Reasons for poverty in Russia

Ann-Mari Sätre,
Ph.D., Research Director, Associate Professor in Economics,
Institute for Russian and Eurasian Studies (IRES), Uppsala University,

After increasing throughout the 1990s, poverty in Russia fell in the early 2000s. In 2014-19 poverty has increased again. A large part of Russian families is close to the edge of poverty, the younger families and families with many children are closer than others. Following the initial shocks in 1991–92 immediately after the Soviet Union collapsed, a major financial crisis in 1998 and the international economic crisis in 2008–09 represented setbacks to households and enterprises in Russia. Also the economic crisis in Russia in 2014, following the falling price of oil and economic sanctions due to the Crimean annexation, has had consequences.

In the Soviet Union there was a system for administering wages and benefits, there was officially full employment along with centrally set prices for goods and services. Transition implied a dramatic decline in living standards for most people in Russia. The increasing incidence and severity of poverty was associated with the significant fall in real money income. Furthermore, wage adjustment was not uniform across sectors and regions. Sectors financed by the state were hit hard by real wage declines, while other sectors were less affected. Adjustment in the labour market has taken place in the form of declines in employment, and increasing numbers of people on short-time work and involuntary leaves, and the real wages of the poor were eroded as wage arrears were quite frequent in the aftermath of transition. Wage distribution was widened, an increased number of households faced the situation that their wages were even lower than the subsistence level. This was possible as the minimum wage was set at a level lower than the minimum pension and lower than the subsistence level. The inconsistency was particularly serious as it implied that those who had a decent situation in the Soviet time, working full time and managing households with children were entering vicious circles that were very difficult to get out of. With wages not possible to live on, they took on a second or even a third job leaving no reserve for outside changes. The smallest backlash could cause ordinary households to fall into deep poverty. This kind of phenomenon can still be seen some 25 years later.

The high number of working people earning low wages is clearly an important characteristic of everyday life. Income inequality has increased, but wealth inequality has increased even more. While wage inequality has increased, major departures from pre-transition structures of wage differentials have been limited. The low wages that were paid in non-priority sectors in the Soviet economy have persisted, along with a heavy reliance on the extraction of natural resources as a source of national wealth. This situation has been caused by a failure effectively to manage the economic system, inasmuch as the system has been unable to promote the significant development of the non-oil economy, in which a large part of the population is employed, and thus to increase the capacity of those sectors to pay decent wages. Continued low wages and a loss of social welfare services have led to a society where living expenses are often higher than income for ordinary people, trapping large sections of the population in a vicious circle of poverty.

In effect, some features of the Soviet system have survived the reform measures of the 1990s, which also explains the lack of progress that has been made in manufacturing. Two different kinds of reasons can be identified—those that are connected to state policies and the working of society on the one hand, and those that are related to attitudes and behavioural patterns on the other. In the first case, the prevalence of soft (negotiable) budget constraints has meant that there are fewer redundancies than there would have been otherwise. This has saved jobs at the expense of higher wages, and explains why a large part of the workforce is still employed in unprofitable large-scale enterprises. The phenomenon of ‘over-employment’ has survived, while a large proportion of the population in the region is paid wages that are barely enough to cover basic expenditures. The issue of low salaries that are paid in certain professions, such as to teachers and doctors who are employed in non-commercial organizations, has also persisted since Soviet times.

In order to handle the gap between expenses and income people have used whatever resources they have, which means that some of them have exhausted their resources. Losses of wealth among the poorest is a tendency which means that quite a few are losing a buffer they have had for possible future difficulties. What is left is your own labour power, and a tendency to work more and more in order to cope with a difficult situation. What is even more worrisome is that reaching this point makes people highly vulnerable. If something happens, it might easily start a downward fall.

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