Poverty and its lines:
How the state is manipulating the numbers
April 13, 2023
  • Maxim Blant
    Economic commentator, Radio Free Europe/Radio Liberty
Maxim Blant writes that the government is expanding the categories of people who receive state support while reporting a falling poverty level. However, amid the war, this policy is fraught with serious economic risks.
For 2022, Rosstat reported the lowest poverty level in Russia’s entire post-Soviet history. “Only” 15.3 million people, or 10.5% of the population, were below the “poverty line.”

The annual readings traditionally reflect the data for the third quarter of the year, which, according to statisticians, is least distorted by seasonality. The impact of seasonality can be judged by the official statistics for 2022. In January-March 2022, another record was set, only a bad one. More than 5 million more people were below the poverty line than in January-March 2023 – 20.9 million or 14.3% of Russians. Yet by the fourth quarter of 2022, the number was even lower than the eventual full-year figure at 11.6 million, or 7.9% of the population.

Rosstat, and then the government, has pointed out that such fluctuations are observed every year, as the poverty level is highly affected by seasonality. At the end of the year, incomes are higher due to various awards and bonuses. At the beginning of the year, the “poverty line” is usually raised, with the result being that more people fall under it.

The data from 2021 has been routinely used to support these claims. Back then, in the first quarter 14.2% of the population was under the poverty line, versus 8.5% in the fourth quarter. In the third quarter (and also for the full year), the figure was around 11%, 0.5 percentage points higher than in 2022. These fluctuations suggest that a significant part of the Russian population lives around the property line, which is used to determine who needs social support. Before considering how appropriate this line is, we should understand how officials have explained their success in bringing down poverty.

Social payments and low unemployment

According to Rosstat, social payments and government benefits were the main driver behind the lower poverty reading. From April 1, 2022, in addition to payments for children from 3 to 7 years old, the authorities began to support families with children from 8 through 17 years old. According to Finance Minister Anton Siluanov, this measure affected 3.7 million families, with the corresponding budget outlays exceeding RUB 1 trillion.

Another RUB 400 billion was spent on an unplanned indexation of pensions from June 1, 2022. The need for that arose after the spring economic shocks caused by the war and international sanctions.

Since we are talking about the budget, it is impossible to ignore flows directly related to the war. These include one-time payments to mobilized soldiers, monetary allowances for contract soldiers who are fighting, and payments to the wounded and family members of those killed.
The Russian Ministry of Defense does not report losses, but even if we just consider men officially mobilized, the number of families who received additional money from the state is in the hundreds of thousands.
Another factor cited by Rosstat is record-low unemployment and rising nominal wages. The logic here is simple. Even though household real incomes (adjusted for official inflation) fell 1.4% in 2022, the number of people who have no official income also decreased – and since by law, Russian employers cannot pay wages below the minimum wage, the number of people in need of social support also decreased.

Number games

Reducing poverty is one of the official “national development goals” put forward in Vladimir Putin’s decree. In 2018, the target was to halve the poverty level by 2024 relative to 2017, when it was 12.9% of the population. Meanwhile, in 2020, after the Constitution was amended, the time frames were pushed back to 2030.

Still, the goal can clearly only be reached, if it is reachable at all, on paper. Simply put, by arbitrarily shifting the poverty line. The 2022 data very much reflected multiple previous changes to the methodology, which led to rather curious paradoxes.

For example, the “poverty line” in 2022 was RUB 13,545/month (about $175/month at the current exchange rate), while the living wage (“subsistence minimum” in Russian – the income level necessary to meet basic needs) put in place from June 1, 2022, was RUB 13,919/month. Moreover, for the able-bodied population, the living wage amounted to RUB 15,172/month.
“In other words, the 'poverty line' was below the level necessary to meet basic needs, and significantly lower for adults of pre-retirement age.”
The term “poverty line” itself appeared in Russian legislation in November 2021. Prior to that, the living wage served as the benchmark. Until 2021, Rosstat calculated that based on the cost of the “basket” of food and goods necessary to meet basic needs.

However, in 2021 the methodology for calculating the living wage was changed. The government decided to link it to median per capita income, dividing the population into two equal parts based on income.

The living wage was set at 44.2% of the median income (no one explained why exactly 44.2%, and not 40% or 50% – it was just given). Instead of calculating it quarterly, they switched to marking it annually. The notorious “poverty line” was introduced solely to compare numbers with previous periods. Meanwhile, the cost of the “basket” was no longer calculated. Instead, the last level for the cost of living calculated using the old methodology – for the fourth quarter of 2020 – began to be adjusted in line with officially reported inflation.

However, after the outbreak of the war in Ukraine, the methodology was hurriedly changed. The economic shock that followed, accompanied by a surge in inflation (it was 7.6% just in March 2022, according to official statistics), forced Putin into an arbitrary, unplanned hike in the living wage by 10% from June 1.

This made it possible to pay social benefits to the needy and prevented a social implosion. This is where the divergence between the living wage and the “poverty line” occurred. Curiously, the budget law adopted in autumn 2022 stipulated that the living wage and the minimum wage are to be set by a special procedure in 2023-24 based on expected inflation.
Nobody talks about median incomes or median wages anymore. Because, if it was based on either, the poverty line would be significantly higher than currently.
In 2020, when a new methodology for calculating the cost of living was discussed, linking it to the median income was proposed. True, instead of 44.2%, it was supposed to be 42% (no reasonable explanations for this figure were given either).

In recent months, Rosstat stopped reporting data on median incomes and wages. However, SberIndex tracks wages, with the median at RUB 49,627/month in December 2022. This means that the minimum wage should be RUB 20,843/month (42% of the median wage of RUB 49,627/month), versus the RUB 16,242 minimum wage set by the government and now enshrined in law.

As for per capita median incomes, there are not even unofficial estimates. However, Deputy Prime Minister Tatyana Golikova gave RUB 45,272/month as the average per capita income for 2022. If we estimate the living wage based on that, using the methodology of Rosstat, it should not be lower than RUB 20,000/month. Were the government to set the bar so high, it would not be 15 million, but 30-40 million Russians below the “poverty line,” and there would not be enough money in the budget for social benefits, even if Siluanov by fiat redirected all military spending to help the needy.

Inflation decides everything

The tricks with constantly changing the methodology for calculating the poverty level mean that the indicator has become entirely dependent on how Rosstat counts official inflation. For 2022, it amounted to 11.94%. Even if this estimate is to be believed, the basket of goods used to calculate consumer and services price inflation differs significantly from that used for the cost of living. How seriously they can diverge can be seen from a simple example. According to NielsenIQ, fast-moving consumer goods (they are the main expenditures for low-income people) went up in price by 17% in 2022. In Russia, where millions of families live around the “poverty line,” a 5 percentage point divergence between that figure and official inflation changes things radically.

The current situation suits the Russian government quite well.
In an environment where a significant part of the population is focused on just getting by and is wholly or partly dependent on social benefits or other types of material assistance, it is much easier to ensure political loyalty.
The key thing is to dose the payouts.

However, expanding the categories of people to whom the government provides material assistance has a downside. Before the war, the additional demand that was generated by the state’s “generosity” could at least partially be met by increasing imports. However, international sanctions, combined with the voluntary exit of a huge number of Western companies from Russia, have disrupted that mechanism. No matter how much money the government distributes, there are only so many goods and services available in the domestic market.

The economy’s ability to meet effective demand is being weighed on not only by international sanctions over the war, but also by the war itself. To create new industries and expand existing ones, you need investment and equipment, as well as people who can work that equipment. But in the context of the war, which is being fought mainly by “contract soldiers,” it is very hard for enterprises in the consumer sector to find workers. First and foremost, they have to compete with the military-industrial complex. The production of tanks, guns, missiles and shells, for obvious reasons, is now a priority, and the government does not spare any money on weapons. In addition, the army is sucking up idle labor out of the market.

And as Russian troops are killed and wounded in Ukraine, the need for new recruits rises. The drop in unemployment, against the backdrop of declining industrial production and GDP, merely indicates a change in the structure of the labor market. The number of people working to increase the country’s wealth is falling, while that of people employed in the “economy of destruction” is rising at a faster pace. This is a one-way ticket to stoking consumer inflation. And in a race against prices, low-income Russians are doomed to defeat.
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