Today’s read comes from the NYT in an article titled “Russians Pull Out Credit Cards and Consumer Debt Spirals.” It is interesting because it typifies a core issue when credit cards enter a country. It also highlights the fact that consumers need a proper educational message before they are allowed to do their first transaction. The story begins:
- Yekaterina V. Bulgakova gushed about the cozy one-room apartment that she and her boyfriend share, and particularly about the way they could always cover the rent: by charging it on credit card.
- “Our salaries don’t go far enough” to pay for housing, food and other necessities every month, Ms. Bulgakova, a tattoo artist, said.
Credit Management 101: Use debit for consumable expenses and use credit for durable expenses. It is one thing to finance a new dress or refrigerator and payout over several months. What you don’t want to do is put your consumable expenses, like food and rent, on a credit card and then revolve. Sometimes you must, but it is not the way to start with a shiny new credit card.
- “Nobody wants to go into debt,” Ms. Bulgakova, 21, said. Yet millions of Russians like her are doing just that, spurring a boom in consumer lending.
- The growth in such lending has alarmed some economic policy officials, who note that a growing number of Russians are using a quick swipe of plastic or relying on payday lenders to cope with hard times brought on by Western sanctions and slumping prices for oil, one of the country’s major export commodities.
- The spending has lifted the economy but with ballooning consumer debt that could help start a recession.
Life 101: Own the issue. Are you really saying that this is a Western issue? Nyet!
- Since the onset of Russia’s military interventions in Ukraine and the ensuing sanctions, total outstanding personal debt among Russians has roughly doubled, according to the country’s central bank. Outstanding average debt per person has reached about $3,300, according to the National Association of Professional Collection Agencies, a trade group whose membership has grown by a third since the crisis began in 2014.
Lending 101: Read the US Ability to Repay Rule. It is a no-brainer:
- the average monthly wage in Russia of about $735 ($8,820 per year)
Math 101: How could you expect to earn $8,820 per year and carry $3,300 in debt?
There is good debt, and there is debt. Good debt is when you buy a house and settle down. You can go through life, make your payments, and build equity. Then there is debt you incur because you need to buy food or pay the rent. What happens next month?
- Some independent and government economists say that the personal credit industry has found a mother lode in a population that was wholly debt-free when it entered the capitalist era a generation ago. Others warn that the industry’s expansion is unsustainable.
- Many first-time credit card users have little experience managing debt. And with Russia facing other economic woes, these spenders are also seeing their inflation-adjusted salaries decline.
- The central bank has tried to cool the market by raising so-called provisioning requirements that dictate how much money banks must set aside to insure against defaults and by capping the amount of interest that payday lenders can charge at 1 percent per day, still a steep 30 percent a month.
- Debt payments are taking a bite out of some slim paychecks: Low-income households spend an average of 8 percent of their monthly incomes on debt payment, according to the central bank. Surveys show that most borrowers are 25 to 35 and that they are taking more than three loans from different sources, according to Vladimir Tikhomirov, the chief economist at BCS Global Markets.
- State-owned banks issued the bulk of this credit, about 70 percent, the report said, suggesting that the Kremlin has at least partly endorsed the rise in consumer lending.
And if you think U.S. collectors need the Fair Debt Collection Practices Act to protect them from third party agencies, consider this:
- Russian debt collectors are notoriously violent. The state allows court bailiffs with minimal oversight to enter homes to confiscate televisions or other valuables to offset debts. Scofflaws face harsh punishment, including a ban on foreign travel.
Keep an eye out for Mercator’s upcoming research report on third party collection agencies and collection fairness. U.S. lenders consider bad debt to be a cost of doing business; sometimes you can not get blood from a stone.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group