MOSCOW BLOG: Mortgages vs. pensions and blasts from the past

MOSCOW BLOG: Mortgages vs. pensions and blasts from the past
Clamouring citizens are back at the central bank in Moscow after 17 years.
By Ben Aris in Moscow February 9, 2016

Russia is in a painful place and freeing the ruble in November last year may be acting as a very effective shock absorber in the face of plummeting oil prices, but it also means that the brunt of the pain is being borne by the people.

A knot of angry protestors gathered in the slush outside the Central Bank of Russia (CBR) offices on Moscow's Neglinaya Street in recent days to hurl insults and cry for help after their FX-denominated mortgages became unaffordable.

Typically, it is the would-be home owners who choose to borrow in the much cheaper foreign currency, or those who want to buy a bigger place that they can't quite afford at the ruble-denominated rates. But taking a hard currency loan exposes you to changes in the exchange rate. That is not a good idea in a country where the value of the national currency is so closely tied to something as volatile as oil prices. The crash of the ruble in the last year to a third of its previous value means these loans are now three times more expensive.

According to activist groups, around 100,000 mortgage holders have fallen victims of the weak ruble. Mikhail Kozhokin, board member of the state-run behemoth VTB24 bank says the number is, in fact, much lower: 17,500 as of December 1, 2015, reports the Moscow Times.

These borrowers will probably lose their homes as a result of the current economic straights but some of the lending banks have been offering to refinance their loans. Bottom line is that borrowing in a foreign currency in an emerging market – especially a loan with as long a life time as a mortgage -- is a foolhardy thing to do: caveat emptor, emerging market currencies are not stable.

Happily for Russia the number of FX mortgages are very small. In countries like Poland, Hungary and Ukraine the share was large enough to threaten the stability of the banking system and caused havoc for the population as they were so widespread.

But looking at the protest it also highlights how far Russia has come. The reports describe young people with steady jobs who have just bought their first home and are now facing mortgage repayments that are several times their salaries. These are tragic stories for sure, and the numbers of those affected are hopefully enough that the state will take pity on them and help.

Echoes of another devaluation

But to put this protest into context, I once stood in the same spot during a very similar protest in the same freezing weather with another group that had been ruined by a massive ruble devaluation.

In November 1998, a knot of pensioners gathered outside the eggshell blue mansion on Neglinaya to call for the state to help them. They were pensioners who were already struggling to get by on a lot less than $50 a month. The crash of August 17 that year saw the ruble devalue by 75% almost overnight, but worse is that the entire top tier of the banking sector went bust – taking the life savings of many pensioner with it.

A raft of oligarch-controlled banks had sprung up in the 1990s and grown fat on retail deposits by offering higher interest rates than the stolid state banks like Sberbank. The names of Uneximbank, SBS Agro, Inkombank and Most Bank were household names in those days, but a decade and half on they are already slipping into the fog of history. They represented between them almost all the commercial banking in Russia and they all went belly up in that crash (although Uneximbank transferred everything of value it still had to Rosbank, which is still around and now owned by French bank Societe Generale).

One of the pensioners, Ivan Kozlov, held a sign up saying "Mr Gerashchenko – have a heart. Give us back our money," referring to the then governor of the Central Bank of Russia. Another feisty old woman got into flaming row with the sheepish policemen that eventually turned up to try and move everyone along. The policemen gave up after a few minutes and sloped off sheepishly as the crowd hurled cries of "Shame!" at his back. The policemen at this week's protests actaully arrested a few of the protestors. 

A few days later I was just down the road on Stolichnaya Pereulok about to enter the Christian Dior store and interview the manager for a story about how the rich had been relatively unaffected by the crisisin 1998.

"We only have one problem here," the manager said. "We can only stock size 6 stockings and size 12. We don't know what to do with all the other sizes!"

On enquiring on how it was the store only sold those two sizes the manager answered: "because only the girlfriends and wives shop here."

As I left I nearly walked into another babushka wearing the trademark thick brown winter coat, white felt beret and carrying a large black handbag. She was looking so forlorn I asked her if everything was ok at which point she burst into tears.

It transpired that she had collected her meagre pension that morning but had left it in her avoska, the Soviet-era string bags that everyone used to carry in case the shops had something to sell, on the tram.

"I don't have any money for the month. I came here to beg as rich people go to this store don't they? But I have never done it before. I don't know what to do!" she wailed. It was heart breaking. Like so many old women in the 1990s she had lost her husband to drink and her son to Afghanistan. I gave her $20 and told her to go home.

In the last 15 years, Russia’s wealth has grow tenfold. Incomes have soared from that $50 the pensioners were getting to peak at some $800 as a national average and a lot more in Moscow. The last year has seen that income halve in dollar terms and it has also been significantly reduced in ruble terms as well.

On the one hand, looking at the worried faces around me and listening to the increasing number of anecdotes of firings or enforced holidays you can see the pain the average Russian is feeling. Pain is relative and while the protestors on Neglinaya today are in a far better position than the pensioners were 15 years ago, I am sure they are just as worried and just as unhappy as their predecessors were. The difference of course they have the opportunity to rebuild their lives. They still have jobs even if their pay is worth a lot less and the economy is still functioning more or less as it was before the collapse in the price of oil in December 2014.

But the two protests also bring home how volatile Russia remains. How hard it is to have dreams of a better life and future for your children or your own old age. Today's mortgage defaultees could easily be back on Neglinaya in another 15 years, but this time protesting the loss of their life savings in much the same way as the pensioners I first met were in 1998.

President Vladimir Putin has provided wealth and prosperity for many people in Russia but he has not provided stability and predictability, which are as important, if not more important, for a middle class than dollars in the bank. The fact these protests were over unpayable mortgages is poignant as nothing represents a "normal" country than the ability to buy a home on borrowed money.

It's a debt that you carry most of your adult life and one that people will only take on if they believe they know more or less what their future holds for them. The failure of these mortgages, albeit in the riskiest possible category of mortgages, speaks of the basic flaws in the government’s strategy to build a new country on the ruins of the Soviet Union of favouring the state and wealth accumulation over building quality institutions and social support for families that underpin the stability of any country. This is my third big crisis since I arrived in Russia (there have been four if you include 1991 that destoyed everything). The countries in Central Europe have moved beyond these violent swings, but the further east you go the worse it gets. Russia is in a bad place now, but the other countries in Eastern Europe and Central Asia are in far worse shape. Ukraine in particular has been in permanent crisis since 1991, bar 2006 and 2007 (also boom years in Russia), as it is even further behind Russia in terms of building quality institutions. Oil prices will probably return to around $70 in the foreseeable future, but until Russia, and all the countries east of here can fix their institutions, I have a nasty feeling I will back outside the cast iron gates of the CBR building on Neglinaya again several more times.