Surge in Putin Patriotism Masks Pain of Sanctions

Aug. 18 (Bloomberg) -- Ukraine is "on the offensive" to defeat rebels in its easternmost regions, according to Daragh McDowell, a senior analyst at Maplecroft. McDowell discusses Ukraine's efforts for European integration and Russian President Vladimir Putin's tactics. He speaks with Mark Barton on Bloomberg Television's "On the Move." (Source: Bloomberg)

Russians are backing Vladimir Putin as he confronts the U.S. and Europe over Ukraine, even if their wallets tell a different story.

Putin’s popularity is soaring, along with consumer confidence and a gauge for “social comfort.” Another set of data reveals an abrupt change in a country that reveled in consumerism after the collapse of communism. Car sales are plunging, tour operators are going bankrupt and disposable incomes are stalling.

A new generation of Russians who have grown up since the fall of communism is finding patriotic pride in making do with less. While Putin’s ratings are still on the rise, analysts and researchers in Moscow say the deteriorating economic data highlight the risk of letting politics trump prosperity.

Waging Financial War

“Pride and patriotism have awakened in Russians, as was the case in the USSR, and that’s why they are willing to sacrifice some part of their wellbeing,” said Dilyara Ibragimova, a lecturer on economic sociology at the Higher School of Economics in Moscow. “I think that’s temporary, because the continued growth of prices will hit their pocketbooks and affect their attitude.”

Cars, Vacations

Car sales, which grew by monthly leaps of as much as 88 percent in 2007, plunged by an average of 20 percent in June and July. At least five tour operators have gone bankrupt as people cut back on travel. Domestic demand is seizing up even as a Russian consumer-confidence index had its biggest jump in more than four years last quarter and a gauge of “social comfort” has been at a record high since June.

Shoppers buy T-shirts with portraits of Russia's President Vladimir Putin reading "The most polite man," in a shop in central Moscow on Aug. 11, 2014. Photorgapher: Kirill Kudryavtsev/AFP via Getty Images Close

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Shoppers buy T-shirts with portraits of Russia's President Vladimir Putin reading "The most polite man," in a shop in central Moscow on Aug. 11, 2014. Photorgapher: Kirill Kudryavtsev/AFP via Getty Images

That marks an about-face for Russia, where consumer spending accounts for half of the $2 trillion economy. Against the backdrop of the economic collapse in the 1990s, Putin has made Russia’s rising prosperity and stable public finances the cornerstone of his appeal.

Helped by the rising price of oil, the country’s biggest foreign-revenue earner, Putin presided over budget surpluses during his first two terms in the Kremlin between 2000 and 2008. Growth averaged about 7 percent a year during the period and real wages increased an average of 15 percent annually, according to data compiled by Bloomberg. Including declines for much of 2009, wage growth has averaged 3.9 percent since.

Spending Stalls

As growth engines sputtered with the financial crisis shaking the global economy and capping fuel prices, consumers stepped in. Their spending propelled growth in 2010-2013 as investment wobbled and industrial output slowed. Until this year.

Photographer: Andrey Rudakov/Bloomberg

Car sales in Russia are plunging, tour operators are going bankrupt and disposable incomes are stalling. Close

Car sales in Russia are plunging, tour operators are going bankrupt and disposable incomes are stalling.

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Photographer: Andrey Rudakov/Bloomberg

Car sales in Russia are plunging, tour operators are going bankrupt and disposable incomes are stalling.

In March, when Russia annexed Crimea from Ukraine, disposable incomes had their biggest drop since 2009. The government estimates gross domestic product will grow 0.5 percent this year, the slowest since a 2009 contraction.

That hasn’t made a dent in Putin’s public standing.

“The politics seems to be more important now than economics, which is taking a second seat at the moment,” said Ivan Tchakarov, the chief economist at Citigroup Inc. in Moscow. “The majority of Russians appear to be ready to sacrifice their economic welfare if it serves a bigger goal, which is now to show that Russia is again acquiring the trappings of a big power.”

Putin’s approval ratings took off on the back of his actions in Ukraine, first by bailing out then-President Viktor Yanukovych in December and then seizing Crimea after months of deadly protests that toppled the regime in Kiev.

Putin’s Popularity

Stuck with 61 percent backing in November, the lowest since June 2000, support for Putin increased to 87 percent by early this month, 1 percentage point short of a record reached in September 2008 after a war with Georgia, according to polling company Levada Center. Putin would win an election by 64 percentage points if elections were held the following Sunday, according to a survey by the Moscow-based Public Opinion Foundation.

Photographer: Andrey Rudakov/Bloomberg

Car sales, which grew by monthly leaps of as much as 88 percent in 2007, plunged by an average of 20 percent in June and July. Close

Car sales, which grew by monthly leaps of as much as 88 percent in 2007, plunged by an... Read More

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Photographer: Andrey Rudakov/Bloomberg

Car sales, which grew by monthly leaps of as much as 88 percent in 2007, plunged by an average of 20 percent in June and July.

The patriotic bubble deflating may be a risk for Putin, according to Alexei Levinson, head of the social and cultural studies department at the Levada Center in Moscow. Even so, the country has a long road to travel before distrust of the government replaces love of country and deprivation leads to upheaval, as happened between World War I and the Russian Revolution, he said.

‘Political Comfort’

“Political comfort is a substitute for economic comfort,” said Sergey Tsybizov, the 28-year-old head of IT projects in the Moscow region at Russian automaker OAO Sollers. “Essentially it’s as if Russians were handed a cookie and they are happy, but almost all of them forget they need bread or soup.”

The crisis in Ukraine helped Putin put behind him the biggest anti-government protests of his years in power that followed allegations of vote rigging in parliamentary elections in December 2011. Putin has hardened his response against critics since winning a new six-year presidential term in 2012.

The takeover of the Black Sea peninsula “brought a patriotic surge,” Putin, 61, said Aug. 14, urging Russians to draw together and work for the good of the country, even as chaos engulfs Ukraine.

The number of Russians who own a national flag rose to 38 percent in July from 29 percent a year ago, according to a Levada poll published today. The survey of 1,600 adults in 46 regions was conducted July 18-21 and had a margin of error of 3.4 percentage points.

“Russians love strong leaders and Putin is certainly perceived to be a strong leader as he stands up to the West,” Tchakarov said.

After months of waiting out sanctions by the U.S. and Europe, Putin struck back this month with bans on food imports from countries that penalized Russia.

Lauding Putin

Tsybizov said his parents, who live in Volgograd, “clapped their hands” at the retaliation.

Yet as Putin was notching up his perceived geopolitical successes, the home front grew increasingly out of sync. Gauges of consumer demand began flashing multiyear lows.

Sales of laptops dropped 33 percent from a year earlier last quarter. In the first three months of 2014, Russians reduced trips abroad for the first time since 2009.

Disparities are pronounced. In June, retail-sales growth fell to 0.7 percent, the slowest since January 2010, and picked up only slightly to 1.1 percent in July. At the same time, a measure of people’s financial situation reached a historical peak, staying stable last month, according to state-run VTsIOM.

The polling company said its index that tracks Russians’ economic outlook hit a record 69 points in July, almost triple its readings in 2009 and 2010.

“Psychologically, Russians are treating the situation very positively but are behaving very cautiously,” Mikhail Dmitriev, a deputy economy minister from 2000 to 2004, said in an Ekho Moskvy radio interview. “The broader implications of this are related to the ambiguous perception by the Russian population of everything that’s going on.”

To contact the reporter on this story: Olga Tanas in Moscow at otanas@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Scott Rose, Torrey Clark

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