CENTERFOR STRATEGIC

RESEARCH

Mikhail DmitrievResearch Director

Center for Strategic Research

ICEUR, Vienna3 March 2014

The new Russian consumer:Preferences, socio-economic situation, consumption patterns

Business seminar in Vienna“The Russian Economy after Sochi”

CENTERFOR STRATEGIC

RESEARCH

2

Before the crisis:

Demographic dividend and a positive global labor supply shock

Advanced economiesWorldEmerging markets

Share of the working-age population

Source: City Research, Mckinsey Global Institute

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RESEARCH

3

Drivers of pre-crisis acceleration

Source: World Bank, IMF, WTO

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Catching up with the OECD

4Source: WEF (2011). The Russia Global Competitiveness Report 2011, p.4

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Wages were crowding out profits

5Source: Rosstat, Gaidar Institute

Gross profits and mixed income

Wages (including shadow earnings and mixed income)

Wages were crowding out profits

6Source: Rosstat, Gaidar Institute

Credit-driven consumer boomCENTER

FOR STRATEGICRESEARCH

Retail sales Real disposable income

Credit model of consumption Outstanding loans to individuals, growth yoy

Credit-driven consumer boom

Source: Rosstat, CBR, Gaidar Institute

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БЛАГОДАРЮ ЗА ВНИМАНИЕ

Success stories:Retail and hotels

Source: MED

Share in GDP Growth of sales 2000=100

7

Russia

Austria

Germany

Italy

UK

France

Japan

Canada

Russia

Germany

UK

France

USA

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RESEARCH

Success stories:Telecommunications

Cell phone subscribers per 100 persons 2009 г.

8

Russia

Italy

Germany

Spain

France

USA

Japan

Source: MED

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Success stories:Foreign tourism

During last decade Russia rose from the 12th to the 7th place in the world in terms of tourist spending abroad

Number of foreign tourist trips outside CIS, thousand

Amount spend abroad, bln USD

9Source: UNWTO, Russian border authorities

1314714838 15666

1869020464 21641

25487

0

5000

10000

15000

20000

25000

30000

2004 2005 2006 2007 2008 2009 2010

8,8

17,3

23,820,9

26,9

0

5

10

15

20

25

30

2000 2005 2008 2009 2010

10

БЛАГОДАРЮ ЗА ВНИМАНИЕ

Car ownership

Source^ the World Bank

Number of cars per 1000 inhabitants

10

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Success stories:Financial penetration

Share of banking account holders, percent

0

10

20

30

40

50

60

70

2007 20100

0.2

0.4

0.6

0.8

1

2007 2010

Number of ATM per 1000 persons

11Source: NISP, CSR

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The share of the middle class

12Source: Natalya Tikhonova

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Middle class projections

Source: calculations by S.Misikhina 13

By 2020 middle class may comprise up to 50% of adult population and up to 70% of the population of the large cities

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Income and employment growth

Source: Rosstat14

• During 1999-2007 real disposable incomes real disposable incomes increased 2.4 times and real wages more than 3 times

• Unemployment by ILO definition declined from 10.5% in 2000 to 5.1% in 2012

• Income inequality increased only marginally: in 10 years Gini increased – from 0.40 to 0.42)

• Poverty headcount reduced by over 2.5 times and continued to decline during the first phase of the global financial crisis

• Incomes were growing rather uniformly across various income groups, so the benefits of growth were spread broadly

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POVERTY ALEVIATION

Source: CSR, Russian Academy of National Economy and Civil Service15

• In 2001 0.9% of Russians were living on 1.25 $US on PPP a day. • Since 2008 this group is no longer observable in household surveys. • 6% of Russians in 2006 were living on less than 2 $US on PPP a

day. • By 2009 there share declined more than 100 times – to just 0.05%. • Practically all Russian poor now belong to the low middle class by

the World Bank definition (daily incomes between 2 and 13 $US a day).

• Even if measured by the US poverty threshold (15.5 $US a day in 2010) Russian poverty headcount declined from 64.4% in 1999 to just 30.6% in 2010

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Between 2001 and 2009 the share of Russians living for 2 $US a day on PPP declined more than 100 times from 5.97% to 0.05%

Alleviation of absolute poverty

0,89

0,32 0,33

0,10,16

0,06 0,02 0 00

0,10,20,30,40,50,60,70,80,9

1

2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: CSR, Russian Academy of National Economy and Civil Service

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БЛАГОДАРЮ ЗА ВНИМАНИЕ

17

  Russia (2012) USA (2010)

Daily subsistence minimum (USD on PPP)

10,8 15,5

Share of population below subsistence minimum, %

12,6 15,1

Share of Russians which were poor are by the US poverty criteria:• In 1999 – 64.4%• In 2010 - 30,6%

Poverty in Russia and the USAIn percent of the population

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Covergence in non-substantial consumption

• Developing countries’ poverty crtiteria are no longer applicable to Russia

• Being poor in Russia no longer means absolute deprivation. • Vast majority of Russian poor can afford a certain degree of

non-substantial consumption • In many ways the gap between them and the middle class is

shrinking. • In 2005-2010 the gap between 1-2nd and 5-9th income deciles

declined • in car ownership from 2.5 times to 1.9 times • in computer ownership – from 3.3 to 1.5 times.

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RESEARCH

High mobility between income groups facilitates convergence

19

Source: NISP

32,4 29,2 37,1 50,1 64,632,6 31,5

39 21,828,320,3

277,5 5,119,2

9,612,68,42,9

14,72,7 1,4 2

0%

20%

40%

60%

80%

100%

обобщенныйсредний класс

перифериясредних

ниже среднего перифериябедности

низший класс

нет движения вверх на 1 ступеньвниз на 1 ступень вверх на 2 ступенивниз на 2 ступени вверх/вниз более чем на 2 ступени

no moves1 group down2 groups down

1 group up2 groups upmore than 2 groups up

UnderclassGeneralized middle class

Non-poor, non-middle class

Periphery of poverty

Periphery of themiddle class

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Nutritional convergence

20Source: CSR, RANH I GS

  Nutrition gap between non-poor and poor

  2000 2010Vegetables 2,1 1,6Fruits and berries 3,4 2,2Meat and meat products

2,5 1,6Milk and milk products

2,1 1,6Eggs

1,8 1,4Fish and fish products

2,1 1,6

Calories per day 1,8 1,3

Proteins per day 1,9 1,4

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Non-substantial consumption

21

No-frost refrigerators

LCD and Plasma TV

Home made cars

Imported cars

0 5 10 15 20 25 30 35 40 45 50

46.5

26.6

23.6

17.2

35.1

14.5

28.7

10.7

Poor Non-poor

Cell phones per 100 households:Poor 244 Non-poor 225

Source: CSR, RANH I GS

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The end of import- and credit-driven consumer boom is just behind the corner

• Import-driven current consumption has already been close to saturation

• Overconsumption of imported consumer goods and services has already contributed to ruble devaluation

• Steady imports decline as a share of GDP will reduce incremental share of imports in consumption growth

• Income growth, which was underpinning growth momentum until recently, has been stalled

• Consumer credit boom also nearing the end: consumer debt servicing is already compatible with the volume of outstanding debt growth

22

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23Source: Ren-Cap NES Macro Monitor

Economic openness diminishes

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

50

100

150

200

250

0

5

10

15

20

25

30

Bln $US

Торговый баланс Платежный балансВаловые ПИИ (Правая ось)

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013*

2014

*0

2

4

6

8

10

12

14

16

18

0

0.5

1

1.5

2

2.5

% GDP

Торговый баланс Платежный балансВаловые ПИИ (Правая ось)* Est.

Trade balance Gross FDI (RHS)

Current accountCurrent account Trade balance Gross FDI (RHS)

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…but foreign debt dependency increases

Источник: Ren-Cap NES Macro Monitor

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013*

2014

*0

5

10

15

20

25

30

35

0

100

200

300

400

500

600

Экспорт (% ВВП)Экспорт (млрд долл США, правая шкала)

0

5

10

15

20

25

30

35

0

100

200

300

400

500

600

700

800

Валовый внешний долг (конец года, млрд долл США, левая шкала)

Расходы по обслуживанию внешнего долга (% экспорта)

Gross foreign debt, end-year, bln $US (LHS)

Foreign debt payments, in percent of export Export, % GDP Export, bln $US (RHS) * Est.

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Non-food consumption dominated in retail sales

But now it comes to a halt

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The next big things: non-tradables

• Instead, consumption growth is likely to be focused on non-tradables:

• housing • education• health; • infrastructure services (particularly in the public utilities sector).

• Housing will be the most important of them all

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2727

Incomes were a priority issuein early 2000-s

27

No answer, irrelevant answer

Personal wishes

Restore Russia's might

Put an end to Chechen war

Address problems of housing and utilities

Address problems of culture, science, health and education

Stimulate economic growth and employment

Improve the effectiveness of public management

Rise the living standards and resolve social problems

0 5 10 15 20 25 30 35

26

1

1

2

2

5

16

25

33

Source: FOM

People’s “mandate" to Putin, 2002

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Source: CSR

Source: CSR28

13

15

21

22

22

28

29

33

35

36

39

40

41

42

42

43

45

46

46

46

47

48

48

48

48

49

51

52

53

53

56

57

58

58

60

62

62

64

66

67

70

75

81

94

0 10 20 30 40 50 60 70 80 90 100

Earthliness

Confused

Ignorance of the history and culture of their own people

Prowestern views

The fact that democracy in the country is in danger as shown by the latest elections

Do not know what needs to be done

Irresponsibility, hollow promises

Managerial incompetence – unprofessionalism

Inability to build a professional army, weak army

Ever-lasting lies

Longing to make a profit for themselves, and for this purpose making deals with anybody

Ongoing inflation in the country that eats up pensions and wages, and child benefits

Creating life conditions that make people think how to let their flat in Russia

Inefficient economic policy

Only good at promoting their own image

The fact that Russia is given a raw-exports role in the world

Longing to enjoy a better life than common people, caring for themselves only

Demagogy, only slogans and promises

The fact that this policy is only beneficial for the rich

Enslaving terms of mortgage lending

Beadledom

Good at stealing and paying to remain in power

Uncertainty of the future

The fact that civil servants are better off than entrepreneurs

Robbing the people

No care for the old people

Alienation from the people

Endarkenment of the people

Improper police actions

Inefficient social policy

Transferring their money abroad

Disrespect for their own country laws

Reduced number of government-paid university students

Seeking benefits only for themselves

Active only during elections

Poor follow-up of decision implementation

Inability to improve the enforcement of law and order in the country

Introduction of Unified State Examination

Seeking to get everything for themselves and their relatives, clan system

Seeking to retain their power in any way possible

Ever-lasting talk about anticorruption campaign with no real action taken

Collapse of the economy and agriculture

Bad solutions to the housing problem

Ongoing increase in utility prices

Housing became a top

priority in 2012

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Housing convergence

29Source: CSR, RANH I GS

  Poor Non-poor

Share of households living in separate dwelling, % 97,7 98,7

Number of rooms per household 2,58 2,44

Total area, sq m 15,7 22,1

3030

Housing stock dynamics

30Source: Rosstat

• During 1980s housing stock increased by more than 30%• During the crisis of 1990s the growth slowed down by the

factor of 2• During successful 2000s it grew by only 14% - less than

during the previous decade

0

500

1000

1500

2000

2500

3000

3500

1980 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Всего (млн.кв.м.) В собственности граждан (млн.кв.м.)

Mln sq m

total In individual ownership

31

Mortgage lending is underdeveloped

31Source:Trust-Bank

• Due to high growth of consumer lending current consumption was increasing faster than incomes

• Share of consumer loans in total lending to individuals neared 50%, against 20% which is typical to EU

• On the contrary, by the size of the mortgage market Russia is lagging behind.

• Mortgages were stimulating purchases on the secondary market but discouraged housing construction

Russia Austria Germany France

Turkey Hungary

% of loan portfolio

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Accessibility index of housing with loans

32

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

20

40

60

80

100

120

Russia Moscow Moscow region Saint-Petersburg

Source: CSR

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40 50 60 70 80 90 1000

20

40

60

80

100

120

Share of housing owners, %

Per

capi

ta G

DP,

100

0 $U

S

Russia

LuxemburgNorway

Switzerland

High housing ownership ratio may be an obstacle

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First and second baby-boom generations will determine

consumption patterns until the middle of this century

Age0-910-1920-2930-3940-4950-5960-6970-7980-8990-99>100Total19

90

1997

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

48.000%

50.000%

52.000%

54.000%

56.000%

58.000%

60.000%

62.000%

64.000%

66.000%

Share of working-age population

Source: Rosstat, Center for Strategic Research

Second baby-boom generation

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Uneven impact on unemployment

• 2/3 of unemployment increase in advanced economies was delivered by the US and Spain

• 60% of increase in the number of unemployed in emerging markets was generated by China and Russia

Source: ILO, IMF

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Global demographic turnaround

• In 2013 the share of working-age population in the world population began to decline after a long period of fast continuous growth

• The end of demographic dividend directly affects all major regions but South Asia and Africa

• China’s share of working-age population will decline in the next two decades almost as fast as that of Japan during 1990-2010

• Global labor supply is facing long-term slowdown

• Future economic growth will be overshadowed by the negative labor supply shock

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The end of global demographic dividend: the share of working age population declines

Source: City Research

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Economic and labor market implications

• Labor force decline will increase global returns on labor versus returns on capital

• Average long-term wage growth may exceed growth of GDP per capita

• Fast decline of labor supply will drive up China’s labor costs faster than ever, limiting export-led manufacturing growth and reducing trade surplus

• Growing domestic consumption will suppress the investment rate and induce faster growth of services for domestic market

• Working age population decline creates a powerful drag on productivity and economic growth

• Shrinking labor force and growing labor costs in China and other emerging markets will ease pressure on employment in manufacturing and other tradables for the advanced economies

• Domestic labor force decline and easing pressure from BRIC will accelerate wage growth in advanced economies

• Demographic turnaround will contain the rebound of pre-crisis imbalances

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One of economic implications:global drag on productivity

growth

Source: City Research

• 1% decline in the share of working-age population was associated with productivity growth decline of 1.75-2.75%

• China’s demographic supply shock implies that its average GDP growth for the next 20 years will stay below 6%

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Russia:double labor supply shock

Labor market outcomes:• Slow economic growth and productivity growth• Declining labor force (- 630,000 in 1Q-3Q 2013)• Net job destruction (- 780,000 in 1Q-3Q 2013)• High labor participation rate• Very low unemployment (5.3-5.6%) close to 20-year minimum• Very high youth unemployment (15.8 % in mid 2012 – 4 times

higher than in the 30-49 years old age group)• Wages growth (5.6% 1H 2013) - much faster than GDP (below

1.5% 1H 2013) – at the expense of declining profits

Double labor supply shock:

• Very fast decline of the working age population

• Numerous and well-educated second baby-boomer generation entering labor market

Change in real GDP growth rates: 2012-13 (percentage point)

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Medium-term forecast (before the Ukranian crisis)

Source: Gaidar Institute

GDP

Final consumption

Household consumptionGovernment consumption

Gross investmentsExportImport

2010 2011 2012 2013 2014 2015 2016

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Thank you for attention!

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