Condition of the Russian Consumer: Recovery on the Horizon?
Valdai Discussion Club Conference Hall (Bolshaya Tatarskaya 42, Moscow, Russia)

Participants in the Valdai Club economic seminar held in Moscow on Monday believe that although inflation rate in Russia is record low, the prospects for a recovery in Russia’s household consumption remain dim in the near term. The consumer sector appears to be doing relatively well in the upper middle-class segment, with Moscow and St. Petersburg generally looking more favourably compared to regions with lower income per capita, including smaller cities.

In her presentation, Natalia Orlova, Chief Economist at Alfa Bank, described Russia’s consumer trends from the perspective of the banking sector. According to Orlova, the current crisis is different from the one of 2008-09 in that consumption contracted much more considerably, at 15 percent, and the recovery is much slower. Discussing trends in consumer lending, she said that debt servicing still remains an issue, as it translates into net reduction of annual consumption. In order to offset this, the growth of retail revenues must be at 18 percent, which is hardly achievable now.

An interesting feature of the Russian consumer lending is that overleveraged regions tend to be those, which have a higher level of unemployment and have a higher level of poverty, Orlova said. Similarly, although the demand on consumer loans is comparable to what it was three years ago, the approval rate has dropped, as banks are more reluctant to lend money. This is another reason why the retail market is not recovering as fast as during the 2008-09 crisis.

When it comes to the deposit market, the trend is mixed, Orlova said. On the one hand, it shows a sustainable 15 percent growth in ruble-denominated deposits, but the capitalization of interest explains 55-per cent growth of this increase, and the cleanup of the banking sector still worries depositors.

Albert Avetikov, Director for Investor Relations at the Lenta retail chain, put forward a vision of consumer trends at the microeconomic level. Avetikov described the evolution of consumer behavior since 2014, as seen by a major food retail chain. The first stage of the crisis, in the last quarter of 2014, saw upfront buying, as consumers bought imported goods, such as home electronics, en masse, as a way to hedge against the depreciation of the ruble. It was followed by trading down, when consumers opt for cheaper alternatives of particular products. Hidden unemployment, when employers cut working weeks instead of firing workers, gave rise to a new pattern of consumer behaviour, which has become more price-sensitive and promotion-oriented. According to Avetikov, in 2017, Russia faces deflation in the retail segment for the first time in decades, and consumers can afford more expensive products, than a year ago. However, since the growth in disposable income is in the negative territory, no rebound of consumption is to be expected in the near term yet.

During the debate that followed, the panellists discussed whether the appreciation of the ruble and a lower key rate would be positive for consumption growth. Avetikov believes a stronger ruble is important for consumer sentiment, creating more confidence and boosting consumption. At the same time, on the macroeconomic level, an appreciating ruble makes imported goods more competitive. As for lowering the Central Bank key rate, Orlova believes that it can boost consumption, but not in the short run, as consumers will first focus on refinancing their loans, so it would primarily send a positive signal to banks.