Workers and retirees in Russia will likely need to tighten their belts given recent news on the state of the country’s economy.
“Labor in Russia is now cheaper than in China.”
That’s the startling statement by Mikhail Matovnikov, chief analyst at Sberbank, Russia’s largest bank. Speaking at a presentation to shareholders last week, Matovnikov revealed the sobering reality of the Russian economy, which has been hammered by years of sanctions and low commodities prices.
The median monthly wage in Russia is $433, lower than in Serbia, Romania, China and Poland. This means that that the average Russian earns less than $5,300 a year. In 2015 alone, real incomes shrank 9.5 percent, according to the Wall Street Journal.
When Russian wages last dropped below Chinese wages in September 2015, some analysts and investors tried to put a brave face on the data, suggesting that it offered Russia the chance to woo manufacturers with the promise of improved cost competitiveness. Now most analysts see the news in a grim light, one more symptom of a severely ailing economy that the government has done little to alleviate.
And the news only gets worse from there. Last week, Vladimir Putin signed into law a measure to raise the government pension age from 60 to 65 for men and from 55 to 63 for women. In December, Putin spoke of potentially raising the pension age, but said that he still thought that “the time has not come yet.”
It seems that the time is now. By increasing the male retirement age by five years and the female age by eight years, the Russian government hopes to help balance its budget.
“The alternatives are raising tariffs, social payments,” said Putin economic aide Andrei Belousov. “Today our Pension Fund is not balanced, it has a deficit of around 2 trillion roubles ($30.4 billion) and the trend is for it to grow. Something needs to be done.”
The Russian government had considered increasing both its income and value-added taxes—but only after the 2018 elections. Putin seems to be betting that the pension changes will not erode much support amongst the retirees and government workers who have formed the bedrock of his support.
Raising the pension age has an interesting side effect, however. The average life expectancy for Russian men is only 66 years, meaning many will hardly live long enough to collect their checks.
It’s a risky move to make just a few months before parliamentary elections in September. It remains to be seen if Putin can pull off what Paul Ryan couldn’t: cutting pensions without cutting support for his party.
