Russians begin to live on credit

More and more Russians are taking a path long beaten in the West: they are buying on credit. Even though the share of purchases made in this way has not yet reached 15%, the trend is there for all to see.

Russians are now making use of ideas that are widely established in Europe and the US: instalment plans, credit cards and "buy now, pay later" schemes. "The entire civilised world is using credit, so it's time we got used to it, too," says 34-year-old engineer Yuri Kapralov. "Far from everyone can afford to buy good and expensive items straight away." Nikolai Isayev, a 26-year-old programmer, shares this viewpoint. "We are a young family, and cannot afford to buy furniture and a computer at the same time," he says. "In the West, young families make their first big purchases on credit. Fortunately, this system has now come to Russia as well."

People could buy on credit in Soviet ties, but in the 1990s, when the country was hit by economic crises and runaway inflation, the idea was forgotten. Schemes have only been revived in the recent years of economic growth. Dmitry Pilnikov, a manager at Russky Standart bank, explains, "When we had only just begun issuing loans, people saw us as robbers and were very aggressive. Now Russians have grasped the benefits of buying on credit, and sentiments have changed." Many banks foresaw the consumer boom in Russia and prepared for it in advance. The growth in real incomes over the past few years has given Russians the chance to create a lifestyle according to their tastes and needs. Experts point out that the best-selling durables are high-quality domestic appliances, photo and video equipment, furniture, and also ... decorations and cars.

Banks reacted immediately to the demand. There are already 20 banks in the country giving loans for the clients to purchase expensive domestic appliances and cars. Credit institutions literally bombard Russians every daywith advertisements. "The banks have gained capital, and now they are prepared to take up the risky business of issuing credits to consumers," explains Alexei Zabotkin, an economist with Moscow's Obyedinennaya Finansovaya Gruppa (Joint Finance Group) investment bank.

Credit institutions are particularly entrenched on the domestic appliances market. Recoupment is quick with the average period of return at four to five months. Loans granted for this period do not require the banks to borrow money outside; they simply draw on their own deposit base, which is very convenient. The market for car credits is in for a big future with the continuing automobile boom in Russia. Ernst & Young experts believe that by 2006 the share of foreign and Russian cars purchased on credit will have reached 30% and 20%, respectively (with a recovery period of a year and a half or two years). This compares with up to 90% of new cars bought on credit in the US.

The luxury industry is just starting to flourish. Members of the burgeoning middle class, who are anxious to elevate their social status in other people's eyes, are acquiring "material evidence" of their affluence. The attributes of wealth include Swiss watches, custom-made jewellery from celebrated houses, clothes from famous labels, attache cases, cigarette lighters and pens. Banks readily accommodate buyers of such commodities with loans starting from three thousand roubles (just over $100). The annual interest rates for these loans may be as high as 20%.

The housing shortage in Russia has been and remains a sore point. Prices per square metre keep growing all the time, depriving many families, especially public-sector employees (teachers, doctors, the military), of any hope of ever buying a flat. In this situation, mortgages may have a big future. President Vladimir Putin emphasised in his annual address to the Federal Assembly on May 26 that the mortgage system should be an easy way to solve the housing problem "for medium-income people". By 2010, one-third of the population as a minimum should be able to purchase a modern flat using their savings and a mortgage. This was the objective the president set. Now, Putin noted, flats are within the reach of high-earners alone, i.e., 10% of the population.

The government and parliament are continuing their work on mortgage programmes. The Federal Agency for Mortgages has been set up. Step by slow step the regions are introducing mortgage systems. However, annual interest rates from 12 to 15% are too steep for mortgages to be adopted on a wider scale. For housing credits to gain popularity, the rates need to be below 10%, experts believe. Otherwise, clients will as before find it cheaper to rent a flat, or borrow money from relatives to buy one.

Banks readily offer loans for medical treatment, holidays, education and other services, but there cannot be any expectations that any mass demand for credits will emerge in the near future. Russia still has a long way to go before it catches up with the West, where people cannot think about life without loans, mortgages or instalment plans.

The attitude to loans is largely a matter of how a nation thinks. No "debtors' pit" threatens Russians, if only because of their long and well-established habits. In Russia, it is still the rule to pay in cash or borrow money for major purchases from relatives or friends. Naturally, as the economic situation in the country improves, so does banks' credibility, but still ... there are such things as the force of inertia and the protective instinct.

"Paying in cash, when you know how much you have is, in my view, better," says 36-year-old auditor Vera Nevskaya. "I don't trust credit settlements," remarks 23-year-old worker Konstantin Bozhnichkin. "No matter how low the interest rate may be, I will hardly buy a car on credit," says 29-year-old manager Svetlana Milayeva. "It's better to owe your relatives than a bank."

With this in mind, it is clear that only time will show if buying on credit will become a trusted option for the population.