The Crisis at Half-Life

After Some Encouraging Momentum Built Up in the First Half of 2010, Russian Consumers Have Grown a Tad More Cautious as Household Disposable Incomes Keep Shrinking  
Household disposable incomes in Russia dropped 5.5 percent in January of this year compared to the same time last year, in the latest sign that Russian families still face widespread economic troubles as the economy struggles to recover from the worst financial squeeze since 1998. Disposable personal income, or take-home pay, dipped 48.8 percent in January compared with December last year, the largest monthly drop since the 1998 financial crisis, figures released by the Federal State Statistics Service show.
The latest official figures also show that the global downturn has filtered deeper into the real economy, and may have started to weigh heavily on ordinary citizens. The average per capita income fell to 14,014 rubles ($481.2) in January. The average monthly nominal wage amounted to 20,782 rubles ($713.7) last month, representing a 10.2 percent increase compared to January of 2010, but a 22 percent drop compared to December of 2010. Real (inflation adjusted) wages in January 2011 increased by 0.6 percent compared with January 2010, while they fell 23.8 percent compared to December last year, the biggest monthly drop since August 1999.
Since the early 1990s, Russia’s State Statistics Service has been keeping track of changes in prices of a set of 83 basic goods and services as a way of comparing purchasing power in different regions. The Russian Consumer Price Index, or CPI – a standard package of goods and services that Russian households purchase for consumption – increased 4.1 percent to 9,073 rubles ($302) in January, the federal agency said Thursday, RIA Novosti reported. In Moscow and St. Petersburg, where living standards are higher compared to the rest of the country, the cost of a standard package of goods and services in late January was 12,728 rubles ($424) and 9,558 rubles ($318) respectively. This represents a monthly price increase of 4.1 percent and 4.7 percent respectively for both cities, and further proves that ordinary households are being financially stretched despite some positive signs of economic recovery.
The most expensive region in Russia, as far as basic food and services are concerned, is the mineral-rich Chukotka, which is estimated to hold close to ten percent of Russia's gold reserves. In January, consumers in Chukotka were paying 15,680 rubles ($538.4) (double the average national minimum wage) for a basic set of goods and services, compared to just 7,369 rubles ($253) paid by residents of the Saratov Region – the nation’s cheapest by CPI.
Analysts say these bleak statistics show that concerns over the global economic downturn have continued dealing blows to consumer confidence. A poll of consumer optimism among consumers in seven developing countries conducted by the Credit Suisse Research Institute in January shows that only 27 percent of Russians foresee improvement in their financial standing, while ten percent were in fact expecting a decline. The researchers, who found that last year incomes grew the least in Russia and Egypt, said this balance of positive and negative expectations was worse only in the latter. The portion of disposable personal income spent on food was the largest in both countries – 35 percent in Russia and 40 percent in Egypt.
According to the most recent statistics compiled by the United States Agriculture Department’s Economic Research Service, U.S. residents spent about ten percent of their income on food. In comparison, people in Mexico spent 22 percent, the residents of China spent 28 percent, and Russians used 37 percent of their income for food. “Consumers in Russia have retained confidence in the job market and many believe in the stability of their personal financial situation,” said Dwight Watson, the managing director at Nielsen Russia and North-Eastern Europe, a research firm that recently conducted a survey of consumer confidence around the globe. “But with growing grocery and utilities prices, [Russians] now find themselves with less disposable income. This is one of the reasons for the slow recovery in consumer confidence in Russia.”
Since the 1998 Russian financial crisis, the Russian economy has enjoyed an averaged seven percent growth, resulting in the doubling of real disposable incomes and the emergence of a middle class. However, the economy took a nosedive during the 2008 to 2009 global economic slowdown, as oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. Since then, the Central Bank of Russia has spent one-third of its $600 billion international reserves, the world's third largest, to prop up the ruble. The government also dished out $200 billion in a rescue plan to increase liquidity in the banking sector and aid Russian firms unable to roll over large foreign debts coming due. With the government’s modernization efforts showing few results so far, the country’s reliance on commodity exports makes it vulnerable to boom and bust cycles that follow the highly volatile swings in global commodity prices. Yet as the economic decline appears to have bottomed out in mid-2009, large segments of the population have yet to feel the end of the financial crisis.
This was not the case with well-heeled Russians, who appeared to have shaken off the worst of the depression as the economy stuttered to recovery last year. Russia, which lost more billionaires than any other country during the financial crisis, boasted 114 dollar billionaires at the end of last year, according to an annual ranking of the country’s richest 500 published this month by Finans magazine. The domestic car market could see $40 billion in sales in 2011 on improved consumer confidence, increasing access to credit and a government backed cash-for-clunkers scheme. Mobile phone penetration has soared from 80 million in 2006 to 230.5 million last year, equal to 163.62 percent of the country's population. Even with a modest rise in income, analysts say spending on communication, housing and transport will double.
Despite such impressive post-crisis figures, the recovery in consumer spending in Russia has shown signs of slowing in recent months. The monthly rate of inflation, based on the CPI, rose 2.4 percent in January or an annualized 9.6 percent, further proving that the economy is not out of the woods yet. Rising inflation has impacted the cost of basic goods and services, which jumped 12.9 percent on average at the end of 2010 to reach 8,700 rubles ($290), effectively eroding average pension gains. Currently the consumer sentiment index is 13 percent lower than its pre-crisis peak, according to the Levada Center, a leading polling agency. "While consumer optimism gained slightly at the beginning of last year, by the summer that growth fell to zero," Marina Krasilnikova, the head of a department at the Levada Center, said. In her opinion, a key characteristic of 2010 was worsening expectations. "The current situation's assessment is unchanging, and the outlook is even hazier," she said. Krasilnikova said people don't see any signs of a change for the better, sources of economic growth or their own prosperity. "People don't see where they can invest to be confident in the future," she said.

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