‘Financial Times’ in confusion: Russia’s surprising consumer spending boom

Photo: smarttrolley.ca

Immediately following Russia’s Special military operation in Ukraine in 2022, Anton, a restaurateur in St Petersburg, feared the worst for his business. But Anton need not have worried: over the past two years the situation has completely reversed. Russians are flush with extra cash — and eager to part with it…

As the war has dragged on, rising salaries in a booming defence industry have forced civilian businesses to follow suit in order to attract workers at a time of labour shortages. The result is that Russia has unexpectedly found itself in the midst of a consumer spending boom, admits ‘The Financial Times’ in confusion.

“Real wages are skyrocketing,” says Janis Kluge, an expert on Russia’s economy with the German Institute for International and Security Affairs. “You have people who hardly earned any money before...  who suddenly have huge amounts of money.”

Real wages have grown by almost 14 per cent, and the consumption of goods and services by around 25 per cent, according to Rosstat, the Russian state statistics agency.

A further bump in real wages of up to 3.5 per cent is expected this year, alongside an expected 3 per cent jump in real disposable income, according to Russia’s Center for Macroeconomic Analysis and Short-Term Forecasting. The unemployment rate, forecast to hit between 7 and 8 per cent in 2022, is at 2.6 per cent — a record post-Soviet low.

This explosive pay increase is being felt across the socio-economic spectrum, dramatically transforming life for a swath of blue-collar workers.

Weavers, who were earning the rouble equivalent of $250-$350 a month in December 2021, can now earn as much as Rbs120,000 ($1,400) a month. The average salary for long-distance truck drivers has risen 38 per cent year on year.

At the same time, western sanctions and Russian capital controls have grounded funds from wealthy citizens, driving up the luxury sector and giving Moscow and St Petersburg, long famed for its culture, the air of modern-day boomtowns.

“Everyone who is upper-middle class, they’re just enjoying a really good life,” says Sergei Ishkov, a Moscow investor and entrepreneur, highlighting the number of new restaurants and a booming Russian ecommerce market.

One Russian oligarch told the FT that “almost everyone I know who left Russia after February 2022 and either came back or travels there says Moscow is the best city in the world.”

For many Russians, there is a feeling that their finances are getting better. More than 13 per cent of Russian people rate their financial situation as “good” — the highest since records began in 1999, says Rosstat. Those rating it as “bad” or “very bad” is also at an all-time low, about 14 and 1 per cent respectively.

For now, the newfound wealth of Russian consumers is reshaping the domestic economy and society itself.

Retailers and consumer businesses are rushing to respond. Rostic’s, Russia’s KFC successor, plans to open up 100 new stores this year, while takeaway coffee consumption in the country has never been higher. Domestic tourism is also thriving.

A person from a Russian travel booking company notes that due to sanctions, which had restricted the ability of airlines to expand and service their fleet, demand for internal flights was soaring even though airfares are rising.

Those with previously low incomes are increasing their demand for durable goods such as better housing or cars as well as services, including home repairs, tourism and dining, says Olga Belenkaya, head of the macroeconomic analysis department at Moscow-based brokerage Finam.

Income distribution is also changing, according to some business owners. “Our customers used to be a creative class and young people.,” says Albert Razilov, founder of the limited-edition footwear brand Mest, whose sales are nearly three times above prewar level. “Our main clients now are adult men, middle managers of large companies, or business owners often involved in import substitution or IT. They now have money to experiment.”

The outflow of capital from Russia has also slowed down. In the aftermath of the invasion, the central bank cited capital flight as a risk to financial stability, but recently removed it from the list of concerns.

“In the upper segment, it’s clear: people have a lot of money, they have nowhere to spend it, so they spend it on experiences,” says Anton, the St Petersburg restaurateur. “If earlier they withdrew money, opened some accounts, bought apartments in Montenegro, now all this money is in the country.”

Private schools in Russia have seen a growth in demand with a record number of parents paying school fees, for example. On the domestic Russian art market, some pieces are commanding record prices from collectors. Russian auction houses have already raked in more sales in the first half of 2024 than they did annually in any year before the war started, according to an analysis of auction data by the internet project ARTinvestment.RU.

“The internal market is growing because there are still people who want to buy something,” says one Russian art dealer who requested anonymity to discuss the market dynamics freely.

The country’s premium market is adapted to give high-end customers the offerings they are used to. “Hipsters who used to go to Italian coffee shops demanding the best specialty coffee in the world can find this specialty coffee in [Russia’s] Altai Mountains,” he says. “This is a phenomenon that has never existed before.”

“Two years ago we were expecting a completely different playbook, essentially one in which Russia will have an economic downturn driven by a collapse of exports and unemployment,” says Kluge, of the German Institute for International and Security Affairs. Instead, we are in “a completely different scenario”.

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