Analytics

JLL: Later retirement will make Russians wealthier

Russian government intends to elevate the retirement age, raise VAT from 18% to 20%, and impose duty on all and any purchases in foreign online shops. JLL research company assessed how amendments to laws on retirement, and tax and customs regulations will affect everyday lives of the Russians and the commercial real estate market.

Ylya Pitalev | RIAN

Longer life, longer work

A gradual increase of the retirement age starting in 2019 will have a positive impact on businesses and consumers, but the effect will be extended over time, JLL believes.

According to the analysts, a larger labor force and a respectively better pension coverage will improve Russians’ living standards. That will in turn result in greater retail sales and revenues from lease of commercial real estate. Nevertheless, the impact of the retirement legislation amendment will not be seen immediately. According to the assessment by JLL, based on the Federal Service for National Statistics’ data, the labor force will grow by two million people next year and by 12.6 million by 2036.

The difference between an average monthly salary and an average retirement pension was RUR 25,821 ($400) in 2017. Taking that as a reference point, purchasing capacity of the people who do not retire and continue their labor activities, will grow by RUR 627 bln ($10 bln) in 2019 which is 2.1% of the overall 2017 retail sales. By 2036 it will reach RUR 3.9 trillion ($63 billion) or 13% of the 2017 retail sales. Yet the effect will most likely be more distant due to a later actual retirement of the current labor force”, the JLL analysts believe.

The opponents of the reforms claim that low lifetime means many working Russians will not live to their retirement age. JLL specialists argue that the difference between the current life expectancy and the present-day retirement age is big enough for the latter to be raised. The research notes that the retirement age in Russia has not changed since 1928 when the average lifetime was 43 years. These days, average difference between life expectancy at birth and retirement age is seven years for men (11 years globally) and 22 years for women (19 years globally).

VAT growth will trigger inflation

Another legislative initiative which caused a robust public debate is a VAT increase. According to JLL, that will make prices grow. By raising the tax rate by two points, the government hopes to expand budget revenues and stimulate higher consumer spendings. JLL believes the step will hardly have any sensible impact on the national GDP, as RUR 600 bln ($9.7 bln) of additional budget revenues per annum will be used to fund new presidential initiatives on various social programs, and thus spent on social consumption.

The history of raising VAT in Europe has shown that tax adjustments precipitate inflation. At times, inflation growth was even greater than the VAT increase.

Russia’s Central Bank expects that the tax adjustment will bring about an extra percentage point of inflation. It therefore hopes to keep the ultimate rate within the target figure of 4%. Yet the figure may be much higher, given the bad forecasts for this year’s harvest.

The most vulnerable social groups will suffer the most. Even though legislators intend to mitigate negative aftermaths by maintaining a reduced taxation rate for goods of prime significance, the hike in clothing, footwear and gasoline prices will be quite perceptible for households.

As far as commercial real estate is concerned, a higher VAT will result in an additional annual 1.7% growth in rental prices (or about RUR 800K ($13K) a year for 1,000 square meters of rented office premises).

Customs’ support for local markets

The efforts of the Federal Customs Service should cheer up the national retail market. The Service suggested gradually lowering the cost of purchases which are subject to charging a customs duty. It is expected since 2020 any purchases in foreign online shops will be taxed. JLL experts therefore forecast a drop in transborder purchases and flows of goods from both China (currently, almost one half of all orders in foreign online shops go to China) and Europe. That will stimulate both online and offline domestic retail markets in Russia. The markets growth will in turn power demand for warehousing facilities.

By Anna Oreshkina

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