Disparity: Russia's increasing economic inequality

You have probably seen many incredibly well-off Russians spending vast sums of money all around the world, in places like Nice, London, New York and Courchevel. Unfortunately, the reality is that these people only make up a very small percentage of Russia’s total population. This points to the high levels of income and wealth inequality, an obstacle to further development and economic success. In this article, I will explore economic disparity in the Russian Federation, a country that has been subject to considerable economic, political and social changes in the last few decades, as a consequence of the collapse of the Soviet Union in 1991.

(Source: The Telegraph)

Income inequality: overview

Income share held by the top 10% in the Russian Federation, 1988-2012 (Source: World Bank)

Looking at income inequality in the Russian Federation, the society is far from equal. With its Gini index at 41.59, it is ranked as the 62nd most unequal country. Data on the income share by the population’s top 10% shows that the major changes to Russia’s income inequality occurred during the collapse of the Soviet Union. In 1988, the top 10% earned 19.45% of overall income; and by 1993, this figure doubled to 38.29%, as shown in the graph below. However, the figure dropped to 29.4% by 1997, and continued to decline until it reached its lowest point in 2000 since the collapse of the Soviet Union – 27.6%. Since then, the share of income of the top 10% has increased to the most recent 32.2%. This is more than 50% higher prior to the collapse. The Gini index has followed this pattern, and reached its highest value of 48.4 in 1993.

Income inequality: 1988-1993

Some suggest that one of the reasons for the rapid increase in income inequality from 1988 to 1993 was the privatisation of previously state-owned assets at the time, especially in the industrial and financial industries. Profits would have gone to the government, which would then be redistributed to the citizens via the welfare state. Now the profit was accumulated in the hands of the few owners and shareholders of such businesses.

However, in Ostrow’s “Politics in Russia” (2013), he suggests that the effect on inequality due to privatisation would not have materialised by 1993. Moreover, although there has been a significant increase in entrepreneurial income, which some have tried to connect to the rise in inequality, Ostrow argues that it played a very small part in contributing to the overall income inequality. Perhaps a more viable explanation would be the growing differences in wages. While real wages in the state sector and declining firms were stagnating, those working in successful firms that benefited from the liberalisation of trade saw significant increases in their incomes.

It is also important to mention that the black market was large at the time. Many goods were smuggled into Russia and traded, acting as a source of enormous income for some, pushing the top earners’ share of overall income higher and widening the income gap. As transactions in the black market are not accounted for in official statistics, this means that some of the figures I have looked at possibly underestimate the scale of income inequality during the collapse of the Soviet Union. Moreover, this inaccuracy is exacerbated by the high levels of corruption within the country. Modern Russia is built on bribery, an enormous source of unofficial income for many “at the top”.

Income inequality: 1997 – 2012

The decrease in the income share of the top 10% in 1997 can be explained by falling oil prices, and the 1998 Russian Financial Crisis (also known as The Ruble Crisis). The crisis caused the government to devalue its currency and to default on its debt. This impacted the top earners negatively, whose incomes were dependent on trade. Devaluation led to a short-term decrease in profits for firms, leading to a decrease in the top earners’ incomes. Lower earning deciles did not see their incomes decrease as fast as the top 10 to 20%, since theirs were not tied to trade. Hence, their share of the country’s overall income increased, causing the inequality gap to decrease. Up to 2012, there have not been any events in Russia which would have affected income distribution on a large scale, meaning that the income inequality has been increasing slowly with no major fluctuations.

Regional inequality

Regional inequality is also important in understanding economic inequality in Russia. As seen in the following graph, oil producing areas such as Nizhniy Novgorod Region are earning the most.

(Source: PBS)

The widening income gap between different areas since the 1990s can be explained by Russia’s increasing dependence on oil, and the economy’s move away from agricultural and manufacturing industries. Non-oil regions have not seen much of a rise in their incomes since the 90s, while incomes in Moscow and oil producing areas increased by factors of 3 to 5. This disparity is not only shown in the official statistics, but is clear from the contrast of standard of living and lifestyles of the people from those different regions.

The real issue – wealth inequality

Although income inequality is increasing, the larger problem at stake is Russia’s high wealth inequality. The two are different - income is the amount a person receives (e.g. in wages) over a specific timeframe; whereas wealth measures the value of a person’s stock of assets at any point in time (e.g. property, savings, shares).

According to The Guardian, the top 10% owns 87% of the wealth. This can be explained by the process of privatisation in the 1990s, when some managed to secure Soviet assets at a very low cost. As these assets, such as oil plants and banks, have increased in value as the Russian economy recovered from the turbulent 90s, their wealth increased too. As a result, 110 Russian billionaires currently hold 35% of the country’s wealth, making Russia the most wealth-unequal country in the world.

Moreover, the “trickle down” effect is ineffective in Russia, as those who are in possession of large sums of money tend to spend it abroad or save it in European banks, rather than consume Russian goods and services. This has led to the following distribution of wealth, according to Credit Suisse. As seen from the pie chart below, 93.7% of Russia’s adult population owns less than $10,000 in wealth. To put this into perspective, we can compare this wealth to the cost of property in Moscow. In fact, the cheapest two-room flat I could find would cost over $100,000.

(Source: Business Insider)

The following bar chart also shows the severe extent to which wealth is unevenly distributed in Russia, by comparing it to American society.

(Source: PBS)

Poverty and social mobility

13.3% of Russia’s population lives below the poverty line, with the majority living in rural areas, where the standard of living has not improved in the last couple of decades. Although poverty has decreased from 24.6% in 2002 and reached its lowest in 2007 (10.7%), it is on the rise again. This could be due to the recent recession, as part of the 2014 (and ongoing) crisis.

Woman begging for money in Moscow (Source: Reuters)

Social mobility is also a significant factor which contributes to inequality, and the ability to improve one’s standard of living. Although access to and the quality of education is relatively equal across the whole country, as a vast majority schools are state-owned and follow the same curriculum; corruption has led to lower levels of social mobility. Top earners are able to buy top-scoring certificates of general education (the equivalent of A levels in Russia) and pay to get in some universities. Moreover, unlike the 90s, when new opportunities were open to many people, current workplace offers and opportunities only go to the ones with connections in those fields, thus limiting social mobility.

Looking to the future

It is clear that wealth and income inequality, as well as growing poverty and increasing social immobility, are major problems facing Russia today. Many of the recent changes in income and wealth distribution were caused by changes in Russia’s economic and political systems following the collapse of the Soviet Union. In order to solve such problems, a more democratic and transparent approach needs to be taken: corruption needs to be eliminated. The government should also consider developing rural areas by supporting the growth of local businesses, building more infrastructure and sport venues, which can host worldwide events and encourage tourism, bringing revenue to the region and creating more job opportunities.