Modeling the food embargo impact on the Russian households’ consumption

Abstract

The share of import in Russian food trade decreased significantly after the establishment of the food ban for the wide list of countries of 2014. This decline could not go unnoticed by the Russian households. Therefore, the aim of this research is to study the changes in the structure of consumer demand for food products associated with food embargo. Estimations are obtained by the model based on the QUAIDS and Working-Leser models. The originality of the research lays in the construction of the individual prices vector. Traditionally models based on AIDS use aggregate price indicators, such as regional CPIs, but prices are the result of consumer choice, so they can not be aggregated at such a high level. However, individual purchase prices should not be used as well, because of the problem of endogeneity. This study presents a method of estimating individual prices, so they are both differentiated by income groups and other households’ indicators and cleared from the endogeneity. The results demonstrate that the introduction of an import ban caused structural shifts in consumer demand for food products. The growth of the absolute value of price elasticity may be explained by the lower quality together with higher prices of food products on the new market. The rise in the income elasticities means fall in the demand for luxury goods, because of the low ruble exchange rate and overall economic instability. The growth of economies of scale means that households changed their consumption strategies to save their welfare. However, these changes are present for the city population, while farmers seem not to lose their well-being at all. Furthermore, a more thorough analysis showed that after the shock in 2014, the indicators started to get closer to their initial values. This may be the result of adaptation or the increase in the effectiveness of import substitution. In this regard, the research gives Russian food safety positive prognosis in the long-run, but only if the quality and the variety of food products are improved.