Putin’s miracle dissolves as Russian middle class faces crunch

Now, the 22-year-old Moscow college graduate lives with his future in-laws, unable to find a job.

"Things have just been getting worse,” says Sidorov, who has his sights set on consulting companies such as KPMG and Ernst & Young, now known as EY. "I don’t see any grounds for optimism.”

His darkening outlook marks a turning point after almost unbroken growth in prosperity since Vladimir Putin took control of Russia. An economic slump sparked by U.S.-led sanctions over Ukraine and a collapse in oil prices threatens to undo many of the gains the former KGB colonel delivered since becoming president in 2000.

That means the unwinding of a middle class that emerged, taking with it the hopes and profits of companies such as General Motors Co. and Germany’s Metro AG, which bet big on the world’s biggest energy exporter. Consumer confidence has plunged to its lowest since 2009.

"The boom years are over,” says Chris Weafer, a senior partner at consulting firm Macro Advisory in Moscow. "The old model based on trickle-down oil revenue has come to an end.”

The middle class -- defined by Russian researchers as people with higher education who earn above the average and don’t do manual labor -- has doubled to 40 percent of the 146 million-person population under Putin. While he pledged in 2008 to increase it to as high as 70 percent by 2020, Natalia Tikhonova of the Higher School of Economics in Moscow sees it shrinking to 30 percent in the next year or two.

Shrinking Middle

Some forecasts are even more pessimistic. The number of middle-class Russians could halve to 20 percent, taking it back to the same level as after the 1998 default and devaluation, says Evgeny Gontmakher, chief economist at the Institute of Contemporary Development, whose board of trustees is headed by Prime Minister Dmitry Medvedev.

About half of the middle class comprises state employees or people who work in public companies and have been loyal to the government, says Boris Makarenko, deputy head of the Center for Political Technologies in Moscow.

At the same time, only about 15 percent of the population form the core of the middle class, with another 25 percent on the margins who are vulnerable, according to Tikhonova.

The Russian economy, which grew an average of 7 percent annually during Putin’s first two terms from 2000-2008, is forecast by the central bank to contract as much as 4 percent this year.

Stagnation Risk

The risk is of an extended period of stagnation with zero or negligible growth until 2020, according to Gontmakher.

Even a recovery in oil prices from their current level of less than $65 a barrel will have little impact, Gontmakher says; he notes growth was only 1.3 percent in 2013, before sanctions and the Ukraine conflict, when oil averaged about $110 per barrel.

The World Bank said this month that "unprecedented” achievements of the last decade in poverty reduction and upward mobility might be under threat. The Washington-based lender estimated that Russia’s middle class accounted for 86 percent of household consumption by 2010.

Their spending is already being squeezed.

Car sales in Russia, which the government in 2011 predicted would overtake Germany as Europe’s largest automobile market in 2016, will drop by as much as 35 percent this year, according to PriceWaterhouseCoopers.

Ruble Weakness

GM, the biggest U.S. carmaker, last month said it would idle its only fully-owned manufacturing plant in Russia. Metro, Germany’s largest retailer, reported a decline in first-quarter earnings because ruble weakness has hurt its Russian business.

Valery Tuinayants, who sells hats to chains including Metro and Groupe Auchan SA of France, says sales are down 30 percent so far this year compared to 2014 revenue of $10 million.

Farid Chakaboev, who offers mobile-phone services to migrants from former Soviet Central Asian nations, fired his assistant and a courier in 2014 as migrant workers left Russia following the ruble’s plunge last year.

After seeing his business almost double each year since he set it up in 2010, Chakaboev closed his Moscow office and now works from home.

"I expect this year to be very difficult,” he said. "I had plans to buy property, I wanted to change my apartment for a bigger one, but now I think I will have to postpone.”

Toxic Cocktail

Some analysts predict that thousands of such personal setbacks risk blending into a toxic cocktail for Putin.

The economist who correctly predicted demonstrations in 2011 and 2012, Mikhail Dmitriev, says protests in smaller cities may break out relatively soon because of tough economic conditions there. Moscow and St. Petersburg, where incomes are higher, will follow in terms of the potential for unrest, he says.

"Middle-class allegiance to a regime can quickly evaporate if the powers and privileges of its members come under attack,” Gontmakher says. "Many members of the Russian middle class, especially those who do not rely on the state, have become increasingly resentful of government policies.”

While Putin’s personal approval ratings, which are above 80 percent since he annexed Crimea from Ukraine in March last year, suggest he’d be able to put down any dissent and keep his grip on power, folks like Sidorov, stuck with his future wife’s parents, aren’t so lucky.

Sidorov, who lived for four years in student accommodation in Moscow after leaving his home in the Urals city of Izhevsk, where his father works as an estate agent and his mother as an accountant, says the best he can hope for at the moment is to get a summer internship. But even those are now scarce.

"This is a very bad sign,” the economist Tikhonova said. "it means we are losing the chance of further development.”

(bloomberg.com)