New Year Hangover Here to Stay for Troubled Russian Consumer

(Bloomberg) -- For the beleaguered Russian consumer, this month’s return to work after the New Year holiday came with an extra dose of pain, as a tax increase pushed up prices across a raft of everyday goods.

Consumer confidence has fallen to the lowest level in two years, while research company Romir found that the average shopping bill shrunk for three weeks straight at the start of January. Retail sales growth slowed in December as real wages grew at the slowest pace in 16 months, according to data released on Friday. Forecasts don’t show the trend improving any time soon.

The sour outlook is another headache for the Kremlin as it attempts to store up reserves as a backstop against potential sanctions, while also boosting growth and keeping a lid on social discontent. Trust in Putin has fallen to the lowest level in at least 13 years, according to a recent poll.

“This year inflation will be quicker and on the backdrop of incomes not growing, that’s the worst situation for consumption,” said Natalia Porokhova, head of research at Russian credit-rating agency ACRA. “The economy is slowing and there are several factors pressuring people’s incomes.”

Consumer-price growth was already picking up pace before a value-added tax hike kicked in on Jan. 1. It rose to 4.7 percent on an annual basis in the first two weeks of January, according to the Economy Ministry, on track for a seventh consecutive month of acceleration. The worst of the impact from the tax hike is yet to come because many retailers won’t have wanted to raise prices immediately in an environment of slowing demand.

Once the lifeblood of Russia’s economy, domestic demand has failed to recover much following a 2015 recession as incomes have continued to fall. Dmitry Polevoy, chief economist at the Russian Direct Investment Fund, forecasts that retail sales growth will slide to 1 percent this year, the lowest level since early 2017, before picking back up toward 2 percent in 2020.

“The question is how much demand will decline due to the VAT, it was rather weak to begin with,” said Liza Ermolenko, an economist at Barclays in London. “We expect a serious slowdown in economic growth this year to 1 percent from a year ago.”

--With assistance from Zoya Shilova.

To contact the reporters on this story: Natasha Doff in Moscow at ndoff@bloomberg.net;Anna Andrianova in Moscow at aandrianova@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Tony Halpin

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