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Where Russia's Elite Can Shop Till They Drop


Letter From Moscow

WHERE RUSSIA'S ELITE CAN SHOP TILL THEY DROP

Loping along Moscow's Dorogomilovsky Street with a cocky air, two men in their 20s walk up to a decrepit metal sidewalk stall, its pea-green walls spattered with rust. Pressing their faces up close to the open sales window, the two customers watch intently as a clerk demonstrates how to strap on a brown leather shoulder holster--a hot seller in the crime-ridden capital.

There's lots more in the small kiosk, which caters to the one-stop shopper. A bottle of Chivas Regal goes for 38,000 rubles ($32)--about a week's salary for the average Russian. Zippo lighters cost 32,000 rubles, nylons 6,000 rubles. Brightly colored condoms go for 500 rubles. "People buy them day and night," says kiosk owner Nikolai, who declines to give his last name. Nikolai says his kiosk earns a net annual profit of about $15,000--a fortune in Russian terms.

Bloomingdales they're not, but the kiosks are the hottest players in Russian retailing these days. For decades under communism, consumers were stuck waiting in long lines to buy scarce products in state stores. But over the past two years, tens of thousands of kiosks have opened up on city sidewalks in Russia and other former Soviet republics. Moscow alone has 15,000 of the stalls. Nobody knows just how much revenue they generate, but the kiosks trade in everything from U.S.-made Snickers candy bars to Israeli orange juice to Chinese running shoes and parkas.

MALL BEGINNINGS? As an important test of Russian grass-roots capitalism, these entrepreneurs may well end up transforming their operations into the kind of full-fledged retailing that Westerners take for granted. That's what has happened in Poland, where the kiosks that sprang up near Warsaw's Palace of Culture four years ago have been roofed over to create a shopping mall.

No such mall has opened yet in Moscow, but Edward Abramov and his three brothers have great plans for their flourishing kiosk near Moscow's Kiev train station. "We've succeeded by selling better goods at lower prices," says Edward. He will soon apply that classic retail formula on a larger scale by constructing a block-long store on the same site. Set to open by Christmas, this emporium will sell imported food, such as Italian cookies and balsamic vinegar from Germany. Meanwhile, the plodding state-owned stores have been forced to compete with kiosk capitalists such as the Abramovs. Many now rent out counter space to entrepreneurs who do a brisk business selling foreign-made VCRs, televisions, and irons.

It's this intense appetite for quality consumer products that's creating the boom in kiosks, whose owners scrounge endlessly for items to sell. Many Russians, for example, have quit low-paying state jobs to travel abroad to any country where consumer goods are abundant. These buyers ride the Trans-Siberian Railroad to China to buy athletic shoes and cheap parkas. "Some people go to Turkey or Poland every two weeks and bring back clothes," says a clerk at a kiosk near the Kuznetsky Most metro station in downtown Moscow. The kiosk clerks clean up too: They earn nearly double the average monthly salary in Russia.

Getting started in the kiosk business, however, takes money, guts, and connections. In Moscow, most of the metal stalls are made at a local factory and cost 4 million rubles ($3,333). For Russians, that's a lot of money. But a would-be kiosk owner also needs at least 1 million rubles more for bribes in most Moscow neighborhoods. Kiosk owners say the payoff list can begin with some of the city's regional architects, who approve the design of these simple stalls, and end with the police officer on the beat. Along the way, bribes are paid to the electrician who hooks up the power, to the health inspector, and to the local ward boss.

Then there's tribute exacted by Russian organized crime, whose members often are well-armed and have moved into Moscow from outlying regions such as Georgia and Azerbaijan. These gangs customarily rake off 10% to 30% of a kiosk's profits. "If you don't pay, they'll burn down your kiosk," says one owner who did not want to be identified. He ran into a typical problem. When he opened for business, three separate protection racketeers all demanded payoffs. "I told them that I was only going to pay one of them, and they would have to work it out among themselves. The strongest won out." Yet most kiosk owners seem to accept the payoffs, and some even praise the racketeers' level of service. "If someone steals from you, the mafia will catch them and give you the money back," says one owner.

Once open for business, kiosk operators rely on liquor, cigarettes, and chocolate as bread-and-butter items. But the retailing concept has already matured enough that kiosk owners now try to match their wares to the income and tastes of their clients. Central Moscow, for example, tends to be more affluent. So kiosks there stock up on foreign liquors, such as Amaretto and Bailey's Irish Cream. A 750-milliliter bottle of Jim Beam bourbon goes for about 11,000 rubles ($9). At some walk-in kiosks near the Bolshoi Theater, well-off Russians can buy fur and sheepskin coats starting at $1,200.

In blue-collar areas on the fringes of Moscow, tastes are more downscale. There, factory workers and pensioners favor cheaper Russian vodka and cigarettes. For example, Andrei, a kiosk owner in gritty southwestern Moscow, has trouble selling half-liter bottles of Absolut vodka, even when it is bargain-priced at 7,000 rubles ($5.83). But he has no trouble moving half-liter bottles of Moscow-made Russkaya at 2,100 rubles each ($1.75). Similarly, Russian-made Yava cigarettes at 300 rubles a pack (25 ) outsell Camels at 800 rubles (66 ).

Customers are not always satisfied, though. Stories abound of people getting sick from the kiosk equivalent of bathtub gin. Or the vodka may have a big dose of Moscow water added to stretch it out. And Russian playgrounds are filled with mothers complaining that running shoes and Chinese-made winter parkas purchased at kiosks rip apart at the seams after two or three months.

The hope is that an increasingly sophisticated wholesale network will emerge to provide better-quality goods. Kiosk owners now can purchase Snickers or Cadbury chocolate bars from hundreds of small Moscow wholesalers who buy directly from foreign manufacturers or licensed distributors. Says Yevgeny Golomedov, a former mining engineer whose company, Sebezh Ltd., has a contract to sell Cadbury and Schweppes products: "It's easy to find customers. The real competition is for supplies." Like the Abramovs, some of these wholesalers are evolving into savvy players themselves. Vitex, a clothing importer on Pushkin Street, has now grown large enough to have showrooms as well as retail outlets.

As the kiosk owners slowly assemble the pieces of a modern retail infrastructure, they have to deal with a new problem: taxes. Moscow bureaucrats, who used to order crackdowns on kiosks, which they considered to be public nuisances, are now ordering levies on them instead. The municipal government is requiring kiosks to install electronic cash registers that will ensure accurate receipts. The bureaucrats' aim is to make it harder for kiosk operators to evade Moscow's 32% profits tax. Operators must also cough up hefty income taxes.

The new taxes are certainly an annoyance for the kiosk proprietors. But the biggest challenge they face, in one sense, is a consequence of their own success. By creating such a ferment in Russia's consumer culture, the street merchants are forcing state-owned stores to focus on customers and encouraging the best kiosk owners to expand far beyond sidewalk vending. In the end, the kiosks may phase themselves out--but only after playing a key role in stimulating the emergence of a thriving Russian retail system.PATRICIA KRANZ


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