The International Herald Tribune

In Russia's boom, riches and rags
By Erin E. Arvedlund The New York Times
Friday, April 15, 2005

More billionaires than ever, but wealth isn't trickling down

MOSCOW Record high prices for oil and metals helped to give Russia, with its rich resources, the world's second-most new billionaires last year. But the wealth in this booming, communist-to-capitalist country is not trickling down.

Overall, Russia leapfrogged Japan to the No. 3 spot on Forbes magazine's latest list of billionaires, behind the United States, which is No. 1, and Germany.

Although wages in Russia have risen - the average jumped 50 percent in the past three years, to 6,832 rubles, or $246, a month in 2004 - the income gap between the richest and the poorest Russians is yawning noticeably, said Viktor Ivanter, director of the Economic Forecasting Institute at the Russian Academy of Sciences, in a recent interview with the Russian daily newspaper Nezavisimaya Gazeta.

Peter Westin, chief economist with Aton Capital Group, said: "People's incomes are growing across the board, and state sector workers have had huge wage increases in last few years. But they are still lagging behind the rich.

"Everyone is moving up the ladder, but the top rungs are moving faster."

Forbes listed the United States with 341 billionaires, or 49 percent of the world's total last year, while Germany had 57. Russia totaled 27, including the country's first female billionaire: Elena Baturina, owner of Inteko, a giant construction company. She is also the wife of Moscow's mayor.

Commodities, often combined with being on the right side of the political power structure here, were the main factors deciding which Russians made the list, and who dropped down or off it.

Russia's richest man is Roman Abramovich, head of the oil giant Sibneft and worth $13.3 billion, according to Forbes, which published the list early this year. He has used some of his wealth to buy the Chelsea soccer team in Britain.

The list's most noticeable decline was that of Mikhail Khodorkovsky, once Russia's wealthiest man, now in jail and facing criminal charges in one of the country's controversial privatizations. The value of his oil company, Yukos, plummeted after the Kremlin contended the company owed billions in back taxes. Khodorkovsky is now worth $2.2 billion, down from more than $15 billion in 2003.

Russia ballyhoos its ruble billionaires now, too. The monthly economics magazine Finans recently published a list of more than 400 people. But the economic situation for a large share of the population is a daily struggle to survive. According to World Bank estimates, 17.8 percent of Russians lived below the official poverty line last year, defined as wages of 2,451 rubles a month.

What worries some economists most is the widening income gap. Russia's top 10 percent of earners made nearly 15 times as much as those in the bottom 10 percent last year; in developed countries, the norm is less than five times, said Christopher Weafer, chief strategist at Alfa Bank in Moscow. A year earlier, by his calculations, the coefficient in Russia was 12.

Historically, a gap of 10 or higher has often led to social instability. Weafer warned, "You can't afford to have such a skew for too long, because usually it's led to political uncertainty and higher investment risk."

Russia's economic boom is mirrored by that of China (2 billionaires on the Forbes list) and India (12 billionaires); both countries have big income gaps. But, according to Marshall Goldman, associate director of Harvard University's Davis Center for Russian and Eurasian studies, there are some significant differences among the elite. "In India and China, many of the billionaires are self-made - they founded the businesses, they invest in them," Goldman said.

Most of the rich Russians, however, took over state assets from ministries where they worked or through questionable means like the "loans for shares" program in the early 1990s, when the Kremlin sold off companies to well-connected businessmen for far less than market value.

That poses a quandary for President Vladimir Putin.

"On the one hand, he has to be responsive to public anger over the oligarchs," Goldman said. "On the other, he must realize the Yukos affair has gotten out of hand, and hurt the economy and his standing in the international investment community."

Putin aims to lift the tide for everyone by doubling Russia's gross domestic product, now at $582 billion, by 2012, a target date that has shifted several times, depending on the country's progress.

To some extent, the strategy is working. The poverty level of 17.8 percent last year was down from 20.6 percent in 2003 and from more than 24 percent in 2002.

But many specialists say a crucial piece is missing in Russia's riches-and-rags economy.

The news about the number of Russian billionaires "certainly gives the lie to the widespread view that Putin conducted a war on the oligarchs," Stephen Kotkin, director of Princeton University's Russian studies program, said in an e-mail message. But, he added, "The presence of dozens of billionaires, however eye-catching, is of less moment than the absence of millions of small and medium businesses."

While small- and mid-sized businesses account for about half of the GDP in the United States, for instance, they make up only 14 to 15 percent of Russia's, according to figures from Opora, a Russian lobbying group for small entrepreneurs.

Russia's middle class still consists mostly of salaried workers for the state or large corporations, rather than a broad group of property owners, Kotkin said. The Kremlin has noticed.

"The government and the regional authorities have failed to create conditions for small- and medium-sized business to flourish," Putin said on state-run television in March. "Everyone who opens a new business and registers a company should be given a medal for personal bravery."

Oil represents roughly one-quarter of Russia's gross domestic product, but oil production is not growing as it once was. Output will rise just 3.8 percent this year, about half the average annual growth rate of the past five years, according to the International Energy Agency.

That is largely a result of falling investment, partly because of the breakup of Yukos, once Russia's biggest private oil company, and partly because of Russia's onerous tax system.

Some Russian billionaires say they see problems with the country's wealth gap.

"It's a dubious privilege," Alexander Lebedev said of making the latest Forbes list, with a net worth of $1.6 billion. "The general attitude here in Russia to people who have wealth is not very positive. It's partly explained by the attitude of the rich, not paying in kind to the population of their country."

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