No Place to Hide as Ruble, Inflation Haunt Russian Consumers

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Don’t look to the Russian consumer to bail out the economy from its first recession in six years.

Data ranging from spending to incomes on Thursday laid bare the cost of last year’s ruble debacle and a surge in inflation. A collapse in retail sales continued with a 9.2 percent plunge in May from a year earlier, after a revised 9.6 percent slide in April. Adding to the gloom, a slump in fixed-capital investment worsened and stretched into a 17th month as real wages and disposable incomes continued to fall.

Against that bleak backdrop, an annual event showcasing Russia as a destination for foreign investment opened in President Vladimir Putin’s hometown of St. Petersburg. The squeeze on consumption, which accounts for about half the economy and powered growth for a decade, is dimming the prospects for a faster rebound.

“Retail sales will reach bottom in May-June but it doesn’t mean they will turn around quickly and start improving,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said by phone. “A turnaround in investments depends on inflation and investments may get positive but no earlier than in 12 months.”

Fair Value

The consumer is getting no lift from a letup in inflation and the ruble’s 14 percent rally against the dollar this year. The Russian currency’s three-month implied volatility, a measure of exchange-rate swings, is at 20 percent, the highest globally, according to data compiled by Bloomberg. It traded 0.5 percent stronger at 53.36 against the dollar as of 5:11 p.m. in Moscow.

Five-year government bonds gained, lowering the yield by seven basis points to 11.17 percent.

As Putin prepares to make a pitch to investors and executives at the St. Petersburg International Economic Forum on Friday, the Russian leader will have to come clean about the downturn, according to Piotr Matys, a London-based foreign-exchange strategist at Rabobank.

“He will be realistic about the current state of the economy and domestic demand,” Matys said. “Putin may also reassure foreign investors that his country is ‘open for business’ and that Russia is more determined than ever to reduce its reliance on external demand for its oil and gas and implement structural reforms to strengthen economic fundamentals.”

Ditching Reforms?

Putin is fending off major economic proposals and waiting for the central bank to replenish its reserves as a cushion to support his geopolitical ambitions, including in Ukraine, according to four people with knowledge of the matter. Any meaningful structural initiatives to pull Russia out of recession, curtail corruption or strengthen property rights will probably be absent from his annual address to investors at the forum, according to the people.

With the economy in the doldrums, Russia’s poverty level in the first quarter rose to the highest in 10 years, with almost every sixth person earning less than the minimum subsistence level. A survey by research company Nielsen showed consumer confidence at a record low as 18 percent of Russians lacked free cash after buying food and other basic items.

Little relief is in sight for consumers. The Bank of Russia said on Monday that inflation risks leave limited room for further interest-rate cuts after four decreases this year brought the benchmark to 11.5 percent.

Consumer Outlook

Consumer demand is contracting sharper than forecast and the economic slump hasn’t reached bottom yet, according to Bank of Russia Governor Elvira Nabiullina.

Even so, May data released on Thursday showed consumer spending and incomes declining less than forecast by economists. Wages adjusted for inflation tumbled 7.3 percent from a year earlier after declining an upwardly revised 9.6 percent in April. That was better than the median estimate of 15 economists in a Bloomberg survey for a 12.3 percent drop. Unemployment dropped to 5.6 percent from 5.8 percent.

“We are seeing that the dynamics of consumer demand has stabilized,” Russian Deputy Finance Minister Maxim Oreshkin said in an interview at St. Petersburg. “Inflation was the main reason for the slump, but the growth in prices has now stopped and that’s why we are seeing stabilization of retail sales.”

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