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The top 1% controls a third of the wealth, and the poor are getting poorer. How Russia became one of the most unequal places on Earth.

Source: Meduza

According to January 2018 research by Oxfam, the richest one percent of people worldwide “bagged 82 percent” of the wealth created in 2017, while the poorest half of humanity “got nothing.” Since the 1980s, inequality has been growing everywhere on Earth, except in Western Europe. The rich own more and more, while the working class and middle class own less and less. This process is especially pronounced in Russia. Meduza breaks down these trends into graphs and takes a closer look at how Russia became a world leader in social inequality.

When it comes to the most common inequality indicators (comparisons of earnings by different socio-economic strata), Russia doesn’t really stand out in the world, and its imbalances are still below the levels in places like the Persian Gulf and Africa, as well as the United States. Income inequality mainly captures the differences in salaries paid to the rich and the poor. There is another measurement of inequality, however, where Russia’s situation is dramatically worse: the distribution of property in Russia is more unequal than in any major economy in North America, Europe, or Asia, according to the World Inequality Database (which does not index countries in the Middle East, Africa, or Latin America). Since 1997, millionaires and billionaires have owned a greater share of the national wealth in Russia than they have in the United States.

After the USSR’s collapse, Russia caught up to and overtook the West on social inequality

Inequality in Russia nosedived following the Bolshevik Revolution. Despite the privileges enjoyed by the party’s nomenklatura, the USSR’s top one percent earned just four percent of the national income. After the fall of the Soviet Union, inequality spiked rapidly. This process only accelerated in 2001 with the introduction of a flat 13-percent income tax (before this, wealthier Russians were subject to higher taxes, though they often evaded these obligations).

Over the past decade, income inequality has fallen in Russia. Moscow State University Professor Natalia Zubarevich attributes this shift to the redistribution of “oil rents”: the state extracts the lion’s share of oil companies’ revenues, which ballooned thanks to high prices worldwide, and then allocates this money to social spending on salaries for doctors, teachers, and others.

In terms of income inequality, Russia is now similar to the United States, but both countries are far more unequal than a place like France, which like the rest of Western Europe makes a concerted effort to distribute earnings more evenly. Since the end of Communism, Russian income stratification has outpaced every other former socialist economy, including China.

Wealthy and middle-class people are earning more than they did in the USSR, and the poor are earning less

According to the authors of “From Soviets to Oligarchs: Inequality and Property in Russia, 1905–2016,” which appeared last year in The Journal of Economic Inequality, average per-adult national income in Russia grew 41 percent in the quarter-century after the Soviet Union’s collapse. “However, the different income groups have enjoyed widely different growth experiences,” the researchers conclude. The top 10-percent earners enjoyed “very large growth rates” (171 percent), the middle 40-percent saw “positive but relatively modest growth” (15 percent), and the bottom 50-percent earners benefited from “very small or negative growth” (-20 percent).

While monetary inequality was generally low throughout the Soviet period, the scholars observed “interesting medium-term variations,” identifying a large inequality decline in the Revolutionary stage (1905–1925) and a “relative enlargement of income hierarchies” during the Stalinist period (1925–1956), before the 1956–1980 period gave way to “approximately constant” income distribution and “relatively balanced” growth across all groups. Income inequality peaked in 2008, when the top one percent earned a quarter of the national income. Then the worldwide financial crisis knocked them down a peg.

Russia’s billionaires grabbed most of the wealth created by the USSR, and they own most of what’s been produced since

When the USSR collapsed, more than 80 percent of the national net wealth belonged to either the state or “collectives” (ranging from collective farms to cooperatives). After 1992, public ownership started plummeting. Russia’s mass privatization in the 1990s affected both state enterprises (which is still widely unpopular today) and housing. Agricultural land remained in collective hands, and shares in common land were issued to collective farmers who were nevertheless unable to manage this property fully. To this day, housing is the main basis of wealth for both Russia’s middle and working classes.

Since the early 2000s, the national net wealth owned by Russia’s rich and super rich has skyrocketed. The first post-Soviet millionaires gained control over a significant part of the country’s industrial property back in the mid-1990s, during the initial privatization, but their share of the net wealth didn’t peak until 2008. Since then, the one hundred billionaires ranked by Forbes control 6–10 of Russia’s net wealth (depending on financial markets and the shifting value of Russian enterprises). About 65 percent of Russia’s net wealth belongs to the top 10-percent earners (according to the World Inequality Database, this includes, for example, most of the people who own apartments in Moscow — people who own property worth more than 3.72 million rubles, or $56,185). The poorest half of the population owns less than five percent of the country’s net wealth.

In other words, Russian wealth stratification is the worst of any of the major economies analyzed in the World Inequality Database. Things are not improving, either: the share of Russia’s national wealth owned by the middle class has dwindled over the past decade, as white collar workers have struggled against a weakened ruble and the repercussions of the 2008 financial crisis.

Russia’s millionaires and billionaires have moved most of their wealth abroad. According to “From Soviets to Oligarchs,” offshore wealth is about three times larger than Russia’s official net foreign reserves (about 75 percent of national income versus around 25 percent). Rich Russians have as much financial wealth stashed outside the country as the entire Russian population has inside Russia itself. The explosion of private wealth in Russia, moreover, has come “almost exclusively at the expense of public wealth,” insofar as the sum of private and public wealth has scarcely increased relative to national income (from 400 percent in 1990 to 450 percent in 2015).

There are ways to fight inequality, but you can only go so far

Economists who study rising inequality have a whole laundry list of its negative consequences: from deteriorating public health, higher crime rates, and declining social mobility to reduced access to quality education. When it comes to promoting equality while sustaining economic growth and technological progress, however, things are a bit trickier. There is research suggesting a relationship between rapid technological advances and rising inequality. In the United States, where socio-economic inequality has been rising steadily since the 1980s, there are several competing explanations for this phenomenon. Some experts say inheritance is to blame for the narrow concentration of wealth in the U.S., while others point out that almost none of the very richest Americans in the 1980s (including their descendants) are among the country’s wealthiest citizens today. The richest people in the United States owe their fortunes to technological innovations — a pattern economist Sherwin Rosen called “the economics of superstars.” Most of the benefits of this economic growth go to these exceptional individuals (and their children), who spend their earnings on charities, over-consumption, and failed investments.

Unsurprisingly, the authors of last year’s World Inequality Report warn that “no single scientific truth exists about the ideal level of inequality, let alone the most socially desirable mix of policies and institutions to achieve this level.” The only indisputable fact is the growing wealth disparity worldwide. Whatever the disagreements about economics and ideal societies, however, there’s little to embrace about inequality in Russia, where most of the wealth produced domestically is hoarded and invested abroad.

Fighting inequality in Russia today is especially difficult. The best way to become richer is to be rich already, and the only means of reigning in these disparities have been special taxes on “crooked privatizations,” high inheritance taxes, different forms of nationalization, and so on.

Combating income inequality, on the other hand, is simpler: the first step would be progressive income taxes. In addition to its existing flat income tax, Russia currently taxes mining and drilling operations, which is how the state seizes some of the super-profits earned by billionaires. But this isn’t enough. Over the next several years, the Russian government plans to spend trillions of rubles on several massive construction projects. The money needed for these colossal undertakings will come from ordinary taxpayers, and the few citizens whose wealth and income have skyrocketed over the past three decades are contributing the same 13 percent as everyone else.