POVERTY GROWTH REPORT UNDERESTIMATES THE PROBLEM

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002350 SIPDIS STATE FOR EUR/RUS, DRL NSC FOR ELLISON DOL FOR BRUMFIELD E.O. 12958: DECL: 09/13/2019 TAGS: ELAB ECON EIND PGOV SOCI RS SUBJECT: POVERTY GROWTH REPORT UNDERESTIMATES THE PROBLEM Classified By: A/ECON John Stepanchuk, Reasons 1.4 (b,d) -------------- SUMMARY -------------- ¶1. (C) The number of Russians living in poverty rose for the first time in seven years in the first quarter of 2009. Families with multiple children, single pensioners, and migrant laborers suffered most acutely. Experts and legislative officials accused the government of using an insufficient basket of goods and services for the subsistence minimum, claiming the number of impoverished Russians should have been significantly higher. A local poverty expert told us the government also overinflated the incomes of the poor in its attempt to compensate for "gray income," in addition to other factors that distorted first quarter statistics. According to experts, the government is unlikely to meet its poverty reduction promises and resolve the related issue of falling household consumption in the absence of an emphasis on the poorest Russians in its anti-crisis programming. End summary. -------------- POVERTY ROSE IN THE FIRST QUARTER OF 2009 -------------- ¶2. (U) For the first time since 2002, the share of the population living below the subsistence minimum rose in the first quarter of 2009. According to data released by the government statistics service (Rosstat),17.4 percent, or 24.5 million Russians, had incomes less than the subsistence minimum in the first quarter, up from 16.3 percent in the first quarter of 2008. First quarter statistics are traditionally higher than annual averages owing to the fact that the government recalculates the subsistence minimum at the beginning of each year (it rose 8.3 percent to 5,083 rubles per month this year). However, this was the first time since 2002 that the first quarter results were higher than the results from the first quarter of the preceding year. ¶3. (C) Families with multiple children, single pensioners, and migrant laborers comprised the poorest section of the population. Alina Pishnyak, Senior Research at the Independent Institute for Social Policy, told us that children, particularly those aged three to six, faced the most acute risk of poverty. Despite popular belief, pensioners in general were not the poorest owing to their tendency to live together or with working family members. Single pensioners, however, did suffer from insufficient incomes. Of the economically active population, migrant laborers were the most impoverished. -------------- EXPERTS CLAIMED RATE SHOULD BE HIGHER -------------- ¶4. (U) Experts and legislative officials disparaged Rosttat's minimum basket of goods and services and its associated estimation of the poverty rate. Ovsei Shkaratan, Higher School of Economics professor, told Noviye Izvestia, "the minimum basket in Russia had never had anything to do with minimums, subsistence or otherwise," asserting that, "the 'minimum basket' the government was talking about was an 'impoverishment basket' and nothing else." Oleg Shein, Assistance Chairman of the Duma Committee for Labor and Social Policy, commented to the paper that 60 percent of Russians could not afford durable goods, leading him to estimate that 40-45 percent of the population was already below the subsistence minimum. ¶5. (C) Pishnyak of the Independent Institute for Social Policy emphasized the flaws in Rosttat's formula and unusual events that skewed the results of the survey. Rosstat estimates household incomes based on contract salary information from employers. In order to compensate for the tendency of workers to receive part of their income under the table, Rosstat rounds up income estimates for workers across the spectrum by a standard figure to compensate for this "gray income." However, Pishnyak contended that the amount of "gray income" received by wealthy Russians was significantly higher than the amount received by the poor. Thus, Rosstat's adjustment resulted in an underestimation of poverty. In addition, many employers that withheld bonuses at the end of 2008 paid them in the first quarter of 2009 instead, when their expectations regarding the economy MOSCOW 00002350 002 OF 002 improved slightly. Pishnyak stressed that this delay distorted estimates for the first quarter, and that employers were unlikely to pay bonuses at all in the coming winter. According to her figures, 30-40 million Russians had incomes below the subsistence minimum in the first quarter. Pishnyak predicted 11-13 percent poverty growth, year-on-year, by the end of 2009. -------------- COMMENT -------------- ¶6. (C) Experts' predictions for continued poverty growth bode ill for Russia's economic recovery. Household consumption constitutes a significant portion of domestic demand. As falling income levels hit family budgets, Russians are saving and paying off debts instead of spending on goods and services. Given the government's lack of emphasis on the poorest segments of the population in its anti-crisis measures, it is unlikely to fulfill its promise to lower the poverty rate to 10 percent by 2011 and reverse this trend. End Comment. Beyrle