolidation is a new trend in the market.
To sum up, the decline in Russians real incomes (the first quarter of 2016: 3,9% - FSSS) is continuing. Consumer activity will not change and remain low. However, the situation during the 2008-2009 crisis was different with less prolonged pessimism [Davydenko, 2017]. Nevertheless, political/social events led to a decrease in the social tension level. The outstanding issues are indicated by Davydenko, Romashkina, and Nasyrova (2017) in the retail field could be resolved in connection with the correct policy suggestions and a quite active economic policy, according to authors opinion. According to the researches mentioned in this section, we can assume that huge sanctions and crisis effect on consumers is still disproportional. Thus, we are interested to find categories of the population with certain features which have “felt” the changes harder.
Statement of the research question
The research question of this thesis is arising from the title: what is the effect of sanctions on consumer behavior of Russians? As it can be seen from the literature review, this topic has been studied in several perspectives with an accent on how population spends money, what and how it chooses. This thesis is going to fill the gap in the research field of sanctions' effects by describing and comparing the reasons of dissatisfaction of the population about shopping in 2011 and 2016, before and after sanctions. Thus, the research question can be transformed to “How has retail dissatisfaction of the population changed after sanctions and crisis?”
Before answering the research question and describing changes, the study is examining if there was a structural break after the imposition of sanctions, or the trend of consumption was not influenced significantly. Structural break measures the general effect of sanctions and crisis on the consumers; thus, it is important to see how the trend has been changing through the time. Time series were collected to test the break. In this research consumer behavior is represented by the volumes of acquired goods in different years with predisposition that individuals buy more, when inflation decreases and the economic situation is stable [Berdysheva & Romanova,2016]. Thus, the first hypothesis is formulated as: There was a structural break in volume of the retail trade in Russian Federation after the imposition of sanctions. Thus, zero hypothesis assumes that consumers did not change their behavior. The sanctions were accompanied by economic crisis, thereby the test on structural break is representing the effect of both on consumers. The volume of acquired goods or the volume of retail trade is counted in this thesis in dynamic as the Retail Trade Volume Index to eliminate the effect of inflation, which has risen significantly in 2014, because of the drop of oil prices and further ruble devaluation. To test the first hypothesis the linear regression is built, which main regressor is inflation. The inflation is measured as Consumer Price Index. The interconnection between consumption and inflation in terms of falling income is logically inverse. The higher inflation gets, the lower consumption becomes. However, this study is interested to check if the sensitivity to the increasing prices has been changing since the economic situation has been evolving, consequently the next purpose appears.
The second purpose is to answer the following questions: which groups of society have become more dissatisfied and by which reason? The high prices are enough to make consumers dissatisfied, but not the only one. The changes in consumer behavior (attitude) of population is studied on the basis of several demographic and general characteristics, which includes gender, age, the condition of health, the education level, martial status and place where individual lives (rural or urban area). The cross sections data helps to identify which groups are more dissatisfied with retail trade and by which reason via characteristic variables. The Federal State Statistics Service has been conducting “Comprehensive monitoring of living conditions of the population” since 2011. Up to the moment four surveys have been done in 2011, 2014, 2016 and 2018.The data was taken from the questionnaires of the program. The questionnaire provided respondents with several options of retail dissatisfaction, those consists of quality of products, assortment of products, price of product and queues. The last option does not have the straight connection with the sanctions, because it can be the result of the many other and less greater events than sanctions, and this problem is needed to be solved on individual level of the shops or areas with same conditions. Meanwhile, other three reasons of dissatisfaction were influenced by food embargo and ruble devaluation, which followed the sanctions and oil prices' drop. The attempts to substitute the import products have not been successful at the beginning, because Russian producers were not ready, and the common economy stagnation did not empower business to develop, as it was mentioned in the literature review. Despite some analogues exist, people still want imported products, because the low quality of the substitutes. Local producers of food (especially dairy, meat and fish) have become monopolists and establish the prices similar to previously imported products, despite the quality of their own. This study is interested to find if the population has become more dissatisfied by the quality, assortment and prices in 2016 than it was in 2011. The reasons of dissatisfaction are dependent variables and the categorial variables mentioned previously are regressors. For answering the research question the probit models for each reason of dissatisfaction was build.
Methodology
The research question is needed to me reminded to approve the used methods of analysis. More general one is “What is the effect of sanctions on consumer behavior of Russians?” For answering any complex question there should be a clear understanding of the objectives, the ways these objectives will be achieved and the order of actions. This thesis is studying two interrelated topics: consumer behavior and sanctions. Both are not specific measurable values; thus, the first step is to choose the other variables which will describe or reflect them. Two data types were used to study the topics and to answer the Research Question: time series and cross section. This is quantitative research, thus the main methods used are econometrical: linear regression and probit model with robust errors, which are consistent to heteroscedasticity. All Figures, calculations and regressions were processed in Stata.
1 Time series
As it was already mentioned, the consumer behavior is represented in this study as the Retail trade volume index. This index characterizes the total change in the commodity mass of retail trade in the current period compared to the previous (base) period and shows how the turnover has changed as a result of changes only in its physical volume, excluding the influence of price changes, according to the methodology of the FSSS. The index can be calculated manually by the following formula,
(1)
,
where: Rev1, Rev0 - revenue of sold goods in current and basic year;
Def - index-deflator.
The FSSS provides monthly Indexes of Retail trade volume for food products, nonfood products and total indexes for food and nonfood categories together. Moreover, monthly indexes were published in different modes; to previous month, and to the same period (month) in previous year. For this study the indexes to the same month in previous year were chosen, because indexes to previous month have strong seasonality. The time series of three types (food, nonfood, total) of indexes were taken from the official website of Unified Interdepartmental Information and Statistical system. The time frames of the data are from January 2015 to March 2019 (171 observations). This time period includes two great falls of economy and retail in 2008-2009 and 2015 caused by crises, but also include the growth between 2005 and 2008, as can be seen on the figure 1 (for total indexes).
Figure 1. Total Retail trade index and Consumer price index in dynamics 2005-2019
Retail trade volume index is representing consumer behavior, and the thesis is seeking to find (1) was it influenced greatly by the sanctions and (2) how, thus the Retail trade volume index is dependent variable. The inflation was chosen to be a regressor for it, as the level of prices influences the volume of sold goods, which means that it influences on consumer behavior (decisions to buy or not). The level of inflation is measured as Consumer price index. According to FSSS definition Consumer price index measures the ratio of the value of a fixed list of goods and services in the prices of the current period to its value in the prices of the previous (basic) period and characterizes the change in time of the General level of prices for goods and services purchased by the population for non-productive consumption. Consumer price index is calculated for several categories of goods, as Retail trade volume index; for food, nonfood, services categories and total. The index is calculated to different basic periods, for the research the indexes to the same period (month) in previous year for food, nonfood and total categories were taken to be able (1) to build a regression, and (2) to avoid strong seasonality of month to previous month indexes, as in the Retail trade volume index.
The method of graphic analysis is the first step to understanding the data. The Figure 1 represent how the total consumption and inflation have been changing through the observed period from 2005 to 2019. The inflation started to grow fast at the second half of 2007 and reached its pick in May 2008, from 107.7% to 115.13%, which was caused by financial crisis in the USA. The price growth caused the significant fall in consumption between September 2008 and September 2009, from 109% index has fallen to 94.3%, which was caused by that time the worldwide economic crisis. However, this research is interested in the second significant drop of consumption, which has started to fall in January 2015 and continued till January 2016. The inflation growth and consumption fall have happened simultaneously. During that period Retail trade volume index has been falling from 105.1% to 85.8%, the CPI has grown from 108.29% to 116.92% in April 2015 and then started to decrease gradually till January 2016. Such fast reaction on price growth was caused by the ruble devaluation at 2014 and continuous fall in real income.
The Figure 2 illustrates dynamics of indexes for food category of goods. The dates of sharp rises and drops are approximately the same as for total indexes, but changes of their meanings are different. In case of CPI, the index has sharply risen after food embargo was implemented as Russian retaliatory sanctions in November 2014 (from 112.64%) and reached its peak in January 2015 (to 123.26%). Meanwhile, consumption of food has been falling, but less than inflation has been growing. In November 2014 Retail trade volume index was 99.2 % and in January 92.4%. However, the price shock was so great that consumption continued to fall, even when inflation started to decrease. The lowest point which Retail trade volume index reached was October 2015(89.8%). This can be explained by the pricing policy in Russia, if prices grow, they will never become less, until the government strict regulations implemented. The consumption of food has been gradually declining since 2012 because of the decrease of real income and has accelerated after embargo. Individuals either started to spend less on food or could not afford as much as they used to, because of the price growth. However, in comparison with nonfood Retail trade volume index drop, food index decreased less despite more severe inflation.
Figure 2. Food Retail trade index and Consumer price index in dynamics 2005-2019
The Figure 3 represent the indexes for nonfood goods. Comparing to total and food indexes the inflation in this category has grown less and later, what can be explained by the breadth of the category, which includes many different products. Unlike food, which was banned from being imported, the rest of the goods were relatively unaffected by the sanctions, but instead were affected by the devaluation of the ruble, which led to higher prices on imported goods. If food prices rose, as in some categories of products domestic producers became monopolists, then this did not happen in this industry, but currency courses did.
Figure 3. Nonfood Retail trade index and Consumer price index in dynamics 2005-2019
The general background of falling incomes and rising prices forced citizens to buy much less in nonfood category comparing with food. The highest inflation was 115.71% in November 2015, when the lowest consumption index was 82.4% in December 2015.
The Figure 4 represents all indexes in dynamics, thus the differences in changes of CPI and Retail trade volume indexes in different categories are noticeable. The last conclusion that can be derived from the Figures is that after the recovery to approximate level before the crisis of 2014-2015 and sanctions the consumption has started to decline and inflation has started to increase. This can be the sign that economy in general is not recovered yet, but not enough time has passed after “recovery” to analyze that.
Figure 4. Comparative Figure of Retail trade index and Consumer price index in total, food and nonfood categories in dynamics 2005-2019
The next step, before describing the methods, how regressions were chosen and structural break was found, is the analysis of the gathered data. Both indexes in three dimensions (food, nonfood and total) from 2005 to 2019 are time series. Time series have to be stationary before any models are started to be build. The real data of sequential indexes is logically may have trend, seasonality and autocorrelation between close observation. The autocorrelation (AC) and partial autocorrelation (PAC) functions were used to approve the theory that the time series are nonstationary. The following Figures 5 -8 represent the results.
Figure 5 and 6. Autocorrelations and partial autocorrelations of Retail trade volume index 2005-2019
Figure 7 and 8. Autocorrelations and partial autocorrelations of Consumer Price index 2005-2019
The autocorrelations and partial autocorrelations are high and in both cases are equal to almost 1 on the first lags and still be very high for AC, which points on nonstationary process. To eliminate that the differences of indexes are used to be taken. The Figures from 9 to 12 illustrate the autocorrelations and partial autocorrelations of the differences.
After taking the differences the autocorrelations and partial autocorrelations decrised significantly but we the 12th lag became noticable in Retail trade volume index and CPI Figures, which has to be taken into account, when composing the regression. This can be explained with the nature of taken indexes, as the basis period is a previous year, and data is monthly, thus the12th lag excels. However, its significance has to be checked. Taking indexes' differences helped to make time series stationary by reducing ACs and PACs. The same manipulations were realised with indexes for food and nonfood categories.
Figure 9 and 10. Autocorrelations and partial autocorrelations of differences of Retail trade volume index 2005-2019
Figure 11 and 12. Autocorrelations and partial autocorrelations of differences of Consumer price index 2005-2019
To make sure that the time series became stationary, Dickey-Fuller test was conducted for original data and for differences. The results (the MacKinnon approximate p-values) are presented in Table 1 and confirm at the 99,9% level the stationarity of the difference series, thereby the further regressions can be composed.
Table 1
Dickey-Fuller test results
|
Index |
Original indexes |
Differences |
|
|
Retail trade volume index |
0.5511 |
0.0000 |
|
|
Retail trade volume index (food) |
0.4724 |
0.0000 |
|
|
Retail trade volume index (nonfood) |
0.4186 |
0.0000 |
|
|
CPI |
0.6544 |
0.0000 |
|
|
CPI (food) |
0.5907 |
0.0000 |
|
|
CPI (nonfood) |
0.6837 |
0.0000 |
The statement of the research question section emphasized that the research question of the whole paper can be answered only after the first hypothesis is confirmed, which states that there was a structural break after the imposition of sanctions. This qualitative study is based on econometric methods, thus, to find out if citizens' attitude to price fluctuations has changed after sanctions, the linear regression with indexes' differences is going to be estimated and tested on structural break. The formula of regression is:
(2)
where: - estimated constant;
- differences of the Retail trade volume index;
- further identified lag(s) of the Consumer price index;
- further identified lag(s) of Retail trade volume index.
Adding lags to the linear regression, which variables are sequential in time series, is improving the quality of the model, which is approved by Akaike information criterion and Bayesian information criterion of models with and without lags. Moreover, the sequential data with high probability, even after taking differences, have some seasonality in it, which is noticeable on the Figures of autocorrelations of both Retail trade volume index's differences and Consumer price index's differences.
2 Cross sections
The second part of data of this research are two cross sections, which are “Comprehensive monitoring of living conditions of the population” of 2011 and 2016. This is the representative data about the whole Russian Federation collected via interviews with citizens. The Federal State Statistics Service conducted surveys in 2011, 2014, 2016 and 2018 (not published yet). The years 2011 and 2016 were chosen because they represent situation before the sanctions and after. According to FSSS description the purpose of the survey is to receive statistical information about the living standards of households and their needs in different spheres (from safety to sociocultural). There are two types of questionnaires for households and for individuals, with subdivisions on individuals younger 15 and older 15 years. In data about 2016 the age of respondents, according to official methodology, varies from 0 to 99. To make cross sections comparable 2016 survey's results were cleared from the answers of children younger than 15. The samples' sizes are very different, 2011 monitoring contains 19 905 interviews, while 2016 monitoring contains 131 945 interviews (excluding children younger 15). However, both of them are proclaimed representative, thus size should not play a significant role.
For this research from the wide list of variables further were chosen dissatisfaction reasons of trade process (dissatisfaction by retail), which are prices, quality or assortment of products, age, gender, martial status, education level, self-estimation of health condition, rural or urban area of living. Reasons of dissatisfaction are dependent binomial variables (0-satisfied, 1-dissatisfied).
From the Table 2, representing descriptive statistics of cross section in 2011, we can conclude that 11% of the interviewees from the monitored sample were dissatisfied with high prices, 7% were dissatisfied with quality of the goods, and 8% were dissatisfied with assortment. There are 58% of women and 58.7% were married individuals. More than a half (60%) of observant citizens have secondary education, 26% of people have higher education, 3% have no education, the rest have basic general (9 grades) education. 71% of interviewees were living in cities of towns, and 29% were living in rural areas. One third of individuals has estimated their health as good, 52% as normal, 10% as bad,1% as very bad and 3% as very good.
The next step is Student's t-test, which compares two averages and identifies their significance. The t-test is used for estimating means difference of every independent variable. The t-test shows if there is the difference between means and considered a necessary step of any quantitative research.
Table 2
Descriptive statistics for cross section of 2011
|
Variable |
Observations |
Mean |
Std. Dev. |
|
|
Dissatisfaction |
||||
|
High Prices: yes=1 |
18,668 |
0.113885 |
- |
|
|
Quality: yes=1 |
17,798 |
0.070457 |
- |
|
|
Assortment: yes=1 |
18,052 |
0.083813 |
- |
|
|
Gender: Woman=1 Man=0 |
19,905 |
0.582165 |
- |
|
|
Age |
19,905 |
46.26998 |
18.1153 |
|
|
Education |
||||
|
Basic |
19,816 |
.0963868 |
- |
|
|
Secondary |
19,816 |
0.609306 |
- |
|
|
Higher |
19,816 |
0.259235 |
- |
|
|
No basic |
19,816 |
0.035073 |
- |
|
|
Health |
||||
|
Very good |
19,772 |
0.029840 |
- |
|
|
Good |
19,772 |
0.332642 |
- |
|
|
Normal |
19,772 |
0.521495 |
- |
|
|
Bad |
19,772 |
0.105958 |
- |
|
|
Very bad |
19,772 |
0.010065 |
- |
|
|
Marital status: Married=1 Not=0 |
19,658 |
0.586733 |
- |
|
|
Living area: urban=1 rural=0 |
19,905 |
0.709671 |
- |
Results of Student's t-test (Table 3) showed a statistically significant difference between the mean values of such variables as gender, age and living area (at 99% level) for all three dependent variables (reasons of dissatisfaction). For dissatisfaction with Prices the differences of means of Normal and Bad health and Marital status and are significant at 95% level according to t-test. For dissatisfaction with quality and assortment of goods t-test results showed statistically significant difference between means of secondary education and no education variables. Outstanding from other, for dissatisfaction with assortment the difference of health variables (except Very good) are statistically significant. P-values signs have the further logic in all tables in this research + p<0.10, * p<0.05, ** p<0.01, *** p<0.001
Table 3
T-test results for 2011
2011 |
Price (y1) |
Quality(y2) |
Assortment(y3) |
||||
|
0 |
1 |
0 |
1 |
0 |
1 |
||
|
Mean |
Mean |
Mean |
Mean |
Mean |
Mean |
||
|
Gender: Woman=1 Man=0 |
0.58 |
0.62*** |
0.58 |
0.63*** |
0.58 |
0.62** |
|
|
Age |
46.67 |
45.03*** |
46.67 |
44.25*** |
46.67 |
41.42*** |
|
|
Education |
|||||||
|
Basic |
0.13 |
0.09 |
0.10 |
0.08 |
0.10 |
0.09 |
|
|
Secondary |
0.61 |
0.62 |
0.61 |
0.62 |
0.61 |
0.60 |
|
|
Higher |
0.26 |
0.26 |
0.26 |
0.28+ |
0.26 |
0.29* |
|
|
No basic |
0.04 |
0.03 |
0.04 |
0.02** |
0.04 |
0.03* |
|
|
Health |
|||||||
|
Very good ... |
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