Russian households are bearing the brunt of the blowback from the crisis in Ukraine and a tailspin in oil prices, setting the stage for the biggest drop in consumption in more than two decades that will deepen the country’s recession.
Crushed by a 44 percent slump in the ruble in the past year as prices soar, retail sales are set for what Otkritie Capital predicts will be their biggest decline since the breakup of the Soviet Union in 1991, when savings were wiped out and households endured food shortages and hyperinflation. That’s unnerved consumers like Svetlana Korotkova, who’s stockpiling cereals and canned goods to build up what she calls her “safety cushion,” a lesson she learned from perestroika-era deprivation in the 1980s.
“Government resources are very limited now, so I don’t expect strong help,” said Korotkova, a 42-year-old accountant who spoke as she browsed through a shopping mall in Tula, about 200 kilometers (125 miles) south of Moscow.
Six years after presiding over a one-third increase in pensions at the height of the last crisis, President Vladimir Putin, whose approval rating is near a record high, is now pegging changes in retirement payments to last year’s inflation as he steers the bulk of a 2.3 trillion-ruble ($37 billion) program to support lenders and industry, almost half of it to recapitalize banks. As prime minister in 2009-2010, Putin deployed what Goldman Sachs Group Inc. estimated to be the largest stimulus package among Group of 20 nations, totaling 9.8 percent of economic output.
That stands in stark contrast to current government plans to battle a recession economists predict will last for four quarters. With little relief in sight for consumption, which accounts for about half the economy, Russia risks a more drawn-out crisis, according to Natalia Akindinova, director of the Development Center of the Higher School of Economics in Moscow.
“Now the anti-crisis plan is more focused on banks and industrial sectors, but not the sectors that are suffering the most,” Akindinova said. “The ones that suffer the most are trade, construction and services.”
Consumers are retrenching after the ruble lost almost half of its value against the dollar in the past 12 months. The ruble’s one-month implied volatility jumped to almost 90 at the beginning of January before paring the increase to 38 on Monday. That’s still almost double the level of the next most volatile emerging-market currency, the Brazilian real.
The ruble strengthened 1.9 percent to 62.2730 to the dollar as of 2:14 p.m. in Moscow.
Inflation, which soared to 15 percent from a year earlier in January, is forecast by the Economy Ministry to peak at as much as 17 percent this spring, a level not seen since 2002.
That would push price growth above the central bank’s benchmark interest rate, currently at 15 percent after a surprise cut in January. Bank of Russia Governor Elvira Nabiullina said the move was warranted because the recession-bound economy will take a bite out of inflation in the second half of the year.
With Putin considering a possible run for the Kremlin in three years, “this year is an opportunity to curb income-growth expectations in order to surprise on the upside by 2018,” Alfa Bank economists Natalia Orlova and Dmitry Dolgin said in a report.
Support for the Russian leader matched a record 88 percent in October and was at 85 percent last month, compared with 65 percent in January 2014, according to a Jan. 23-26 survey of 1,600 people by the Moscow-based polling company Levada Center. The results have a margin of error of 3.4 percentage points.
For 2015, the Economy Ministry predicts a decline of more than 9 percent in real wages after a 1 percent drop in 2014. That compares with an average annual increase of more than 10 percent in monthly wages in the past 15 years. Disposable incomes will probably shrink more than 6 percent, with retail sales set to slide 8 percent, according to the ministry’s updated forecasts, released last month.
If Putin has fewer policy levers to help consumers, that’s partly an acknowledgment of just how far Russia’s public finances have deteriorated. In the years that followed Russia’s last recession in 2009, the oil price the government needs to balance the budget has more than tripled from $30, according to Finance Minister Anton Siluanov.
Pressure on Russia’s finances is growing amid U.S. and European sanctions and a global oil glut that drove crude prices almost 50 percent lower last year. The government ran a deficit of 0.5 percent of economic output last year. With crude prices at $50 a barrel, the shortfall may widen to 3.8 percent, according to Economy Minister Alexei Ulyukayev.
After a rebound in the economy in 2010, growth decelerated every year since then. Consumer spending formed the backbone of the brittle recovery in the runup to the crisis in Ukraine and the oil price freefall in 2014.
Household consumption accounted for most or all expansion in gross domestic product between 2010 and 2013, according to a World Bank report published last year. It contributed 3.8 percentage points to GDP gains in 2012 and 2.3 percentage points the following year, when the broader economy gained 3.4 percent and 1.3 percent, respectively, the lender estimates.
Now most consumer indicators are flashing red.
Consumer confidence plunged last quarter to the lowest in five years. The Russia Services Business Activity Index last month shrank to the weakest reading since May 2009, sapped by a drop in incoming new contracts, outstanding business and employment.
Russia will report consumption-related statistics this week. The annual drop in real wages accelerated to 6.1 percent last month, the biggest decline since 1999, according to the median estimate of 12 analysts in a Bloomberg survey. Retail sales probably fell 1.9 percent from January 2014, which would be the first negative reading since 2009, a separate poll showed.
“I don’t understand why this is happening to us,” said Svetlana Graiche, a human resources consultant in Moscow whose family had to forgo a vacation abroad and is reconsidering plans to send their son to a German-language school. “I expect there will be less work. God willing my income in rubles at least won’t change.”
The distress plaguing consumers is roiling a swathe of industries, from wine importers and music-streaming services to luxury hotels and retailers like O’Key Group SA and Euroset Holding NV. O’Key, a Russian food retailer that focuses on large supermarkets, blamed the economic downturn and the country’s retaliatory ban on some food imports from European countries and elsewhere for a decline in consumer traffic that last quarter led to a 5.1 percent drop in its like-for-like sales.
As Russia was staggering from the lowest oil prices since 2009, Putin responded in early December by ordering budget cuts of at least 5 percent a year in real terms for 2015-2017. This year, most expenditures will be reduced by 10 percent, with the exception of outlays on defense, pensions and agriculture.
“In this current geopolitical situation, if you listen to Russian media, social stability becomes much more important,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “All that matters is for people to have their job and it doesn’t matter if their purchasing power is shrinking; it’s only important that they have their job. That’s why no one is worried about helping private consumption.”
Even that confidence in the future is now fraying. A study by the Sociological Institute of the Russian Academy of Sciences found that only a third of respondents described their work situation as “good” and 40 percent said there was some likelihood they’ll be unemployed within the next year. The survey, conducted in November among 4,000 people older than 18 across all regions of Russia, found that 53 percent believe the country was facing a “tense, crisis” situation. No margin of error was given.
The severity of the crisis has reopened discussions about contentious topics such as a possible increase in the retirement age. Siluanov, the finance minister, said in an interview that authorities must conduct a “serious inventory of all social assistance, payments and benefits.” Every third Russian receives some social aid, making the system more generous than its Soviet predecessor, according to Siluanov.
Outlays on health care will be cut by more than 12 percent in 2015, while expenditure on education is reduced by 3.3 percent, according to this year’s budget plan.
“They are prepared to, in a way, sacrifice the consumers this time around and make them take most of the heat,” Liza Ermolenko, an economist at London-based Capital Economics Ltd., said by e-mail. “This part of the economy is going to be the one that takes most of the adjustment that is needed.”