Going down.

Photographer: Vasily Maximov/AFP/Getty Images

Russians Survived Oil Slump. Now for Round 2.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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By the end of the first half of 2015, Russians appeared to be coming to terms with the economic pain inflicted by lower oil prices. Now they may be in for a bruising second round.

Ordinary Russians already are paying a steep price for the decision of successive governments to exploit the increase in oil prices in the 2000s without devoting any resources to modernizing the economy. The consumer paradise that appeared in big cities is showing cracks, and conditions are likely to get worse. 

For the quarter through June, Russia's gross domestic product shrank 4.6 percent compared with a year earlier, after losing 2.2 percent in the first three months of the year. There were a few, small signs of improvement.

Early this year, Russians were learning to live with the effects of a ruble that had lost value after last year's oil price slump. The country is dependent on imports of consumer goods, and inflation rose above 15 percent. On a year-on-year basis, inflation has been above this level in the first half of the year. On a month-on-month basis, however, inflation dropped from 3.9 percent in January to 0.8 percent in July. 

As the pace of price increases slowed, retail sales stopped declining: In real terms, they grew in May and June on a month-on-month basis, though they were down 9.4 percent in June compared with a year earlier.

These weren't evidence of improving conditions, just signs that demand and supply were finding an equilibrium. The daily lives of Russians went from bad to worse. In Moscow, once the showcase of the consumer boom, there was only half as much new shopping center space added in the second quarter compared with a year earlier, and vacancies in malls roughly doubled, to 7.5 percent.

The stock of nonperforming retail loans has been growing every month this year, reaching 7.5 percent of the total by June. The issuance of such loans has stopped growing: Russians are no longer interested in borrowing.

They also are traveling less. Russian tourism to Turkey fell 28 percent in the first half of the year compared with a year earlier, and trips to Spain, France and Italy fell by a third. And the number of visitors to Thailand, once a popular destination, was cut in half. Several airlines, including EasyJet, Lufthansa and Delta, have cut flights to and from Russia.

The government's ham-handed attempts to stem the economic decline by encouraging consumers to buy domestic goods have only made things look worse. The food embargo against countries that have introduced Ukraine-related sanctions against Russia -- new ones were added to the list today: Albania, Iceland, Liechtenstein and Montenegro -- along with the much publicized destruction of smuggled European food haven't stemmed the decline in output. Industrial production had increased 0.6 percent in January from a year earlier, but was down 4.8 percent in June.

The Russian government knows that fostering self-sufficiency is a slow process. Prime Minister Dmitry Medvedev said this week that it would take years to replace certain imports. Earlier this year, some analysts suggested that replacing expensive imports with local goods might become Russia's next growth engine as oil prices remain low. But the oil rebound last spring undermined -- or, more likely -- delayed any such effect. The ruble appreciated along with oil and at one point it even became the world's best-performing major currency.

Now, as oil's decline has resumed, the ruble is down again, but it hasn't matched the lows reached last winter:

The government probably needs the ruble to fall lower for import substitution to start making more sense. Besides, it needs to keep balancing the budget as revenue declines. In the first half of 2015, oil and gas accounted for 45 percent of federal budget revenue, down from 52 percent a year earlier, when the average oil price was $58 per barrel. Now, Urals, Russia's oil export mix, trades at about $49. If it averages $45 in the second half of the year, which is likely given the persistent global glut, Russia will need to devalue by at least 10 percent to avoid widening the budget deficit. 

The government and the central bank will have few qualms about letting the ruble slide further and making ordinary Russians pay some more. Apart from import substitution, the Kremlin hasn't come up with any ideas for restarting growth. And citizens have been extraordinarily patient through the first bout of devaluation and inflation, accepting the propaganda line that the country needed to make sacrifices in the face of Western hostility. Putin will use the full might of his propaganda machine to continue promoting this idea as the population absorbs new shocks. No one knows how long Russians can continue to accept these hardships, but with the current commodities rout, they may have no choice.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net