Diamonds Are No Longer the Flavor of the Month with Rich Russians, as Investing in Ecology, Education and Art Becomes Trendy The Russian government plans to introduce a tax on luxury items, including expensive houses, yachts and cars, to help raise funds for the budget, the Economic Development Minister Elvira Nabiullina said last week. But the latest Summer Millionaire Fair held in Moscow at the beginning of July appeared to show that rich Russians are taking a greater interest in different luxury items, such as VIP-class goods and services. Russia has the largest number of billionaires in Europe, according to Forbes magazine. In 2009, Moscow became the world’s capital for billionaires, ahead of New York. Eighty two of the richest Russians on the Forbes list hold fortunes estimated at over $1 billion. Their names are well-known, and these people play an important role in the economic and political life of the country. However, those belonging to the category of "just wealthy" are much less known. These people keep out of the public eye, apart from some personalities in show business. But these high-earning professionals and business owners account for most of the luxury purchases. Research conducted by the Russian Economic School (RES) in association with City Bank found that 990,000 people in the country have available cash assets ranging from 1.3 million rubles ($43,150) to 13 million rubles ($431,500). This segment includes less than one percent of Russia’s population, but the wealthiest earn a quarter of the total incomes in Russia and own 30 percent of all bank deposits. In the five years before the economic crisis, the number of wealthy Russians grew by 20 percent annually, which led to a boom in luxury goods sales. "Over the five-year review period between 2004 and 2008, the Russian luxury goods market experienced a period of tumultuous growth, when sales increased by an average of 30 percent. The number of millionaires and billionaires rose dramatically during this period, as did the level of ‘aspiration’ spending among the middle classes. Boutiques and retail space mushroomed," said Fflur Roberts, the luxury goods industry manager at Euromonitor International, a company that conducts market research worldwide. But the economic crisis has had a significant impact on Russia’s "wealthy population," which decreased from 1,200,000 to 990,000 people in 2009. "Sales of luxury goods slowed down considerably at the end of 2008, as the impact of the global financial crisis hit Russia hard. The first indication was seen toward the end of 2008, and in particular during the New Year sales period. As a result, the rampant growth predicted at the beginning of the year was significantly modified, and overall sales growth was well down on previous years," said Roberts. "Two thousand and nine was a very difficult year for the luxury industry, as sales crashed under the strain of the financial crisis, which has taken a heavy toll on all levels of the Russian society. The biggest spenders were particularly affected since they reined in spending on luxury goods. Many global brands had their overall sales dramatically impacted, and local boutiques had to close their businesses. British luxury brands, such as Alexander McQueen and Stella McCartney, saw both their newly opened flagship stores close their doors to shoppers in Moscow," Roberts added. But the economic situation has improved this year. "Russia is expected to recover to the pre-crisis level around 2012," Roberts said. Experts predict that the number of wealthy Russians will reach the pre-crisis level in 2011, and the total number is expected to grow by two to five percent annually in the nearest future. A survey conducted by RES found that 70 percent of wealthy Russians put their main capital in bank deposits, but 20 percent prefer to invest money abroad. This year private investment in foreign countries has increased, experts say, pointing to the recent trend of interest shown in BRIC countries. Researchers divide wealthy Russians into three groups. The first group is that of the "status consumer" - young, ambitious people aged 25 to 40 who tend to buy luxury goods to emphasize their high social standing. They actively pursue new opportunities for investment. The older wealthy Russians are divided into a "saving" type, which puts money into bank deposits, and "aggressive players" who are prepared to take risks to increase their capital. So who are these people and what do they tend to buy? MasterCard has conducted further research of wealthy Russians. It found that the financial elite of the country are men aged between 25 and 45: high-earning top- and middle-level managers and highly skilled professionals and entrepreneurs. These people are the main luxury consumers. Twenty-five percent of Russians said they plan to buy luxury cars in the next one to two years, while forty percent report that they buy designer clothes and luxury brands of cosmetics and alcohol, MasterCard found. There is also a new trend in that more money is being spent on home comfort. Wealthy consumers report that they have started spending more on interior and garden design, on the arrangement in their apartments and houses, and on home accessories. "People who can afford the high standard of living now tend to care more about the environment they live in. They are well-educated; they have traveled a lot and have knowledge of life in foreign countries. As a result, they focus on the quality of houses more than on prices," said Dmitry Abramov, the owner of the GarantStroy building company, which builds luxury chalets from hand-crafted wood. "Firstly, they are interested in impressive, non-typical architecture, preferably in Western European styles. Secondly, they are interested in modern technologies and want to live in houses made from ‘healthy’ and environmentally friendly materials, such as natural woods." The second trend of luxury consumption is the increasing interest in buying not only goods, but services as well. "The Bonne International stand, which offers native English governess’ services, was very popular at our exhibition," said Maria Naduvaeva, PR Director at the Millionaire Fair Moscow. "It indicates the aspiration of wealthy parents to come back to Russian aristocratic tradition and raise their children well-mannered, well-educated and multilingual." Although the salary of British nannies amount to at least $4,000 monthly, it did not put visitors at the stand off. Considering that health is as, or even more, important than education, the attention of rich visitors was also attracted by thermal medicine procedures at the cedar pools at Equilibris Medical Center. Moreover, experts are observing growing interest in art and antiques. Even the "averagely rich" tend to consider investments in art and antiques as a part of their future finance plans. Places such as the Garage art gallery and the Vinzavod art center in Moscow have become "must see," and artwork has become "must buy." All in all, money for luxury tends to be invested in something beyond the framework proposed in the amendments to tax law.