ANALYSIS - Crisis hits wages in Russia

By Emre Gurkan Abay

MOSCOW (AA) - The negative impact of the crisis in Russia due to low oil prices, Western sanctions imposed due to activities in Ukraine as well as counter-sanctions, continue to be some of the biggest problems of the recession-hit country.

With its economy shrinking by 3.7 percent last year, Russia's GDP continued its decline in the first quarter of this year by dropping another 1.1 percent. The country’s foreign trade surplus also decreased to $31 billion during the same period, a decrease of 47.7 percent, compared to the first four months of last year.

During a speech in Moscow three weeks ago, Russian President Vladimir Putin warned that if the country was unable to find new resources for growth, Russia would be stuck with a 0 percent growth rate for years to come.

While a report prepared by Russian Ministry of Economic Development indicated that even if oil prices stabilize at $50 per barrel, it would be “practically impossible” to reach a 5-7 percent economic growth rate.

According to research released in March by VTsIOM, a Russian public survey agency, one of the biggest fears for Russians is the high inflation rate, which is currently at 7.3 percent. The Head of Russia's Central Bank Elvira Nabiullina also stressed a week ago that risks of an increase in the country’s inflation rate remain.

The inflation rate in Russia was 12.9 percent last year and the country’s Ministry of Economic Development’s forecast is that by the end of this year, inflation will decrease to 6.5 percent in annual terms.

- Decreasing income of Russians

In addition to high inflation, the drop in real wages, and accordingly, the decrease of living standards stands among the biggest fears of Russian citizens.

According to the recent “Social Economical Situation of the People” report released by Moscow-based Higher School of Economics, the monthly average salary in Russia decreased by 34 percent to $558 last year, compared to 2014.

The report underlined that the new level of average salaries in Russia was now close to the average salary level of Kazakhstan. The data by Russian Federal State Statistics Service (Rosstat) shows that the real wages in April this year dropped by 7.1 percent compared to the same month a year earlier.

Another report by VTsIOM, “The Consuming Sensitivity of Russian People,” revealed that 72 percent of Russians believe that they should forego big expenditures while 87 percent are afraid of incurring debt to banks.

Oleg Chernozub, an expert from VTsIOM points out that while these figures were never this “negative,” the data on consumer behavior could also mean that the Russian economy may have entered a “deflation spiral.”

This statement reflects the seriousness of Russia's economic situation as according to data announced by the country’s statistical services, Rosstat, the amount of people living in poverty increased by 3.1 million last year reaching 19.2 million, which means that 13.4 percent of the country’s population is living in poverty.

- Sanctions

Another milestone around Russia’s neck is the sanctions imposed against the country due to its activities in Ukraine and the annexation of Crimea.

The sanctions imposed by U.S. and some EU countries on Russian energy and military industries are preventing them from purchasing new equipment or obtaining loans from Western institutions.

“The Crimea and the Punishment: the impact of sanctions on the Russian and European economies“report published by the German Institute for Economic Research DIW, revealed that because of sanctions imposed on Russia by the West due to its activities in Ukraine, the Russian economy is losing a GDP growth of 2 percent every quarter.

According to the research, since the start of the sanctions in the second quarter of 2014 to the third quarter of 2015, the Russian economy shrank by 4.1 percent whereas if sanctions were not imposed, a growth of 6.9 percent would be expected.

While the Russian Central Bank announced that the outflow of capital from the country during the first four months of 2016 amounted to $12.8 billion, the Russian Ministry of Finance also announced last week that some $6 billion was used from the country’s reserve funds to make up for the budget deficit.

- Dropping energy revenues

Decreasing revenues from oil and gas exports are also a major problem. The country’s revenues from natural gas exports in the first three months of this year decreased by 25.8 percent to $8.5 billion, while oil revenues during the same period dropped by 38 percent to $14 billion.

While Russian Minister of Finance Anton Siluanov stated that the share of oil and gas revenue in Russia’s total income dropped to 34 percent in the first quarter of this year, analysts underline that this is due to the drop in hydrocarbon prices globally, rather than a structural change in the Russian economy.