Socioeconomics: Uniquely Russian Poverty

In mid-May of this year the third Russian Social Forum took place in St. Petersburg. This gathering was held after a thirteen-year pause. The organisers – mainly left-wing intellectuals, scientists, educators, various left-wing associations, and civic political movements – had doubts about its appropriateness in view of the significant change in the political and social situation in both Russia and the rest of the world over the past thirteen years. In the end, around 360 participants took part. Apart from middle-aged people who made up the bulk of the participants, a large number of young people, students, and activists arrived from many regions of the Russian Federation. One of those who contributed to the Forum’s success was also a distinguished, long-time left-wing politician and member of the Russian Duma (Parliament) for the KPRF (the Communist Party of Russian Federation) Oleg Nikolaevich Smolin.
He is a philosopher, scientist, member-correspondent of the Russian Academy of Education, and First Vice-Chairman of the Duma Committee for Education and Science. I should also say he has achieved all of this despite being severely handicapped by blindness since his youth. Smolin is known for his intensive activities in a number of institutions advocating for the disabled. He is also the first Vice-President of the Russian Para-Olympic Committee.
During the Russian Social Forum I asked him to summarise his interesting talk. I am happy to share his thoughts with our transform! readers.
Jiří Málek

Socioeconomics: Uniquely Russian Poverty

As you may know, the term ‘Russia-specific poverty’ was formulated by the Deputy Prime Minister of the Russian Federation Olga Golodets and refers to poverty among the working population.
The Russian President’s Decree No. 204 (the so-called May Decree) established, as one of the major national goals, a target of reducing the number of poverty-stricken Russian citizens by half over the next six years. However, it does not specify how this is to be achieved. The government, for its part, does not seem to have a clear plan, although certain ideas have been made public. However, before examining them we need to define the kind of poverty we are talking about.
According to official statistics, the share of the population whose earnings are below the state-defined subsistence level has been:

year	in Million	in % of total population
1995	36.5	24.8
2000	42.3	29.0
2005	25.4	17.8
2010	17.7	12.5
2015	19.5	13.3
2017	19.3	13.2
2018	18.7	12.9

Source: Rosstat data (Russian National Statistical Agency), 30 April 2019

As we can see, the number of these people in 2018 is actually greater than in 2010.

It is, however, important to understand how and by whom this indicator is determined and maintained.

1. The consumer basket on whose basis the official Russian subsistence level is calculated is rather meagre. Its content has been unaltered for eight years – and will remain so until 2020. It is primarily based on a bread-and-potato diet and enforces minimal possible spending on almost everything.

Components of the generalised consumer basked
for the main socio-demographic strata in the Russian Federation (in natural terms)

Type of product	consumption level working-age people in kg(*), average per person	consumption level pensioners in kg(*), average per person	consumption level children in kg(*), average per person
Bread products	126.5	98.2	77.6
Potatoes	100.4	80.0	88.1
Vegetables and melons	114.6	98.0	112.5
Fresh fruit	60.0	45.0	118.1
Sugar and confectionery products	23.8	21.2	21.8
Meat products	58.6	54.0	44.0
Fish products	18.5	16.0	18.6
Milk and dairy products	290.0	257.8	360.7
Eggs	210 pieces	200 pieces	201 pieces
Vegetable oil, margarine, and other fats	11.0	10.0	5.0
Other products (salt, tea, spices)	4.9	4.2	3.5

(*) if not stated otherwise

It is no coincidence that before each election to the federal and regional parliaments a number of heated discussions usually arise in which several candidates, in an attempt to attract media attention, compete in creatively defining how these items are quantified. Some go so far as to compare these standards to the rations of World-War-II prisoners of war or inhabitants of the besieged Leningrad. In point of fact, however, this consumer ‘food basket’ is calculated based on standards defined by the United Nations for the developing countries of Asia and Africa. It is obvious that this method is not the most appropriate one for Russia since the climate in most parts of the country – which determines the calorie needs – is in no way similar to Africa’s. And, of course, we should not forget that we are talking about a country that aspires to be one of the world’s great powers.

2. In recent years, we have repeatedly seen the following: Rosstat reports an increase in prices while at the same time it reduces the value of the calculated subsistence income indicator. For example, in the third quarter of 2015, according to official data, inflation, compared to the previous period, rose by 0.72%, while the subsistence income for the same period was decreased by 3.4% compared to the previous quarter.
Referring, apparently, to such ‘miracles’, the Chairman of the State Duma Committee on Budget and Taxes, A.M. Makarov noted at the St. Petersburg Economic Forum 2017 (I can only quote from memory here):
‘After we incorporate Rosstat into the structures of the Ministry of Economic Development we will be in a position to achieve targeted values according to all required indicators.’
However, if the fight against poverty is addressed in this manner the struggle would be defeated at the outset in terms of indicators – for all of the poor would simply be considered rich or at least well off.  

3. The government’s representatives declare, at all levels including in parliamentary debates, that there actually are no pensioners in Russia living below the poverty threshold. This argument is usually supported by stating that under the current law pensioners whose income does not reach the subsistence level – either a federal or a regional level – are entitled to the appropriation subsidies from the federal or regional budgets.
However, we should bear in mind that the calculated subsistence income of a pensioner in Russia is much lower than that of a working-age person, which in turn is also significantly undervalued. For the first quarter of 2019 a subsistence income of a working-age person is set at the level of 11,655 roubles while that of a pensioner is said to be 8,894 roubles. However, it is well known that the nutritional requirements of a person have little to do with his/her age; the costs of housing and utilities for the working population and retirees are also roughly the same; the need for medicines and medical care usually only increases with age. According to the reports of the National Audit Office, prepared under the direction of T.A. Golikova (the current Deputy Prime Minister of the Russian Federation on Social Affairs), the country’s legacy of a free medical care system is being gradually replaced by paid services.[1] In addition, it is not unusual for pensioners, especially in the countryside or depressed areas of the country, to use part of their modest income for supporting their grandchildren or unemployed children.

4. However, the largest stratum of the poorest in Russia are not actually pensioners but families with children.
According to Rosstat, their share among the poor in recent years has constantly exceeded 60%.
Table 3. Percentage of households with children under the age of 16 in the total number of households possessing a per capita income below the subsistence level:

2012 – 62.2%;

2013 – 64.0%;

2014 – 62.9%;

2015 – 62.6%;

2016 – 62.4%;

2017 – 81.0%

According to Rosstat, within the period from 2011 to 2016 these families only became poorer. In 2011, they were on average 1,768 roubles below the monthly subsistence income per capita, and by 2016 this gap grew to 2,836.8 roubles. In general, the more children in a family, the greater the possibility of the family sliding below the poverty level.

5. The criticisms of the inadequate existing methods of measuring the national subsistence level have actually been corroborated by numerous unsuccessful attempts of people from higher-income strata – journalists and parliamentarians among them – to temporarily adjust their lifestyles to the official constraints. One of the ‘best’ results was achieved by a regional MP who claimed that he managed to live on the official monthly subsistence income for about a week. Another participant in this kind of experiment has openly admitted that in his case one family meal in a restaurant has exceeded the amount that Russian law currently sets as sufficient for living through a month.
It is not surprising that the Federation of Independent Trade Unions of Russia (FNPR) uses every opportunity to declare that a more or less decent standard of living can be afforded by people whose income is equal to or higher than the national minimum consumer budget rather than the national subsistence level. It is worth noting that during the recent economic slowdown in Russia (2014-2016) this budget went up from 25,000 to 36,000 roubles in contrast to the periodic reduction of the official minimum income. We believe that precisely this indicator must be used as a benchmark for setting the national minimum wage policy. Of course, it may not be possible to do so immediately, but can be done gradually, in stages.
Incidentally, according to the FNPR, even before the pre-recession year of 2014, the official salaries of only half of all workers in the country were above the minimum consumer budget. This figure, as modest as it used to be, has by now deteriorated sharply. Please note that taking into consideration, among other things, the extreme inequality of income distribution in Russia all income social policy indicators ought to be based on median income calculation rather than on average ones.

6. At the end of 2018 the Russian government reported that it had successfully achieved, by 94%, the target indicators set by presidential decree on 7 May 2012. At the same time, of course, the method of calculating such a level of performance was not presented. And, most certainly, there was a reason for this: the government data are sharply at odds not only with the assessments of independent experts but also with the polls organised the All-Russian People’s Front, an organisation initially created to expand the political base of the Russian President by serving as a sort of a public watchdog. For example, according to Rosstat, at the end of 2017 the average monthly salary for doctors in Russia was calculated to around 53,000 roubles. However, the poll conducted by the All-Russian People’s Front has shown that 58 % of respondents said their salaries were below 25,000 roubles!

7. A somewhat more realistic picture of the poverty level in Russia is provided by sociological surveys. Here are results of a survey performed by the Russian Public Opinion Research Centre (VCIOM) in the spring of 2017:

• 10% of respondents claimed to have an income insufficient even for sustaining an acceptable level of nutrition – a state that can be described not even as poverty but as outright misery;
• 29% of respondents claimed to be in a position to meet only their needs in nutrition with no disposal income left for clothing – which describes a state of outright poverty;
• 41% have an adequate income for food and clothing but not sufficient for purchasing long-term appliances – this is the stratum of the upper part of the ‘lower class’;[2]
• 14% can afford all of the above, but hardly anything else – most probably this indicates the real size of the ‘middle class’. By comparison, in the welfare states of Europe this describes about 60% of the population;
• Only 3% of respondents claimed they were able to purchase a car. The purchase of an apartment or a country house is, however, beyond their reach – this is the basic description of the ‘upper middle class’;
• The remaining 3% who experience virtually no income constraint is actually the ‘upper class’.

Similar results have been obtained by Rosstat as a result of the Comprehensive Observation of Living Conditions of the Population for 2018 (published on 1 April 2019). According to these data:
79.5% of polled Russian households reported to be regularly experiencing obvious financial constraints, including 14.6% claiming they face ‘severe difficulties’. Other studies also yield similar results: every tenth Russian household struggles with a chronic shortage of food (misery) and every third household can be classified as poor. In total, poverty in Russia is faced by about 40% of the population.

8. Let us take a look at the data on the size of a minimum wage in different countries provided by FNPR:

country	minimum wage
China	500$
Turkey	460$
South Africa	180$
Russia	175$
Brazil	170$
India	64$

It is obvious that these pieces of data do not provide an accurate picture of the ratio of minimum wage levels, as they are not calculated for purchasing power parity. It is also obvious that Olga Golodets’s statement about uniquely Russian poverty is true only if we compare Russia with the developed capitalist countries. In the rest of the world, including the so-called ‘emerging-market’ countries (for example, India) the poverty of the working people is by no means unique. Yet Russia’s economic potential has enough space for a significant increase in the level of wages, including the minimum wage. Such an increase would benefit not only people, but also the overall economic situation itself.

Reasons

At the ‘government hour’ in the Russian Parliament (State Duma) on 3 April 2019, Deputy Prime Minister T.A. Golikova said that the government has been studying the root causes of poverty in the country. In my opinion, there is no reason to spend any additional public money on such research since even a cursory look at the situation almost immediately indicates at least the six most evident reasons.

1. An unacceptably low minimum wage, which does not permit reaching the subsistence level even for a worker alone (13 percent income tax is deducted from the ‘minimum’ wage), not to mention members of his/her family.
2. The unacceptably low level of minimum pensions. It is nor suprising that the President of Russia in has annual address to the Parliament has suggested the government raise these pensions to the subsistence level prior to talking about indexing them.[3] When the Communist Party’s MPs advanced a proposal for legislation that would gradually raise the monthly minimum wage to 25,000 roubles it was immediately accused by other MPs of playing populist games.[4] However, when a similar proposal was put forward by one of the leading national economists A. Aganbegyan at an expert’s session of the Federation Council on 26 April 2019 no one dared to accuse this outstanding scholar of populism.
3. The level of real unemployment, which, given the large number of people working part time, is much higher than what the official figures reveal.
4. Demographic: the more children a family has, the higher is its risk of it sliding into poverty.
5. Long-term stagnation of the Russian economy, the sustained lack of economic growth. The economic downturn had begun in the fourth quarter of 2013, well before the start of US/EU sanctions and the sharp drop in oil/natural gas prices. In 2014-2016 the country had experienced so-called negative growth – a contraction of the economy. And in 2019, despite the target set by the Russian President to achieve a rate of growth higher than that of the rest of the word, the expansion of economic output is expected to be around a modest 1.3%. And the indicator for the first quarter of 2019 is ca. 0.5%. At the same time, the living standards of the population are falling for the sixth year in a row. Official forecasts for the medium term diverge from each other. For example, the Ministry of Finance expects a handsome 7% annual growth in 2021, while the Ministry of Economic Development foresees the country’s economy approaching a modest figure of 3% growth only by 2024. There is a clear consensus that the problem of poverty should be primarily tackled through an overall increase of the social ‘pie’.
6. The amazingly high level of social inequality in the country. Modern Russia is a classic illustration of Marx’s theory of poverty being generated by wealth. The country has set a record for social inequality in the G20 list: according to the Swiss Credit Bureau, 1% of Russia’s population owns 71% of the national wealth. At the same time, the country is unique in terms of not having a progressive taxation system.   

The question is, how much would recent changes in the government’s economic and social policies contribute to the real reduction of poverty in the country? Let us take a look at just two examples.
The first example is the so-called pension reform, or rather the raising of the retirement age. Prior to the enactment of the law, men aged 60-64 and women aged 55-59 were entitled to receive a pension while continuing to be employed. However, according to the new policies, people are no longer entitled to pensions while being employed. At the same time, many will become unemployed. It is easy to predict how this will affect the real level of poverty. Other social consequences of this reform are seen in the percentage of men who die prematurely before reaching the age of 65:

country	percentage of men not reaching the age of 65
Iceland, Switzerland	10%
Sweden, Italy, Netherlands, Malta, Norway	11%
Lithuania	36%
Moldova	37%
Ukraine, Belarus	40%
Russia	43%

It is likely that the raising of the retirement age will cause the proportion of Russian men dying before the age of 65 to rise even more, keeping the country to the top of this sad European list.
A second example is the increase of the value-added tax (VAT) rate. Even the Ministry of Economic Development of the Russian Federation has admitted this has led to substantially higher than expected price increases across the board, including the prices of essential goods. It is unlikely that this kind of increase will reduce the number of poor people. Also, the slowdown in economic development exceeding what was projected for the first quarter of 2019 is clearly connected with the VAT increase. And stagnation, as already mentioned, is directly related to poverty. It is only to be expected then that the Audit Office of the Russian Federation does not predict any viable reduction of poverty level until at least Q4 of 2019.

Main pillars for a new policy

In my opinion, a fundamentally new economic and social policy is needed in order to overcome poverty. The three main pillars ought to be:

I would like to end by a quoting an extract from my own address to the round table in the State Duma on 8 April 2019:
‘ […] otherwise, real poverty in the country will continue to grow – the only difference is that now it will occur through issuing victorious reports of defeating it. And we will have to recall again and again the sad joke about ‘Living poorly but shortly”.
So let us try to do our best to “live longer but better!”

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Footnotes

[1] See, for example, S. Fadeichev, S. Bobylev, S. Pavlova, and V. Mashatin. The Accounts Chamber checked optimisation in the sphere of health, culture, education, and social services. See here the official website.

[2] По оценкам доктора экономических наук М.Г. Делягина, эту группу тоже следовало бы отнести к бедным, однако автор придерживается менее пессимистического взгляда.

[3] The Russian President’s message to the Russian Federal Assembly, 20 February 2019.

[4] For more information, see transcript of the plenary session of the State Duma dated March 7, 2019.