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Analysis & Opinion
23.06.11 The Russian Paradox
By Tai Adelaja

Russia’s economy is showing signs of strength, but most Russians who have been earning more are getting poorer. Average monthly nominal wages in the country rose 12.5 percent to 22,520 rubles ($803) year-on-year in May, but Russia's stubbornly high inflation eroded most of the gains in people's purchasing power, the Federal State Statistics Service (Rosstat) reported on Wednesday.

Personal disposable income went up 3.2 percent to 18,183 rubles ($648) in May, compared to the same period in 2010, even as average incomes fell 9.1 percent compared to the previous month, the agency said in its latest report on the socio-economic situation in Russia. Despite a healthier increase in take-home pay, real disposable income (after taking inflation into account) actually fell 3.7 percent between January and May, Rosstat said.

While Russia still ranks world's number five in the number of its super-rich families, experts say public sector employees and pensioners continue to bear the brunt of the cost of living pressures. A recent opinion poll taken by the Bashkirov and Partners sociological group found that Russia's low-income consumers remained highly price-sensitive and are always seeking out the cheapest deals. Russian consumers are also reducing their consumption of more expensive food, such as dairy products and fish, and are opting instead for cheaper meal components, the survey revealed.

Around 40 percent of respondents said they have cut back on purchases on non-essential items like home appliances, and 35 percent said they have stopped buying new clothes. About 32 percent said they have cut back on groceries as a way to better absorb the shock of rising prices. According to the latest Rosstat figures, while the price of household appliances went up just 0.7 percent and of clothing – by 3.1 percent, food prices have been rising relentlessly.

The price of wheat – the main ingredient in bread, which is a staple food in Russia – was up four percent in May alone, according to Rosstat. The agency also recorded price increases in a number of food products and beverages including buckwheat, oatmeal, bagels, coffee, ice cream, beer and soft drinks. The consumer price index (CPI), which measures changes in the price level of consumer goods and services purchased by households, went up 6.6 percent from the beginning of the year to reach 9,200 rubles ($328) in May, or twice the government-mandated national minimum wage. Russia's highly-symbolic cost of consumer basket – the recommended minimum set of food products – rose 6.9 percent from the beginning of the year to 2,807 rubles ($100) in May.

In Moscow, where the average salary is twice the national average, the average salary shot up 12.4 percent in the first four months of this year to reach 39,700 rubles ($1,414), Marina Ogloblina, the head of the city Economic Policy Department, told journalists on Wednesday. But even resilient Muscovites are reeling from high prices, as inflation eats deep into their monthly take-home. Real inflation-adjusted disposable incomes for Muscovites were down by 12.2 percent between January and April, compared to the same period in 2010, Ogloblina said. Consumer prices inched up from 4.2 percent last year to 4.8 percent since January, as annualized headline inflation hit nine percent.

However, consumer spending in Russia started the year with significant momentum, suggesting that many Russians continue to spend no matter what. Retail trade turnover was up 5.2 percent between January and May, but most of the spending was on durable goods and basic food items, Rosstat reported. And it is not just that more and more Russians are finding it hard to change their grocery spending habits. Rosstat figures also indicate that Russia is falling in love with consumer credit all over again. Retail trade turnover between January and May rose 5.2 percent to 7.182 trillion rubles ($256 billion), compared to the same period last year, Rosstat reported.

Economists are attributing the present upswing in consumption to a sharp and unexpected spike in consumer credit. Russians, long known as high-spending hedonists, are not ready to shed their old habits yet, they said. And as the banking system comes through the financial crisis and the economic downturn, the consumer lending boom, which came to an abrupt end in late 2008, is again gaining momentum. Russian consumers are borrowing and spending more while saving less – a development that can boost economic growth but also fuel inflation, the Central Bank said in May. Credit growth, the bank said, is a “new monetary risk to inflation.”

Russia's annual inflation reached an 18-month high of 9.7 percent as of May 23, figures from the Central Bank show. Consumer prices will rise 9.05 percent in 2011, according to the median estimate of 16 economists surveyed by Bloomberg. "Inflation remains the nation's biggest scourge and it has continued to plague consumer confidence," said Svetlana Romanenko, the head of sociological research at Bashkirov and Partners. "People were telling us that their spending plans have crumbled as inflation shot up."

The rising inflation figures, expert say, also put Prime Minister Vladimir Putin government’s dilemma in stark terms. While the government remains under pressure to enforce fiscal discipline even as global crude prices go up, increased government spending before parliamentary elections at the end of the year and a presidential vote in early 2012 is expected to boost inflation. The cabinet easily approved about 420 billion rubles ($15 billion) of additional spending late April, most of which will be spent on social programs such as raising old-age pensions, baby bonuses and family incentive programs, as well as raising salaries for government employees by 6.5 percent in October. While some of the spending is expected to overhaul some of the country's most neglected sectors, experts say the prime minister is also aiming to win public support ahead of crucial national elections.
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