Ruble’s Next Trick Will Be to Make Russian Consumer Prices Melt

  • Stronger ruble starting to contribute to slowdown in inflation
  • M.Video, Lenta, Ikea cutting prices after consumption collapse

A currency exchange board in Moscow.

Photographer: Andrey Rudakov/Bloomberg

Until recently, the impression most Russians had was that the only way for prices was up.

When the ruble strengthened, it fed off booming consumer spending to keep inflation in double digits. And the years it plunged -- in 2008 or more recently in 2014 and 2015 -- prices shot up as an economy addicted to imports coped with more expensive goods from abroad.

That formula no longer holds. The ruble, whose collapse more than two years ago was a major contributor to an inflation spike in 2015, is starting to work in Russian consumers’ favor after rallying more than 28 percent in the past 12 months. By making imports less expensive, a stronger exchange rate may already translate into slower inflation in January and February, according to the Higher School of Economics in Moscow. It estimates that a 10 percent increase in the value of the ruble would shave half a percentage point off annual inflation.

“Previously, when the ruble strengthened, the impact on prices was outweighed by growing consumer demand,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage. “Today the situation is different: disposable incomes of Russians have fallen, so a drop in prices is quite a reasonable move as competition for customers continues.”

Retailers from M.Video to Lenta Ltd. can no longer take the consumer for granted after the recent recession clobbered demand. Add to the mix the ruble’s spurt last year, and there are suddenly deals to be had on everything from Apple Inc. gadgets to Ikea furniture.

The Russian currency is up almost 2 percent against the dollar so far this year after gaining 20 percent in 2016. It traded little changed at 60.2175 versus the dollar as of 8:14 p.m. in Moscow on Wednesday.

Chasing Target

The markdowns are playing into the hands of the central bank as it looks to push inflation to its 4 percent target in 2017. While the ruble had its best year ever in 2016, the appreciation was slow to trickle through to consumer prices, keeping non-food costs -- which have the highest share of imports -- rising faster than headline inflation for the past 14 months.

That’s already caught the attention of the central bank, with Governor Elvira Nabiullina warning in December that the deceleration for non-food items is “insufficient” and may partly be a result of the longer period this price segment takes to react to external shocks and ruble weakness.

Now that Russia’s biggest retailers are starting to discount prices on products, the tide may be turning. M.Video, Russia’s largest electronics chain, is in talks with suppliers after already reducing retail prices on Apple gadgets and reaching an agreement with Samsung. Volkswagen AG also said on Wednesday that it’s lowering prices on its original spare parts from this month by as much as 15 percent, partly as a result of a stronger exchange rate.

According to Yandex.Market, a website that includes more than 20,000 merchants selling everything from dog food to roller skates, average prices for the most-often searched goods -- which are also least vulnerable to seasonality -- have been declining in the past months.

Ikea, Lenta

Ikea reduced the cost of more than 1,800 items by 15 percent to 20 percent, citing the ruble’s stabilization among factors behind its decision. In the case of Lenta, the retailer chopped prices last quarter on products ranging from detergents to vegetables to account for a stronger exchange rate, according to its chief executive officer, Jan Dunning.

“If the ruble strengthens further, this may trigger deflation and reduce same-store sales growth in the short term,” he said. “Still, deflation increases purchasing power of the Russian consumer, and it’s good in the longer term.”  

While nations across eastern Europe have recently had to endure record stretches of price declines, that remains a distant prospect in Russia, according to the central bank.

The price adjustments are necessary because of the way economic hardship reshaped habits.

Steeled by adversity, the share of price-sensitive shoppers reached a record 77 percent of respondents in the second quarter of last year, according to Sberbank CIB’s survey of consumers. It also found that in July-September 2016, 44 percent were drawn to stores solely because of promotional offers, a slight change from a historical high of 47 percent in the prior three months.

But a stronger ruble will only go so far in driving down prices. Currency pass-through is usually less potent when the exchange rate appreciates than during its decline, according to the central bank. Another hurdle is a plan to start foreign-exchange purchases in February, which is set to drag down the ruble.

“When the ruble is appreciating, prices will change, but the process will take more time and will happen more smoothly than during its weakness,” said Nikolay Kondrashev, an analyst at the Development Center of the Higher School of Economics. “Prices won’t decline as fast as they grew.”

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