Russia’s Ikea Shoppers Threatened by Middle-Class Job Losses

By Maria Levitov

Nov. 26 (Bloomberg) -- While Russia’s oligarchs have lost hundreds of billions of dollars in the global financial crisis, a less-noticed threat to the nation’s economy comes from 24-year- old Georgy Mironov.

Mironov was let go from his managerial position at a Moscow advertising agency last month as business declined, helping push the jobless rate to 6.1 percent in October. Job cuts are a recent phenomenon in a country where average wages rose sixfold and unemployment fell in the past nine years, while growth averaged 7 percent.

“There’s no telling what tomorrow will bring,” Mironov said. “The market is filled with people looking for work.”

The unemployment rise, announced last week, is the latest blow to Prime Minister Vladimir Putin’s plan to expand the middle class and make the economy, currently the world’s 10th largest, one of the top five by 2020.

“A spike in unemployment will be the dominant trend of the next six months,” said Konstantin Kosachyov, head of the lower house of parliament’s international affairs committee. Russia can’t allow “crashes, defaults or other shakeups, which would yet again knock the nascent middle class flat on its back.”

Almost half of Russians worry they will be unemployed in the next three months, a survey published on Nov. 6 by state-run pollster VTsIOM showed.

Moscow’s Zara

Higher wages and expanding employment sent ordinary Russians to shopping malls that sprang up during the recovery from the 1998 debt default and ruble devaluation. Shoppers packed Inditex SA’s Zara stores and Benetton Group SpA’s outlets, stormed new Ikea stores -- often at malls with ice-skating rinks -- lined up at Metro AG and Groupe Auchan SA supermarkets and renovated their apartments.

Retail sales, fed by rising consumer borrowing, increased at an average annual rate of about 13 percent. Loans to individuals rose 58 percent last year, reaching 2.97 trillion rubles ($110 billion) on Jan.1.

Putin’s economic-growth plan, announced in June 2007 when he was president, anticipated that the ranks of the middle class would swell and the average monthly wage would exceed $2,000 from the current $660. Putin sounded less optimistic last week.

“What began as a financial crisis became an economic one before our eyes,” Putin said at the Nov. 20 congress of his United Russia party in Moscow. “In the current situation, we must be prepared for structural changes in the labor market.”

Stocks, Oil

The global financial turmoil and ensuing slowdown have sent the Micex stock index down 60 percent since Aug. 1, while the ruble weakened 16 percent against the dollar. The price of Urals crude, Russia’s biggest export earner, has fallen 65 percent since this year’s July 3 high to $49.24 a barrel on Nov. 25.

Growth may slow to 3 percent in 2009 from about 7 percent this year, according to President Dmitry Medvedev’s economic aide, Arkady Dvorkovich. The jobless rate may rise to 6.5 percent next year from an estimated 6.2 percent at the end of 2008, according to the median forecast of six economists surveyed by Bloomberg.

“Unemployment will take a bite out of consumption, the biggest contributor to growth,” said Elina Ribakova, chief economist at Citigroup Inc. in Moscow. Consumer spending contributes about 60 percent to gross domestic product.

Anna Muravina, 40, owner of Moscow-based interior-design firm MuGu-Interiors, said some of her clients have frozen projects and stopped paying for items they’ve ordered.

‘State of Shock’

“They are in a state of shock because they don’t know what will happen next,” she said. Several contracts the company was about to sign with new clients have fallen apart in the last two months, Muravina said.

“It’s obvious that we won’t see the high levels of consumption growth we’ve been seeing,” said Alexander Morozov, chief economist at HSBC Bank in Moscow. Unemployment benefits are so small they will do little for consumer spending, he said.

The government will boost the maximum monthly jobless payment to 4,900 rubles ($177.19) next year, an increase of 1,500 rubles, Putin said on Nov. 20.

Lawmakers are urging companies to minimize the damage.

“No one has lifted the responsibility for the stability of our society from the shoulders of employers,” said Boris Gryzlov, speaker of the lower house of parliament. “Our entrepreneurs shouldn’t be troubled by the problem of choice. They simply don’t have one. Job creation and the well-being of their workers are the path that will lead them through the crisis.”

Service Contraction

Such advice isn’t resonating with brokerages, steelmakers and the retail industry, where service companies contracted in October for the first time in more than seven years.

Troika Dialog, Russia’s oldest investment bank, X5 Retail Group NV, Russia’s largest food retailer, and OOO Evroset, the largest mobile-phone retailer, plan to cut jobs. OAO Magnitogorsk Iron & Steel, the third-largest Russian steel company, and OAO Razgulay Group, a Russian grain and sugar producer, will also shed staff and said they may decrease wages for some remaining workers.

Just seven months ago, Economy Minister Elvira Nabiullina was warning that labor was “overvalued.”

“Candidates ruled the roost, now it’s a company-hiring market,” said Teri Lindeberg, chief executive officer of Staffwell, a Moscow-based recruiting agency. “Employers are going to take the opportunity to scale back and cut people on probation, poor to average performers, employees who aren’t justifying their over-inflated packages.”

About 1,070 Russian companies have announced plans to cut an estimated 45,000 jobs this year, the government’s official newspaper, Rossiyskaya Gazeta, said on Nov. 14. The budget next year assumes 1.6 million Russians will register for unemployment benefits, compared with 1.25 million this year.

“The middle class will be greatly affected, but so will the low-income individuals employed in construction, retail and other industries,” HSBC’s Morozov said. “There will be social consequences. The longer it takes to find a way out of the current situation, the more severe they may become.”

To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net