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### Viewing cable 09MOSCOW821, RUSSIAN MIDDLE CLASS NOT DEAD YET?

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09MOSCOW821 | 2009-04-01 14:02 | 2010-12-01 21:09 | CONFIDENTIAL | Embassy Moscow

`

    VZCZCXRO6429
    PP RUEHDBU RUEHHM
    DE RUEHMO #0821/01 0911401
    ZNY CCCCC ZZH
    P 011401Z APR 09
    FM AMEMBASSY MOSCOW
    TO RUEHC/SECSTATE WASHDC PRIORITY 2655
    INFO RUCNCIS/CIS COLLECTIVE PRIORITY
    RUEHXI/LABOR COLLECTIVE PRIORITY
    RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
    RHEHNSC/NSC WASHDC PRIORITY

` `

    C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000821

    SIPDIS

    STATE FOR EUR/RUS, DRL
    NSC FOR ELLISON
    DOL FOR BRUMFIELD

    E.O. 12958: DECL: 04/01/2019
    TAGS: ELAB ECON EIND PGOV SOCI RS
    SUBJECT: RUSSIAN MIDDLE CLASS NOT DEAD YET?

    REF: MOSCOW 03242 2008

    Classified By: EconMinCouns Eric T. Schultz, Reasons 1.4 (b,d)

    -------
    SUMMARY
    -------

    ¶1. (C) Leading Russian sociologists concur the GOR missed the
    chance to invest in the middle class during the economic
    boom. As a result, the middle class remains only
    approximately 20 percent of the population. That said,
    experts assert that the small middle class is nonetheless
    well positioned to weather the current crisis owing to its
    savings and human capital. Moreover, they see the middle
    class less as a revolutionary class than an inert mass,
    inclined to support the administration. Neither sociologists
    nor the administration consider the middle class a threat to
    the regime, even in the throes of an economic downturn. As
    such, the government has decided to focus its anti-crisis
    resources on blue-collar workers instead of providing the
    support and institutional reform needed for middle class
    development -- and ultimately the innovation economy that
    Medvedev and Putin advocate. End Summary.

    ----------------------------------------
    MIDDLE CLASS SURVIVING, BUT NOT THRIVING
    ----------------------------------------

    ¶2. (U) During last month's annual conference on the
    sociopolitical challenges of the 21st century, sponsored by
    the Independent Institute for Social Politics (ISP), panels
    of sociologists and economists, many of whom advise President
    Medvedev, said the Russian middle class would survive the
    economic crisis but would not thrive. Igor Yurgens, of the
    Institute for Modern Development, opened the conference by
    underscoring the GOR's neglect of investment in the public
    and social institutions necessary to nurture the middle class
    during the eight year economic boom that coincided with Prime
    Minister Putin's presidency. The opportunities provided by
    massive petrodollar inflows were now gone, he stated. Owing
    to the government's failure to capitalize on these
    opportunities and the reversal in Russia's economic fortunes,
    the vertical impetus for social mobility had stopped
    functioning.

    ¶3. (C) XXXXXXXXXXXX, further  stressed the lack of
    quantitative middle class growth in  spite of Russia's
    economic prosperity. She used studies from  2000 and
    2007 to demonstrate that the size of the middle  class
    remained relatively constant, at anywhere from 12 to 20
    percent of the population. By her estimate, the core of the
    middle class was between 5-7 percent of the population,
    although by lowering the income standards and the standard
    set for social and professional status, the middle class
    would then range between 12-20 percent of the population. In
    her calculations, the middle class was made up primarily of
    managers of large companies, bank directors, financial
    specialists, business owners (restaurants, retail trade),
    part of the intelligentsia, and middle to high-level
    bureaucrats. The latter category had grown during the crisis
    (owing to the slowdown in the private sector), and she said,
    now comprised about a quarter of the middle class.

    ---------------------------
    GETTING THROUGH THE CRISIS
    ---------------------------

    ¶4. (C) During a separate meeting with us, XXXXXXXXXXXX
    claimed  that the fall in real incomes, not job losses, was now the
    biggest threat to middle class prosperity. XXXXXXXXXXXX
    estimated  that middle class incomes would shrink this year by
    10 to 15  percent with a negative GDP growth rate of 3.5 percent.
    (In  comparison middle class incomes dropped by 25 percent during
    the 1998 crisis). She added that the "core" of the middle
    class had actually contracted slightly, from 6.9 to 5.3
    percent, which she said was probably due to the fact that a
    number of white collar workers (bankers, managers, as well as
    small and medium sized entrepreneurs) had fallen out of the
    middle class since the beginning of the crisis. She
    contended, however, that the employment situation with the
    middle class had for the most part stabilized.

    ¶5. (C) XXXXXXXXXXXX commented that the middle
    class had certain  "cushions" which gave it an advantage
    over the blue collar, or poorer classes during the crisis.
    First of all, many of the middle class had accumulated

    MOSCOW 00000821 002 OF 003

    savings during the boom  years (comprising between seven to
    10 percent of their total  incomes, or the equivalent of four or
    five monthly salaries).  Between October 2008 and February
    2009, they tended to take  advantage of the GOR's gradual
    devaluation to purchase foreign exchange, trade it for rubles,
     and then purchase  large consumer items and durables, such
    as automobiles and  refrigerators, which were priced in rubles.
     She said as of February, however, the middle class "consumer binge"
    had  pretty much run its course owing to the decline in real
    incomes, depletion of personal savings, and persistent
    inflation.

    -----------------
    NOT REVOLUTIONARY
    -----------------

    ¶6. (C) Despite claims by political activists like Garry
    Kasparov that the middle class will create "problems" for the
    administration when job cuts start and salaries freeze, most
    sociologists here portray the middle class as a conservative
    force rather than a potentially disgruntled constituency
    eager to defend its interests. XXXXXXXXXXXX argued
    the number of "entrepreneurs" within the  middle class had
    not grown during the Putin years. He  claimed virtually all
    of the growth had come instead from the rise of government
    bureaucrats who benefited from impressive  pay increases
    under Putin. As a result, the mentality of the  middle class
    has shifted considerably away from the more
    independent and market-oriented conceptions of the
    Yeltsin-era (in which entrepreneurial types dominated).

    ¶7. (C) During the Putin era, Russia has developed what
    XXXXXXXXXXXX  termed a "third world" middle class
    with a  conservative mentality, shaped by hierarchical thinking,
    and  largely risk averse. Indeed, according to his research,
    the  core of the middle class has now absorbed much of the
    bureaucratic worldview of the majority. This explains the
    broad support for Putin and Medvedev across society, the
    power of social conservative values, and a reluctance to
    challenge authority.

    ¶8. (C) Paradoxically, Russia's youthful middle class is more
    Western in its lifestyle, but still very anti-Western in its
    politics, according to XXXXXXXXXXXX. She sees Russia's
    young "social innovators"  (her company eschews the term
    "middle class" as too  controversial) as characterized by a more
    Western lifestyle, including the willingness to take bank loans,
    use the  internet, pay for fitness centers, etc. Their better
    education makes them mentally more flexible but does not make
    them more politically liberal. Far from afraid of the
    economic downturn, most are confident that their abilities
    allow them to re-invent themselves and adapt to challenges.

    ¶9. (C) XXXXXXXXXXXX  commented to us that today's
    youth are firmly  indoctrinated in a "patriotic" mindset that
    blames the US and  the West for much of Russia's ills.
    They remain largely  apolitical, but more attuned to the
    interests of the state,  rather than the rights and opportunities
    of the individual.  As such, he sees Russia's youth as more inclined
    to rally in  defense of the state than to agitate for revolutionary
    change.

    --------------------------------------------- --
    MIDDLE CLASS WELL POSITIONED, BUT LACKS SUPPORT
    --------------------------------------------- --

    ¶10. (C) That said, XXXXXXXXXXXX and XXXXXXXXXXXX
    told us in separate meetings that the middle  class still had the best
    chance of stimulating Russia's  development in the post-crisis world.
     It had invested more in its own human capital (education and training)
    during the high growth years; whereas the lower socio-economic strata
    used most of their new-found cash to purchase basic consumer  items.
    In addition, the middle class had acquired work experience and
    professional skills enabling them to adapt to shifts in labor market
    demand. Blue-collar households, in contrast, were suffering
    disproportionately from inflation,  down-sizing, and salary
    reductions. XXXXXXXXXXXX  concluded the middle class
    would be the best candidate for supporting collaboration
    between the state, society, and  private sector to address
    Russia's economic problems.

    ¶11. (U) However, these analysts pointed out that the GOR's
    focus on blue-collar workers in its anti-crisis measures had

    MOSCOW 00000821 003 OF 003

    deprived the middle class of resources and opportunities to
    stimulate growth or reform. According to Tambovtsev, the
    main hope for middle class to play a transitional role in
    society lay in small business entrepreneurship.
    Unfortunately, the absence of secure property and contract
    rights, a biased judiciary, and administrative barriers
    impeded SME growth. Falling consumption was also hurting
    SME's, which tended to orient themselves toward household
    consumers. Without the resources and institutional reforms
    necessary to improve their productivity, middle class
    entrepreneurs were unlikely to serve as a strong
    countermeasure to current economic trends.

    -------
    COMMENT
    -------

    ¶12. (C) While not dead, the Russian middle class does not
    show signs of rapid growth in the near term, nor does it seem
    likely to be the engine of democratic change in Russia.
    Better equipped to deal with the downturn than the working
    classes but politically inert, the middle class poses little
    threat to political and social stability. Moreover, despite
    the administration's emphasis on preparing for post-crisis
    development through innovation and small/medium businesses,
    the most likely candidate to help the government achieve
    those aims -- the middle class -- has largely been ignored by
    the state. We expect this process to continue: budget
    constraints will leave minimal resources for cultivating the
    human capital of the middle class. End Comment.
    BEYRLE

`