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Reference ID Created Released Classification Origin
06MOSCOW6815 2006-06-27 11:10 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Moscow

DE RUEHMO #6815/01 1781110
R 271110Z JUN 06

E.O. 12958: N/A 
REF: A. MOSCOW 2655 
     B. 05 MOSCOW 13444 
     C. MOSCOW 6334 
     D. 05 MOSCOW 5252 
     E. MOSCOW 1082 
     F. MOSCOW 3356 
MOSCOW 00006815  001.2 OF 005 
1. (SBU) SUMMARY: With real average incomes up 66 percent 
over the past five years, Russia's middle class has begun to 
emerge from the shadows -- after all, someone other than the 
mega rich has to be buying all those TV sets, cars and cell 
phones.  Understanding that the movement is now well 
underway, we asked ourselves two questions.  For those not 
yet firmly rooted in the economic middle of the country, what 
might we expect looking forward?  The path up the economic 
ladder may be barred for many -- low-wage civil servants, the 
geographically isolated, and those trapped in a dependency 
mindset.  Some observers worry that the economy is not 
creating enough new professional jobs or providing sufficient 
space for entrepreneurial activity to allow real social 
mobility out of the lower-middle class.  Nonetheless, there 
is clear evidence that the benefits of Russian growth are 
spreading, and intergenerational mindset changes appear to be 
setting a positive trend line for the future. 
2, (SBU) The second, and no less important question, is what 
can we expect from this group in political terms?  Right now, 
Russia's emerging middle class is hardly a coherent political 
force -- and what politics they do espouse cannot be called 
uniformly progressive (from a social perspective) or liberal 
(from an economic view).  But, while there is deep apathy 
about electoral democracy, observers here do note a budding 
political consciousness.  Attitudes within the middle class 
about the rights of citizens relative to the government are 
evolving, and people are increasingly willing to assert their 
interests and to push back against abuses of the state.  END 
3. (SBU) Much ink has been spilled on the size and 
characteristics of Russia's middle class.  A wide menu of 
definitions are available, with an equally wide divergence in 
assessments of middle class strength, most now solidly 
ranging from one-fifth to one-third of the population.  As 
Tatyana Maleva, Director of the Independent Institute for 
Social Policy, has said, "The phenomenon is multifaceted, 
contradictory, and complex."  Questions of definition or size 
aside, the economic and political forces at play help us to 
discern the trends in the middle class's development going 
4. (SBU) Growing prosperity in Russia is bringing expansion 
of economic freedom, the alleviation of poverty, and an 
attendant growth in markets for U.S. goods and services.  A 
middle class worthy of the name, of course, should be more 
than formerly poor people with more cash and goods in their 
pockets -- it should display certain economic values, such as 
faith that investment now, e.g., in their own or their 
child's education or health, will yield a better future for 
themselves and their progeny.  From an economic point of 
view, we want to see more Russians given more opportunities 
to realize their economic dreams, in the hope that this will 
translate into accelerated investment in human capital and a 
cycle of continued growth and prosperity. 
5. (SBU) From that perspective, what are the trends?  Russian 
GDP has grown at an average rate of around seven percent the 
last seven years.  Poverty continues to decline: while most 
statistics suggest poverty has dropped to 15-20% of the 
populace, it is worth noting that the best household survey 
MOSCOW 00006815  002.2 OF 005 
available on Russia (the formerly USG-funded University of 
North Carolina's Russian Longitudinal Monitoring Survey 
(RLMS)) places 2005 poverty levels at 7.8 percent, down from 
38.1 percent in 1998.  Real average incomes have gone up 66 
percent from 2000 to 2005.  Purchasing power, especially 
given real ruble appreciation, has surged as well.  According 
to RLMS, Russians spent 43 percent more on electronics and 
durables in 2005 vs. 2000, and 36 percent more on services 
and recreation over that time.  Twenty-one percent of 
households now own a computer, up
from four percent in 2000. 
According to Levada Center polling, forty-five percent of 
Russians now own cellular phones, up from 2 percent in 2001 
(and most that own one actually own two, given the near 100% 
cell-phone penetration rates found in Russia).  Car sales, 
considered by many to be a good proxy for middle class 
growth, jumped 106% in dollar terms from 2002 to 2005, 
according to PricewaterhouseCoopers (ref A). 
6. (SBU) Despite this strong prima facie evidence of growing 
wealth, some observers worry that this rising tide is not 
lifting all boats.  They argue that the majority of Russians 
-- the 50 to 70 percent of the population who are not poor 
yet not quite middle class (referred to by many as the "lower 
middle class" for lack of a better term) -- have seen too 
little benefit.  Poverty levels are down, they say, largely 
because of increased state transfer payments to Russia's 
poorest, while those in the middle class -- the entrepreneurs 
and professionals already plugged into the modern economy -- 
are becoming better and better off as the economy expands. 
But those in between may face constraints that will keep them 
from climbing easily into the middle class, several contacts 
told us. 
7. (SBU) Low-paid government workers constitute a big chunk 
of this immobile lower middle class.  According to Mikhail 
Chernysh of the Institute of Sociology, approximately 20 
percent of the Russian population falls into this category. 
In fact, many teachers and health care workers, part of the 
bedrock of the middle class in the west, only recently 
climbed out of poverty when the state began raising public 
sector wages in 1999 (ref B). 
8. (SBU) What are the prospects for low-wage civil servants 
taking the next step into the middle class?  According to 
Ksenia Yudayeva of the Center for Economic and Fiscal 
Research, a fair number already have: "Everybody knows 
government workers get private payments.  Teachers get money 
for tutoring and people normally give doctors extra cash." 
Those with skills in demand have found a growing market for 
their services.  "The best doctors live well here," Natalia 
Tikhonova of the Higher School of Economics, told us. 
Unfortunately, she said, too many state employees "have not 
received retraining in 20 years."  According to a Ministry of 
Health study, 60 percent of doctors only prescribe from a 
limited set of 40 medicines.  As they cannot be considered 
highly qualified, their skills are simply not in demand, and 
their wages reflect this. 
9. (SBU) Still, with President Putin's new spending focus on 
health care and education as National Priority Projects, 
formal salaries in these sectors may be rising regardless of 
the quality of services provided.  Our contacts expressed 
doubts that such increases would be widespread and 
significant enough to lift very many into the middle class. 
Maleva worries that increased salaries without meaningful 
health care or education reform will only serve to stoke 
inflation.  Nonetheless, she acknowledged that in a year it 
could be the case that wage hikes for some of these workers, 
who already display many typical middle class values, will 
raise their incomes to middle class levels as well. 
10.  (SBU) It would be more encouraging if there were 
MOSCOW 00006815  003.2 OF 005 
significant numbers of civil servants leaving for 
opportunities in the private sector, where the path to the 
middle class may be less obstructed.  Unfortunately, the 
trends seem to be going in the opposite direction.  According 
to Yevgeniy Gavrilenkov, Chief Economist at Troika Dialogue, 
over the past three years the number of Russian bureaucrats 
has risen 17 percent, while labor productivity in the 
government sector continued to fall.  In effect, the 
government has been employing more people in positions with 
limited upward mobility rather than promoting their entry 
into the more dynamic private sector labor market. 
11. (SBU) Limited geographic mobility is often mentioned as a 
constraint on social mobility.  "Russians aren't like 
Americans -- we don't like to move all the time," Maleva told 
us, reflecting a widely held belief.  A lack of information 
about job markets and housing (and a lack of affordable 
housing itself) make Russians less likely to take their labor 
to where the jobs are, we heard.  However, according to 
Rostislav Kapelyusnikov, Deputy Director of the Center for 
Labor Studies at the Higher School of Economics, that 
constraint has been overblown.  He argues that, once 
distances between migration points are accounted for, 
Russians actually are as geographically mobile as western 
Europeans.  According to Tikhonova, although individual 
Russians do face challenges in relocating, it is clear at a 
macro level that people are moving -- only about one-third of 
Russians are still living where they were born, she told us. 
"If a labor market develops, people will move there as if 
sucked by a vacuum." 
12. (SBU) Unquestionably, however, some people are still 
being left behind, many of them in depressed, remote rural 
areas.  According to Yudayeva, it is not simply that they 
face migration constraints.  "There are entire rural 
populations suffering from chronic alcoholism.  Many of these 
people may have turned to alcohol due to economic hardship, 
but that does not mean they will then turn away from it when 
there is economic recovery.  It's a one-way street."  For 
many members of the lower middle class, their own dependency 
mindset remained the most significant obstacle.  As Tikhonova 
put it, "They just haven't adapted, and don't believe they 
can do anything with their lives." 
13. (SBU) No one should be surprised if growth is somewhat 
unevenly distributed and some demographic segments benefit 
less.  "Clearly there will be some who can't integrate -- 
just like in the west," Yudayeva told us.  However, she does 
believe that the benefits of economic expansion have been 
broadly dispersed.  The latest RLMS results support that 
conclusion.  From 2004 to 2005, real income grew by 12 to 18 
percent for each of the lowest four household income 
14. (SBU) So, what will determine the prospects for continued 
growth of this middle class?  Our contacts site three key 
predictors: education, economic growth, and the changing 
mindset of young people.  Maleva believes that one half of 
the 50-70 percent of the population in between the poor and 
the middle class is close enough to the middle class in 
attitudes, attributes and assets that it could join its ranks 
in the coming decade, under the right co
nditions.  Of 
particular importance, she believes, would be reforms to 
improve the quality and market-relevance of higher education. 
 Gavrilenkov agreed: "The best thing they could do would be 
to boost education spending from the current three to four 
percent to around eight percent, like Denmark and Sweden did 
in the 1970s.  They need to prepare a new generation." 
15. (SBU) Tikhonova, who currently places the size of the 
MOSCOW 00006815  004.2 OF 005 
middle class between 20 and 33 percent, believes its ranks 
could swell to 40% in 10 or 15 years if economic growth 
generates enough professional-level jobs and creates a 
favorable climate for entrepreneurs.  Those near the top of 
the lower middle class will climb up into the spaces 
provided.  (The Ministry of Economic Development and Trade, 
in fact, predicts that 60 percent of the population could be 
middle class over that time frame.) 
16. (SBU) Longer term, changes in mindset will likely raise 
that 40 percent ceiling, Tikhonova said.  "Younger people are 
very different, more adaptable."  As Yudayeva sees it, 
adaptability is largely generational, and those least 
adaptable will gradually disappear, to be replaced by that 
younger crowd without the same dependency mindset.  If the 
economy continues to grow, she was "very optimistic" that the 
middle class would grow with it.  The pace of that expansion 
may slow if, as Gavrilenkov said, "the period of 'easy' 
growth in Russia is coming to an end," (now that spare 
capacities have been utilized, and oil price growth may 
decelerate or even reverse course in the coming years). 
Thus, restructuring and reform will become increasingly 
important to sustain high growth.  But what growth there is 
should open the way for more Russians to move up a rung or 
two on the economic ladder. 
17. (SBU) The long-term expectation among most liberal 
observers is that a thriving Russian middle class will become 
a progressive political force as well -- one that eschews the 
extremes of the right and left, advocating for rule of law, 
property rights and predictability to secure its gains. 
Here, though, the picture is still mixed at present.  As 
Maleva explained, "the Russian middle class is progressive 
only in terms of economic behavior, not political 
preferences."  Right now, their preferences are as diverse as 
the general population, and, if anything, they are more 
nationalistic than most, Chernysh notes. 
18. (SBU) They Russian middle class has also proven prone to 
populism.  Svetlana Misikhina of the World Bank told us, 
"Everybody is interested in taking money from the oligarchs 
and putting them in prison.  Everyone favors redistributing 
the stabilization fund to all.  These are not middle class 
ideas."  Mikhail Dmitriyev, head of the Gref Center, says 
such attitudes have been on the increase in recent years. 
"Five years ago, public opinion polls and focus groups showed 
that 22 to 25 percent of the population wanted continued 
market reforms.  But this group has disappeared into 
insignificance.  Now a consensus has formed in favor of 
large-scale renationalization.  Any campaign for reform would 
fall on deaf ears," he told us. 
19. (SBU) However, such swings in middle class opinion may 
have more to do with a tendency to agree with the position of 
the government than with emerging core values.  Five years 
ago, the propaganda extolled the virtues of reform.  Now, the 
government wants to separate itself from the Yeltsin years, 
the propaganda is all about reestablishing Russia as a great 
power, and the electorate has fallen in line.  "The group 
that wanted reforms for its own reasons has always been 
smaller," according to Yudayeva. 
20. (SBU) Of the small group that might genuinely be 
interested in reform, perhaps even fewer are interested in 
traditional political activism to meet those ends. 
Nonetheless, contacts did believe that some form of political 
consciousness is growing within the middle class ranks. 
According to Tikhonova, Russians are developing an 
appreciation for rights, "but not in the western sense." 
MOSCOW 00006815  005.2 OF 005 
Rather, they increasingly feel they have a right "to indicate 
their interests, and to protect those interests against 
bureaucrats."  This tracks with our own findings in regional 
capitals (ref C). 
21. (SBU) Yudayeva also believes that a form of political 
liberalism is growing.  For example, she recalled the 
reaction to the military hazing case of Andrey Sychev, in 
which the young soldier was brutalized in a hazing incident 
(ref E).  "In the Soviet Union we never would have learned 
about this.  There has been a change in mentality about the 
balance of rights between people and the government," she 
said.  In March, this changing dynamic was on display again, 
when motorists' protests across Russia helped overturn the 
conviction and prison sentence of a driver whose only crime 
was being sideswiped by a speeding black Mercedes containing 
a regional governor (who died in the crash) (ref F). 
22. (SBU) As American Bernard Sucher, Chairman of Alfa 
Capital and long time Russia-watcher, sees it, the expansion 
of the Russian middle class is slowly and steadily altering 
the dynamic between the government and the governed.  "With 
each day, more and more people in Russia are gaining an 
economic stake in the system, and long-term, they'll force it 
to respond to their needs.  Democrats are being created every 
day," he believes.  It may be some way from Jeffersonian 
democracy, but Sucher suggested that many observers lack 
perspective about how far Russia has come.  "The genie's out 
of the bottle -- the Russian government can't go back to 
restricting property, or travel....  The powers that be are 
scared of crossing these lines." 
23. (SBU) Russia's rising tide may not be lifting all boats, 
but it is lifting the boats of those who have chosen to adapt 
to modern economic realities.  It is no surprise that some 
are adapting better than others, but time is on the side of 
Russia's youth.  But while "Russians Slowly And Steadily Join 
The Middle Class" may seem an uncompelling headline, it does 
capture the central trend at play here.  Political 
consciousness of the sort typically associated in the west 
with a middle class has undeniably taken root, but expecting 
it to blossom into political activism at this point, in this 
political environment, may be too much to ask.  Nonetheless, 
the trend is clear, and it is hard to imagine that the haves 
in this country will ultimately behave any differently than 
their counterparts in other modernizing so
cieties.  They will 
eventually want a voice and vote in how their country is run 
and their tax dollars spent. 


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