Russia Struggles with Economic Class Divides

Pekka Sutela, writing in Inderscience, has concluded, after studying the new Russian economy, that the next decade should bring more riches to the thriving middle class of Russian rich and more poverty to the truly poor in Russia, according to a press release put out by Inderscience Publishing.

Russia has come very far economically since the collapse of Communism. At that time, Russia was exclusively an industrialized country, which, in this context, means that there were no auxiliary services or businesses. According to Sutela, Head of the Bank of Finland Institute for Economies in Transition located in Helsinki, Finland, there was a lack of common businesses like shops for daily goods, restaurants and cafeterias. There was a dearth of financial institutions including banks. Those few who owned cars had few service stations to service their automobiles. There were few, if any consultancies, travel bureaus, casinos or bars.

Sutela explains that these shops and services that are axillary to industry are heavily weighted in a modern market economy. After the collapse of the Soviet Union, such auxiliary shops and services began to spring forth. First, they appeared in the two major metropolitan centers of Moscow and St. Petersburg. They were then begun in increasing numbers across much of Russia as a whole.

This growth in market economy enterprises resulted in a burgeoning middle class that is acquiring wealth rapidly. The newly rising middle class spurs not only consumption of goods but also further market growth and economic structural change. In contrast to this, the manual labor force, which is only very slowly shrinking, is being driven into deep poverty. Sutela states that Russians who live in poverty are truly poor.

Even though Russia is making great gains, there are still two overriding questions that must be acknowledged and addressed. Currently, as of the 2006 ranking, Russia placed eleventh in the tabulation of the size of world economies. Russia, India, South Korea and Mexico all rank together at eleventh place in the world. Although the Russian Ruble is still traded on the world money exchanges as an undervalued currency, Russia's economic growth is rapid at roughly 4 to 6 percent each year.

Additionally, the regions of the Ural and the Volga are gaining, according to Sutela, hundreds of thousands of increasingly rich middle class individuals. As in all of Russia, it is these in the growing and increasingly wealthy middle class of the Ural and Volga who are fueling the high retail growth rate in these two areas and are equally fueling consumption and growing demand for goods. All this rapid Russian growth will probably allow Russia to outpace its current co-rankers and put Russia at a world economy ranking close to Italy's by 20011, according to Sutela, writing in the inaugural issue of Inderscience, which is a new publication within the International Journal of Economic Policy in Emerging Economies.

But, Russia's energy production for heating and fuel is lagging behind along with exports. In fact, Russia is importing goods at an increasing rate, which has the potential to seriously upset Russia's balance of trade. It will be of prime importance for Russia to diversify its products by adding that which will have a strong export market, per the examples of China and Japan, and its services so that foreign investors are continually more attracted and therefore willing to invest in Russia to keep the current investment surge going strong. This diversification is necessary to maintaining a sound balance of trade.

This returns us to the two questions facing Russia regarding its economy and society. There is growing poverty in the lowest levels of Russian society; there is a deep divide between the newly developing middle class and the truly poor. Sutela expresses it as Russia's economy being split in two. Diversification can also provide vitally needed jobs for the growingly impoverished and large labor class.

The questions Russia must answer are: Can Russia develop energy production enough and diversify enough to keep its growing and increasingly wealthy middle class employed, consuming, saving and investing? And, can Russia amend the great divide between the wealthy and the impoverished who, as Sutela says, are truly poor?

Pekka Sutela, "Gambling on Russian economic forecasting," Inderscience Publishers.