Russia Set to Fall Further Behind US in Terms of Living Standards

DSCN2995“Change Yourself for the Better.” If you read the following article, about the OECD’s forecast for economic growth in Russia, between the lines, you will discover a takeaway message that has been apparent to numerous observers for a long time. Until Russia does away with official kleptocracy, rampant corruption, outrageously bad governance, and the shock-and-awe policing of politics and business by the siloviki—i.e., unless it renounces Putinism and all its ways—there is little chance the living standards of ordinary Russians will improve much in the next forty years. Photo by the Russian Reader

Russia Set to Fall Further Behind US in Terms of Living Standards
OECD’s Experts Have Predicted the Futures of the World’s Major Economies
Tatyana Lomskaya
March 7, 2018

Russia is one of the few member states and parters of the Organization for Economic Cooperation and Development (OECD), in which real per capita GDP will fall by 2060 relative to the benchmark, the United States, according to an OECD reported entitled “Long-Term Prospects: Scenarios for the World Economy, 2060.” Vedomosti has had access to the eport. A source at the OECD confirmed its authenticity while noting it was a preliminary draft.

In the absence of reforms, Russia’s per capita GDP will grow only 0.7% in the next twelve years, predict OECD economists. The stumbling block is low workforce productivity. In recent years, it has not increased at all, and it will accelerate to a mere 0.5% in the period 2018–2030. Another brake on economic growth is poor demography: the economically active and able-bodied segment of the populace has been declining. By way of comparison, due to its positive demographic circumstances, Turkey’s standard of living will increase considerably by 2060 to about three fourths of the figures for the US, write the report’s authors.  In Russia, it will increase to 40% of the benchmark before decreasing slightly.

It is hard not concur with the diagnosis, notes Alexander Isakov, VTB Capital’s chief economist for Russia. Demography and workforce productivity are the biggest constraints on economic growth in Russia.

In his March 1, 2018, address to the Federal Assembly, President Putin promised to increase per capita GDP by 50% by 2025. He said = Russia must firmly gain a foothold among the world’s top five economies by then. Putin meant GDP at purchasing power parity (PPP), Economic Development Minister Maxim Oreshkin explained on the TV program Pozner. According to the IMF, Russia is now in sixth place in terms of GDP (PPP), four percent points behind Germany. The goal is to “bypass Germany,” explained the minister.

The goal can be brought within reach by applying active budgetary (e.g., tax cuts and increases in oil and gas costs) and monetary (e.g., lending) stimuli, says Kirill Tremasov, director of the analytics department at Locko Invest, but this is fraught with great risks.

Without reforms, Russian and the other BRICS countries will slow the growth of the world’s real GDP for forty years beginning in 2019, warn the report’s authors. To accelerate growth, they must increase workforce productivity by reforming governance, increasing the duration of schooling, and reducing trade tariffs.

If during the period 2020–2060, the BRICS countries develop the rule of law (which the World Bank evaluates on a scale from minus two to plus two), increase schooling to the median level of the OECD countries, and decrease trade tariffs to OECD median levels by 2030, the growth of per capita GDP will be 25% to 40% higher than in the baseline scenario. A key factor is governance reforms: combating corruption, improving law enforcement and the judiciary, increasing the efficiency of the civil service, and involving ordinary citizens more actively in politics.

The report notes this is especially important for Russia. Among the BRICS countries, Russia has the worst score for rule of law (-0.8) and the best score for average length of schooling (10.8 years). The Russian civil service has been adapted to the current political system, which assumes maximum centralization and the absence of political competition. Tremasov is skeptical: it is impossible and pointless to reform the civil service without democratizing the political system.


“How Living Standards Will Change: The OECD’s Baseline Scenario. Real Per Capita GDP at Purchasing Power Parity in 2010 Prices (US=100).” The blue horizontal lines represent predicted outcomes for 2018; the red lines, predicted figures for 2060. The countries included in the survey, as  listed from top to bottom, are Brazil, Russia, Turkey, Poland, Italy, France, Great Britain, Finland, Germany, Switzerland, Norway, and Ireland. Source: Preliminary Calculations from the OECD. Courtesy of Vedomosti

In his May 2012 decrees, Putin charged the government with increasing workforce productivity by one and a half times by 2018, but it had increased only by 3.8% as of 2016. Minister Oreshkin listed the obstacles: underinvestment, insufficiently developed infrastructure, and a lack of resources to upgrade productive assets.

Managers do not have a “culture of constantly improving efficiency and productivity,” he complained.

Workforce productivity is indeed the main obstacle to economic growth, but an increase of investments is needed in order to increase it, notes Natalya Orlova, chief economist at Alfa Bank. In 2017, about 50% of the increased investments in Russia were due to the extractive resources sector, although the bulk of GDP is generated in other sectors, says Orlova. Investments in agriculture grew by a mere 1.3%, fell in manufacturing and construction, and the commercial sector crashed altogther, falling 9.7%. Investment growth has been hindered by economic and geopolitical uncertainty, and the government has an ever harder time of reducing that uncertaintlywith sanctions in place, notes Orlova. Business, on the contrary, needs guarantees the rules of the game will not change for a long time.

Growth in productivity is impossible without increased competition, Tremasov points out. It is competition that compels companies to introduce new technology, reduce costs, and improve management. The more intense the competition in a sector, the higher the productivity, he notes, citing the retail trade and metallurgy as examples. Therefore, the main means of increasing economic efficiency is reducing the state’s share in the economy, argues Tremasov, as well as attracting foreign investors, reforming the judiciary, and reining in the security services [siloviki].

Measures to improve the country’s demographic circumstances will bear fruit in twenty-five years, when the corresponding generation enters the labor market, notes Isakov. The authorities should thus concentrate on increasing productivity.  If the market functions smoothly, the difference in productivity between companies in the same industry decreases, he argues, because they borrow technology and methods from each other, while inefficient companies are forced out of the market. In Russia, on the contrary, differences in productivity within industries are some of the highest in the world, due in part to gray sector employment practices, Isakov concludes.

Economic growth could take off if reforms are implemented, argues Orlova. The Russian economy is currently so inefficient that the jumpstart supplied by reforms would be huge.

Translated by the Russian Reader

Poor Russians Up to Their Necks in Debt

ruble coin 2This one-ruble coin, minted in 2014 and sporting the newish symbol for the ruble, adopted in 2013, won’t buy you love or much anything else. 

Poor Russians Go into Debt
Tatyana Lomskaya
October 11, 2017

Low-income Russians have been unable to wait for an uptick in incomes and have turned to loans to meet their consumer needs. Experts, including the Central Bank, believe such borrowers are a danger to the economy.

The demand of Russians for loans has been growing. In August, their arrears to banks rose to levels not seen since the spring of 2014. Ruble-denominated loans reached their maximum historic high, according to RANEPA’s monthly newsletter Monitoring the Economic Situation in Russia. Banks have been vigourously issuing loans. In July, they provided Russians with 23% more loans than at the same time last year. Consumer loans have been the fastest growing. According to the National Credit History Bureau, such loans increased by 27% over the past eight months.

Loans have been playing a growing role in the budgets of Russian families, notes the newsletter. In the first six months of the year, new loans made up 21% of household final consumption expenditures. This is significantly higher than the crisis levels of the last two years (15–18%), although it is still below the peak levels of 25–27% in 2013–2014. With virtually no increase in the real incomes of individuals, this generates additional risks to their financial circumstances, noted RANEPA’s analysts.

Residents of poor and distant regions are the biggest borrowers of consumer loans at the moment, along with the poorest segments of the populace, notes Natalya Zubarevich, director of the regional program at the Independent Institute for Social Policy. This is how they offset falling incomes. Wages in Russia have been growing since August 2016, but real incomes have continued to fall.

People cannot skimp and save forever. People turn to loans to meet their needs, says Zubarevich. What matters is that banks not issue too many loans, which would raise the specter of a huge number of defaults.

The debt burden has been growing more quickly in regions with the highest poverty levels, according to the FR Group, although the situation varies from region to region, notes project manager Anastasia Zyurkalova.

Russians have been spending more and more of their income on consumption. According to some indications, they have abandoned the savings model of financial behavior, acknowledges Yelena Grishina, head of RANEPA’s research laboratory on pension systems and social sector actuarial forecasting. One of the ways they survive is by taking out loans. Certain segments of the populace have outlived the means they once had for limiting consumption. In the first six months of 2017, a linear dependence bwtween increases in the volume of loans and poverty levels in the regions was observed, says Grishina. Russians are now more positive than a year ago: they have assessed the changes in their welfare, and the percentage of those who skimp on food and clothing has decreased, note RANEPA’s analysts [sic].

The burden of non-mortgage loans is highest in regions with high unemployment and a poorer populace, Alfabank’s chief economist Natalya Orlova wrote last autumn. The middle class [sic] would be unlikely to emerge as the main source of the growth in demand for retail loans, she noted. The average borrower is more likely to be someone with a limited income. Judging by the numbers for the first six months of 2017, nothing has changed, says Orlova. It is still less well-off Russians who want to bring their consumption up to average levels. The increase in retail loans in the poorest regions is likely due to people’s tapping out their savings and and trying to maintain a certain level of consumption, agrees Karen Vartapetov, an analyst at S&P.

A significant portion of the demand for consumer loans comes from people whose incomes are less than the median income in Russia. Often, their incomes are unstable as well, and their debt burdens are high, noted analysts in the Central Bank’s research and forecasting department. (Their opinions may differ from the financial regulator’s official stance.)  Yet banks currently do not really have the capacity for an increase in lending, and so even a moderate uptick in consumer loans is fraught with risks no less serious than during the 2010–2012 loan boom. To limit these risks, the Central Bank has been working out individual debt burden indicators, notes a source at the regulator. The share of an individual’s expenditures on repaying loans should be such she could continue to pay back the loan even if negative events were to occur.

For the time being, the largest banks surveyed by the Central Bank have reported that the percentage of borrowers with increased levels of debt burdens has not grown, and the number of people with monthly incomes of less than 20,000 rubles [approx. 290 euros] who have taken out cash loans has fallen, says the source at the regulator. The banks have been forced to behave more conservatively. Everyone well remembers the wave of late payments in 2012–2013, says Yuri Gribanov, CEO of Frank RG.

After the crisis of 2015, the quality of loan applicants has not improved considerably, notes Sergei Kapustin, deputy board chair of OTP Bank. There are still many people with problematic debts that have not been managed and refinanced at another bank. According to certain channels, the share of such debts is ten percent, and banks have been forced to lower the number of loans they issue. In addition, a number of bankers issue unsubstantially large loans to people who have borrowed money at other banks in amounts disproportionate to their incomes.

The demand for consumer loans is currently quite high, says Mikhail Matovnikov, Sberbank’s chief analyst, and there are still a lot of extant bad loans at high interest rates, especially among low-income Russians. This not at all what the economy needs, and it is bad for borrowers, too, he argues.

The banks’ fight against such loans has pushed borrowers into the arms of microfinance institutions, where the circumstances can be even worse. This year, the microlending market has grown from 186 billion rubles to 242 billion rubles [approx. 3.5 billion euros]. The banks have not met the steadily growing demand for loans, according to research by microlender Home Money.

home money

A screenshot from Russian microlender Home Money’s website. “It’s simpler to make a phone call than to borrow from somebody! Call if you need to! New services: personal legal consultant; home protection; credit history.”

Measures to limit interest rates cooled the consumer lending market in 2015–2016, notes Dmitry Vasilyev, an analyst with Fitch. Currently, the portfolio’s growth matches the nominal growth in incomes of Russians (2–3% during the first sixth months of 2017) and the percentage of risky and unsecured loans has lowered. Some borrowers have drifted to the microlenders, while some banks have been weeded out due to noncompliance with tougher standards, says Vasilyev.

Orlova points out the banking sector is at a crossroads. Maintaining quality lending means not taking on as clients people working in the informal sector and incapable of confirming how much they make and microlenders currently lending at very high rates. Or banks could increase their appetite for risk and take on inferior borrowers to increase their market shares and loan portfolios. Banks have to earn money. If there are no borrowers willing to pay (for example, the government, which would have to become much more active in the state debt market), the issue would become particularly critical. Prospects for income growth in the coming year are worsening, and the risk that not very well-off people would not be able to service their loans is growing, warns Orlova. Poverty will not seriously decline in Russia in the coming year, if we believe the government’s three-year macro forecast, as submitted to the State Duma. It will drop from 12.8% of the populace this year to 11.2% in 2020, i.e., it will not drop to the levels of  2012–2013 (lower than 11%).

Translation and image of the ruble coin by the Russian Reader. Thanks to Comrade Koganzon for the heads-up. The original article, as published yesterday by Vedomosti on the front page of its paper edition, was behind a paywall. Thanks to Press Reader for providing me with the text of the article.