Half of Russia's population at risk of falling into poverty, but its despair index is recovering

Half of Russia's population at risk of falling into poverty, but its despair index is recovering
Russia's poverty is rising, but its despair index is falling thanks to low inflation, unemployment.
By Ben Aris in Berlin November 11, 2016

Half of Russia’s population are at risk of falling into poverty, a report from the World Bank says, but the bne IntelliNews despair index has been recovering to pre-crisis levels. 

In its latest update on Russia, the World Bank said some 21.4mn people, or 14.6% of the population, fell below Russia’s national poverty line in the first half of 2016, after disposable incomes shrank on average by 5.8%.

Russia’s poverty rate has been creeping up all year from 13.4% in January to 14.6% in the middle of this year.

Nominal wages have started to recover as the fallout from the rapid collapse of oil prices at the end of 2014 fades. Real wages dropped by over 10% in the latter part of 2015 as inflation soared, but since the start of this year they recovered and even briefly turned positive in February and March (rising 0.6%, 1.5% respectively). However, as industrial production growth remains extremely fragile real wages have continued to contract since then, falling by 1–1.3% each month.

However, what has done the real damage to the wellbeing of the population is the far sharper fall in real disposable income, which was falling by 6.3% at the start of this year and remained at about that level all year before shrinking sharply in August, down by 8.3%, the latest data available. This has fed through into retail sales which have been contracting by over 5% a month all year.

All this is squeezing Russia’s middle class the most, as it is their income that is in the firing line, and more are falling down a class from middle to poor. The World Bank estimates that the number of Russians considered “vulnerable” to poverty, with incomes totalling less than $10 a day, also jumped to 51% in the first half of this year.  “The country’s bottom 40% of earners have been among the first to feel the pinch, including many middle–class Russians,” the report said.

All this has impacted bne IntelliNews “despair index”, a short hand index that adds together poverty, inflation and unemployment to give an indication of what is like for people in the bottom third of society. The base line for the index is a theoretical 6 (no poverty, 4% residual unemployment, 2% residual inflation); the best score of any country in the last 20 years was France with 6.1 in 2001, but since then scores of 25-30 are typical.

While Russian income is falling, it is not falling very fast so the overall despair index in Russia has actually improved this year quiet substantially.

Russia’s despair index reached a post-1990s peak of 33.7 in September 2015 and was elevated at about the same level for all of 2015. But thanks to the rapid fall in inflation this year, the index has followed CPI down and was only 26.2 in September – its lowest level this year.

What has been pulling the index down, despite the fall in real disposable income, is the concurrent rapid fall in inflation and historically low unemployment at 5.2%. So while the population has less money to spend, it is in a more buoyant mood as traditionally the population is far more scared of rising inflation than it is of falling income. A survey released at the start of this year showed that Russian’s number one fear was rising inflation – a rise that failed to materialise. The same survey showed that low wages was one of the least important problems the average Russian was worried about. The reason for this is in part due to the fact that over the last decade and half Russian’s income has grown so substantially that they have built up a large buffer and can absorb quiet a large fall income without having to substantially change their life style – some trimming of the household budget is enough to accommodate the increased cost of living for many households.

And compared with the rest of Europe a despair index score of 26.2 is actually pretty good. It is on a par with Germany and actually well ahead of most other European countries, many of which are dealing with mass youth unemployment as a result of the Great Recession.

What may be surprising is that after the horror of the 1990s when Russia’s despair index hit a mind–boggling peak of 2,333, it has performed extremely well, even outperforming the US in 2011 when the index was launched, with the two countries scoring 25.5 and 28.1 respectively. 

Since then the lowest Russia’s despair index has fallen is to 21.5 in 2012. While the economy may have boomed in the first half of the noughties, the benefits from low unemployment and low inflation, didn’t trickle down to the people until after the crash of 2008.

Last year was a real annus horribilis for Russia, a slow–moving crisis that was worse than the sudden collapse of 2008 according to many indicators, and Russia’s despair index jumped from 24.1, which was below the score of any country in Europe, to 31.5, as bne IntelliNews reported at the time.

Scores over 30 are a real problem for governments as they represent levels of pain amongst the population that spark social unrest so Russia’s return to a score under this level is one of the reasons why the public has been relatively subdued in the face of the economic problems that the country is facing. The same is not true in Ukraine where its despair index has soared in the last two years and was at 46.5 at the end of 2015, although it has started to fall again more recently.

And the despair scores should fall further in 2017 as economic growth returns to the region. The World Bank upgraded its economic forecast for Russia in 2016 in its latest update, cutting the predicted 1.2% contraction for this  year to just 0.6% – on a par with the official forecast from the Ministry for Economic Development (MED) and there is a wide consensus that growth will be in the black next year in both Russia and Ukraine.