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Thursday, January 18, 2007

Energy Resources Mean Nothing to the Russian People . . . Nothing Except Continued Suffering

German Gref was once touted by some as a progressive, Westernizing force int the Kremlin. As Vladimir Putin consolidates his power, we see once again a rose-colored projection going up in flames. Writing in the Moscow Times Alexander Zhelenin, a freelance journalist working in Moscow, explains why Russians energy resources are meaningless to the Russian people:

Unless projections by economists turn out to be radically wide of the mark, the Russian economy should post strong growth numbers in 2007 for a seventh straight year. Although 60 percent or more of the growth can be attributed directly to high world commodities prices and the resultant high profits for exporters, particularly in the energy sector, annual gross domestic product growth between 4.5 percent and 7 percent is impressive. Although not as quickly as the government or economists would like, inflation is still slowing and industrial output is on the rise.

LR: "Impressive" is a relative term. Unfortunately, even this insightful author forgets to mention that it's simply not appropriate to compare rates of economic growth in Russia to those in places like the US, Germany or Japan, because the economic base is so much smaller in Russia. In other words, 1% of America's economic pie amounts to far more money per American than 2.5% of Russia's economic pie does for Russians. Before being compared to American growth rates, Russian rates need to be divided by a factor of three, transforming 7% growth into 2.3% growth and 4.5% growth into a borderline recession.

Standard of living indicators for the majority of the population, however, remain low in comparison to overall economic growth. This is a problem President Vladimir Putin has commented on publicly on more than one occasion.

Economic Development and Trade Minister German Gref recently said that in the near future Russia should expect "a breakthrough in the economic sphere, with an accompanying rise in consumption and personal incomes."

In July, Gref released data related to this same theme. At a meeting between Putin and members of the government, Gref announced that the average income had reached 11,000 rubles, or about $420 per month. Given past figures this might have sounded like good news. But the number is a bit misleading, as the astronomical earnings of a small number of people at the top of the pile and regional differences distort the picture. It makes about as much sense as calculating the average temperature for the patients at a particular hospital.

In a number of places, like Dagestan and Ingushetia in the North Caucasus, an income of 11,000 rubles would be very high. In a region plagued by widespread unemployment, a monthly salary of 2,000 to 4,000 rubles, or $75 to $152, is considered fairly good. And this is where people often have to pay bribes as high as 12,000 rubles just to land a job in the first place. Nobody appears to be concerned with the question of where poor people are supposed to get their hands on such a sum. Local authorities in the North Caucasus are run by oligarchic clans. It has always been this way and nobody in power is interested in seeing things change. As far as the Kremlin is concerned, as long as everything looks peaceful from the outside, the local authorities can handle the details as they see fit.

One of the results of this situation is an exodus of able-bodied workers from the North Caucasus into Russia's central regions, where a shortage of laborers means job opportunities with less corruption than at home -- a migratory pattern that disturbs ethnic-Russian nationalists. This also contributes to an increase in criminality in the region and a lack of trust in local authorities. But I digress.

I took part in a study in the Black Sea resort of Sochi that provides another example. The results of the research were staggering -- 40 percent of those surveyed reported monthly incomes of 3,000 rubles or less. And this in Russia's resort capital!

I had a remarkable conversation with a woman who worked there as a pharmacist. She and her husband had moved to Sochi from the Far East, where she had been earning 16,000 rubles per month at the same job. This is just one example of the degree to which income levels vary across the country.

The latest average salary figure I have heard for Moscow, for example, is 28,000 rubles (keeping in mind, of course, the hospital analogy above). Moscow is a city of millionaires and billionaires with a high concentration of offices and banks that employ high-salaried managers and middle-income, white-collar workers. This is enough to counter even the notoriously low salaries for the millions of government workers in the capital.

But let's put geographic differences aside and return to our first figure of 11,000 rubles. In most places this sum is too low to cover reasonable living expenses.

According to calculations by the Russian Academy of Labor and Social Relations, the average subsistence-level income in the country is 14,000 rubles, or about $525, per person. This demonstrates that the government's official subsistence income of about 2,600 rubles per month is indecently low. The Finance Ministry doesn't even refer to it anymore.

Leaving averages aside and looking at different groups, we discover that, according to official data, about 65 percent of the population live on less than 8,000 rubles per month, and 50 percent earn less than 6,000 rubles.

So Gref's talk of a "breakthrough" in salaries should be good news. But is it really going to happen? Not according to some economists.

"Russian incomes cannot grow faster than they are at present," said Andrei Kolganov, a professor of economics at Moscow State University. "There is no solid foundation to current economic growth."

Kolganov said that, given the economy's dependency on world energy prices and the unlikelihood that these prices will grow at the pace seen over the last four years, rapid income growth is unlikely.

The State Duma election in 2007 and the vote to choose a new president next year will likely have an effect. Vladimir Gutnik, head of the Center for European Research at the Institute of World Economics and International Relations, said the elections will drive incomes higher.

"We can expect significant increases in wages for state employees, pensions and government aid," he said. "It is clear that these increases will outpace the rate of inflation, even if the economy does not grow at the rate forecasted."

This can be accomplished even if growth slows by using funds accumulated in reserves and the stabilization fund to cover the difference.

So, while expectations of a boom in incomes and consumption from continued economic growth might not be reasonable, an infusion of cash could still make them realistic. Pouring this money into people's pockets, even if only ahead of elections, isn't the worst outcome we could hope for, especially as the reserves have been built up from years of economic growth.

As long as this strategy doesn't put too much upward pressure on prices, it will provide some hope for the economic road ahead.

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