Economy
Rising Household Debt In Russia Could Be Political, Economic Time Bomb
December 13, 2023
David Szakonyi
Associate Professor of Political Science, George Washington University
Political scientist David Szakonyi writes that though the Kremlin may benefit from the Russian population's deep indebtedness in the short run, insolvent borrowers may become a serious long-term problem.
Recent statistics from the Central Bank paint an increasingly dire picture of how indebted the Russian population has become. As of July 1, 2023, there were approximately 46.7 million debtors across the country, an 11% increase over an 18-month period dating back to January 2022. Just as alarming is how unbalanced this debt burden is across Russia. Over 11.2 million people have 3 or more outstanding loans.
The economic risks of this explosive growth in credit have been explored in debt, including very eloquently in Russia.Post. Yet less attention has been paid to the political rationale behind the government policies that have encouraged citizens to take out such extensive loans in the first place. It is no coincidence that this rise in private debt has come alongside an attempted retrenchment in the Russian welfare state and growing authoritarianism in the country. Loading on private debt can help keep citizens politically inert and free up budget resources, but not forever.
Many governments, both autocratic and democratic, view permissive credit regimes as a substitute for adequately funding the welfare state and supporting wages. Just one in five Russians say that their salary alone is enough to cover basic living expenditures, prompting many to turn to second jobs or especially loans to cover the difference.
The economic risks of this explosive growth in credit have been explored in debt, including very eloquently in Russia.Post. Yet less attention has been paid to the political rationale behind the government policies that have encouraged citizens to take out such extensive loans in the first place. It is no coincidence that this rise in private debt has come alongside an attempted retrenchment in the Russian welfare state and growing authoritarianism in the country. Loading on private debt can help keep citizens politically inert and free up budget resources, but not forever.
Many governments, both autocratic and democratic, view permissive credit regimes as a substitute for adequately funding the welfare state and supporting wages. Just one in five Russians say that their salary alone is enough to cover basic living expenditures, prompting many to turn to second jobs or especially loans to cover the difference.
“Rather than allocate resources to support inadequate incomes though transfers, governments often heavily encourage people to take out these loans to maintain their previous level of consumption and well-being.”
An ad on the internet: "Quick loan approval - no hidden fees". Source: VK
Debt is thus seen as the only way out of economic shortfalls, and even a last-ditch effort to avoid a more precarious fate. Some Russians are taking out loans both to pay bribes that allow them to avoid mobilization, as well as to pay for protective equipment in the event they are sent to war. The result is that already economically disadvantaged groups fall deeper into financial misery through the onboarding of additional loans.
In the meantime, the regime temporarily avoids public condemnation for falling living standards that are artificially propped by personal loans. Much of this policy dates all the way back to the 2008 financial crisis which hit incomes hard, helping spawn a new industry of high-risk lenders with dodgy payday lenders and loansharks masquerading as “microfinance” organizations. In the 2010s, analysts were already warning about an unsustainable expansion in consumer debt and rapidly declining loan portfolio quality.
Russia’s all-out invasion of Ukraine has significantly accelerated loan uptake, and the government appears reluctant to address the underlying issues. Indeed, some of the government’s most recent moves make this policy of shifting burdens especially evident. First, the latest three-year budget currently under consideration by the Russian State Duma slashes social spending by roughly one-quarter by 2025 and will for the first time be surpassed in volume by defense spending. These deep budget cuts not only inflict significant harm on the quality of education, health care and housing, but also the social assistance necessarily to support incomes.
Similarly, the Russian government has leaned heavily on preferential mortgage programs to stimulate demand in the residential construction sector. This lifeline to the housing industry displaces risk squarely onto buyers, while helping to offset the impact of higher interest rates. Though such programs do employ state subsidies, individual borrowers are still on the hook for loan repayment, rather than being passive recipients of other types of subsidized housing.
Besides saving on budget resources, encouraging growth in private debt enables governments to limit citizens’ economic autonomy, and as a result their ability to exercise their democratic rights. Just as state employees are less likely to strike oppositionist stances for fear of jeopardizing their employment, debtors may be wary of any shocks to the status quo that could further imperil their ability to pay back their loans. Officials such as Economy Minister Maxim Oreshkin may warn of people falling into a “debt trap, in some cases worse than gambling”, but: stripping people of capacity for economic maneuver can also breed political compliance.
In the short term, this dependency can lead to people taking desperate steps to relieve their debt burden. Workers take on extra shifts in more precarious forms of employment in order to earn additional income. In more extreme cases, fighting on the frontlines also brings with it considerable monetary compensation and debt relief, and even escape from notoriously aggressive Russian debt collectors. Debt pushes people to back up against the wall and make unpleasant decisions.
Debt as a political trap
But in the long run, debt can be a powerful political catalyst and a real source of liability for governments. Debt arouses intense levels of popular anger and resentment at one’s governments for having nudged people into these financial traps. Just think of the tens of thousands of people who took to the streets of New York in 2011 under the Occupy Wall Street partially as a response to perceived anger about oppressive medical debts and student loan payments. In the UK context, austerity-induced indebtedness contributed to feelings of political neglect, with voters turning against the incumbent Conservative party that was seen responsible for jeopardizing their economic security. Russia is no stranger to protests fueled by anger over loans. A falling ruble put severe pressure on dollar- and euro-denominated mortgages, sparking loud demonstrations in 2016. Riot police had to be called in to quell the situation.
Such salient grievances open up opportunities for savvy political entrepreneurs who can frame personal debt as a part of their indictment of the regime.
In the meantime, the regime temporarily avoids public condemnation for falling living standards that are artificially propped by personal loans. Much of this policy dates all the way back to the 2008 financial crisis which hit incomes hard, helping spawn a new industry of high-risk lenders with dodgy payday lenders and loansharks masquerading as “microfinance” organizations. In the 2010s, analysts were already warning about an unsustainable expansion in consumer debt and rapidly declining loan portfolio quality.
Russia’s all-out invasion of Ukraine has significantly accelerated loan uptake, and the government appears reluctant to address the underlying issues. Indeed, some of the government’s most recent moves make this policy of shifting burdens especially evident. First, the latest three-year budget currently under consideration by the Russian State Duma slashes social spending by roughly one-quarter by 2025 and will for the first time be surpassed in volume by defense spending. These deep budget cuts not only inflict significant harm on the quality of education, health care and housing, but also the social assistance necessarily to support incomes.
Similarly, the Russian government has leaned heavily on preferential mortgage programs to stimulate demand in the residential construction sector. This lifeline to the housing industry displaces risk squarely onto buyers, while helping to offset the impact of higher interest rates. Though such programs do employ state subsidies, individual borrowers are still on the hook for loan repayment, rather than being passive recipients of other types of subsidized housing.
Besides saving on budget resources, encouraging growth in private debt enables governments to limit citizens’ economic autonomy, and as a result their ability to exercise their democratic rights. Just as state employees are less likely to strike oppositionist stances for fear of jeopardizing their employment, debtors may be wary of any shocks to the status quo that could further imperil their ability to pay back their loans. Officials such as Economy Minister Maxim Oreshkin may warn of people falling into a “debt trap, in some cases worse than gambling”, but: stripping people of capacity for economic maneuver can also breed political compliance.
In the short term, this dependency can lead to people taking desperate steps to relieve their debt burden. Workers take on extra shifts in more precarious forms of employment in order to earn additional income. In more extreme cases, fighting on the frontlines also brings with it considerable monetary compensation and debt relief, and even escape from notoriously aggressive Russian debt collectors. Debt pushes people to back up against the wall and make unpleasant decisions.
Debt as a political trap
But in the long run, debt can be a powerful political catalyst and a real source of liability for governments. Debt arouses intense levels of popular anger and resentment at one’s governments for having nudged people into these financial traps. Just think of the tens of thousands of people who took to the streets of New York in 2011 under the Occupy Wall Street partially as a response to perceived anger about oppressive medical debts and student loan payments. In the UK context, austerity-induced indebtedness contributed to feelings of political neglect, with voters turning against the incumbent Conservative party that was seen responsible for jeopardizing their economic security. Russia is no stranger to protests fueled by anger over loans. A falling ruble put severe pressure on dollar- and euro-denominated mortgages, sparking loud demonstrations in 2016. Riot police had to be called in to quell the situation.
Such salient grievances open up opportunities for savvy political entrepreneurs who can frame personal debt as a part of their indictment of the regime.
“Even at a time of seemingly political apathy and resignation, economic issues still cut deep and can cause real pain for those in power.”
Indeed, the current debt plight in Russia is a direct result of government policies designed to offload risk onto the consumer. Regime critics may be well-poised to make that connection.
A growing debt burden is thus both a political as well as an economic time bomb. This partly explains the mad rush of Russian policymakers to prevent the potential damage from getting out of hand. They are tightening credit markets, rolling back the preferential lending programs, reining in violent debt collectors, and possibly setting a cap on maximum consumer interest rates. But insolvent consumer borrowers may require bailouts, lest huge numbers be forced to declare bankruptcy. Whether the government can keep the population trapped by, but not completely consumed by debt may ultimately determine its political fate.
A growing debt burden is thus both a political as well as an economic time bomb. This partly explains the mad rush of Russian policymakers to prevent the potential damage from getting out of hand. They are tightening credit markets, rolling back the preferential lending programs, reining in violent debt collectors, and possibly setting a cap on maximum consumer interest rates. But insolvent consumer borrowers may require bailouts, lest huge numbers be forced to declare bankruptcy. Whether the government can keep the population trapped by, but not completely consumed by debt may ultimately determine its political fate.
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