Ruble Rout Pounding Russia’s Retailers as Prices Soar

By Matthew Campbell and Ilya Khrennikov

Photographer: Andrey Rudakov/Bloomberg

Employees use a cart to restock shelves with loaves of bread inside a Dixy supermarket... Read More

The generally upbeat story -- and current hardship -- of Russia’s middle class since the end of the Cold War can be partly told through Dixy Group.
Founded in 1992 as a wholesaler in St. Petersburg, it has more than 1,800 stores selling once-exotic products like Danone yogurt and Nestle ice cream. Today, just like the urban consumers it serves, Dixy must grapple with the plunging ruble, which makes it harder to keep shelves stocked with popular brands at prices shoppers expect.
“We’ve been seeing accelerating inflation for food all year,” said Fedor Rybasov, Dixy’s chief financial officer. With suppliers charging more, “at the end of the day the increases are reflected in the retail price.”
Servicing the company’s loans has also gotten more expensive, Rybasov said, as the Russian central bank raises interest rates. Life is harder for
companies that have significant foreign debt, since revenues in rubles don’t fetch as many dollars or euros as they did a few months ago.
The ruble is trading at about 40 to the dollar amid the continuing Ukraine conflict, a record low that’s prompted the central bank to spend more than $3 billion to shore up its value just this month. To make matters worse, U.S. and European Union sanctions on some goods, and a retaliatory Russian import ban on food from those countries, have restricted the availability of many products, driving up prices even further.
Add it all up, and goods enjoyed by relatively prosperous residents of Moscow and St. Petersburg -- beneficiaries of Russia’s economic boom of the last decade -- are increasingly tough to provide. And that’s hitting the bottom lines of the companies that sell them.

Pricey Butter

Squeezed middle-class consumers are spending more and more of their income on food, crowding out discretionary spending on luxuries like electronics, foreign travel and imported clothing. The proportion of the average household budget that goes to food has climbed to 38 percent, versus 34 percent at the beginning of the year, according to VTB Capital.
“It is the middle class rather than the working class” that is primarily feeling the impact of the ruble’s woes and import restrictions, said Neil Shearing, an economist at Capital Economics Ltd. in London.
Some Russians are resorting to dark humor. A joke making the rounds in Moscow tells of two women in the supermarket queue. “Why is food so much more expensive?” one asks. “It’s our mortgage on Crimea,” is the answer.
Moscow teacher Margarita Zobnina could attest to rising prices at the supermarket, where she says Russian butter now costs 110 rubles, up from 80 a few months ago.
“Before, you could get imported butter for 100 rubles,” Zobnina said. “Now, the imported stuff is gone and Russian butter is more expensive.”

Stranded Tourists

Or consider foreign travel: In the third quarter, 16 tour operators that organize trips abroad went bankrupt, stranding thousands of tourists in far-flung locations such as Egypt and Thailand. Those still in business are cutting their winter offerings by as much as half due to lower demand, according to the country’s Federal Tourism Agency.
Some foreign retailers are responding by shrinking Russian operations. Warsaw-based Empik Media & Fashion, which operates Russian stores for brands such as Aldo and Gap, is closing its Esprit and OVS stores, it said Sept. 30. Finnish retailer Stockmann Group is doing the same with more than 20 unprofitable Seppala apparel shops in Russia.
Even companies that don’t import directly are vulnerable to the ruble’s slide because many of their suppliers depend on foreign goods. At online retailer Ulmart, Russia’s largest by revenue, “we pay for all the goods in rubles,” said commercial director Oleg Pchelnikov. “Still, we see supplier price increases because many of our vendors have dollar-based pricing.”

Oil Offset

Not every Russian business is suffering equally, or at all. Energy exporters like state-backed Rosneft OAO (ROSN) and Gazprom OAO (OGZD) generally sell oil and gas abroad in dollars. While they may be affected in the long term by the ruble’s weakness and Western bans on exports of high-tech equipment, for now their foreign energy sales are more valuable when the proceeds are brought home -- which serves to at least partially offset falling oil prices.
Their oil revenue helps underpin spending on benefits and subsidies that are cushioning the economic blow for some citizens. Oil production, which accounts for almost half the state budget, last month approached the post-Soviet record of 10.6 million barrels a day.
A prolonged ruble slump could also help Russian manufacturers build up export capabilities, despite some short-term pain when it comes to financing foreign debt and buying equipment, said Dominic Sanders, a partner in Moscow at law firm Linklaters. A devaluation “can be a real boon for local manufacturing and exporters of raw materials,” Sanders said. “If you look at things from a slightly longer-term perspective, some businesses will actually benefit.”
That’s little consolation for many consumers. Irina Zabalueva, a 28-year-old public relations manager, only goes to restaurants once or twice a week, down from four times before, and she typically chooses cheaper places, she says, as the cost of everything from dairy to dresses has risen.
“The price of clothes no longer corresponds to the quality,” Zabalueva said. “Now I have to really think whether I need new clothes or not before buying.”