World economy

What Happened to Russia’s Middle Class?

Russian central bank seems a bit perplexed by the recent increase in the wealth gap between the richest and the poorest of the country as well as a shrinking middle class. Their ability to steer inflation in the desired direction is being threatened by the sanctions, and interest rates in combination with rising prices have really done a number on the local middle class. This may well affect the value of Russia’s currency and is of great interest to forex and binary options traders alike.

Putin’s problems

For all his popularity, Vladimir Putin is presiding over one of the worst economical crisis that has gripped Russia since the end of the Cold War and the 90’s. After a period of economic recovery in the early 21st century, earnings and domestic demand are both returning to the bad old days. According to most recent data, retail sales have dropped last month to record levels. In addition, disposable income is down roughly 7% on an annual level, according to Bloomberg.

Under these conditions, the cost of living is getting out of control and wages for the middle class are no longer enough to cover them. The low income families could rely on public welfare to get by, but their status prevents medium income families from getting help that they will most likely need in the future. On the other hand, consumption has nowhere to go but down when people lack disposable income so the economy as the whole is suffering.

Current estimates show that there are 14 million people less in Russia’s middle class compared to two years ago, when sanctions were put in place. And this is according to Sberbank. Although, sanctions are not entirely to blame for this ordeal that Russian economy is going through.

All about that oil

Another thing that has characterized almost every problem related to Russian economy had something to do with the declining prices of crude oil. While not nearly as affected as the Gulf nations or OPEC as a whole, Russia has not exactly benefited from this experience. Now, every change in fiscal policy has to take this into account, along with hundreds of thousands of lives that will be affected in one way or another.

The middle class is more than just a social category – it acts as a buffer that decreases the risks from fiscal policy changes. If there are enough people to support the consumption rates and fuel the demand, the government will have a lot more manoeuvring space in regard to their fiscal policy. The IMF experts, on the other hand, believe that “hollowing out” the middle class is actually good for the economy as a whole, although it is uncertain just what do they mean by it.

Bare necessities

Since people have less money to spend on “luxury”, the only sustainable demand is for bare necessities. The irony is that the poor, who were already struggling to begin with, are actually less affected by inflation rates since their expenditure was already at the bare minimum to begin with. Aside from that, they can always rely on government to provide basic essentials so their standards of living are not in question. The rich, likewise, show little to no regard to these policies since only a fraction of their income is spent on their actual necessities and they can easily afford to buy everything they need, and a whole bunch of stuff that they do not. They could not care less about the interest rate or consumer prices.

Conclusion

With risks mounting as things progress, the central bank’s credibility is at stake, now more than ever. Their forecasts have been wrong for four years straight, and the 4% inflation target for late 2017 may not be met at this rate. If derivative traders are any indication, they believe that a third rate cut is due within the next trimester. All in all, this is shaping to be the worst economic crisis Russia has experienced since 1998. That year the country was forced to default on its debts and has yet to regain the trust of investors that had been breached. Things being what they are, this is going to be an interesting period.

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2 Comments

  1. January 13, 2017 at 11:05 pm — Reply

    Wow! Great thkngini! JK

  2. December 6, 2016 at 4:59 am — Reply

    This is a topic that’s close to my heart… Cheers! Exactly where are your contact details though?

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