Chasm between rich and poor widens in Russia as living standards fall

November 30, 2016 Lenta.ru
Amid the ongoing crisis, the Russians are quickly losing their accumulated assets, and social stratification in the country is increasing. According to official forecasts, the welfare of the population will recover only in 2018 – at the same time, the authorities will seriously start thinking about raising the retirement age and taxes.
A woman begs in one of the subway underpasses in Moscow
Analysts at financial institutions recorded an increase in the social gap between the wealthy and the poor. Source: Artem Zhitenev/RIA Novosti

A study conducted by the Swiss financial corporation Credit Suisse has revealed that Russians’ living standards fell by 14.4 percent in the space of just one year from mid-2015 to mid-2016. According to the survey, called the Global Wealth Report, within 12 months, the average income of households decreased from $12,086 to $10,344.

Thanks to high oil prices in the years from 2000 to 2007, the prosperity of citizens increased eight-fold during this period. In 2007, this growth slowed down, becoming irregular, and then stopped altogether and started falling back.

Analysts at financial institutions have also recorded an increase in the social gap between the wealthy and the poor. In Russia, 89 percent of the public wealth is controlled by 10 percent of households. This is one of the highest rates in the world. For comparison, this figure is 78 percent in the U.S. and 73 percent in China.

The importance of the housing market

It could be that Credit Suisse, in its report, did not take into account some specific features of the Russian economy. Foreign researchers do not always take into account the role of real estate in the country. Very often, the poor live in apartments located in prime locations in major cities.

For many Russians, to sell their property, and thus improve their lives, is difficult to do, because of their sacred attitude towards their living quarters – such people do not see an apartment as a source of potential capital, but the very purpose of their existence.

“The main asset of the population in our country is housing. Now we are in an economic recession, and the housing market is very sluggish. Fewer transactions are taking place, and as a result, the prices indicated in the statistics are not, shall we say, entirely accurate,” said Alexander Burdyak, senior fellow at the Russian Presidential Academy of National Economy and Public Administration’s Institute for Social Analysis and Forecasting.

“Statistically, inequality is caused by the huge differences in housing prices between Moscow and other cities. People living in a studio apartment in the capital are five times richer than those who are living in a similar premises in the region,”

…and a weak ruble

In addition, one of the causes that has led to the reduced quality of life in Russia, according to Credit Suisse, is the devaluation of the ruble. In 2007, the U.S. dollar was worth 25 rubles, and now, nine years later, it is worth 64 rubles.

“This sharp drop in living standards was due to the lower exchange rate of the ruble, as at Credit Suisse does all its calculations in U.S. dollars. In other countries, the local currencies have not dropped as much against the U.S. dollar as the ruble has in the last year or two,” said Burdyak.

According to the study, the total value of assets held by Russians amounts to trillions of dollars. It is not clear how they calculated prices for residential real estate, which is the main asset for the overwhelming majority of Russians.

According to official statistics, the calculations show a very different picture. In 2015, according to the Ministry of Construction, the country’s housing stock surpassed 3.4 billion square meters, and the average market price of one square meter was 36,000 rubles.

Multiplying these numbers and dividing by the average U.S. dollar exchange rate, we get a total value of residential real estate at the disposal of the Russians at around $1.8 trillion. To this, we can add deposits in banks accounts ($360 billion).

Finally, there are investments in securities, mutual funds, foreign real estate and other assets abroad. This gives additional hundreds of billions of dollars. The Boston Consulting Group, for example, estimates the volume of Russian assets at $1.4 trillion.

A clear and worrying trend

However, regardless of the manner in which Credit Suisse came to its conclusions, one thing is clear – the population is losing money, and the gap between rich and poor is growing.

Moreover, the situation will only worsen. According to the forecast of the Accounting Chamber, by the year 2019, there will be approximately 20.5 million people living below the poverty line in Russia. This is 1.4 million people more than 2015.

The fact that devaluation of the ruble has become one of the reasons for the sharp decline in the people’s standard of living was also acknowledged on Nov. 22 by presidential adviser Sergei Glazyev.

“No country in the world has seen such high volatility in their national currency in recent years. It’s twice greater on this indicator than that of our neighbor Turkey. We are also setting records when it comes to currency devaluation, including among the oil-producing countries,” said Glazyev.

“I agree with the Credit Suisse data, and I even think that they have somewhat embellished it. In Russia, it is not one tenth, but three percent of the people who own most of the Russian economy. The reason behind this is the colossal difference in incomes,” said Nikolai Kolomeitsev, First Deputy Chairman of the State Duma Committee for Labor, Social Policy and Veterans, in an interview with Lenta.ru.

Taxes and state-produced alcohol the answer?

According to Kolomeitsev, there are several ways to combat this high social stratification. First, Russia needs to implement a progressive taxation system. Secondly, it needs to restore the state monopoly on alcohol production.

“In tsarist Russia, and in the Soviet Union, the state had a monopoly on alcohol production. This eliminated the possibility of poisonings, and brought in more income to the treasury. We need to restore state control over the production and sale of alcoholic beverages. Alcohol, if it comes under control of the state, should provide an additional four trillion rubles of revenues for the budget. The progressive taxation system – another five trillion,” he said, though he did not explain how an increase to the state budget would help to boost the incomes of the poor.

Furthermore, a simple redistribution of the tax burden is unlikely to solve the problem of poverty and social stratification. This can be achieved only by sustained economic growth. And there have been some successes here.

The economy is starting to leave the shocks behind it, and is adapting. In 2017, GDP is expected to grow. The Ministry of Labor is predicting that by 2018, the incomes of Russians will return to their pre-crisis levels.

On the other hand, in 2018, the government will start to actively discuss issues of raising the retirement age and the tax burden – and these measures could nullify the slowly improving public welfare.

First published in Russian by Lenta.ru.

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