MOSCOW BLOG: The most equitable Bric

By bne IntelliNews September 2, 2010

bne -

The conventional image of Russia is a country of a few super-rich oil barons and over a hundred million paupers. However, despite having more billionaires than any other country, Russia has seen inequality fall during the last decade of strong economic growth: not only is the gap between Russia's rich and poor the smallest of all the four "Bric" countries, incomes are more evenly distributed than in the US.

One widely quoted measure of income inequality is the gini coefficient, which measures the slightly broader concept of wealth that includes things like home ownership. If communism had worked, then everyone would make the same money, which results in a gini coefficient of zero. In a perfectly unequal society where one person has all the money, the gini coefficient is 100. In the real world, currently Sweden is the most equitable nation on earth with a gini coefficient of 23 and Namibia is the least with a coefficient of 70.

Over the last decade, the rich in the US got richer a lot faster than the poor got less poor, as shown by the gini coefficient for US household wealth which rose from 40.8 in 1997 to 45.0 in 2008 (the last available data), according to the Central Intelligence Agency's World Factbook.

In Russia, the rich certainly got a lot richer over the last 10 years, with the well-connected business elite becoming some of the richest people on earth. However, the decade-long economic boom that started after Vladimir Putin became president (helped along by soaring oil prices) meant the poor got richer even faster. In dollar terms, Russia's GDP increased 7.5-fold over the last decade from around $200bn to $1.5 trillion; at the same time, average wages increased 14-fold over the same period from $50 to around $700 a month. "So the proportion of GDP accrued by labour has increased a lot. Some high-profile Russians have gotten very rich not from labour but from capital, yet they took that not from other people but from the state," says Liam Halligan, chief economist at Prosperity Capital Management.

Russia's gini coefficient rose from 39.9 in 2001 to 42.3 in 2008 - a lower increase than in the US in both relative and absolute terms, and a lower value than any of the other Bric countries, beating out China's 46.9, India's 53.5 and Brazil's 57.0, according to the CIA. (Actually, there is some uncertainty over the Indian number, as both the CIA and the UN only quote a result from 2004 of 36.8 as their most recent result, whereas the higher number is only an academic estimate.)

Houses for courses

One of the reasons that Russia does so well on a gini coefficient basis is that everyone was simply given their apartment following the collapse of the Soviet Union, which must count as one of the largest transfers of wealth from a state to its people in history. The trouble is that until recently no one could tap this money literally locked up in bricks and mortar. But with the volume of mortgage loans now doubling every month since the start of summer, this wealth is quickly becoming accessible to a growing number of Russians.

Critics of the gini coefficient say that Russia's rich have hidden most of their money offshore, but this is partly offset by the fact that most of Russia's poor also hide their money under the mattress; only one in four Russians have any kind of bank account. "The proportion of mattress-stuffed money among Russia's poor is much higher than among America's poor, as the US tax net is so much tighter," says Halligan. "That suggests US inequality is even worse relative to Russia than the numbers suggest, if you take into account off-the-books money at both ends of the income scale."

The effect of this rapid growth in the wealth of the masses has been dramatic. If the same growth were to happen on US President Barack Obama's watch, the US' per capita income would go from the current $46,400, according to the CIA, to $649,600 over the next eight years. Any president that delivered that kind of wealth increase would not only be re-elected, he would be canonised. Thus, this huge transformation has created a burgeoning middle class in Russia almost overnight. When Putin launched his long-term reform plan, he called for moving 60% of the population into the middle class by 2020. But according to a report released by leading Russian investment bank Troika Dialog at the end of August, Russia is already there: Troika claims the middle class (defined as income/capita of more than $6,000 a year) already makes up 68% of the population, against Brazil's 31%, China's 13% and India's 3%. Whatever definition you take of middle class, it is still clear that the distribution of wealth on this score is also a lot more equitable than in any of the other Brics by a long chalk.

First signs of unrest

Freed of the need to simply survive, the emerging middle class typically becomes more political, as it has the most to lose from bad government. The Russian population has borne the pain of transition quietly for most of the last 19 years, but over the last year a growing number of protest movements are popping up.

These range from the silly to the serious: some drivers have tapped plastic blue buckets on their car roofs to mock the blue flashing lights bought by rich businessmen that allow them to routinely ignore traffic laws, through to the Article 31 demonstrators who meet on the 31st of every month to protests the state's refusal to allow free assembly of protesters guaranteed by article 31 of the Russian constitution. In addition, the gay rights movement is becoming a lot more militant, special interest groups have sprung up in the regions and the Kremlin has several times been embarrassed into action by online outrage in Russia's blogosphere. In the latest example, Russian President Dmitry Medvedev stopped the construction of a highway through the Khimki forest following a public protest.

Both Putin and Medvedev are now talking about the need to promote civil society - but they have also made it explicitly clear they want to go slowly, as they are terrified of losing control of the process in the way that Mikhail Gorbachev lost control during peristroika. Medvedev's decision to cancel the Khimki road and Putin's road trip across Russia in a Lada in August show they are both increasingly concerned about maintaining popular support, but accountability doesn't come naturally to the Kremlin. Going forward, the Kremlin is already attempting to play a delicate game, balancing the easing of centralised control while at the same time controlling popular opinion.

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