Rising Inequality: The Unparalleled Disparities of the Russian Federation

Widening inequality has become in one of the main challenges of our time. Income and wealth gaps between the rich and the poor have reached some of their highest levels in developed economies and emerging and developing countries (EMDCs) are struggling to reduce them. According to the latest Credit Suisse Global Wealth Report, Russia has perceived the largest radical increase in inequality in an emerging country since the 1990s becoming in the nation with the highest rate of wealth inequality in the world.  This rising trend traces back to the beginning of the transition period towards a market economy which exacerbated the inequalities across the country.  As a result, it has become in one of the main challenges for the Russian Federation and its current economic crisis may pose a threat to combat this trend. The need for effective redistributive policies are required in order to reduce the large inequality gaps and foster a more inclusive economic growth. In addition, it has to be accompanied with effective labor market reforms, law enforcement, and a comprehensive tax system that promotes a greater redistribute effect.

 

Wealth and Income Inequalities

 

The growing and staggering inequalities in Russia position the country as an exception compared to the rest of the world. According to the most recent Global Wealth report by Credit Suisse, the top decile of the population owns 87% of all household wealth in the country. This is even dramatic when compared with major economies with high inequalities such as the United States and China where the top decile controls around 76% and 66% respectively. In addition, Russia has approximately one billionaire for every $11billion dollars in household wealth compared to the one billionaire for every $170 billion worldwide. These figures show that inequality in Russia has become in one of the main challenges to be tackled, as Vladimir Putin rightly described in 2012 as “absolutely unacceptable”. Similarly to wealth inequality, the gap in income inequality has also widened significantly with an increase in the Gini coefficient from 0.26 in the 1990s to over 0.40 in the most recent years. Thus, a greater emphasis to strengthen the middle class would contribute to higher economic growth and social satisfaction.

 

The largest radical increase in inequality occurred during the transition towards a market economy which gave rise to an uneven distribution of natural resources that exacerbated the problem. The massive privatization period seen in the 1990s benefited different individuals and their wealth increased dramatically due to their acquired assets.  In addition, the transition was expected to evolve into a high-skilled economy driven by a fair distribution of wealth. However, it has resulted in large intra and inter industry disparities where wages of agricultural workers differ 25 times from those in the finance or trade sectors, making economic inequalities persistent throughout the first part of the 21^st century. 

 

The current severe economic crisis in Russia may pose a threat to the widening inequalities between the rich and the poor and also between regions. As the most impacted during an economic crisis are the most vulnerable in the society, it is essential to provide the right mechanisms to avoid exacerbating this problem in a moment when household wealth are under pressure due to tied financial conditions. 

 

 

Regional Disparities

 

 

Given the large diversity and geographic size of the Russian Federation, it may not come as a surprise to perceive high inequalities between regions. Nevertheless, Russia is currently experiencing one of the highest levels of regional inequality in the world where only seven of its 83 regions are considered as “drivers of growth” and 30 of them are categorized as “adverse”.  The lack of diversification and creation of quality jobs throughout the country has contributed to these disparities that create differences in living standards, wealth and quality of life. The distribution of natural resources in different geographical locations partly mark the enormous differences between regions. As the country has followed a rather resource-based economy, the regions with natural resources tend to provide higher wages, more qualified human capital and better quality of life than other parts of the country. Thus, the economic growth and prosperity experienced during the commodity boom has primarily benefited energy hubs and bypassing the country’s poorest areas.

 

Russia has implemented development policies such as intraregional budget transfers and investment in infrastructure in order to reduce inequalities and equalize its regions. However, the remarkable role of natural resources in Russia’s economy has made it relatively unsuccessful due to their vast differences across the country. In addition, these policies have been criticized due to the perceived corruption of regional elites that may affect the efficient and proper allocation of capital for social spending. According to surveys made by the Institute of Contemporary Development in Moscow, the levels of institutional trust in Russia are very low and corruption is ranked as the second biggest problem in the country.  Similarly, the Transparency International Corruption Perception Index ranked Russia 119 out of 168 countries in 2015. Thus, law enforcement and strengthening institutions will be key to design and implement anti-inequality policies that deliver the expected results.

 

 

Redistributing Through the Tax System

 

One of the main ways to reduce inequalities is through a progressive tax system. While the Russian government has mainly focused on social spending and transfer programs, it has made little use of taxation in order to redistribute resources. Russia currently has a flat tax system with an income tax set at 13 per cent, exacerbating rather than solving the problem of inequality. As the rich and the poor have to pay the same percentage of their incomes, the most affected are going to be the poor that are left with less resources to pay for their needs. The restructuring of the tax system remains hesitant as Russian policy makers fear hurting the middle class and increase the levels of tax evasion. Nevertheless, according to Oxfam, even with a flat tax rate, the current estimated tax evasion in Russia is approximately 40 per cent and the mechanism to enforce legal measures have been lacking.  Thus, the need to strengthen institutions is required in order collect more taxes and promote a better allocation of resources across the country.

 

In any case, the Russian tax system plays a very limited role in fighting the increasing disparities in the country and requires to be redesigned in order to counterattack the growing inequalities. This will not only help to redistribute resources but it also will act as a source to raise revenues for public spending. In addition, inequalities will not be solved unless there are changes in the labor market from low-productivity and resource intensive industries to a more productive economy that equalizes human capital and opportunities throughout the nation. All of these have to be accompanied with a notorious law enforcement and a reduction in corruption as it is perceived as one of the main concerns among people.