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#13
New York Times
January 20, 2003
Buying on Credit Is the Latest Rage in Russia
By SABRINA TAVERNISE

MOSCOW, Jan. 19 New advertisements are appearing on Moscow's streets and subways. Comic-book-style stories portray the new quandaries of the Russian middle class.

"If we buy the car, we can't afford to remodel the apartment," says a woman with a knitted brow, in one ad. Then comes the happy ending. Her husband replies, smiling: "We can do both! If we don't have enough, we'll take a loan!"

In a country that has yet to discover the personal check, where people still pay for apartments and cars with suitcases of cash, Russian consumers are beginning to borrow. This is a new step for Russia's economy, which until now had neither credit cards nor mortgages, and required life's largest purchases to be paid for up front.

For years it was banks, companies and the Russian government that binged on borrowing, careering from one default to the next. But now the government has its financial house in order, and average Russians are beginning to enjoy a basic aspect of a capitalist system. "Consumer credit is about to explode," said Greg Thain, chairman of a Moscow marketing firm called Integrated Marketing Service, which recently conducted a study of 5,000 Russian families' budgets.

Economists offer a range of explanations. As Russia comes out of its fourth year of economic growth, its banking system is beginning to recover from a financial collapse in 1998. After sobering up from the wild currency and bond speculation during the 1990's, banks are regaining the trust of depositors, and are getting down to the more mundane business of lending to consumers.

At the same time, wages are on the rise, and the economy is flush with rubles, partly the effect of an oil boom. Wages are now increasingly paid above the table. Tax changes have drawn more incomes out of the shadows, leaving people more willing to disclose personal details about their financial abilities.

Interest rates, which can range from 15 percent for 10-year mortgages to double that for cars and appliances, would be considered usurious in the United States. But they are attractive in Russia, where the novelty of buying on credit is still so exciting to consumers that most don't even consider how much they are really paying over time when interest is factored into the total.

"The primary driver is increasingly legal incomes," said Aleksei Zabotkine, head economist at United Financial Group, an investment bank in Moscow. "Banks have excess cash and are willing to take on the risky business of lending to the public, and the public is willing to give information."

But eager-to-lend banks do not ask many questions. Nina A. Andreyeva, 41, a manicurist in a fur coat and hat, was filling out her second loan application in a giant home appliance store in northern Moscow on Saturday to help pay for a washing machine and television. She checked boxes indicating her line of work (health worker) and the location of her apartment (on the edge of town). After breezing through the application, she needed only to present her identification card no proof of employment or verification of income.

"It's very convenient," she said, pen in hand. "We can start using these things right away, and it's not so hard on our budget."

The borrowing is happening in purchases of home appliances, apartments, cars even clothes. Mr. Thain said mortgages ranked first in total amount of loans, followed by home appliances and cars. The borrowing, so far, is mostly to consumers in the Moscow area, and has yet to spread to poorer provinces.

While the figures are minuscule compared with developed economies like the United States, they are growing. Russian Standard Bank, one of the largest lenders in the car and home appliance sectors, nearly tripled its client base last year from the previous year, with 550,000 loans at the end of December. The figure was up 63-fold from 1999, the bank's first year in operation. As of November, ruble-denominated loans to consumers in Russia totaled $3.7 billion.

"They told us it was a stupid idea and that we would be put out of business," said Dmitri V. Rudenko, deputy chairman of the bank in his office in northern Moscow. "But we thought, if it worked in Brazil and India, why not in Russia?"

The bank's customers are primarily what Mr. Rudenko described as blue collar. They earn about $250 a month. Few own cars. Still fewer have ever used a credit card. Even so, the default rate is low, 3.5 percent, he said, adding that for many Russians, repaying is a point of pride.

There are, of course, hustles. In one case, a group of vagrant men with passports went individually to each store that offered appliances on credit. They approached bank salesmen, who are based in the stores, asking for loans. Several bank employees noticed the men had traveled together in the same expensive, foreign-made car, and concluded they were being paid by a con artist.

The hustlers "didn't understand the credits all came from the same place from us," said Dmitri V. Pilnikov, a Russian Standard manager, based at M-Video, the store where Ms. Andreyeva bought her television.

Jaded by a decade of pyramid schemes, Russians were initially wary of the loan offers. Mr. Pilnikov said he struggled at first to get people to take leaflets. Early attempts at advertising were relatively ineffective. Attitudes changed when a relative or neighbor tried it out and liked it.

"When we started, people looked at us like we were robbers," said Mr. Pilnikov. "They were very aggressive. But then their neighbors told them it wasn't a rip-off scheme. Now the thinking has turned around."

Loans are of shorter duration than they are in more developed economies. Russian Standard, for example, charges an annual rate of 29 percent for a standard consumer loan, and says its average span for a loan is between six months and a year. But most borrowers are concerned solely with the size of the monthly payments, and stores have responded. At M-Video, red tags highlight down payments and urge shoppers to buy on credit.

And demand has soared. Mr. Pilnikov said the store had to hire extra security guards to help regulate the rowdy line of loan seekers that, ahead of the Christmas holidays, stretched from his office almost 40 feet to the doors of the store entrance. An age requirement applicants must be 23 to 65 years old has forced him to turn away many of the bank's most eager customers: Russian grandmothers.

"They show me their medals of honor as hero workers from World War II," he said, shaking his head. "They say they have good pensions."

Mr. Zabotkine expects that the credit binge will end in crisis. Russians have no experience in the culture of borrowing, and in the current euphoria, few seem to be imagining the consequences of default. A still weak legal system means banks will have difficulties pursuing deadbeats in court. Dasha Malinova, 20, said she and her husband applied for a loan just to see what it was all about.

"It's cool," said Ms. Malinova, flipping her fur-trimmed wrist. "Everyone is taking them."

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