Russians Lower Their Standards

BY CHRIS MILLER

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Year after year, Russians keep getting poorer. According to new data from Russia’s state statistics agency—an organization that is often accused of fudging data in the Kremlin’s favor—2018 marked the fifth straight year in which Russians’ inflation-adjusted disposable incomes fell. Since Russia annexed Crimea in early 2014, in other words, Russians have gotten steadily worse off.

There are several causes, not all of which are in Russia’s control. The country depends heavily on oil and gas exports, so when prices for those fall—as they did in 2014 and 2015—the country’s economy slows. But as oil prices climbed in 2016, Russia’s economy started growing again. Last year, oil prices were relatively high, hovering around $70 per barrel. Thanks largely to that hike, total exports increased 27 percent. That didn’t mean much for ordinary Russians: Oil firms might have done better, but average Russians did worse.

Western financial sanctions haven’t helped. By restricting foreign investment and raising financing costs, sanctions slow business growth. Even so, Russian firms have been doing better than Russian citizens. Industrial production, for example, increased by 2.9 percent in 2018—relatively solid growth. That meant little for individual incomes, though.

Russia isn’t the only country where firms have been doing better than workers. One might see this as more evidence of a global trend of economic power shifting toward big companies. Perhaps it is—but Russia’s government is unique in the vigor with which it embraces policies that everyone knows will make Russians worse off. Russian society is also unique in that no one seems to care.

Consider Russia’s main economic policies over the past year, all of which will continue into the foreseeable future. First, Russia’s government ran a sizeable budget surplus in 2018 and plans to continue doing so through 2021. It fears that the United States will impose new sanctions that cut access to Western financial markets, so it is saving up in preparation.

Budget surpluses are not a bad thing in and of themselves. But the money has to come from somewhere. One method is to cut spending, which Russia’s government has done aggressively. Since shifting from prime minister to president in 2012, Putin has slashed government spending in almost every category, excluding defense, pensions, and (thanks to last year’s World Cup) sports. In health care alone, he reduced spending 16 percent, adjusted for inflation, despite Russia’s mediocre health outcomes and aging population. Education spending is down by 14 percent since 2012.

Even as the Russian government cuts public services, it is raising taxes.

Even as the Russian government cuts public services, it is raising taxes, most notably the value-added tax, which it increased by 2 percentage points earlier this year. Prices on all goods and services will jump accordingly—even though Russians’ salaries will not. This will make Russians poorer still.

To top it off, last year, the Kremlin pushed through a controversial plan to raise the retirement age. The aim was to reduce spending on government pensions. The decision was probably necessary in the long run given the country’s aging and shrinking population. But almost all Russians rely on government pensions for most of their retirement income. Now they will get less.

Put these policies together, and a trend emerges: Not only is the Kremlin unprepared to pursue policies to raise Russians’ incomes, but it is actually embracing measures that make Russians poorer. Yet Russians do not seem to have caught on, at least not yet.

To be sure, there is plenty of evidence that Russians are disgruntled. In late January, the Russian government’s own pollster found that only 33 percent of Russians say they trust Putin, down from 70 percent after he annexed Crimea. In several high-profile regional elections last year, the Kremlin’s preferred candidates lost, thanks to protest votes against Putin’s United Russia party and the country’s ruling elite more generally.

But for every opinion poll or election result suggesting unhappiness, there are others pointing in the opposite direction. Russians may trust Putin less than before, but more than 60 percent say they approve of his work as president. This is down from post-Crimea highs, but it is a figure that would delight U.S. President Donald Trump or French President Emmanuel Macron.

True, opinion polls probably overestimate support for Putin, at least slightly. But the key question is not what Russians grumble about, or what they tell pollsters, but what actions they take. Governments the world over would happily hike taxes and cut social spending—but in most countries, citizens would mobilize against them. Russia’s political elite and its business elite are deeply intertwined, so businesses, especially state-owned firms, know how to get what they want. Average citizens, by contrast, play no role in the governing process, so they are ignored. Grumbling alone isn’t going to change this.

Russia’s government wasn’t always so dismissive of average Russians’ well-being. During the 2000s, Putin’s first decade in power, his political advisors believed that rising incomes and rising social spending were key to keeping the population quiescent—and to keeping Putin in power. The Kremlin hiked pensions by double-digit rates throughout much of the 2000s. Amid anti-Putin protests in 2011 and 2012, the government boosted wages of state employees, betting correctly that doing so would ameliorate the dissatisfaction.

Over the past five years, though, Russia’s government has drawn a different lesson: The population can be managed without higher incomes.

Over the past five years, though, Russia’s government has drawn a different lesson: The population can be managed without higher incomes. The elite has no need to share the fruits of growth. And with growth so meager—only 1 or 2 percent over the coming years—there is not much growth to share. Rather than increasing incomes, cutting taxes, or hiking pensions or wages, the government is leaning on other tactics to manage the population. A bit more propaganda helps direct blame away from the Kremlin. A bit more repression raises the cost of taking to the streets. And a bit more pessimism, widely shared among populace and elite alike, sustains the view that change is impossible anyway.

This is not true, of course. It is easy to imagine policies that would make typical Russians richer rather than poorer. State-owned firms could transfer more of their profits to the government through legal means like taxes, rather than frittering them away via corruption, for example. Putin could invest more in health and education. He could compromise with the West to get sanctions lifted.

But why should the Kremlin care? Like most governments, Russia’s rulers respond to incentives. In the 2000s, they feared protests. The past five years, though, have convinced them that there is no clear link between impoverishment and dissent. Some Russians joke that the population is in a tug of war between their refrigerators and their televisions. The fridge is empty, but the television says everything is great. And for those who don’t believe the television, there is the police baton. So far, those have worked wonders in keeping Russians off the streets. And so long as Russians sit at home, the Kremlin has no reason to keep their fridges full.