Intellinews, 10/15/24

A new study led by prominent Russian economists at the Higher School of Economics (HSE) found a significant underestimation of the country’s wealthy population and rising property inequality, The Bell reported on October 15.

The research, carried out by Alexander Surinov, the former head of Rosstat and now director of HSE’s Centre for Economic Measurement and Statistics, alongside his colleague Sergei Kuzin. The results show that there are nearly twice as many relatively affluent Russians as previously thought, further exacerbating the nation’s income disparity, and that two thirds (66%) of Russian made under RUB40,000 ($415) a month, less than the national average wage of RUB70,000 ($725).

The study employed an innovative approach to reassess income distribution, blending two methods that traditionally has skewed the results in the past.

Survey-based data tends to underrepresent wealthier individuals, who are reluctant to disclose their true income, while administrative data from the Federal Tax Service (FTS) omits lower-income groups, many of whom avoid formal tax systems altogether as they are so poor.

The HSE scientists addressed these limitations by mixing the results from the two surveys, including the data from tax declarations for 2022, to get a more accurate picture of income stratification in Russia.

Key findings showed that individuals earning over RUB150,000 per month accounted for 1.1% of the population – more than double the previous estimate of 0.5%. Similarly, those with monthly incomes exceeding RUB200,000 represented 0.5% of the population, up from the earlier figure of 0.3%.

For comparison, a Siberian bus driver has recently seen salaries increased from RUB70,000 to RUB100,000 to persuade them to remain in their jobs, but many have been enticed away by military salaries where they can earn over RUB200,000 a month as a driver behind the line of contact in Ukraine.

These adjustments primarily came from a recalibration of the cohort earning RUB100,000-150,000, which dropped from 2.3% to 1.8%. Meanwhile, 66% of Russians continue to earn less than RUB40,000 per month, with 18% earning between RUB40,000 and RUB60,000, and 8% earning between RUB60,000 and RUB80,000.

The recalculation has also heightened Russia’s already high levels of income inequality. The country’s Gini coefficient – a standard measure of inequality – rose from 0.34 to 0.36, indicating a sharper divide between rich and poor. The coefficient of funds, which compares average incomes of the wealthiest and poorest deciles, also increased from 9.1 to 9.9.

Moscow’s wealth gap stood out in particular. In the capital, the average income of the top 1% was found to be underreported by a quarter, rising to RUB356,000 from a previously estimated RUB285,000. In other regions, incomes of the top 1% were underestimated by 11%, reaching an adjusted average of RUB128,000.

Conflicting pictures

The results of the HSE’s survey confuse the picture as another survey found Russia’s poorest regions have been the biggest winners from the war, as heavy military spending on the war provided full time employment in military industrial factors in Russia’s far flung regions. At the same time a study of regional bank deposits showed that deposit accounts have swelled in poor regions thanks to military pay, as the bulk of Russia’s recruitment and the partial mobilisation in September 2023 was focused on Russia’s poorest regions.

At the same time a chronic labour shortage has driven up nominal wages far faster than inflation leading to a spike in real disposable incomes up to a record 9.6% in July. As bne IntelliNews reported, the soaring real disposable incomes have created a new War middle class, for whom life has never been better, The Bell reported earlier this year.

Russia’s income distribution has always been distorted by its Soviet legacy and the country’s vast size. As bne IntelliNews reported in 2018, incomes in some of the monotown mining towns deep in the tundra continue to outstrip those of Moscow, although the cost of living there is also considerably higher. At the other end of the scale, the incomes in the southern regions of the Caucuses and in the centre of the country remain at rock bottom.

Despite these gains that have been to the benefit of millions of people in the lower strata of society, Russian income inequality remains a serious problem.

However, overall the lot of Russians has improved over the last year. As reported by bne IntelliNews in its last despair index – the addition of poverty, inflation and unemployment – that captures a picture of what life is like in the lower third of society, the index value is currently at its lowest level ever. In particular, Russia’s poverty rate is currently 10.5%, or approximately 15.3mn from a total population of circa 150mn people, including immigrants. The poverty line is currently RUB13,600 ($140) monthly income.

Russia’s poverty rate compares favourably with most of the EU where poverty rates are typically in the low teens. The average poverty rate in the European Union is currently around 16-17%, according to Eurostat, but varies widely by region inside the EU. The picture is further confused as poverty is a relative concept and what constitutes poverty in Denmark is very different to what it means in Russia. At the same time, President Vladimir Putin has pledged to bring Russia’s poverty rate down to 8.5% as part of his National Projects 2.1 programme.

The incomes should be adjusted for PPP (purchase power parity), and on this basis Russia’s economy looks much stronger, after it overtook Japan to become the fourth largest economy in the world this year in adjusted perms. Russia also overtook Germany in PPP GDP terms two years ago.

Adjusting the average income of RUB70,000 for PPP (using an exchange rate of RUB27 to the dollar, rather than the current RUB95 to the dollar) and the average income rises to $2,590, on a par with the average income in the EU, although it is still half the average income in Germany, but twice those in Central Europe.

Implications of recalibrating income data

HSE’s updated income figures could bolster the Russian government’s narrative around its progressive tax reforms. In May Putin announced the end of the flat tax regime, which he put in place almost as soon as he took office in 2000, with higher taxes for most affluent Russians.

As of next year, higher earners will face a new tax structure: a 15% tax rate on annual incomes over RUB2.4mn, which will progressively rise to 22% for those earning over RUB50mn. While these reforms may appear to target the wealthiest, analysts suggest they will likely bypass the true elite who derive much of their income from dividends and share sales, which are exempted from income taxes, The Bell reports.

In reality, the reforms may have the most significant impact on workers in the defence industry, whose incomes have risen sharply due to the ongoing war effort in Ukraine. As Kommersant reports, the anticipated increase in revenues from higher personal income tax (estimated at RUB533bn per year) is expected to pale in comparison to the financial injection required for Russia’s military build-up. By 2027-28, the government may introduce additional income redistribution measures in response to these financial pressures.

As reported by bne IntelliNews, instead of cutting military spending in 2025, the new three year budget, currently under debate, will be increased by a quarter in 2025. Indeed, the increase was so extreme, the Kremlin ordered the media to bury the story; those that did report the increase cited only the raw spending numbers and did not provide year-on-year comparisons.

The threshold for when the new progressive tax regime kicks in remains extremely high and barely affects Russia’s elite, nor will it make a big difference to Russia’s tax revenues. However, after refusing to touch the flat tax regime for three decades, the Kremlin is now moving cautiously to finally increase taxes on Russia’s prosperous middle class and rich and introduce a more equitable tax regime.

Bloomberg’s Russia economist Alexander Isakov warns that the wealthiest Russians should prepare for more substantial tax hikes, predicting that rates could rise to 30-35% by the next election cycle.

This recalibration of income distribution highlights the challenges facing the Russian economy, where regional inequality remains stark despite the recent military spending rebalancing. The benefits of economic growth remains too concentrated among a small, affluent segment of the population in the richer regions. As military spending continues to soar, pressure on the tax system may prompt further reforms that could significantly alter the financial landscape for Russia’s upper-income earners.