Data produced by the Monitoring of Trust in Financial Institutions and the Public's Financial Behaviour reveals increased rates of private over indebtedness in Russia's small towns. Some 45% of people in communities of less than 10,000 live in debt – nearly double the proportion in big cities with more than a million inhabitants, where just 28% of residents have outstanding loans. In addition to this,default rates are much higher in small towns: 23% of small town residents and only 9% of big city dwellers surveyed as part of the HSE monitoring project answered 'yes' to the question of whether they had ever missed a repayment date on their loan during the past 12 months.
Greg Yudin, Senior Lecturer of the Department of Economic Sociology and Senior Research Fellow at the HSE Laboratory for Studies in Economic Sociology (LSES) and Ivan Pavlyutkin, Assistant Professor of the Department of Economic Sociology and Senior Research Fellow at LSES, have been studying the causes of high private over indebtedness in small towns.
Their data came from ethnographic studies in two small towns – Kologriv and Myshkin. They conducted their observations between 2010 and 2013 and interviewed people of various occupations, age groups and social classes.
Despite comparable populations, 3,419 in Kologriv and 5,932 in Myshkin – the communities are different in terms of their social and economic development. Kologriv’s economy consists of sawmill businesses, retail trade, and the public sector, while Myshkin, in addition to the retail trade, has oil and gas processing facilities, tourism, and agriculture. Kologriv has 28 retail outlets (none of them are chain stores), while Myshkin has 78, including two retail chains, Dixy and Magnit.
Household debt rates are high in both communities – half of the local residents owe something to someone – but the nature of debt obligations are different in the two towns.
While private debt in Kologriv is mainly informal, in Myshkin formal lending is more common.
Having surveyed the residents of both towns, the authors found that in Kologriv, one can borrow almost anything informally from a retail store. In contrast, in Myshkin one has to apply to a bank or to a microcredit institution for a formal loan. "In fact, borrowing rather than buying from retail stores is very common in Kologriv; you can borrow a loaf of bread or a box of matches, but you can also borrow goods worth 10,000 rubbles," Pavlyutkin explains. "The situation in Myshkin is different: the arrival of tourists and chain retailers has eradicated local stores' debt ledgers. Today, people there apply for bank loans."
Debt-based trading often implies a more relaxed approach to repayment: default, delay or repayment in-kind by offering some other product or service are considered acceptable. "There is a double standard concerning debt – one must pay it back, of course, but it does not make sense to repay on time. In fact, people have no desire to get out of debt," Yudin notes.
The authors also found that store owners feel an obligation to sell goods on credit out of a sense of responsibility to the community. By selling on credit, they serve as suppliers of resources needed for survival, and at the same time avoid being seen as parasites taking advantage of others' financial problems. "In a town like Kologriv,it is not absolutely clear whether a local business owner is seen as a philanthropist or a parasite; therefore, store owners sell on trust to avoid antagonizing them," the authors explain. This long-standing practice is rooted in the Soviet past and still persists in the post-Soviet years.
Myshkin is what Kologriv should expect to become in the future. With a massive inflow of tourists making it difficult to tell locals from strangers, local businesses are less scared of being judged for lack of responsibility for the community. Many stores have put up We Do Not Provide Credit notices. Formal borrowing from Sberbank has replaced informal debt arrangements.
However, attitudes toward debt have not changed universally. Some people in Myshkin have not yet acquired sufficient financial literacy and often fail to understand the difference between a bank loan and borrowing from a neighbour. This explains the over indebtedness and high loan default rates in Russia's small towns.
Availability of bank loans also breeds consumer opportunism: the same people who used to borrow only the bare minimum, such as food staples from a store owner, do not think twice about taking a bank loan to buy a fur coat or a car without worrying about repayment. Microlending services have emerged in Myshkin offering, in particular, loan refinancing at punitive interest rates.
The authors conclude that informal debt in small Russian towns is being replaced by formal lending. However, the gradual disappearance of non-interest bearing debt does not promote financial autonomy, and living in debt remains a social norm.
Bank lending in small towns is followed by the arrival of high-risk microloans and microfinance. The lack of community control increases the government's responsibility for the situation, but it is unclear whether the government is prepared to take on this responsibility.