Amid the economic crisis, Russians turn to pawnshops

Drying up of loans and rise in price of gold fuel trend towards a more traditional form of credit.

MOSCOW // The clients who descend into Nadezhda Sedova's basement pawnshop often unload their problems along with their valuables. Some are struggling to pay for medicines, others are living paycheque-to-paycheque, still others need a cash injection for a much-needed holiday. "I hear stories about their families and their grandchildren," Ms Sedova said through the small window in the protective booth where she sits. "Sometimes it's easier for them to talk about their problems with strangers than with friends or families."

The economic crisis has hit Russia hard, with rising unemployment and large swathes of the economy in decline. But for pawnshops such as the one Ms Sedova manages near a busy metro station in northern Moscow, business is brisk. With fewer available bank loans and a significant rise in the price of gold recently, increasing numbers of Russians are turning to pawnshops to make ends meet. The amount of money paid out by Russian pawnshops increased by 18 per cent last year compared with 2008, according to an annual report last week by the central bank.

The consumer credit industry in Russia is still in its infancy, though Russians have shown an exceptional hunger for bank loans that have helped fuel consumer spending by the country's ascendant middle class. But since the financial crisis hit Russia in late 2008, interest rates have skyrocketed and banks have established more onerous lending conditions, sparking a 12-month decline in loans to consumers.

The trend has triggered a rise in demand for pawnshop loans, the Russian central bank said, where people often trade in possessions for money with a guarantee that they can buy it back at an inflated price within a certain time frame if they so wish, effectively amounting to a loan. "Amid limited access to bank loans, in some cases pawnshops were the only source of credit for the population and companies," the bank's report said.

The availability of credit from pawnshops provided "a certain softening" of the threat of destabilisation of the lending market, and last year saw the number of pawnshops in Russia increase by 25 per cent, to about 5,000 nationwide. The pawnshop in Russia, known as a lombard, dates to the 16th century, and it continued as an institution under the Soviets despite a state ban on private enterprise as proceeds went to state coffers. This led the Chinese state newspaper The People's Daily to raise the question in 1968 of whether the Soviet Union was actually a "capitalist country in disguise".

Private pawnshops appeared as private banking emerged amid the collapse of the Soviet Union, providing loan options for a population accustomed to borrowing money from friends and family. The thousands of pawnshops operating in Russia deal primarily in gold and silver, though clients can also trade in cars and other valuables. Typically, clients borrow a few hundred dollars against the collateral, with the average loan at 13,000 roubles (Dh1,600), said Mikhail Unksov, head of the Vash Lombard chain to which the shop run by Ms Sedova belongs.

Monthly interest rates can vary, depending on the shop and the amount of money borrowed, from three per cent to 20 per cent. Ms Sedova said a client had come in that day and traded jewellery in exchange for 60,000 roubles at a 14-per-cent monthly rate. Mr Unksov, who has been in the pawnshop business since 1989 and heads an independent, nationwide lobby of pawnbrokers, said the total amount of money lent by Russian pawnshops is up 15 per cent since 2008. Annual turnover last year was 20bn roubles, with Moscow alone accounting for 3.5bn.

The drying-up of consumer loans from banks is not the most important factor driving the jump in Russian pawnbrokers' business, despite the conclusions of the central bank's report, Mr Unksov said. "Above all it's connected with the rise in the price of gold," he said. "The lack of credit from banks plays a role as well, but to a lesser degree than gold prices. Unemployment is up as well, and people are also seeing delays in receiving their paycheques."

Pawnshops have also proved to be an auxiliary source of funding for Russians already drowning in debt, said Dmitry Dorofeyev, who runs a small family pawnshop in northern Moscow. "Lots of people bring in their silverware and jewellery. They say they need to pay off the interest on their bank loans."