Ruble Collapses, Russians Yawn

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This article originally appeared at Bloomberg View

Bargain-Hunting With Russian Plutocrats

With the ruble down 40 percent against the dollar so far this year, and down more than 14 percent in the last 30 days, one might have expected widespread economic panic among Russians.

But there's been nothing of the kind.

It's been business as usual in Moscow: no bank runs, no desertion of retail stores, no sign of consumer hoarding.

Only expensive cars and luxury items are selling better than usual, and that's evidence only of bargain-hunting among the Moscow elite.

When you expect panic, it's easy to pick up signals that match those expectations: store and restaurant closures, long lines for good that suddenly became scarce, ATMs routinely running out of cash. Sure enough, observers have found plenty of alleged evidence for economic distress.

Fashion Consulting Group, a Moscow consulting company, estimated that fashion sales in Russia dropped 7 to 8 percent year on year in the first six months of 2014, and predicted they would be down 20 percent for the full year.

Mexx, the Dutch mid-range clothing brand with 100 stores in Russia, cited ruble devaluation and Eastern European political unrest among the reasons for its bankruptcy filing last week.

Zara, the biggest brand of Spanish fashion group Inditex, closed its Moscow flagship store a stone's throw from the Kremlin this month.

Still, Moscow malls -- at least the three I visited today -- appeared neither deserted nor feverish. The activity was normal for this time of year, most stores doing reasonably brisk business. A Mexx store in a below-ground mall near the Kremlin was rather quiet, but then the prices, marked up in line with the ruble's devaluation, were unattractive compared with those in neighboring shops. And the Zara store closure -- for which Inditex gave no explanation -- appeared to have more to do with the city authorities' ill-considered decision to ban parking on the main shopping street, Tverskaya. (Retailers complain that foot traffic in their stores has dropped 25 percent since the 2010 ban.)

Russians' overall consumption level has not dropped in real terms in 2014. According to the State Statistics Agency, in January though October, retail trade volume was up 2.2 percent year-on-year after correcting for inflation, a hefty 7.1 percent for the period. Non-food retail sales were up 2.6 percent year-on-year. November and December may actually improve these numbers: Anecdotal evidence suggests that people have been spending their rubles at a faster pace to preempt price hikes. I couldn't resist the temptation myself, picking up the flagship smartphone of a Chinese brand for $200, much less than it would cost in Europe or the U.S.

Russians also haven't been deterred from continuing to save money in Russian banks. According to official data, ruble savings grew for most of 2013 and 2014, and in early November, they stood higher than in January, at 20.5 trillion rubles ($378.3 billion at today's exchange rate, or $2,634 per capita). They were down slightly from the October level, mostly due to an outflow from banks. Yet investments in securities also grew -- 21 percent higher than in November than in January. Depositors are seeking higher returns than banks can offer, but that's hardly a sign of panic.

There are some signs of increased consumption in the luxury sector, visible both statistically and with the naked eye.  Long lines at Tiffany's may be nothing unusual in Hong Kong, but in Moscow they are a new and exotic spectacle.

Given luxury companies' reluctance to discuss their sales by region, the auto sector provides the best evidence of what's going on. The Association of European Business in Moscow has just released November car sales data, and they show Lexus sales up 63 percent year-on-year and Porsche sales up 55 percent despite a drop of 1.1 percent for the market as a whole. For the 11 months to November, the market is down 11.6 percent, so the luxury auto boom is clearly an anomaly.

"All my friends have changed cars, even if they had no such plans," a wealthy Moscow businessman told me. "What can you do if a Mercedes is suddenly 30 percent cheaper in euros?"

Cars and designer jewelry are dubious stores of value, and the wealthy, well-traveled Russians who are buying them aren't thinking of them that way. Rather, they are acting on a long-ingrained habit of converting prices into dollars or euros. Though the Russian economy has become largely ruble-based since the 1990's, when the dollar reigned supreme, the conversion habit hasn't died and some markets -- notably the one in Moscow real estate -- still run on dollar prices. I often catch myself automatically recalculating price tags. That's what those Porsche buyers do, too: They aren't investing in the cars -- they’re picking up bargains.

The middle class has been following the same logic: Toyota sales were up 32 percent in November. Only the low-end buyers have stayed away from dealerships: Lada sales were down 17 percent, for example.

In other words, Muscovites, and Russians in general, have borne the ruble devaluation rather stoically, though salaries have not been keeping up with inflation and especially with the galloping dollar, which directly affects the price of imports. These are people who lived through at least two major economic crises, in 1998 and 2008, and who are used to economic upheaval. Hardship is never unexpected, and laughter -- as reflected in numerous dollar jokes ("Putin, a barrel of oil and a dollar met in a bar. They were all slightly over 60") -- comes more naturally than panic or anger.

That, perhaps, is the biggest problem with the many predictions that President Vladimir Putin's regime will fall because Russians, accustomed to trading their liberty for well-being, will refuse to tighten their belts as Putin now requires. The ability to lead normal lives under tough conditions -- and to put up with some of the nastiest regimes in history -- has always been one of the nation's distinctive features. Putin is hoping it will tide him over, and his foes expect it to run out faster than usual this time. For now at least, the latter is a theoretical argument with very little evidence to support it.

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