A nation possessing 38% of the world’s natural resources is filthy rich – full stop. This nice fact of Russian life has already produced 88,000 millionaires and a solid 53 billionaires. But what about the rest of the roughly 142 million Russians whose appetites for the good life have been whetted by everything from building sites covered in giant BMW posters to Brazilian TV soap operas?
By Frank Ebbecke
Photo by Ruslan Surgeev
They are still struggling to catch up. However, with the help of their flexible friends, the plastic credit cards, and the instant credit desks in most retail chains from Paterson supermarkets to Shatura furniture stores, they cope, albeit under an increasing mountain of debt that is beginning to worry some economists, government officials and bank regulators.
Lifestyle studies confirm that personal desires never change – and Russian behaviour patterns have quickly mirrored those of the world’s advanced economies. First of all, people want to live in a decent environment, which means owning their own residence in, or close to, the major cities with one million or more population. Secondly, people want to buy the car they want, most of them with a Western, Japanese or Korean badge, which, with the current import tax regulations, is not a cheap indulgence. They strike for the personal freedom of mobility; so thirdly, they have the urge to travel. The new Russian generation wants to see the world. And then all the other big and small wishes of which electronic goods are good examples, which can make life easier or more exciting.
According to the Russian Central Bank, retail lending to private citizens hit $15 billion by mid-2004, a 50% increase in six months, and up from just $1 billion since the start of 2000. Despite this phenomenal growth, Russia's consumer-credit market – installment loans, credit cards, car loans, and mortgages – is still in its infancy. Total consumer debt makes up just 3% of Russia's gross domestic product, compared with 75% of GDP in the U.S., and around 20% to 30% in Eastern European markets such as Poland. Just 1 in 100 people has a credit card, compared with 2.5 cards per person in the U.S. So far, Russians are snapping up cards and loans despite interest charges as high as 40% for installment loans and credit card rates of 25-30%.
But what about foreigners living and working here. Can we also access this consumer credit market? While most of us can afford exotic holidays and buy a new TV, or even home cinema, for cash most of us would have to think about shovelling a suitcase load of cash into a safe deposit box to pay for a Moscow apartment.
First of all, you have to get a Russian bank account. For some banks, such as Alpha Bank Express, you simply need your passport, a visa valid for six months or more, and your notification of arrival document (UVEDOMLENIE) . For some other banks, the only way you are going to get a personal account is if your employer has their corporate account there. Most banks are happy to open accounts, including in foreign currencies for foreigners, as long as they have a work permit, residence permit or simply registration documents.
That does not mean they are ready to extend expats credit however.
Most expats are using credit cards here issued by their home country banks and suffering the additional costs of inter-currency and international transactions.
Many Russian banks will readily issue you with a debit card, which means you have to have money in your account, otherwise the transaction will be refused. Getting a ‘real’ credit card is somewhat more problematic.
Take Austria’s Raffeisenbank, for example: after a 20-minute wait listening to anodyne piped music you get through to an operator who wants to know your enquiry. He then makes an enquiry and his message is short and to the point. Send your enquiry by e-mail to firstname.lastname@example.org and you will get a response we were told. We did, and sure enough a senior manager phoned us back and told us that his bank applied exactly the same conditions on consumer loans to foreigners as to Russians, except they required more paperwork from the foreigners. All consumer loans, (and mortgages are not considered part of this category), are provided through credit cards. What Raffeisenbank needs is sight of your passport, migration card, work permit, your visa and a document stating you have registration here and some proof of income such as a taxation form. Credit limits are determined by your income and can range up to $12,000. For cards marketed jointly with other brands, such as the Malina-Raffeisenbank Visa card, the limit is lower, in Malina’s case being $7,000.
When it comes to mortgages, however, the Raffeisenbank web site offers information only in Russian.
A little ‘mystery shopping’ tour in the center of the capital to several well-known banks proved that, painfully, getting a mortgage for a foreigner has some obstacles.
Firstly, you don’t easily find a bank clerk who is able to communicate in any foreign language. Leaflets, brochures, even websites, are also almost exclusively in Russian when it comes to credit.
“They just don’t know how to do it yet”, claims Michael Ruckman, President of the well established brand consultant firm Senteo in Moscow. There is a painful history of the banking business here. There were around 3,000 different banks in the early nineties – and then came the 1998 financial crisis and default. Today there are 1,183 remaining, 922 of them with a retail banking license, and that is widely accepted as being too many. Every one of these banks is happy to accept your money, even from expats, and the bigger deposit, the better. But when it comes to giving credits, especially to foreigners, they keep a pretty low profile.
Foreigners, more used to credit institutions, would likely be less enthusiastic about accepting some of the standard terms and conditions of the instalment loans promoted by high profile lenders.
There is still no adequate databases about individual creditworthiness, and not many independent, really professional debt collection agencies. According to the Russian Central Bank, the two biggest lenders in the domestic Russian market – Russian Standard, Rosbank and Home Credit and Finance Bank – have the highest levels of bad debt. Their outstanding debts increased from 6.3 billion to 21.9 billion roubles in 2006. Between them, the two institutions hold 80% of Russians personal bad debt.
A recent UBS report found that bad debt now accounts for 4.1 percent of Russky Standart's total loan portfolio, up from less than 3.5 percent in 2005.
That is not as bleak as it sounds. Russians have one of the best records of loan repayment. For two years running, only about 1 percent of all Russian loans have been delinquent, three times less than the average for emerging economies, according to a Merrill Lynch report released this month.
Russky Standart's strength is its consumer loan portfolio which is the biggest in Russia, worth $7.6 billion, with a total of 17.5 million clients, or more than 12 percent of the population.
The bank also has the biggest network of on-site loan agents, mostly set up at stores where cell phones and household appliances are sold, and experts said the rate of expansion in this market, which has seen demand grow sevenfold in the last three years, tended to favor the ruthless pursuit of profit over honesty.
But a recent, positive tendency towards a more international, open-minded way to do business and the proven stability of the Russian banking system seem promising: In view of the favourable economic situation of the Russian banks in general the government decided to venture stock market flotation for the two biggest banks:
‘Vneshtorgbank’ (VTB), the number 2, is planning to raise 4.5 billion Euro this month through the Moscow and London stock exchanges and ‘Sberbank’, the Number 1 retailbank in Russia, raised 6.62 billion Euro with its IPO earlier this year. Thanks to the growing demand for loans and other financial services the still underdeveloped Russian bank business is booming - and now gets better and better ratings from respected international analysts like Merrill Lynch investment bankers and the McKinsey management consultants.
Just hang on, and things will get better for expats as well as Russians seeking to access easy credits in this country.