Natalia Biyanova
WPS Monitoring Agency, www.wps.ru/e_index.html

Economic analyst Igor Nikolayev argues that Russia can and should raise the wages of state-sector workers. The income gap between rich and poor is already dangerously high, and it is growing. The state needs to take active measures to avert a social explosion.

- The number of Russian citizens living below the poverty line decreased by 4 million in 2004, and real incomes rose by almost 11%. At the same time, however, the income gap between the richest and poorest societal groups widened. What does this mean? Have the poor become even poorer?
- No, their incomes rose last year as well. It's just that the incomes of the rich are rising much faster. The average incomes of Russia's richest 10% are 14.8 times greater than the incomes of the poorest. That is indeed a great deal. 
We are like a Latin American country. Those countries are characterized by unstable economies, a crisis every now and then, and authoritarian regimes. The existence of the income gap; the problem is that the gap is growing. This poses a clear danger. Increasing income differentiation could lead to a social explosion in Russia. What we are seeing now, in terms of the public response to the abolition of social benefits, supports the assumption that our society is anything but tranquil.
- Does the income gap situation vary from region to region?
- Predictably enough, the difference is particularly marked in the richest regions. As I mentioned, the average parameter nationwide is 14.8 - but in Moscow, for example, it's 51! That's a huge difference! In contrast, the gap is only 7.1 in the Vladimir region, one of the poorest regions of Russia. It is 9.8 in St. Petersburg; it is 20.3 in the oil-rich Tyumen region.
- The gap is considerable in Moscow, but surely this isn't one of the most socially volatile regions.
- It's hard to explain. I think even the poorest Muscovites are better off than the residents of other regions.
- How would you describe the richest and poorest strata of Russia's population?
- Russia's richest 20% are the owners of large chunks of property; high-paid executives and managers; and ordinary employees in sectors where salaries are generally high. The average wage for natural gas industry workers, for example, is over 30,000 rubles a month.
The richest 20% get 46.4% of the total income. Meanwhile, the poorest 20% get only 5.5%. I'm talking about state-sector workers, agricultural workers, pensioners, and disabled persons. Their income is below the poverty line of 2,396 rubles a month.
- And what are the income sources of the richest and poorest strata? What is causing the gap to grow?
- There are four major sources of income: wages or salaries, social benefit payments, income from property, and business dividends. Generally speaking, wages or salaries contribute 63.9% of income structure nationwide, social benefit payments contribute 14.1%, income from property contributes 7.8%, and business dividends contribute 12%. That means there are few Russian citizens living off their property.
- Are you saying that we have never developed a substantial category of property owners in Russia?
- Yes. Income from property amounted to 6% in the general structure during the mid-1990s, and it is now 7.8%: a rise of only one or two percentage points over a decade. That means the social objectives of privatization have never been achieved. The state should consider ways of increasing the category of property owners. This would require proper protection of their rights, and incentives for small business development. The number of small businesses in Russia is under 900,000. It hasn't changed significantly over the past five years.
- The state is clearly trying to reclaim some of its former property at present. Could this solve the problem of the widening income gap?
- Absolutely not. Rather the opposite. Unfortunately, the state is not an efficient property owner. And when it is a socially-oriented state only according to the Constitution, not in practice, the poor can't rely on or hope for any improvement.
- What about the flat-rate personal income tax? I'd say it aggravates matters. Before 2001, those with the lowest incomes paid 1% tax and the rich paid 40%. Now they are taxed at equal rates.
- Introducing the flat rate was necessary for the purpose of legalizing incomes and bringing them out of the shadows. Income tax collection has improved greatly since 2001. The worsening polarization of incomes has been a side-effect. In fact, practically all advanced countries use a progressive scale for personal income tax. I assume the progressive scale will be re-introduced in Russia some day. At present, however, when relations between business and government leave much to be desired, such a move would only send incomes back into the shadows. In dealing with the income gap problem, we should not focus on how to expropriate as much as possible from the rich. The emphasis should be on increasing the incomes of the poor.
- And what can be done to bridge the gap, at least to some extent?
- The state can and should raise the wages of state-sector workers. With oil prices as high as they are, the state can raise these wages by at lest 40%. This rise wouldn't cost more than 250 billion rubles. The federal budget can afford that. Its extra revenues alone exceeded 700 billion rubles in 2004.
- But when real incomes rise, that would mean higher inflation as well.
- If we raise the wages of state-sector workers by 40%, it would cost us only a 1% rise in inflation. That isn't too high a price to pay for the unprecedented stimulus to economic growth.
- All right, the state can afford to raise state-sector wages and pensions at this point - but what about the future, when oil prices fall?
- Oil accounts for just over 20% of the federal budget's revenues. Moreover, we have over 700 billion rubles in the Stabilization Fund. "Raising social spending is dangerous. What if oil prices crash tomorrow?" This is the sort of sermon we've been hearing for the last five years. The state finds this argument quite convenient. It's an excuse not to take any active measures. The state can afford to take its time, delaying the much-needed reforms - but the people want decent living standards today, now.

Translated by A. Ignatkin