Tired of Austerity, Russians Turn to Credit to Top Up Incomes
After five years of stagnating incomes, Russians are increasingly dipping into savings to cover the cost of basic necessities.
(Bloomberg) --
After five years of stagnating incomes, Russians are increasingly dipping into savings and taking out loans to cover the cost of basic necessities.
Consumers’ continuing pain is yet another obstacle to the Kremlin’s hopes of reviving economic growth in line with goals set by President Vladimir Putin last year. One bright spot for the Russian economy has been the decline in inflation this year, but a key driver of that has been continued weakness in consumer spending.
“Inflation is easing but the economic state isn’t improving from it,” said Anton Tabakh, chief economist at Moscow-based credit assessor Expert RA. “The central bank may need to cut interest rates more aggressively.”
Retail sales grew 1% last month, below expectations and the 1.6% average so far this year, even as wages adjusted for inflation jumped 3.5%, beating forecasts, the Federal Statistics Service said Monday.
The central bank resumed monetary easing in June after two surprise rate hikes last year. Growth picked up to 1.7% in July, according to an estimate from the Economy Ministry released Monday. Industrial production was a big driver of the improvement, the ministry said, helping offset the weakness in retail.
For the first seven months of the year, the economy expanded 0.9%, still below the ministry’s full-year target of 1.3%. Hopes that increased government spending will fuel a pickup in the second half are under threat from signs trade tensions are damaging global growth.
What Our Economists say:
“Persistent weakness in retail spending is worrying, with external demand also faltering. The recovery is likely to remain soft until a boost arrives from increased fiscal spending.”
- Scott Johnson, economist, Bloomberg Economics
“Incomes aren’t growing and it’s hard to live in this frugal state for five or six years,” said Lyudmila Presnyakova, a sociologist at the Public Opinion Foundation in Moscow. “People have had to start looking for alternatives, and this year they started tapping more into credit and savings.”
Unsecured consumer lending rose 25% in the 12 months until July 1, according to central bank data. The share of Russians who say they struggle to pay back loans has jumped to around a third this year, from just over 20% in 2017, according to a July survey by the VTsIOM pollster.
Economy Minister Maxim Oreshkin stepped up calls this month for more measures to promote growth to stop the “bubble” in credit from getting out of hand. The central bank argues that retail lending growth is normal and says there aren’t any signs of overheating in the consumer credit market.
The operating environment for retailers is “challenging” due to the prolonged contraction in incomes, particularly outside of big cities, Jan Dunning, the president of Russia’s second-largest retailer Magnit said on a conference call after a recent earnings release.
“The quality of sources to finance consumption is worsening,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki said. “Consumers heavily rely on loans, while high interest rates and income stagnation hurt their future purchasing power.”
--With assistance from Zoya Shilova, Ilya Khrennikov and Andrey Biryukov.
To contact the reporter on this story: Anya 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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