Inequality Is Key to Making Sense of Russian Consumer Plightby
Record drop in retail sales shows disconnect from rising wages
Gains in wealth benefiting top earners as poverty rate spikes
Russian consumer numbers don’t add up.
A record slide in retail sales for 18 months has been immune to gains in employment and wages, improving confidence and inflation at less than half last year’s level. Widening wealth disparity may be the key to the unprecedented collapse in demand, according to Alfa Bank and VTB Capital.
“We attribute the muddled household data to rising inequality of income distribution,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said in a report. “Heightened inequality is the result of the freeze on public sector salaries since 2015.”
While growing inequality has dogged Russia since the Soviet collapse a quarter century ago, enough wealth trickled down during the oil boom years to double the middle class to more than 60 percent of the population and turn consumer demand into the engine of the economy. Much of that has been undone by the fallout of the crash in crude prices.
The widening wealth divide is an issue animating politics and policy from the U.K. to the U.S. The recovery in the U.S. since the financial crisis has not been felt by all parts of society, fueling support for populist candidates in its presidential election campaign. Bank of England Chief Economist Andy Haldane said in a speech last month that the uneven nature of the economic rebound in the U.K. -- across regions as well as income and age groups -- is one reason why improvements in spending, prices and wages have been “modest.”
As millions sank into poverty in Russia last year, it’s the top earners -- more prone to saving and with smaller propensity to spend -- who are primarily benefiting from higher incomes. While household deposits jumped 1.1 percent in May from the previous month, growth in retail loans has been negative or near zero for a year, according to the central bank.
To the extent that the wealthiest do spend, they are a boon to companies like Apple Inc., which said on Tuesday that its sales in Russia doubled from a year earlier.
MD Medical Group Investments Plc, which runs Russia’s largest chain of maternity centers, reported that total deliveries rose 24 percent in the second quarter from a year earlier. Etalon Group Ltd., a developer with a focus on middle-class residential real estate, has said that the crisis is over as demand for apartments picks up.
Private industries are driving the acceleration in pay, while workers in the public sector, which employs as much as a quarter of the total labor force, are only seeing increases of 4 percent to 6 percent, according to Alfa Bank. Federal Statistics Service data show nominal wages surged 9 percent last month from a year earlier after a gain of 8.4 percent in May.
The “tight” historical link between the growth pace of retail trade and real wages no longer holds, according to VTB Capital. Although salaries adjusted for inflation have grown in four of the past five months, a contraction in retail sales has stayed near or below 5 percent all year.
Meanwhile, the World Bank predicts the poverty rate will increase to 14.2 percent in 2016 from 13.4 percent in 2015, returning it to levels last seen in 2007. The number of Russians considered poor already grew by 3.1 million to 19.2 million last year, the most since 2006.
The plight of households is playing out in the market, with the Micex Consumer Goods and Services Index of nine stocks adding only 1.1 percent this year. The broader Micex Index is up almost 11 percent.
While higher oil prices ushered in an unprecedented increase in living standards over the past decade, inequality has grown since Vladimir Putin took power, as measured by the Gini coefficient. The top decile of the richest Russians controls 87 percent of all household wealth in the country, a share that’s “significantly higher” than in any other major economic power, Credit Suisse Group AG said in its latest Global Wealth Report last year.
Wealth distribution is “very uneven” by another measure, with 3 percent of depositors, or 1 percent of the population, holding 46 percent of all personal bank deposits, according to VTB Capital.
There may yet be a silver lining for the central bank.
“If higher wage growth is due to the top income quantiles, it could well prove more persistent and remain elevated in the coming months, but pose less of a challenge to disinflation due to top earners’ lower propensity to consume,” VTB Capital economists led by Alexander Isakov said in a report.