3 reasons why middle-class Russians are seeing their finances plummet

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  • Middle-class Russians are suffering financially from sanctions imposed by Western countries.
  • The ruble is falling, making it harder to pay off debt, and rising interest rates are making it harder to get loans.
  • The stock market shutdown will also be a blow to the middle class in the long run.

As superyachts owned by Russian billionaires head to the Maldives to escape possible seizure, middle-class Russians watch their savings vanish in just days.

“It’s going to be very serious


recession

“, Steven Durlauf, an economist at the University of Chicago, told Insider.

And it’s Russia’s middle class – not Putin or his oligarchs – who will feel the most pain.

Sanctions Western countries passed in response to Russia’s invasion of Ukraine are already disrupting the Russian economy – it’s hurting the value of the rouble, taking away Russians’ ability to repay their debt and making loans more difficult to obtain.

The United States and its allies are specifically targeting Russian oligarchs with their financial attack, but average middle-class Russians will also suffer, according to Durlauf and other economists. This could lead to short-term and long-term economic hardship for people who don’t necessarily favor the war — in fact, thousands of Russians have protested against it.

The war and the resulting sanctions come at a time when Russian savings are already low. Over the past year, economists say, many Russians have borrowed money to fuel their spending, which has helped the country’s economy recover from the setbacks of the pandemic.

This left them in a vulnerable position as the ruble began to tumble. Russian businesses lost $70 billion in one day, and the stage was set for a spike in inflation. While the wealthiest Russians are shielded from the worst effects of the sanctions and the poorest Russians have little recourse to change their situation, it is the middle class that will feel the burn in the coming months as their economy is hurtling towards a probable recession.

These are factors that “will make Russia poor, simply because it cannot engage in the process of international trade, which is an important part of the economy,” Durlauf said.

Many Russians were already in debt and they will be less able to repay them

Russians have a lot of debt and not a lot of savings, Yevgeny Nadorshin, chief economist at Moscow-based PF Capital, told Insider.

During the pandemic, Americans have increased their savings, which has led to increased consumer spending in recent months, which has supported the economy. Russians also spent heavily during this period, but instead of dipping into their savings, they took out loans, Nadorshin said – something they are unlikely to do now that interest rates are soaring.

“Loans supported consumer demand, consumer demand supported economic growth,” Nadorshin explained. “Thrift was not popular last year in Russia. That’s quite a different story than in the United States today.”

Because many households lack a financial safety cushion, their level of savings is low enough to create instability in Russia’s financial system, Nadorshin said.

Because of inflation, the ruble won’t go that far for Russians

Inflation is likely to pick up as it will be more expensive to import and produce goods in Russia, many of which depend on foreign materials. At the same time, unemployment is bound to rise.

The combination will “generate a situation where, in real terms, consumer incomes will start falling again,” Nadorshin said.

The ruble has been in free fall since Russia attacked Ukraine because Western countries and international investors started dumping their Russian investments and applying sanctions. The ruble plunged nearly 30%, trading as low as 119 rubles to the dollar. That’s down from 81.15 rubles to the dollar last Wednesday, just before Russia invaded Ukraine.

The ruble’s falling value is a big problem for consumers, Nikolai Roussanov, a finance professor at the University of Pennsylvania, told Insider. Rising gasoline prices and falling ruble value are a “double whammy”, he said.

“Inflation is going to rise,” he said, and “the rising cost of living is going to happen everywhere…even the prices of national goods will go up because it will be harder to get raw material”.

Indeed, there will be a decline in the standard of living of middle-class Russians. Russia has a social welfare system, Durlauf said, so citizens will continue to have basic access to medical care, but they will have less pocket money.

“Income inequality will increase because if you have [an] increase in unemployment, the unemployed will experience sharp declines,” Durlauf said.

He also pointed out that while wealthier Russians tend to protect their assets using complicated schemes, middle-class Russians typically have savings on the books, such as stocks and domestic bank accounts. “Wealth inequality in some weird way could be shrinking just because you have – at least on paper – substantial depreciation in financial assets.”

The stock market was a relatively new way to save, but it closed down

Only in recent years has the stock market provided wealthy and middle-class Russians with a way to save, with the number of retail investors reaching 15 million in October 2021 – or 6.2 million new investors. retail in 2021 alone, according to S&P Global.

“Over the past few years, many people — like millions of new investors — have contributed savings to the stock market,” Nadorshin said. “The number of active accounts has increased significantly, and passive accounts, where few transactions are made, have also increased significantly. Many of them have lost, and have lost a lot. For their current level of savings, c is partly a disaster.”

But it is a problem mainly isolated from the middle class. Durlauf said the wealthy have the ability to protect themselves, and poor Russians don’t own stocks or financial assets in the first place.

“It’s the middle class that gets hammered if their rubles or their stocks go downhill,” he said.

Durlauf covered that these economic conditions are on hold, as he is uncertain how the Russian public will react to the war and the ensuing economic turmoil.

“You saw thousands of people were arrested as protesters,” he said. “As economic conditions deteriorate, there could be more civil unrest and we [might] have more protests that will condition something about the government’s response. »

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