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Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

Real incomes fall

Hands Holding Russian Cash Near Purse StrapsReal incomes have fallen for three consecutive months despite a growing economy and the ongoing oil boom.

Pay packets fell 2.9 per cent in the first quarter and 3.4 per cent in March when taking into account the effect of inflation, which has shot up due to high commodities prices.

"I actually think that this is quite a serious risk for the economy because after the crisis the economy is largely driven by domestic demand," Alexei Devyatov, senior economist at Uralsib, told The Moscow News. "A fall in real incomes is a serious threat to domestic demand."

This comes as a note of caution against the background of Prime Minister Putin's assurances to the Duma on Wednesday that the crisis was past.

Spending spree

But decreasing real salaries have been met with increased spending as the proportion spent on goods and services jumped from 74.7 per cent to 80.1 per cent, according to the State Statistics Service.

The decrease in savings and increase in credit to fuel the spending spree has lead to decreasing capital formation.

"[A] surprising result is the continued stagnation in investment coupled with a 60 per cent increase in machinery imports from non-CIS and 13.5 per cent growth in residential construction," UBS analysts wrote in a note to investors.

Alexandra Evtifyeva, chief economist at VTB, told Kommersant that the delay in increasing wages could be due to new taxes, which give Russians less disposable income.

But there has also been an increase in the shadow economy, and much of the continued spending may have resulted from tax evasion.

"We believe [the fall in real incomes] might partly be explained by worse disclosure/tax evasion in the private business segment after the increase in the unified social tax from 26 per cent to 32 per cent in 2011," UBS wrote.

Social stability

The decrease in real wages comes ahead of the Presidential election in March next year, and Prime Minister Vladimir Putin has already warned that the tax burden should not be put on workers.

And with the recent Forbes list saying that the number of billionaires has tripled in the last two years, the growing wealth disparity is a concern.

"It's more a concern of social stability because what Russia needs is a middle-class," said Devyatov.

The Ministry of Regional Development, meanwhile, says it is looking to push the average wage for Muscovites up to 110,000 roubles a month by 2020.

While this nominal increase seems a hefty jump from the Russian average of 22,700 roubles ($810) a month, it doesn't take inflation into account.

First Deputy Chairman of the Central Bank, Alexei Ulyukayev, said last week that inflation is likely to be less than 7 per cent.

"This year inflation will be higher than the government projects, and it may remain high for the next few years," said Devyatov. "In the last decade the average price level increased three and a half times, and that kind of inflation means [110,000 roubles a month] would be even lower than today."

He added, however, that the real wage could double in the next 10 years.

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