Inside Russia’s shrinking middle class

Shoppers in Moscow, Russia.

Inside Russia’s shrinking middle class


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Paying for Putin’s military adventures, the Russian middle class is increasingly struggling to make ends meet, or even to survive socially and economically.

Putin made the choice to pursue the path of state capitalism, thereby abandoning global integration, economic efficiency, innovation and competitiveness as realistic goals.

He may believe this strategy is necessary for his political survival, but it is not a plan for sustained economic growth. Indeed, the ranks of the Russian middle class have decreased by 14 million people during the recession.

Russians who have become middle-class consumers still have a habit of patience in adversity, of “thinking that life should be hard — and so don’t protest, except when they feel that their dignity is damaged.

For instance, more than 38 million people have bank loans in Russia. According to the Central Bank of Russia, the total value of which is 10.5 trillion rubles. Of this amount, 891 billion is owed in respect to loans with overdue repayments outstanding. This is a serious problem faced by the majority of developed countries. However, none of those countries adopt such a rigid approach as Russia does. A law which limits a debtor’s constitutional right to freely travel outside Russia has been in operation since 2007.

The Russian central bank has warned that its ability to steer inflation is at risk from growing wealth inequality and the disappearance of the middle-income households that are the most sensitive to interest rates and prices. Earnings and domestic demand are still withering at a pace unprecedented under President Vladimir Putin. Data due Wednesday will show retail sales dropped in September for a record 21st month, while real disposable incomes tumbled an annual 7 percent, according to the median estimates in Bloomberg surveys.

Consumption has been obliterated, writes Blioomberg, as wages couldn’t keep up with the surging cost of living. That’s pushed 14 million Russians — a population bigger than Illinois — out of the middle class since the economic slump started two years ago, according to Sberbank CIB’s latest survey of shoppers. The downfall of a group that rose to prosperity during the oil boom marks a historic reversal after it doubled in size under Putin. Many of them now rely on government programs to complement their dwindling incomes and have become more vulnerable to changes in fiscal policy.

Deeper social inequality weakens the price elasticity of demand and complicates the task of controlling inflation, according to the Bank of Russia. Less-well-off families, usually without savings and little access to loans, spend primarily on basic necessities and hardly react at all to changes in interest rates, it said. Wealthier households, on the other hand, are unresponsive because they spend such a small share of their incomes on staples.

Sberbank CIB’s survey of the “the Ivanovs,” using a common last name to describe the typical shopper, found that the share of Russians who consider themselves middle class was at 51 percent last quarter, down from 61 percent two years earlier. As wages fall in line with inflation, the middle class is unlikely to shrink further, according to the investment-banking arm of Russia’s biggest lender.

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