Russians Are Spending Big On Travel And Cognac. But The Boom Is Just One 'last Growth Spurt,' Says An Analyst.

Russian President Vladimir Putin.

Gavriil Grigorov/Pool/AFP/Getty Images

• Russia's consumer sentiment hit a high in June as its wartime economy boosted spending.
• The sentiment index has risen since April 2022, despite the Ukraine invasion.
• Russia's economy grew 4% in the second quarter of the year. Economists expect this to slow.

Russian consumers are spending large and feeling big about their finances.

In June, Russia's consumer sentiment hit a high not seen since the 2000s, according to Levada Center, Russia's last major independent pollster.

Levada's consumer sentiment index has been moving steadily upward since April 2022, barely two months after Russia invaded Ukraine on February 24, 2022.

Despite sweeping sanctions, Russia's economy has appeared resilient due to growth generated by driven by wartime state spending on military activities and subsidies.

This growth is majorly boosting incomes in Russia amid a severe labor crunch partly due to its shrinking population.

Russian consumers are on a spending spree

Russia's GDP grew 4% in the second quarter of this year from a year ago. It's a slowdown from the 5.4% growth logged in the first quarter, but it's still robust growth. In contrast, the US economy grew 2.8% in the second quarter of this year.

Russia's booming economy has boosted consumer spending, in particular on culture, hotels, transportation services, and personal services, according to a Financial Times analysis of official data last month.

According to the FT, consumption per capita in Russia increased by more than 20% from 2021 to 2023. In particular, spending on travel surged more than 90% thanks to a boost from domestic tourism.

Last year, Russia's imports of cognac and sparkling wine surged 18% and 80% from 2019, respectively, according to an estimate from the Economist media outlet.

Broadly, "consumption is booming due to a combination of massive budget spending and labor force shortages leading to strong wage pressures," Bartosz Sawicki, a market analyst at the fintech Conotoxia, wrote in a note last month.

Economic growth could halve in the second half of 2024

The good times are unlikely to last.

Economists polled by Bloomberg expect growth to slow to about 2% over the second half of the year.

The current boom is "a last growth spurt before Russia's economy starts to markedly cool," said Alex Isakov, an economist covering Russia at Bloomberg Economics.

Russia's central bank recently hiked rates to 18% in an attempt to cool inflation as the economy sees "considerable" overheating.

Such high rates mean consumer spending, too, could cool.

"'Civilian' industries are unlikely to be in a good place to serve as a substitute driver for growth as more consumers face the reality of borrowing at 20% rates or above," said Isakov.