Window on Eurasia: Consumer Spending Decline to Intensify Russian Economic Problems

Paul Goble

Vienna, June 11 – Russia’s already troubled economy is likely to take another hit later this fall when consumers exhaust most of their reserves and significantly cut back their spending, according to Vladimir Milov, the president of the Moscow Institute of Energy Policy and a member of the opposition Solidarity Movement.
The current economic downtown, he points out, is universally recognized to be the result of declining energy prices and problems in the economies of Russia’s trading partners, but it would now be worse if Russian consumers were not continuing to spend at nearly the levels they were earlier (www.nr2.ru/ekb/235931.html).
Russian consumers have done so at the urging of Prime Minister Vladimir Putin who has argued that the current crisis will be relatively short by drawing down their savings, but those reserves will be largely gone by this fall, Milov says. And as a result, a decline in consumer spending will deliver a second hit to the Russian economy.
Just how large a hit that will be remains uncertain. On the one hand, Russian consumers already have cut back. And on the other, consumer spending constitutes a far smaller percentage of Russia’s GDP than it does elsewhere. In the US, for example, it forms 70 percent of GDP, while in Russia, it is now under 40 percent (soundmoneytips.com/user/317799/comments).
In an interview with the New Region news agency, Milov underscored the differences between the current crisis, which reflects first and foremost the decline in the price of oil and gas and the fall-off in foreign investment, and the looming one, which will be driven by and reflect declines in consumption.
“At present,” he said, “people are attempting to preserve their old level of consumption,” drawing on their savings given the encouragement of the government that things will begin to get better in 2010. Indeed, Milov noted, Putin has told Russians, “’consume just as you did; we will support you.”
But as the population draws down its savings and as other problems hit, including the introduction of anti-dumping measures by China that will hit Russia’s metallurgy industry and declining investment from abroad, he continued, it is obvious that the decline will outlast consumer savings and that when they end, the Russian economy will take another serious hit.
In Milov’s view, the Russian government not only has been disingenuous in its discussion of these problems but also has adopted policies that have failed to address them. First, it has tried to save the banking system while not worrying nearly as much as it should about the real sector of the economy on which most people depend more directly.
Second, he argued, the government’s support of key economic figures – the oligarchs – has not led to a real improvement of the situation of the population even if it has calmed these powerful people. And third, the government has put money in the Russian stock market to try to stabilize that, taking huge losses as President Dmitry Medvedev conceded last month.
Because of these and other failures, Milov said, Moscow is going to face more crises like the one in Pikalevo, which attracted so much attention after Putin visited that company town near St. Petersburg in response to worker protests over plant closings. In time, it is likely that Moscow will have to use the security forces rather than money to try to keep order.
Indeed, the Solidarity leader concluded, “the economic and social instability in Russia will stretch out over the next five years,” given that foreign investors will not return to the Russian Federation given that “political risks” in Russia are much higher than they are in many other countries like Brazil or China.
Because the political system in Russia is increasingly closed, Milov said, “the powers that be have been weakened and fulfill their obligations ineffectively, allowing for too many mistakes. The situation can be changed only by political competition and free discussion, arrangements that always work in favor of the economy.”
But there is one indication that declines in consumer spending in Russia in the coming months may have even more dramatic social and political consequences than Milov suggested. According to a commentary by Ivan Yartsev this week, Russia is once again, under current conditions, not in a position to feed itself (www.politcom.ru/8304.html).
Although overall imports have fallen in Russia by more than 40 percent since the start of 2009, he noted, spending on food imports has increased “almost ten percent,” a pattern that suggests “Russian producers are not in a position to work in crisis conditions and satisfy the [already lowered] demand of the population.”
“Unlike in 1998” – the year of default – “one is not talking about import substitution.” Instead, “Russians are simply beginning to consume less, and the domestic food producers are producing less.” For the latter, “the current crisis [unlike the one a decade ago] has not become ‘a window of opportunities.’"
Because of that and because imported food is typically more expensive than domestically produced food, Russians forced to cut back on their consumption this fall may have to cut back in an area their government has been assuring them is not a problem that they need to worry about.
At the very least, the challenge of providing enough food to Russian consumers – and especially those in small cities and rural areas far from Moscow – will force the government to divert resources from other areas lest it face the politically unpalatable and, for Russians, historically loaded option of having to suppress protests by hungry people.