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Cablegate: Social Mobility in Russia: Which Way to the Middle

VZCZCXRO1669
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHMO #6815/01 1781110
ZNR UUUUU ZZH
R 271110Z JUN 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 8153
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEHLN/AMCONSUL ST PETERSBURG 3147
RUEHVK/AMCONSUL VLADIVOSTOK 1480
RUEHYG/AMCONSUL YEKATERINBURG 1738
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAUSA/DEPT OF EDUCATION WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 05 MOSCOW 006815

SIPDIS

SENSITIVE
SIPDIS

NSC FOR GRAHAM, MCKIBBEN
USDOC FOR 4231/ITA/MACK/RISD/JBROUGHER/MEDWARDS
TREASURY FOR LEE, COX, BAKER
STATE FOR EB/SULLIVAN, EUR/KRAMER,WARLICK,HOLMAN

E.O. 12958: N/A
TAGS: ECON SOCI EINV ELAB EFIN PGOV RS
SUBJECT: SOCIAL MOBILITY IN RUSSIA: WHICH WAY TO THE MIDDLE
CLASS?

REF: A. MOSCOW 2655
B. 05 MOSCOW 13444
C. MOSCOW 6334
D. 05 MOSCOW 5252
E. MOSCOW 1082
F. MOSCOW 3356

MOSCOW 00006815 001.2 OF 005


SENSITIVE BUT UNCLASSIFIED -- NOT FOR DISTRIBUTION OUTSIDE
USG CHANNELS.

1. (SBU) SUMMARY: With real average incomes up 66 percent
over the past five years, Russia's middle class has begun to
emerge from the shadows -- after all, someone other than the
mega rich has to be buying all those TV sets, cars and cell
phones. Understanding that the movement is now well
underway, we asked ourselves two questions. For those not
yet firmly rooted in the economic middle of the country, what
might we expect looking forward? The path up the economic
ladder may be barred for many -- low-wage civil servants, the
geographically isolated, and those trapped in a dependency
mindset. Some observers worry that the economy is not
creating enough new professional jobs or providing sufficient
space for entrepreneurial activity to allow real social
mobility out of the lower-middle class. Nonetheless, there
is clear evidence that the benefits of Russian growth are
spreading, and intergenerational mindset changes appear to be
setting a positive trend line for the future.

2, (SBU) The second, and no less important question, is what
can we expect from this group in political terms? Right now,
Russia's emerging middle class is hardly a coherent political
force -- and what politics they do espouse cannot be called
uniformly progressive (from a social perspective) or liberal
(from an economic view). But, while there is deep apathy
about electoral democracy, observers here do note a budding
political consciousness. Attitudes within the middle class
about the rights of citizens relative to the government are
evolving, and people are increasingly willing to assert their
interests and to push back against abuses of the state. END
SUMMARY.

3. (SBU) Much ink has been spilled on the size and
characteristics of Russia's middle class. A wide menu of
definitions are available, with an equally wide divergence in
assessments of middle class strength, most now solidly
ranging from one-fifth to one-third of the population. As
Tatyana Maleva, Director of the Independent Institute for
Social Policy, has said, "The phenomenon is multifaceted,
contradictory, and complex." Questions of definition or size
aside, the economic and political forces at play help us to
discern the trends in the middle class's development going
forward.
.
=========================
A) THE ECONOMIC LANDSCAPE
=========================

4. (SBU) Growing prosperity in Russia is bringing expansion
of economic freedom, the alleviation of poverty, and an
attendant growth in markets for U.S. goods and services. A
middle class worthy of the name, of course, should be more
than formerly poor people with more cash and goods in their
pockets -- it should display certain economic values, such as
faith that investment now, e.g., in their own or their
child's education or health, will yield a better future for
themselves and their progeny. From an economic point of
view, we want to see more Russians given more opportunities
to realize their economic dreams, in the hope that this will
translate into accelerated investment in human capital and a
cycle of continued growth and prosperity.

5. (SBU) From that perspective, what are the trends? Russian
GDP has grown at an average rate of around seven percent the
last seven years. Poverty continues to decline: while most
statistics suggest poverty has dropped to 15-20% of the
populace, it is worth noting that the best household survey

MOSCOW 00006815 002.2 OF 005


available on Russia (the formerly USG-funded University of
North Carolina's Russian Longitudinal Monitoring Survey
(RLMS)) places 2005 poverty levels at 7.8 percent, down from
38.1 percent in 1998. Real average incomes have gone up 66
percent from 2000 to 2005. Purchasing power, especially
given real ruble appreciation, has surged as well. According
to RLMS, Russians spent 43 percent more on electronics and
durables in 2005 vs. 2000, and 36 percent more on services
and recreation over that time. Twenty-one percent of
households now own a computer, up from four percent in 2000.
According to Levada Center polling, forty-five percent of
Russians now own cellular phones, up from 2 percent in 2001
(and most that own one actually own two, given the near 100%
cell-phone penetration rates found in Russia). Car sales,
considered by many to be a good proxy for middle class
growth, jumped 106% in dollar terms from 2002 to 2005,
according to PricewaterhouseCoopers (ref A).
.
GOVERNMENT SECTOR STILL
A DRAG ON UPWARD MOBILITY
=========================

6. (SBU) Despite this strong prima facie evidence of growing
wealth, some observers worry that this rising tide is not
lifting all boats. They argue that the majority of Russians
-- the 50 to 70 percent of the population who are not poor
yet not quite middle class (referred to by many as the "lower
middle class" for lack of a better term) -- have seen too
little benefit. Poverty levels are down, they say, largely
because of increased state transfer payments to Russia's
poorest, while those in the middle class -- the entrepreneurs
and professionals already plugged into the modern economy --
are becoming better and better off as the economy expands.
But those in between may face constraints that will keep them
from climbing easily into the middle class, several contacts
told us.
.
7. (SBU) Low-paid government workers constitute a big chunk
of this immobile lower middle class. According to Mikhail
Chernysh of the Institute of Sociology, approximately 20
percent of the Russian population falls into this category.
In fact, many teachers and health care workers, part of the
bedrock of the middle class in the west, only recently
climbed out of poverty when the state began raising public
sector wages in 1999 (ref B).

8. (SBU) What are the prospects for low-wage civil servants
taking the next step into the middle class? According to
Ksenia Yudayeva of the Center for Economic and Fiscal
Research, a fair number already have: "Everybody knows
government workers get private payments. Teachers get money
for tutoring and people normally give doctors extra cash."
Those with skills in demand have found a growing market for
their services. "The best doctors live well here," Natalia
Tikhonova of the Higher School of Economics, told us.
Unfortunately, she said, too many state employees "have not
received retraining in 20 years." According to a Ministry of
Health study, 60 percent of doctors only prescribe from a
limited set of 40 medicines. As they cannot be considered
highly qualified, their skills are simply not in demand, and
their wages reflect this.

9. (SBU) Still, with President Putin's new spending focus on
health care and education as National Priority Projects,
formal salaries in these sectors may be rising regardless of
the quality of services provided. Our contacts expressed
doubts that such increases would be widespread and
significant enough to lift very many into the middle class.
Maleva worries that increased salaries without meaningful
health care or education reform will only serve to stoke
inflation. Nonetheless, she acknowledged that in a year it
could be the case that wage hikes for some of these workers,
who already display many typical middle class values, will
raise their incomes to middle class levels as well.

10. (SBU) It would be more encouraging if there were

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significant numbers of civil servants leaving for
opportunities in the private sector, where the path to the
middle class may be less obstructed. Unfortunately, the
trends seem to be going in the opposite direction. According
to Yevgeniy Gavrilenkov, Chief Economist at Troika Dialogue,
over the past three years the number of Russian bureaucrats
has risen 17 percent, while labor productivity in the
government sector continued to fall. In effect, the
government has been employing more people in positions with
limited upward mobility rather than promoting their entry
into the more dynamic private sector labor market.

LABOR MOBILITY LESS AND LESS A CONSTRAINT
=========================================

11. (SBU) Limited geographic mobility is often mentioned as a
constraint on social mobility. "Russians aren't like
Americans -- we don't like to move all the time," Maleva told
us, reflecting a widely held belief. A lack of information
about job markets and housing (and a lack of affordable
housing itself) make Russians less likely to take their labor
to where the jobs are, we heard. However, according to
Rostislav Kapelyusnikov, Deputy Director of the Center for
Labor Studies at the Higher School of Economics, that
constraint has been overblown. He argues that, once
distances between migration points are accounted for,
Russians actually are as geographically mobile as western
Europeans. According to Tikhonova, although individual
Russians do face challenges in relocating, it is clear at a
macro level that people are moving -- only about one-third of
Russians are still living where they were born, she told us.
"If a labor market develops, people will move there as if
sucked by a vacuum."

12. (SBU) Unquestionably, however, some people are still
being left behind, many of them in depressed, remote rural
areas. According to Yudayeva, it is not simply that they
face migration constraints. "There are entire rural
populations suffering from chronic alcoholism. Many of these
people may have turned to alcohol due to economic hardship,
but that does not mean they will then turn away from it when
there is economic recovery. It's a one-way street." For
many members of the lower middle class, their own dependency
mindset remained the most significant obstacle. As Tikhonova
put it, "They just haven't adapted, and don't believe they
can do anything with their lives."

13. (SBU) No one should be surprised if growth is somewhat
unevenly distributed and some demographic segments benefit
less. "Clearly there will be some who can't integrate --
just like in the west," Yudayeva told us. However, she does
believe that the benefits of economic expansion have been
broadly dispersed. The latest RLMS results support that
conclusion. From 2004 to 2005, real income grew by 12 to 18
percent for each of the lowest four household income
quintiles.
.
GROWING THE MIDDLE CLASS
========================

14. (SBU) So, what will determine the prospects for continued
growth of this middle class? Our contacts site three key
predictors: education, economic growth, and the changing
mindset of young people. Maleva believes that one half of
the 50-70 percent of the population in between the poor and
the middle class is close enough to the middle class in
attitudes, attributes and assets that it could join its ranks
in the coming decade, under the right conditions. Of
particular importance, she believes, would be reforms to
improve the quality and market-relevance of higher education.
Gavrilenkov agreed: "The best thing they could do would be
to boost education spending from the current three to four
percent to around eight percent, like Denmark and Sweden did
in the 1970s. They need to prepare a new generation."

15. (SBU) Tikhonova, who currently places the size of the

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middle class between 20 and 33 percent, believes its ranks
could swell to 40% in 10 or 15 years if economic growth
generates enough professional-level jobs and creates a
favorable climate for entrepreneurs. Those near the top of
the lower middle class will climb up into the spaces
provided. (The Ministry of Economic Development and Trade,
in fact, predicts that 60 percent of the population could be
middle class over that time frame.)

16. (SBU) Longer term, changes in mindset will likely raise
that 40 percent ceiling, Tikhonova said. "Younger people are
very different, more adaptable." As Yudayeva sees it,
adaptability is largely generational, and those least
adaptable will gradually disappear, to be replaced by that
younger crowd without the same dependency mindset. If the
economy continues to grow, she was "very optimistic" that the
middle class would grow with it. The pace of that expansion
may slow if, as Gavrilenkov said, "the period of 'easy'
growth in Russia is coming to an end," (now that spare
capacities have been utilized, and oil price growth may
decelerate or even reverse course in the coming years).
Thus, restructuring and reform will become increasingly
important to sustain high growth. But what growth there is
should open the way for more Russians to move up a rung or
two on the economic ladder.
.
==========================
B) THE POLITICAL LANDSCAPE
==========================

17. (SBU) The long-term expectation among most liberal
observers is that a thriving Russian middle class will become
a progressive political force as well -- one that eschews the
extremes of the right and left, advocating for rule of law,
property rights and predictability to secure its gains.
Here, though, the picture is still mixed at present. As
Maleva explained, "the Russian middle class is progressive
only in terms of economic behavior, not political
preferences." Right now, their preferences are as diverse as
the general population, and, if anything, they are more
nationalistic than most, Chernysh notes.

18. (SBU) They Russian middle class has also proven prone to
populism. Svetlana Misikhina of the World Bank told us,
"Everybody is interested in taking money from the oligarchs
and putting them in prison. Everyone favors redistributing
the stabilization fund to all. These are not middle class
ideas." Mikhail Dmitriyev, head of the Gref Center, says
such attitudes have been on the increase in recent years.
"Five years ago, public opinion polls and focus groups showed
that 22 to 25 percent of the population wanted continued
market reforms. But this group has disappeared into
insignificance. Now a consensus has formed in favor of
large-scale renationalization. Any campaign for reform would
fall on deaf ears," he told us.
.
19. (SBU) However, such swings in middle class opinion may
have more to do with a tendency to agree with the position of
the government than with emerging core values. Five years
ago, the propaganda extolled the virtues of reform. Now, the
government wants to separate itself from the Yeltsin years,
the propaganda is all about reestablishing Russia as a great
power, and the electorate has fallen in line. "The group
that wanted reforms for its own reasons has always been
smaller," according to Yudayeva.
.
A BUDDING LIBERAL CONSCIOUSNESS
===============================

20. (SBU) Of the small group that might genuinely be
interested in reform, perhaps even fewer are interested in
traditional political activism to meet those ends.
Nonetheless, contacts did believe that some form of political
consciousness is growing within the middle class ranks.
According to Tikhonova, Russians are developing an
appreciation for rights, "but not in the western sense."

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Rather, they increasingly feel they have a right "to indicate
their interests, and to protect those interests against
bureaucrats." This tracks with our own findings in regional
capitals (ref C).

21. (SBU) Yudayeva also believes that a form of political
liberalism is growing. For example, she recalled the
reaction to the military hazing case of Andrey Sychev, in
which the young soldier was brutalized in a hazing incident
(ref E). "In the Soviet Union we never would have learned
about this. There has been a change in mentality about the
balance of rights between people and the government," she
said. In March, this changing dynamic was on display again,
when motorists' protests across Russia helped overturn the
conviction and prison sentence of a driver whose only crime
was being sideswiped by a speeding black Mercedes containing
a regional governor (who died in the crash) (ref F).

22. (SBU) As American Bernard Sucher, Chairman of Alfa
Capital and long time Russia-watcher, sees it, the expansion
of the Russian middle class is slowly and steadily altering
the dynamic between the government and the governed. "With
each day, more and more people in Russia are gaining an
economic stake in the system, and long-term, they'll force it
to respond to their needs. Democrats are being created every
day," he believes. It may be some way from Jeffersonian
democracy, but Sucher suggested that many observers lack
perspective about how far Russia has come. "The genie's out
of the bottle -- the Russian government can't go back to
restricting property, or travel.... The powers that be are
scared of crossing these lines."
.
COMMENT
=======

23. (SBU) Russia's rising tide may not be lifting all boats,
but it is lifting the boats of those who have chosen to adapt
to modern economic realities. It is no surprise that some
are adapting better than others, but time is on the side of
Russia's youth. But while "Russians Slowly And Steadily Join
The Middle Class" may seem an uncompelling headline, it does
capture the central trend at play here. Political
consciousness of the sort typically associated in the west
with a middle class has undeniably taken root, but expecting
it to blossom into political activism at this point, in this
political environment, may be too much to ask. Nonetheless,
the trend is clear, and it is hard to imagine that the haves
in this country will ultimately behave any differently than
their counterparts in other modernizing societies. They will
eventually want a voice and vote in how their country is run
and their tax dollars spent.
BURNS

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