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Elite living in Moscow: Why Moscow, a city of both billionaires and dilapidated housing, is so expensive, is often a mystery to newcomers. In a 3-part series we look at the real cost of living here

Ever wondered why Moscow hotels are so expensive when public transport is so cheap? Or why a Starbucks coffee in Moscow costs more than the same coffee in New York? This three-part series examines the driving factors behind the cost of goods and services in elite, mid-range and budget price ranges to identify the factors which generate such a wide spectrum of prices in the city.

To the newly arrived tourist or the uninitiated expat, Moscow can be cripplingly expensive. Order a coffee without glancing at the menu, and you risk forking out up to $8, according to this year's Mercer survey, which ranked the Russian capital the fourth most expensive city in the world for expat life.

Walking around the capital, with its often-shoddy Soviet-era buildings, beggars and stray dogs, visitors can be hard pushed to work out why prices should be so much higher than in London or New York.

Disposable income

The high number of ultra-rich goes some way to explaining the phenomenon. With 79 at the last count, Moscow has more billionaires than any other city in the world, according to Forbes. In most countries, prices in the high-end segment are fairly inelastic, since the extremely well-off can always be counted on to spend above the going rate.

Disposable incomes are higher in Russia than in the EU countries and the United States due to a combination of high salaries in the top-end segment and low taxes. With a flat tax rate of 13 percent, top-end salaries for business executives such as investment bankers are now returning to pre-crisis levels, according to Forbes magazine. And the big shots take home a lot more cash than their counterparts in New York or London, which makes them less concerned about blowing as much as $50 on a couple of beers in a downtown café.

Prestige factor

Added to this is a novelty value slapped on to certain goods and services. Forbes recorded that hotel stays in Moscow are on average 40 percent more expensive than in London. Tariffs for rooms in the city's most expensive hotel, The Ritz Carlton, start at 32,000 rubles ($1,150) and soar as high as 125,000 rubles ($4,500), but the hotel has still recorded 95 percent occupancy rates for every month this year, according to a survey conducted by Business New Europe.

The reason is that people stay in the hotel because of its high price tag to treat themselves and show off. This stems in part from a desire to live to the excess when times are good after years of shortages under the Soviet Union.

"In Moscow certain goods tend to sell better the more expensive they are as they are considered more prestigious," said Ekaterina Andreyanova, a retail analyst at Rye, Man and Gor Securities.

A similar trend can be seen in the luxury goods sector. Alina Demidova, the founder of Elite Club, which manages assets for private wealthy Russians, said that prices for luxury in some segments are on average 50 percent higher than in Western countries. A Jones Lang LaSalle study conducted in July found Moscow's Stoleshnikov Pereulok to be the third most expensive shopping street in Europe after London's New Bond Street and Paris's Avenue Montaigne.

The prestige factor is particularly noticeable in imported wine sales. A bottle of French or Italian wine that may sell for around $7 a bottle in European stores can cost as much as $100 in a high-end Russian supermarket. Demidova, of Elite Club, says that the mark-up is in part a product of high customs duties, which exceeds 30 percent on some items. However, it can also be attributed to the fact that the Russia does not have the same tradition of wine drinking that Europe and the United States have, so people are more likely to buy a bottle for its prestigious label than for its taste and quality.

"A crate of Château Petrus wine, which costs $2,000 in London, can sell for $10,000 in Moscow," Demidova said.

Expat life

For expats, the main focus of the Mercer survey, high prices tend to stem from a desire to replicate the lives they were used to living in their home countries. Products considered everyday in Western Europe, such as lasagna sheets or German wheat beer, fall under the luxury segment in Moscow due to their scarcity and import costs.

Furthermore, highly-paid expat workers tend to be more carefree than their colleagues back home due to bumped up salaries as compensation for living abroad and the low tax rate. This has created a niche in the market for letting agents and service providers to provide marked up expat services, often with a focus on those with no knowledge of Russian, who therefore have little other choice.

The price of luxury

Minimum price of a premium food basket (week's shopping for two people) ­ 5,000 rubles ($180)

Cup of coff ee ­ $8

Three-course meal (without alcohol) ­ $150

Gin&Tonic ­ $5.50

Beer ­ $20

One night accommodation ­ $1,000-$4,500

Two hours in a VIP limousine ­ $110

Haircut ­ $1,000

Shoes ­ $200-$300 (Prada)

Rent ­ $5,000 per month (4-bedroom elite apartment near Moscow State University)


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