And you though the ruble devaluation would make everything cheap!

The Chocolate Standard

By Joseph McCormick

Every week or so for the past year I've been buying groceries at Sedmoi Kontinent, a chain of "gastronomy" that have reworked themselves into something resembling bona fide supermarkets. The prices have been pretty good for Moscow (i.e., only moderately outrageous by American standards), and until the crisis, the majority of customers seemed to be "normal, middle-class" Muscovites. The greatest convenience for me was that they take plastic (and still do, if you have a foreign credit card).

The last time I was in their Smolenskaya branch, on September 6, the place was mobbed with the tail end of panic buying, as shoppers emptied the shelves of everything priced in pre-crisis rubles.

Yesterday (September 20) the place was eerily quiet -- for the first time in memory, staff outnumbered customers. Except for a window shopping babushka and a family of New Georgians (although Dad was shouting into his mobile phone in Russian, Mom and the kids were speaking Georgian) with a suprisingly empty cart, I had the place virtually to myself. One glance at the prices explained why: like many other stores selling mainly imports, Sedmoi Kontinent has switched over to labelling prices in "uslovnye edinitsy" [YE], i.e., U.S. dollars, with payment in rubles at an (inflated) rate of exchange.

Instead of relief at the prospect of price stabilization -- after all, dollar prices should remain more or less constant -- I experienced an acute bout of sticker shock: the _dollar_ prices of my favorite foods had doubled or tripled. Let me cite just one glaring example. In early August, a 170 g Fazer chocolate bar cost 11 rubles, or about $1.75. Yesterday the new price was $5.10, which would seem to imply a sudden 291% price hike on the part of its Finnish manufacturers, a clear absurdity. At the store's rate of exchange of 16.5 rubles to the dollar, the same candy bar costs 84.15 rubles, a 763% increase in local currency.

I'll admit the ruble has been behaving erratically, but this is well beyond the wildest market oscillations and even exceeds Stockmann's mark-up in the bad old days. (I will leave out the $3 bottles of beer, the $7 mustard, and -- my personal favorite -- the $17 jar of German pickles).

Needless to say, I left with only a handful of items, all of them locally produced. I can't imagine that there are enough cash-rich expats and New Russians left to support such wildly inflated prices. But who would have thought that back in early August, the smart money would have dumped GKO's, mortgaged the farm, and converted everything into chocolate?

Interfax-AiF November 27-December 3, 1998

"Is the Mirror of Russian Statistics Crooked? or The Secret of the State Statistical Committee's Strange Figures"

Article by Aleksey Sinyurin:

In mid-November the Russian State Statistical Committee published its latest report on the monthly inflation rate in our country based on October figures. That event unleashed a new wave of negative emotions in society, the gist of which was familiar accusations along the lines of "Statistics are lying again!"

What Would Have Surprised Disraeli

According to official statistics, during the two and a half months that have passed since the start of the crisis, inflation in Russia was just 49.2%. "All you have to do is visit stores to see that that is not true," has been a common refrain in recent months.

It should be acknowledged that Russian society, in contrast to the West, views the science of statistics with some disdain. Thanks to the movie "Office Romance" the image of dried-up statisticians who can think of nothing except plans, reports and tables lives on in people's mind to this day. But the most important point is that for years statistical data were cited to convince us that "life has become better, life has become brighter." This created the persistent impression that "all statistics lie," and that is something that cannot be overcome overnight.

A saying by British prime minister Benjamin Disraeli from almost 100 years ago and now virtually forgotten in the West remains popular to this day in Russia: "There are lies, damned lies and statistics." Russians also love Bernard Shaw's simple calculation: if one man eats two chickens and his neighbor eats none, then on the average they have both eaten one.

Let Us Try To Calculate Together Nevertheless

In order to calculate the inflation rate, one has to know two main things. Firstly, how much prices have changed for all types of goods and services purchased by the public and, secondly, what percentage of a given individual's cash expense each item comprises. For example, if one product has doubled in price and a second one has quadrupled, yet no one is buying it, that means that on average prices have doubled. If both items are bought in equal proportion, then prices have tripled. If the public allots 20% of its spending to the first item and 80% to the second item, then prices have increased by a factor of 3.6 ((2 x 0.2) + (4 x 0.8) = 3.6), and so on. This seemingly simple truth also needs to be explained.

In order to calculate how much prices have changed for a specific product, the Russian State Statistical Committee records prices all over the country on the last Monday of each month. In each oblast center and in all large cities specially-trained employees visit large stores and markets and record prices for the same group of products. The cost of food and beverage items alone is based on a list of 100 products recorded at a minimum of 5-10 sites. This is done inconspicuously: the counter approaches a salesperson, asks for example how much carrots are, and moves on. Off to the side, he or she writes the figure down in a notebook — one more price recorded.

After recording prices for all types of goods and services, it is necessary to determine how much they have gone up or down on the average in each region of the country. But it is impossible to lump together (even within a single oblast, kray or city) an increase in the price of cabbage and an increase in the price of milk or meat, not to mention higher prices for clothing, cosmetics, utilities or transportation. For that purpose statistics has a system of selective family budget studies, a system that, incidentally, is commonly accepted throughout the civilized world. The gist of it is that over the course of each year a certain number of families with various income levels in each component of the Federation report on what portion of their money they spent for their consumer needs.

Those families are selected by the Russian State Statistical Committee with great care. The number of children and retirees in each family should be roughly the same as the average for a given region. Their income level should be such as to reflect the structure of the region's population as precisely and proportionally as possible. That is, if in an oblast as a whole 15% of families have income per family member of less than R400 [rubles], 50% between R400 and R1,000 and the rest more than R1,000 per person, then families are selected in precisely that ratio.

It is important that the families report their consumer spending with absolute accuracy, without overstating or understating it. That is because how the families report to statisticians determines how statistics will present the personal spending of an entire region and, consequently, how consumer price changes (inflation) will be reported.

It should be noted that these informants are regularly paid a fee so that they will consent to ongoing participation in the studies, as the data must be collected year after year. These families are obligated (and this is what they are paid for) to keep a special journal in which they record all spending by every family member, including minor expenses.

Yet the families studied constantly understate their income. It is only rare individuals who do not do this. Some understate their income in order to conceal black-market earnings and avoid taxes. Some hope to gain more cash compensation or public assistance. Some simply do not maintain the journals out of carelessness, even though they are required to do so.

However, by and large Russian citizens are quite simply too poor, something that not everyone in our country realizes. This is especially true in smaller cities, where wages may go unpaid for months and virtually every family has its garden plot and keeps chickens or pigs. These people simply cannot spend money on goods and services, because they do not have any. They all live in an in-kind economy based on barter. But where there is no money in circulation and people buy virtually nothing, neither can there be any inflation.

Dialogue Between the Blind and the Deaf

Back in 1993, when statistics from selective family budget studies were first being created, specialists from outlying regions reported how they visited the survey families to collect information. They found half-empty journals with notes stating that over the past month or quarter only a few types of cheap products had been purchased. "We do not have money for anything else, everything is so expensive," they replied. As a result, at times it seemed that for a whole quarter not a single refrigerator, vacuum cleaner or iron had been purchased in an entire region. State Statistical Committee specialists had to gauge these based on retail sales volume. The public's expense structure was dominated by vegetables, fruit, bread and milk. A considerable portion also went to vodka. It is interesting to note that in this latest financial crisis these products have shown the smallest price increases. For that reason in those regions where families primarily were buying those items, the inflation rate was also fairly low.

Imagine the following experiment.

Someone visits one of the provincial families which the State Statistical Committee surveys to determine their consumer expenses, and says: "Well, the current financial crisis has had virtually no effect on you; you haven't experienced the same large price increases we have in Moscow." In response you can expect a dialogue something like this:"Do you know how much milk costs now?"

"But you don't buy milk, your country relatives bring it to you."

"And how much more does meat cost?"

"But you and your family only buy one kilogram of meat per month — you don't have enough money for more than that."

"Have you seen how much cigarettes cost now?""But you don't smoke." And so on. In other words, it reminds one of a dialogue between the blind and the deaf.

It is only natural that the State Statistical Committee has not yet come up with an ideal way to calculate inflation. Many comments about its work could be made, but these will be more in the nature of a scientific discussion instead of the man on the street accusingly saying: "That can't be true, because that just never happens!" Would it not be better for statistical agencies to explain to citizens in plain language how they calculate statistical indicators instead of playing cat-and-mouse withthem?

Does Our Neighbors' Experience Mean Nothing to Us?

Consider the example of our recent neighbors in the Soviet Union, the Baltic countries. Statisticians there do a very professional job. In Latvia, which uses the very same inflation index, the form in which the materials are presented is so simple that anyone familiar with the basics of statistical science can understand it. All you need to do is drop by the republic's statistical bureau and in its library you will be given the necessary information, along with an explanation of its meaning. Anyone can calculate the index for themselves and verify whether or not it was calculated correctly. The table has an overall price index corresponding to 100% of Latvians' consumer spending, plus individual components thereof indicating their proportion relative to overall spending. Next to each item is the price index corresponding to it. You multiply this times the percentage of total consumer spending, add the results, and you come up with 100% of spending, i.e. the aggregate inflation index.

Why does our country not publicize the percentage of each product in the consumer spending structure? If that were the case it would be clearer that if prices are up by 50% it is due to manufactured goods doubling in prices while vegetables, fruit, bread and milk increased in price by just 5-10%. And since the latter play such a decisive role in consumer spending, they were the ones that "tugged on the inflation rope." In such cases State Statistical Committee employees reply that there is information that they are required to make public, and information that they are not required to make public and which is for internal use only. Well, in that case the public reserves the right not to believe statistics.

Could that be why Russians understate their income and refuse to keep the journals by which the State Statistical Committee assesses the consumer spending structure? A vicious cycle: if people do not under the purpose of their actions, they lose interest in them.