Sky-high inflation is forcing more Russians to take out expensive short-term loans to make it to the end of the month, when they get their pay-check.

Russians were taking out more consumer loans simply to cover their day-to-day living expenses in May this year than during the coronacrisis. Short-term loans for “urgent purposes” to cover a monthly shortfall accounted for 10% of all retail loans taken out in May, up from 6% in the same month a year earlier, the Central Bank of Russia (CBR) reports. The number of applications for these loans was also up 1pp in April to May and 2.5% year on year, Kommersant reports.

Moreover, the average size of the loans has also increased. Experts believe that is because banks have cracked down on the number of loans they issue and are imposing stricter scoring criteria in an effort to contain the growth of the non-performing loans (NPLs) as Russia heads into recession, due to the extreme sanctions imposed by the West after Russia invaded Ukraine in February.

“In May 2022, 2.38mn payday loans of up to RUB30,000 ($563) for up to 30 days were issued worth a total of RUB21.59bn. This is the highest volume since December last year, and is 16% higher than a year earlier. According to the Central Bank, in January-March in Russia as a whole, microloans were issued [worth] RUB175bn,” the National Bureau of Credit Histories said.

Soaring inflation is causing the problem, which is eating into incomes faster than companies can raise wages. Inflation is at multi-year highs even after it fell from 17.8% in April to 17.1% in May.

And the pressure is not likely to let up anytime soon, even after the CBR’s emergency interest rate hike to 20% just after Russian forces crossed the border into Ukraine, which seems to have effectively contained inflation. As the price growth pressures have eased, the CBR has brought rates back down to the pre-war level of 9.5%, but inflation remains in double digits, which disproportionately hurts the poorest most.

The CBR currently forecasts average inflation this year in the range of 14%-17% and 5%-7%% next year, while the prime interest rate should fall back towards 4% in 2024, says the CBR, but that doesn’t help lower-income families in the meantime as high inflation reduces real incomes.

Less than a quarter (23%) of Russian borrowers are confident that they will be able to service loans already taken, according to a recently released survey by Kept (formerly KPMG) conducted in April-May, while fully three quarters of Russians anticipate problems in meeting debt payment obligations. The survey involved not only retail customers of banks, but also small and medium-sized businesses (SMEs). That uncertainty is caused by fears of losing jobs. Unemployment has not risen from the current figure of close to post-Soviet lows of just over 4%, despite an expected 8%-15% economic contraction this year, but regional authorities are already reporting the first signs of growing tension in the labour markets. At the peak of the coronavirus (COVID-19), pandemic unemployment topped 8% and is expected to rise back to those levels in the coming year. In anticipation, the vast majority (93%) of Kept respondents plan to cut costs in anticipation of tougher times to come.

The anxiety of borrowers has not yet shown up in the bank statistics, although the CBR stopped reporting some key variables like NPLs and sector profits in April.

As of April 1, overdue loans by 90 or more days (the definition of NPLs) exceeded RUB1 trillion, but in percentage terms this is only 4.1% of the banks' portfolio and less than last September (4.3%), reports Kommersant. Sberbank told the publication that the share of loans overdue by a day or more is only 1.5%, and “no problems” are visible in terms of corporate clients.

However, banks and the government are already taking action: the banks can restructure problem loans and the CBR said in its latest banking update for May that the government has been using money from the National Welfare Fund (NWF) to recapitalise important companies. The problems have been smoothed out by credit holidays and restructuring, without which bad debts in April-May could have grown by 15%, Kommersant quotes experts saying, which estimate that every seventh borrower has lost the ability to service their debt. Independent expert Andrei Barkhota told Kommersant that NPLs could rise as high as 25%-30% by the end of the year.

The state is already planning to step in to cushion the blow with a RUB4 trillion ($67.8bn) social relief package to mitigate the economic shock of the war in Ukraine. The Ministry of Finance announced an increase in pensions of 10% at the beginning of June, the Bank of Finland institute for Emerging Economies (BOFIT) reported in its weekly update on June 10. As Russians still retire relatively young, families with a pensioner, who typically also holds down a part-time job, tend to be amongst the most secure. Most Russians regard a pension not as a retirement plan, but as a supplement that pays for a better standard of living in the second half of their lives.

“The previous 8.6% increase in pensions was scheduled for the beginning of this year. The increases are intended to compensate pensioners for rising consumer prices. With regard to the increase now made, it represents compensation for the sharp jump in prices that followed Russia's invasion of Ukraine,” BOFIT reports.

The government’s spending plan is set to boost wages and welfare payments for millions in a bid to ease the economic fallout from the country’s invasion of Ukraine. A bill signed by Russian Prime Minister Mikhail Mishustin on June 21 will also raise Russia’s minimum wage and living wage, by around 10%, according to business daily Vedomosti. Under the new measures, families with children under three will also rise. There will also be more financial support for low-income families with children up to the age of 17. The proposal was set out by President Vladimir Putin last week during a televised meeting of Russia’s State Council, where he stressed that the Kremlin’s main task would be to ensure that the minimum wage remained above “subsistence minimum.”