Does globalization enhance inequality?

There is a common belief among both Russian and foreign experts that on the negative side of free market economics, the oligarchs get richer and the low middle class gets poorer.

Reasonably, one of the implications of capitalism is the lack of equality. Ronald Reagan and Margaret Thatcher, following Friedman and von Hayek’s ideas, argued that in the world of free market trade all individuals are responsible for themselves. With the lack of the government intervention, there are no set wages and no guarantee for employment. For a country, used to a socialist regime, where both an uneducated lazy farmer and an ambitious intellectual were given equal opportunities and an equal salary, it was a shock to switch to a new economic system. Now all “lazy farmers” condemn capitalism because the era of doing nothing and still earning money is over. I am not saying that all the oligarchs now represent the former intellectuals inhibited from entrepreneurial opportunities [during the communist regime private initiative was considered a federal crime]. There was a substantial amount of unethical deals made during the privatization period (before 90s) and that is how many oligarchs have acquired a foundation for their enterprises. For instance, V. Potanin, one of the richest men in Russia today, has bought Norilsk Nickel (the world's leading producer of nickel and palladium) for about 10% of what it was really worth at the moment, taking it from the hands of the “Red directors” in controversial "loans-for-shares" auctions. This was only available through a “partnership” with Yeltsin, who was scared to death to loose the upcoming 1996 election to the communist party and needed the oligarchs to finance his re-election campaign.

Given this background and the political circumstances [namely, corruption] that allowed for such unequal distribution of strategically important assets, the existing “Grand Canyon” between the rich and the poor is not surprising. Analysts estimate 12 million to 30 million Russians, some 8% to 20% of the nation’s 145 million population, qualify as middle class. It is also important to understand what this really means. No mortgage payments, no savings in bank accounts, no private medical care and no foreign car. The average intake of a middle-class family in Moscow and St. Petersburg is less than $1000 per month (according to the Business Week). This number is significantly smaller in other cities such as Samara, Yekaterinburg, Rostov-Don, Nizhny Novgorod, Novosibirsk, and Vladivostok. At the same time, Moscow is #1 most expensive city in the world with the most exclusive assortment of goods and services from the famous brands from all over the world. The demand for luxury goods in Moscow has skyrocketed in the recent years. With 11% inflation as it is, prices in Moscow do not compare to any other city in the world. The entertainment industry is enjoying its utmost growth in the Russian capital, full of high end restaurants, expensive boutiques and exclusive nightclubs. For instance, an average dinner with one beverage in one of the “Novikov Group” restaurants [an exclusive chain of restaurants with world famous chiefs owned by Arkady Novikov; comparable to Nobu or Spago] comes to around $250 per person.

27designer_1-190

Another example may be a new popular Russian designer Denis Simachev, who sells t-shirts with Putin’s face and symbolic images from Russian cartoons combined with crude logos for about $1000 per piece. He has currently opened his boutique in Stoleshnikov pereulok, a prime shopping location in 5 minute walking distance from the Red Square, between Louis Vuitton and Escada stores. As anyone can guess, the middle class cannot afford those luxuries…at least not in the nearest future. But what is this paradox? Why are the rich getting richer? I believe, the answer is very simple. The value of assets in the hands of oligarchs is raising daily. Norilsk Nickel does not increase its production drastically each month, even though it attracts a lot of foreign capital, just the value of the enterprise has increased dramatically since the 90s. Therefore, the businessmen can enjoy the benefits of their former investments in glamorous Moscow. 

Finally, I have to add that Russian service industries, such as banking and construction are growing rapidly and small businesses are gaining strength. This means that the middle class is taking root; yet the stable growth needs to continue in order for the income distribution gap to be narrowed.

5211421_Stable