What drives private consumption in Russia?


The World Bank’s latest report on the Russian economy made headlines because of the Bank’s revision of its 2011 GDP growth forecast for Russia to 4%, down from 4.4%. However, a less conspicuous piece of analysis in the World Bank’s report carries particular importance for MNCs operating in Russia.

World Bank economists ran an analysis of the drivers behind consumer spending in Russia. The three most important factors were, not surprisingly, the level of economic activity, the external environment (price of oil, etc.) and labor market conditions.

The interesting discovery was in the effect of labor market conditions on consumption in Russia. The Bank’s estimates show that the level of unemployment has a strong negative impact on consumption, while short-term fluctuations in incomes do not translate into significant changes in consumption. For every 1% rise in the unemployment rate in Russia, private consumption falls by 2%, according to the Bank’s model.

The real-life logic behind this is that Russian businesses adjust to negative shocks mostly by lowering salaries, rather than firing employees. As a result, Russians have adjusted their consumption patterns to reflect more volatile wages, mostly seen as a temporary condition. Unemployment, on the other hand, is perceived as a much more permanent state, and directly affects Russian consumers’ choices.

The good news here is that the unemployment rate in Russia has been on a largely downward trajectory and was relatively low at 6.5% in July, a slight increase from June’s 6.1%. Coupled with a strong ruble, and a rise in consumer credit, MNCs can expect this trend to support a strong performance in Russia through the rest of 2011.

 

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