After more than a decade in power, Putin represents a form of stability in Russia. However, with the demand for deep and far-reaching change growing ever more voluble, the authors ponder on whether or not Putin has an appetite for structural reforms.
Russia’s middle class: at the centre or on the periphery of Russian politics?
16 February 2012
by Lilia Ovcharova
The peaceful demonstrations in the wake of the Duma elections on 4 December 2011 came as a surprise not only to the international public but also to the Russian leadership. The obvious discontent of the urban population and their demand for fair elections and more political participation sheds new light on Russian society. After years of political apathy a new social stratum, often categorised as the ‘Russian middle class’, seems to be emerging. This may form the crucible for more profound political changes in the future. At the same time, however, there are doubts as to whether and on what basis a middle class in Russia can actually be said to exist. This paper investigates the development and current situation of Russia’s middle class from an economic perspective and draws some conclusions as to its political outlook and potential for change.
Creating a middle class from scratch?
After several years of economic growth, in the middle of the last decade Russia’s political leadership defined new priorities for the country’s long-term development. During the boom years of the early 2000s state programmes had mainly been focused on poverty reduction. Now the enlargement of the middle class to encompass 50 percent of Russian society by 2020 became the new strategic goal for long-term socio-economic development. This decision was accompanied by a debate on the distinctive features and characteristics of Russia’s middle class. Experts and policy-makers agreed that the middle class should be a layer of society displaying stable wealth (in terms of property, savings and income) and highly-developed professional skills, and should form the basis of sustainable development and modernisation.
Several years later, however, a closer look at the revenues, professional activities and ‘financial strategies’ of Russian households reveals that the Russian leadership’s policy is still far from achieving its aim. This is not, as is often claimed, a consequence of the economic crisis and the subsequent rise in unemployment and fall in real wages, but rather of the fact that, in contradiction to its declared goal, the state in the past ten years has formed a society without a middle class. Measured by economic criteria, the share of the middle class in overall Russian society was 20 percent in the early 2000s and stayed at that level even at the peak of the economic boom in around 2007. Thus, the middle class did not grow in size. However, it has become wealthier and its composition has changed. In contrast to the late 1990s and early 2000s, the Russian middle class today features more bureaucrats and fewer business people.
Obstacles to the emergence of a middle class in Russia
There are several obstacles hindering the development of the middle class in Russia.
First, the Russian labour market is characterised by the prevalence of low-wage jobs and informal employment. In 2011 13.1 percent of the employees of large and medium-sized enterprises earned wages below the subsistence minimum. Their income did not even cover the minimum consumption requirements of one individual (see Table 1). The salaries of 42 percent of all employees remained below the minimum consumption requirements of two individuals. In education and health care, sectors with a high proportion of middle-class representatives in Western economies, this concerns more than 60 percent of employees.
Secondly, employment in the Russian job market is characterised by weak contractual relations. Extreme flexibility on salaries has favoured the proliferation of non-standard forms of payment and undermined the institutionalisation and formalisation of labour relations. As a result, nearly 40 percent of all payments are considered informal (see Table 2). In 2009 at least 16 million out of 69.3 million employees were informally employed.
Thirdly, the emergence of a middle class is often dependent on access to income from entrepreneurial activities. It is noteworthy that when market reforms started in Russia in the early 1990s, it was emerging entrepreneurship that fostered the formation of a middle class. At the time, revenues from entrepreneurial activities accounted for approximately 16 percent of the overall income of Russia’s population (see Table 2). Starting in 2001, this type of income began to shrink and continued to shrink during the boom period and the subsequent economic crisis.
Formally, entrepreneurial activities involve approximately 45 percent of all Russian households. However, this number is inflated by the fact that 40 percent of all Russian families engage in private subsistence farming. In the majority of cases income from this source remains low. Private subsistence farming is a survival model rather than a tool for entrepreneurship and vertical mobility. Only 5 percent of Russian families can rely on income from entrepreneurial activities other than subsistence farming. In other words, the overall economic environment is not favourable to the kind of entrepreneurship that could be the driver of middle class growth.
Usually bureaucratic barriers are considered the main obstacle to entrepreneurial activities in Russia. However, this is only partly true. The actual root cause of the problem is the absence of an institutional environment favourable to small and medium- sized enterprises. It is the institutional environment – or rather the lack thereof – that provides bureaucracies with the possibility to erect administrative barriers. The existence of a favourable environment and business climate allows small and medium-sized enterprises in post-industrial countries to deal with administrative barriers through more powerful structures such as banks, insurance companies, and the like. Despite the modernisation debate launched by outgoing President Dmitri Medvedev, there was no improvement of the business climate during his term compared to previous electoral periods.
Since the start of the economic crisis members of the middle class have been changing jobs more often than other social groups. In many cases job changes have been accompanied by wage reductions. Indeed, in 2008 and 2009 the middle class was most exposed to the impact of the economic crisis. After 2010 its members were able to compensate for the losses, but only if they disposed of additional informal sources of income. The perception of the material situation and prospects of middle-class households, particularly of families with children, has clearly deteriorated.
Revenue from property and financial investments is another important indicator for the existence of a middle class. In today’s Russia this type of income accounts for only 5 to 10 percent of the overall income of the population (see Table 3). Moreover, it is limited to a very thin layer of society. In the mid 2000s only 2 percent of all households indicated such revenue as a significant source of income. Among middle class households their share was about 8 percent. Therefore, the overall share of households with income based on sources differing from the Soviet period remains very small. The past few years have not seen any significant institutional or economic shifts that would contribute to the growth of that group.
Source: Rosstat official annual data on expenses and savings (different years).
Investment, credit programmes and savings are key drivers for the development of the middle class. Throughout the post-Soviet period, and particularly during the economic boom in the 2000s, a constant decrease in spending on goods and services and an increase in spending on financial products and of the number and volume of credits and loans could be observed. Moreover, Russians began to purchase property more actively during that period. Nevertheless, the number of Russian citizens involved in these kinds of economic activities remains limited. This is also reflected in savings strategies. The majority of Russian households either do not have any savings or credit at all, or practise very simple forms of saving and credit behaviour (see Graph 1). Around 20 percent demonstrate more differentiated ways of managing their finances, while only 3 percent have developed sophisticated strategies. The latter are to be found among wealthier households, inhabitants of big cities, and among the younger generation.
The economic crisis has put the relationship between credit institutions and borrowers under strain. About 20 percent of borrowers reported difficulties with payments in the wake of the economic crisis. However, and this is a rather positive development, 80 percent of them were able to overcome those problems. Loans and donations within Russian families played an important role, which confirms the persisting immense significance of social networks and intra-family transfers in Russian society. Job changes and adjusted credit agreements with banks were other solution strategies. The latter in particular indicates a healthier relationship between lenders and borrowers, which is an important positive development.
The Russian middle class as a social group is younger, better educated and wealthier than the average Russian population, and its members live predominantly in big cities. It is more actively involved in innovative economic sectors, and is more entrepreneurial and more sophisticated in its financial behaviour. The share of the middle class in consumption by far exceeds that of other strata of Russian society.
In recent years, however, the Russian middle class has started to display more conservative attitudes. This is, inter alia, due to a change in its composition, as it has become more dominated by civil servants and employees of state companies. While in the early 2000s representatives of the emerging middle class were more inclined to take risks, today this group is much more risk-averse and its members are usually not eager to take responsibility for their actions. Thus, the aspiration towards entrepreneurial careers and economic innovation has given way to greater interest in social stability.
Moreover, the Russian middle class is immersed in the Russian economic and political system. Many of its members – and particularly those within the public administration and state companies – benefit from economic and political ‘grey zones’ and informal links with state bureaucracies. Therefore, even though members of the middle class have now for the first time openly shown their discontent with political developments in the country, actual reforms may clash with the economic interests of other representatives of this social stratum. As a result, veto-players opposed to genuine reforms may be found even in the Russian middle class.
The political influence of the Russian middle class is constrained by their relatively small numbers. Their readiness to embrace change is unclear and may remain limited. Nevertheless, after the recent demonstrations the authorities will have to take its position into consideration. The big question is what price both sides will be ready to pay for sustainable reform and modernisation of the country.
The author, Lilia Ovcharova, is deputy director and research director of the Independent Institute for Social Policy in Moscow: www.socpol.ru.
Translated from the original Russian by: Eugene Slonimerov and Sabine Fischer
 ‘Koncepcija dolgosrochnogo socialno-ekonomicheskogo razvitia do 2020g’ [Concept for the long-term socio-economic development until 2020], November 2008, available at: www.ifap.ru/ofdocs/rus/rus006.pdf.
 T. M. Maleva, L. N. Ovcharova and A. E. Shastitko, Rossijski srednyj klass na kanune i na pike ekonomicheskogo rosta [The Russian Middle Class Before and During the Economic Boom], (Moscow: Ekon-Inform, 2008); N. E. Tikhonova, ‘Kriterii vydelenia i opredelenie chislennosti srednego klassa v sovremennom rossijskom obshchestve’ [Characteristics and size of the middle class in modern Russian society], Demoskop Weekly, no. 381-382, 15-30 June 2009, available at: www.demoscope.ru/weekly/2009/0381/analit01.php<cite>.</cite>
 T. M. Maleva, ‘Nizhe srednego: gosudarstvo formiruet obshchestvo, v kotorom net srednego klassa’ [Below the middle: The State builds a society without a middle class], Forbes, November 2011.
 T. M. Maleva (ed.), ‘Srednye klassy Rossii: ekonomicheskie i socialnye strategii’ [The Russian Middle Class: Economic and Social Strategies], Carnegie Center Moscow, 2003.
 T. M. Maleva, L. N. Ovcharova and A. E. Shastitko, Rossijskie srednye klassy nakanune i na pike ekonomicheskogo rosta [The Russian Middle Class Before and During the Economic Boom], (Moscow: Ekon-Inform, 2008).
 See for instance Russian Statistical Yearbook, 2010, p 132.
 T. M. Maleva and L. N. Ovcharova, ‘Rekommendacii po dolgosrochnym I kratkosrochnym meram c socialnoj politike’ [Recommendations for short-term and long-term social policy], Economic Policy, January 2010.