Ruble Plunge Hitting Russians Speeds Slide to RecessionAgnes Lovasz and Anna Andrianova
As Russia’s central bank struggles to shield the ruble from the standoff over Ukraine, Vasily Isaev says it may already be too little, too late to save his Italian vacation plans.
“If you get your salary in rubles, a trip to the beach in Europe is going to be difficult this year,” said the 37-year-old sales manager, looking up from his English homework in the park near Tverskoy Boulevard in central Moscow. “We’re going to Bulgaria instead of Italy this year and we’re renting an apartment a little further away from the sea.”
Consumers like Isaev, spending more than a few months ago to fill a shopping cart with everyday items, may be squeezed most by the currency’s decline as inflation quickens. Wobbling consumption threatens to knock out another pillar of the economy reeling from sanctions that stoked capital flight.
Unruffled by the central bank’s emergency measures, the ruble has depreciated as an expanding list of sanctions in response to President Vladimir Putin’s actions in Ukraine sparked a selloff of assets. The ruble has weakened 7.2 percent this year, the third-worst performance after the Argentine and Chilean pesos among 24 emerging-market currencies tracked by Bloomberg. The currency fell 0.5 percent over the past month.
The ruble was 0.8 percent stronger at 35.43 against the dollar at 7:02 p.m. in Moscow. The benchmark Micex Index of 50 stocks rose 1.6 percent to 1,318.57, trimming declines this year to 12 percent.
The central bank has tried to stem the ruble’s decline by raising its key interest rate 2 percentage points since March. It also intervened on the currency market to prevent a “spiral of depreciation expectations,” Vladimir Kolychev, chief economist for Russia at VTB Capital in Moscow, said by phone today. The monetary authority sold 22.3 billion dollars and 2.3 billion euros ($3.2 billion) in March, according to its website.
Those measures couldn’t prevent the ruble’s weakening from increasing the cost of living by making imported goods more expensive.
That’s affecting business at Narine Karapetyan’s hair salon in Maloyaroslavets, about 120 kilometers (75 miles) southwest of Moscow. Clients are turning to home beauty care to save money after suppliers of imported hair-care products raised prices twice this year, she said.
“Everything is getting more expensive,” said Karapetyan,
30. “The same goes for clothes, shoes and food. I can’t close my store. If I bought a product at a high price, I have to sell it at a higher price.”
Decisions like Karapetyan’s have helped drive inflation this year. The rate rose to 7.3 percent in April, the fastest since last May, the statistics office reported today.
The eroding spending power of consumers is contributing to the slide of the Russian economy, which is reeling from investor flight. Capital outflow was $50.6 billion in the first quarter alone, compared with $63 billion last year.
The capital flight means that Russia’s $2 trillion economy is already in a recession, according to the International Monetary Fund. The lender cut the country’s economic forecast for the second time in less than a month last week, predicting full-year growth will slow to 0.2 percent from 1.3 percent last year.
“Things are bad in the economy, incomes aren’t growing, the economy is not growing and because the ruble is losing value and inflation is accelerating, real incomes of consumers will decrease or grow slower,” Olga Sterina, an economist at UralSib in Moscow, said in an April 21 interview.
The effect may be somewhat delayed as Russians brace themselves for the value of their ruble earnings to erode further. They have stepped up purchases of big-ticket consumer goods, such as cars and televisions, as shown by a 4 percent increase in retail sales in March, according to Sterina.
Revenue at Leroy Merlin, a French retailer of do-it-yourself goods, has risen in recent weeks as customers rush to get the most value for their rubles, Vincent Gentil, head of the company’s Russian unit, said in an interview last month. The splurge “will dissipate in the coming month or two,” Sterina said.
Supermarket chains are already passing the higher cost of imports to shoppers. When suppliers of X5 Retail Group NV raised prices, Russia’s second-largest supermarket chain was forced to increase the cost of imported goods on its shelves by as much as 15 percent, Vladimir Rusanov, a spokesman for the company, said by e-mail.
It’s not all bad news. With about half of Russia’s budget revenue coming from oil and natural gas sales, the biggest beneficiary of the currency’s slide is the government.
Energy exporters will make an extra 2 trillion rubles ($56.5 billion) from the weaker currency, contributing 900 billion of that amount to the budget in taxes, Natalia Akindinova, director of the Center of Development Institute at the Higher School of Economics, said April 28 by phone.
The budget’s health will offer little solace to Isaev’s family as many other Russians may see their dream holidays slip away. As the crisis in Ukraine escalates, the currency may fall to 39 against the dollar by year-end, depreciating another 9 percent from its current level, according to London-based research company Capital Economics Ltd.
Irina Egorova, the 46-year-old owner of a travel agency in the center of Maloyaroslavets, says her company is feeling the pinch. Early bookings for the summer season have dropped from last year. Like Isaev, many of her clients make do with destinations closer to home, such as crisis-hit Greece or Montenegro instead of Spain.
“People are traveling less,” Egorova said. “People are waiting for a last minute bargain.”