Economics
Finance
Welfare

The poor against the war?

Vladislav Inozemtsev writes about the Russians who are most affected by the economic impact of the war

Photo: Scanpix

For more than a hundred days now, Russia has been at war with those whom President Putin recently described as belonging to the same nation. This war is costly not only for Ukraine (its losses are estimated ­at several hundred billion to one trillion dollars) but also for Russia. ­­According to the official data published by the Russian Ministry of Finance, the expenses of the defence department in April 2022 rose to 628 billion roubles per month, which was 2.5 times higher than before the war, and this figure most likely does not ­include the cost of military equipment that has been irrevocably lost (according to some estimates­, this figure has reached at least USD 13 billion since the beginning of the war). And all this does not include other ­financial costs, such as a significant decline in the capitalisation of Russian companies (the richest Russians alone have lost about USD 45 billion as a result), business losses due to reduced demand and disruption of supply chains, and much more. Hundreds of Russian companies have come are experiencing stoppages, the authorities are expecting an inevitable spike in unemployment, and all this is already being taken for granted.

In this context, many experts are surprised that ­anti-war demonstrations are virtually not to be seen in Russia ­(after several demonstrations in the first days of the war, there are mostly fairly rare individual ­pacifist performances), while the support for «special operations» remains high (while Putin’s rating of 80+% can be questioned, the majority of Russians openly or latently support the Kremlin’s policies. ­This situation is usually ­explained by the fact that the panic and expectations that accompanied it during the first days of the war (that the U.S. dollar would soon hit 200 roubles, inflation rate would reach 100% or so, sanctions would lead to a complete standstill in foreign trade operations­) have not come true. Against this background, moderate deprivation looks like a «fair price» to be paid for the inevitable victory of the «Russian world» over all its enemies. This may just as well be true, and I have also said on many occasions that consolidation of protests driven by economic­ factors is almost unknown in post-Soviet countries but one can (and should) nevertheless ask about the tipping point, i.e. when people’s patience may «burst» if the situation deteriorates.

Today, we can identify two groups at the opposite ends of the spectrum that ­have been hit hardest by the «special operation.»

One group consists of the population of megalopolises and capital cities who enjoyed prosperity before the war, and 5−8% of them were employed in foreign businesses. The highest income figures were recorded by freelancers and people tightly involved in the web economy, and­ a large proportion ­of this group used services (from Instagram to ApplePay) and opportunities (cheap international flights and goods ordered from online stores abroad) that are now unavailable. The anti-war sentiment among those people was driven not only by economic problems, but also by the fact that the authorities violated ­all moral norms and laws. Those very cities saw a wave of political and economic emigrants, who rushed out of the country in the early days of the war, believing that they are no longer able to accept the inevitable archaisation of the country.

­At the other end, there are the poorest strata of the Russian population, mainly living in provincial towns and barely making ends meet ­(at the end of 2021, even after the authorities’ master revision of ­the subsistence level, a total of 16.1 million Russians were living below the poverty line). The problems faced by those citizens are primarily due to skyrocketing prices on most goods and services those people use, as well as steadily rising interest rates that have made it impossible for those groups to take out loans to finance their day-to-day expenses, and made it harder for them to repay loans they had already taken out (in the middle of last year approx. 75% of Russian families were spending more than a half their income on food, and at least 10% was spent on utility bills; at that time each Russian citizen had an average of 165,000 roubles in loans and families had to spend another 10.6% of their total cash income to repay those loans).

Quite meaningfully, opinion polls conducted by Russian Field in May 2022 showed for the first time that it is the poor groups that are showing considerable dissatisfaction with the current developments, whereas this group was traditionally considered to be a solid pillar of Putin’s regime. More than a half of this part of Russian ­society said they would not support the decision to launch a special operation (although they did not articulate ­any specific reasons behind this opinion). This is understandable. ­­Since the beginning of the year, the official inflation of food prices in Russia stood at 11.8%, and the prices of products consumed by the poorest citizens went up even more: vegetables by 40−70%, sugar by more than 50%, margarine — 30%, rice — 26%, buckwheat — 20%, etc. At the same time, official statistics may not give a full picture of the situation: according to the Bank of Russia, the inflation felt ­by the population over the past 12 months amounted to 25.1% in May 2022, which is substantially higher than the indices calculated by Rosstat. Moreover, the average cost of housing bills and utilities is expected to rise by more than 4% starting from 1 July, and public ­transport has gone up by 10−16%. Also, we should not forget about­ the substantial increase in prices of ­medications (by 9−11%) while they are no longer provided free of charge to many categories of people in need. ­However, even if we take the aforementioned 85% of income ­which non-affluent Russians spend on food and utilities, we can ­draw a rather pessimistic conclusion that the standard of living for­ this ­category ­of citizens is likely to fall by at least 15−20% compared with the beginning of 2022, and this ­is undoubtedly ­the highest rate since the crisis year of 1998.

The counter-trend is represented by nominal wage growth (­up by 15.0% in the first quarter of 2022 compared to the same period of 2021) and a one-off indexation of retirement pensions and benefits from 1 January­ (up by 8.6%, effected on 1 February 2022). However, the reality is not as good as it seems. Compared to Q4 the fourth quarter of 2021, nominal wages in the first quarter of 2022 fell by 4.5%. Realising the ­insufficiency of the latter measure, the authorities have repeatedly said­ ­they would continue to raise benefits and retirement pensions (and a new measure in this regard was announced starting from 1 June, although its exact parameters have not yet been announced). Given that this applies mostly to non-working­ ­pensioners, we can talk about an average increase in the nominal ­incomes of low-income Russians by 10−15%, which balances off the effect of rising prices by approx. 2/5 (if new indexation is carried out in the summer, the balancing off could reach 55−70% of the inflation effect in the context of the almost-halted­­ inflation [and in the week from 14 to 20 May, the Bank of Russia recorded a 0.02% decline in consumer prices]). ­We should also add the traditional increase in child ­benefits, which has increased the annual incomes of poor households by 6−8%. Thus, purely formally, ­the situation might not seem catastrophic (and it probably does not seem so to the Russian government), but there are two important factors that have come into play.

Firstly, for the first time in recent years, possible unemployment has become a significant risk factor­. Whereas in 2008−2009 the authorities did their best to prevent this phenomenon from occurring, the current situation looks different: unemployment benefits have risen from 950−4900 roubles during the years of financial ­crisis to the minimum wage level during the pandemic, and employers are unlikely to come under as much pressure as before, preferring to lay off workers who will then receive government financing. Moreover, it is absolutely unclear how long the ­companies that are not operating will be able to keep paying salaries and wages to their employees ­(McDonalds or IKEA promised to do it for 3−5 months, while others, like AvtoVAZ, hope to restart production­, but nobody knows how many workers will be employed). ­According to official forecasts, unemployment will increase by 2.1−2.5 million people by the end of the year, but even if this is the case, the territorial distribution of new unemployment is unclear, and it is very likely that the country will again face the problem of «monocities,» which has not been ­on the agenda since the late 2000s (there have also been entire «failing territories,» which are totally dependent on the federal budget).­ ­

Secondly, the importance of social fatigue should not be underestimated:­ unlike in the past, real incomes of Russians fell ­by more than 8% from 2014 to 2021 and, taking social stratification into account, this could mean that the rate of declining income among poor citizens was even higher. At the same time, the crisis caused by the war has been largely overcome at the purely financial level but, in fact, it has not even started yet­ in the real economy. ­Therefore, in another three to four months, when it becomes more than obvious, even to the softest «patrioteers,» that the war in Ukraine is going to be protracted, the economic ­downturn will be revealed in full force, and will ruin the hopes not only for Russia’s economic recovery in 2024−2025, but even for Russia to reach the 2008 levels in any historical perspective­. The importance ­of this factor should not be underestimated because belt-tightening for a relatively short period of sharp decline is one thing, but getting used to living with a permanent decline in real incomes is a completely different story.

Comparing the potential for protests in big cities, with their relatively successful­ inhabitants, against the Russian hinterland, where ­the bulk of­ low-income citizens are concentrated, I would assess the probability of social­ explosion in the latter case as higher (although certainly not extreme). The economic crisis that has arrived in Russia will leave ­higher earners with far more alternatives anyway in comparison with people living in small towns. Moreover, the competition for consumers and, consequently­, the potential for price cuts, is still much higher in the main economic centres (I will not even mention that the residents of the two capitals now account for over 45% of all balances on private bank accounts in Russia, whereas the remaining population accounts for nearly 70% of existing loans). The main part of Russians, who are not planning to leave their country, and are even unlikely to change their place of residence within it, have little reason to be optimistic ­today: the Russian authorities will certainly try to support the poor, but ­they cannot compensate for all the lost income caused by inflation and shrinking ­economic activity. Therefore, the main question is how long the Russian people will be ready to tolerate sacrifices to their standard of living (even if it is not as high as before) in the name of Kremlin’s political ambitions. In my view, in this state of affairs, the Russian opposition must not only denounce ­Moscow’s obviously ­criminal actions in Ukraine (it seems that attempts to satisfy ­Putin’s ambitions to build a superpower will take a very long time), but it must also consistently explain the connection between the current events and the standstill of Russia’s economic growth. Indeed, most­ Russians have been constantly unable to hold the authorities responsible for economic dire straits. Instead, they are ready to blame anything and anyone else for that: the global situation on the oil market, ­speculators who inflate stock market ­bubbles, American bankers, ­NATO and the collective West that lie in wait for Russia — anyone but not­ the bureaucrats and oligarchs at home. This persistent inability has been, and still is, the foundation of the political stability that the authorities hold so dear. However, that very stability seems to have been pushed away in the context of a permanent economic downturn­.

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