Incomes Sink in Rising Tide of Oil

2004.08.06 , РТПУНПФТПЧ 719
Having bounced back from the 1998 default, Moscow is now the world's third-most expensive city. Luxury cars fill the streets. Dealers have more orders than they can fill even in midsummer, forcing many eager buyers to wait months for a car, just as they did in the Soviet era. The owners of stores dealing in luxury goods feel like Soviet shock workers, exceeding their quota in some new-Russian five-year plan.

Once known as a city where churches were as numerous as the stars, Moscow now boasts an even greater number of restaurants, where the city's "golden youth" kick back and enjoy life. Enormous markets, affordable cafes and recreational facilities attract Moscow's working class. For some Muscovites, the consumer-spending boom seems to have replaced more traditional addictions.

Amid this orgy of consumption, data on the slowing growth of Russians' real income come as a shock. Real income grew by 13.7 percent in 2003, but in the period from February to April of this year growth fell from 9.9 to 8.5 percent. In May, growth dropped to a three-year low of 3.8 percent.

In fact, the situation is even bleaker, because official statistics count rubles made from the sale of foreign currency as income. According to the Center for Macroeconomic Analysis and Short-Term Forecasting, when this error is taken into account, real income grew by less than 10 percent in 2003 and has declined steadily in 2004. In the period from January to April, real income fell each month by an average of 0.2 percent and by 0.7 percent in May. The downward trend in Russians' real income seems almost fantastic. After all, the country is awash in petrodollars. Oil exports this April rose by 39.5 percent as compared to April 2003, reaching a record level of $14.2 billion. In May, exports grew by 29 percent, bringing in a total of $13.4 billion.

But other indicators confirm that Russians' standard of living is on the decline. Although retail sales increased from January to May by 11 percent as compared with the same period last year, the service industry, which more closely tracks fluctuations in consumer income, dropped sharply. While average monthly growth in services during the first quarter was 1.8 percent, volume declined by 1.5 percent in April and 1.7 percent in May.

Another indicator of increasing poverty is the reduction in Russia's savings ratio from 22-24 percent in the first quarter to 18.6 percent in May.

With wages on the rise -- up 13.6 percent in this May as compared with May 2003 -- the decline in real income has been caused by a reduction in other sources of income.

These include rental and business revenue, which are on the decline not only because of the stock market's recent rough landing and the unprofitability of some bank deposits, but also a probable increase in pressure from corrupt officials on business at all levels.

The results of such pressure are similar to those of increased tariffs charged by the natural monopolies: the concentration of funds in infrastructure, which diverts funds from the rest of the economy and slows overall growth. For now, corruption seems to be siphoning off money intended not for development but for consumption. The macroeconomic impact of this practice is therefore not particularly noticeable. But the concentration of revenue in the hands of the siloviki reduces the real income of the general population.

Another reason for declining real income is the impact of inflation on pensions, benefits and the wages of state employees in the social sphere. Given this fact, the government's plan to abolish the social welfare net is particularly alarming.

Even industrial workers' income comprises not just wages but a variety of bonuses and incentives, which are used in part as a way of reducing taxes. Thus income can fall even as wages rise.

The real income of federal employees has declined in the second quarter. As part of government restructuring, many employees received severance packages equivalent to two months' wages, but not including standard supplements. With the government paralyzed by administrative reform, most staff positions remain unfilled, and wages are therefore not being paid. The result, despite the announcement of significant wage increases for government employees, is a reduction in their real income.

Compensation for labor is falling at companies that target the domestic market. Such companies work with a smaller profit margin than raw materials exporters, and cannot compete with them for skilled labor, equipment or capital. The only way they can become more competitive is to squeeze more output from employees while freezing wages.

In many companies, salaries rose during changes of ownership, as executives sought to win the loyalty of their workers, then fell again when the situation had normalized.

The ineffectualness of the state and pressure from the new oligarchs, the siloviki, has made ownership less attractive. In this climate of fear and uncertainty, owners are reluctant to expand their businesses. Meanwhile, investment continues to grow (often as showy consumerism, the accumulation of large homes, luxury cars and offices), equipment is exploited until it falls to pieces, and the economy functions largely thanks to human capital, or wages.

The most basic reason for the current reduction in Russians' real income is the government's excessively strict fiscal policy, aimed at reducing inflation at any cost. The money supply not only hasn't expanded in 2004, it contracted by 2.3 percent in the first five months of the year and by 3.5 percent in April and May. During the same two periods last year, the money supply expanded by 22.2 and 17.2 percent, respectively.

A return to the fiscal policy of the mid-1990s carries all the attendant risks. The first sign of bad things to come was the recent banking crisis, which the Central Bank conjured out of thin air.

"The Moscow Times"