Anatomy of poverty

Russia enters a new era of long-term poverty

For the first time in almost five years, when a new era began in Russia as a result of the Crimean adventure and the economy was finally sacrificed to “geopolitics”, Russia is entering a year about which even the government does not say anything good. 2019 will go down in history as the year of two of the most unpopular reforms in Putin's 20 years in office: VAT increased from 18% to 20% and a creeping increase in the retirement age begins. But the main fundamental change in the economy that 2019 kicks off is the creation of long-term conditions for mass poverty.

The paradox is that the VAT is going up at a time when Russians have been getting poorer for four years in a row. At the same time, there is money in the state budget

What is the danger of raising VAT

It would seem that there is nothing wrong with raising the value added tax by just 2 percentage points - from 18 to 20%? Moreover, in Russia there was already a 20% VAT. And when it was introduced in January 1992, it was 28% at all. The problem is when and why it rises.

When the government explained to us the reasons for this decision, it emphasized the possibility of raising an additional 600 billion rubles a year to carry out the May decree of the president. That is, this additional money taken from us (because this tax is “hardwired” into the price of all goods and services), ideally, should then be returned to us in the form of public investment for social needs. Although it is still unclear when and how they will return, but they are already being taken away.

However, the paradox is that the VAT rises at a time when Russians have been poorer for four years in a row. At the same time, there is money in the state budget. The federal budget surplus for 2018 will exceed 3.4 trillion rubles. This is almost six times more than the increase in VAT will give the treasury. The 2019 budget was also drawn up with an excess of income over expenditure by almost 2 trillion rubles. Moreover, the budget surplus in Russia will be for the first time since 2011 - due to the weakening of the ruble and growth in income against the backdrop of a significant jump in world oil prices in 2018. It turns out that the growing rich state, under the pretext of fighting poverty, takes money from poor Russians for a completely prosperous budget.

Record low inflation for two years was caused primarily by the impoverishment of the population - prices did not grow at the same rate because there was a long decline in consumption in Russia

Why rising inflation is dangerous

Since 2016, Russian officials have been bragging about the record low inflation in the country's history. First, the Bank of Russia's inflation target of 4% per annum was reached. Then the rise in prices began to slow down even more and at the peak of the fall reached 2.3%. However, if in 2017 annual inflation, according to Rosstat, was 2.5% (the absolute minimum in the post-Soviet history of Russia), then already in 2018 it was 4.3%.

An even sharper price increase is guaranteed for us in the first half of 2019. In addition to the aforementioned increase in VAT from January 1, which immediately affected the entire price chain in the economy, excise taxes on fuel, recycling fees on cars increased, utilities rose in price (their second rise in price will occur in the summer) and public transport.

What is really going on? Record low inflation for two years was caused primarily by the impoverishment of the population - prices did not grow at the same rate because there was a long decline in consumption in Russia. People were simply unable to buy goods at the new prices. At the same time, although the real disposable income of Russians, according to official statistics - without a single exception - has been steadily falling from November 2014 to December 2017 inclusive, prices still continued to rise. Record low inflation is still inflation.

In four years, Russians have lost about 10-15% of their income. In 2018, against the backdrop of statements by officials about a record growth in real wages - by 9% - the incomes of Russians still practically did not grow. There are no final data yet, but according to the Accounts Chamber, Russians in 2018 became richer by a maximum of 0.4%. Even the level of income in 2013 seems now an unattainable luxury. Meanwhile, over these five years, prices have risen cumulatively by tens of percent.

The number of our compatriots living below the official poverty line, that is, having a monthly income below 11,280 rubles a month, according to Rosstat, has been steadily exceeding 19 million people for the past three years. And the state still does not know anything about the real income of millions of self-employed people. And now tens of millions of poor and simply impoverished Russians will have to face a new price surge.

At the end of 2019, the Ministry of Finance and the Bank of Russia forecast inflation in the region of 5.5%. In the first half of the year, as stated by the head of the Central Bank Elvira Nabiullina, the rise in prices may even be double-digit. At the same time, the government is going to index the salaries of state employees in 2019 once - from October 1. And only by 4.3% - that is, by the amount of inflation in 2018. It is easy to calculate that all this increase will be eaten up in advance by prices already in the first months of 2019.

A new round of inflation automatically makes even those Russians who have not recovered their income even close to the level of 2013 even poorer. And for a long time. Because even if, as the government hopes, inflation returns to the target of 4% per annum in 2020, it will still be a continuing fall in prices against the background of an almost halted income growth. Recall that in 2018 our real incomes did not grow even against the background of the low base effect from their fall in 2015-2017.

Right now, 57% of the population has outstanding debt, and one in two has debt to two or more banks or MFIs

The end of the era of cheap money

After the collapse of 2015, the Russian economy and consumption were supported by a credit boom. Now it will end too. After on the night of December 16, the Bank of Russia was forced to raise the key rate from 10.5% to 17% in a fire order, it steadily decreased until September 2018. But then the reverse process began. Over the last four months of 2018, the Central Bank was forced to raise the rate twice, bringing it to 7.75%. This is how she started 2018.

The higher the key rate, the more expensive the loans. Meanwhile, it was loans that saved millions of Russians from complete ruin in the last two or three years.

2019 began with a rise in mortgage rates by the two largest banks in the country. VTB announced an increase in mortgage rates from January 1 by an average of 0.6 percentage points. But the main trouble is that, having fallen at the beginning of 2018 to a historic low and becoming single digits, now mortgage rates will again be in double digits. In VTB, from now on, the rates for finished housing in new buildings start from 10.1% per annum. On January 14, Sberbank should also officially announce the increase in mortgage rates. Its increase will be even more significant than that of VTB, and will amount to 1-1.5 percentage points.

Inevitably, rates will rise both on consumer loans and on loans from microfinance organizations (MFOs), from which a million Russians in the provinces intercept money at tens and even hundreds of percent per annum “before salary” or “for food”.

Meanwhile, mortgage lending grew by tens of percent a year for two consecutive years. In 2017 and 2018, historical records for mortgage issuance were updated. At the end of 2018 alone, banks issued 1.3 trillion rubles of new mortgage loans, increasing the portfolio by more than 25%. The growth of consumer lending has also resumed. People at the expense of cheaper loans tried to get out of their personal financial crisis. Now that opportunity is closed to them.

The question is, how will Russians entering a new round of long-term poverty repay the loans they took out in 2016-2018, when this money was constantly getting cheaper? Right now, 57% of the population has outstanding debt, with one in two having debt to two or more banks or MFIs. The total debt of individuals jumped in 2018 by 22%, to 15.9 trillion rubles. Moreover, the total debt of Russians now stands at 27.84% of their income. This is an absolute historical maximum.

Pension reform - for "complete happiness"

The pension reform starting in 2019 will not make Russians richer either. It is changing the life strategies of millions of families. Two-thirds of Russian citizens still say they don't have any savings. Now, even many of those who have these savings will have to think about how to stretch the “extra” five years until retirement.

And, of course, the general context and the set of reasons why the “well-fed zeros” in Russia were replaced by poor “tenths” do not change. Russia is not going to change its foreign policy, which means that there is no hope for the lifting of sanctions and counter-sanctions. Our economy does not seem to depend on shocks in the US stock market (the stock market in Russia in terms of trading volume is a puddle compared to the American "ocean"). But on the other hand, American sanctions caused two of the largest collapses of the ruble since 2014 in 2018. Moreover, if in April last year the ruble fell due to targeted sanctions against the companies of Russian oligarchs Oleg Deripaska and Viktor Vekselberg, then in August-September it collapsed only on the threat of new hypothetical sanctions. It was about the bill of six American congressmen, which, among other measures, would ban the dollar transactions of the largest Russian banks and prohibit American investors from buying new issues of Russian government bonds.

Each collapse of the ruble naturally makes the Russians poorer. On the eve of the annexation of Crimea, the dollar cost around 35.5 rubles. Now it's almost double the price. Russians have already experienced almost five years of falling incomes. And the whole economic situation and political context suggests that 2019 will be the starting point for a new wave of impoverishment.

It is clear that purely economic measures cannot radically improve this situation. But in a country where the president, in all seriousness, considers a hypersonic missile with an unpredictable flight path to be the best gift of the nation , no one really thinks about the trajectory of the withdrawal of millions of people from hopeless poverty.