Development in the Russian Regions and the 2019 Elections. Is There a Correlation Between Economy and Politics?

By
Natalia Zubarevich
15 Oct 2019


 

In many countries, the state of the economy affects politics. If a country is in long-term economic decline, an election is likely to lead to the transfer of political power. Conversely, high economic growth tends to make it easier for incumbents to remain in power. In Russia, however, the correlation between the economy and politics is quite weak. At the regional level, there is basically no direct link between economic growth and a rise in public support. This brings up two separate aspects that deserve examination: first, the effect of economic trends on the political preferences of the residents of Russian regions, and second, the effect of the level and dynamic of Moscow’s economic development on the modernization of Muscovites’ political behavior. (Separate analyses are necessary in order to demonstrate the absence of direct linear correlations. In fact, reality is much more complicated.) Two major factors are relevant for all Russian regions.

"The Russian labor market’s adjustment to an economic crisis does not include a rise in unemployment; what happens instead is a rise in informal employment."

The first factor is the economic dynamic. In Russia, the macroeconomic dynamic has an effect on attitudes toward the government only during a sharp economic decline. If the economic dynamic is that of stagnation, the risks for the government are not very high. Russia’s latest crisis, which began in November 2014, became less acute and evolved into stagnation, or weak growth, by 2018. In January-July 2019, manufacturing output grew by 2.6 percent; a decline was registered in only 13 regions and even there it was not substantial. There was virtually no investment growth in the first six months of 2019 (+0.6 percent), which is within the precision interval. Investment continued to decline in half of the regions, but the population did not experience it first-hand: investment does not generate new jobs right away and an investment decrease is not immediately followed by a contraction of available jobs.

There are positive trends too. Since the decline of 2015-2018, residential construction has begun to grow (by 7 percent in January-July 2019) and the population’s ability to purchase housing has improved. The unemployment rate remains very low (4.5 percent in May-July 2019). The Russian labor market’s adjustment to an economic crisis does not include a rise in unemployment; what happens instead is a rise in informal employment. Another form of adjustment are flexible wages that consist of a fixed portion and a variable portion. The latter represents bonuses or allowances that can be reduced without violating the Labor Code. After the sharp economic decline of 2015, real wages began to grow in 2019, albeit not significantly (by 2 percent in the first six months, adjusted for inflation). In fact, things are not that rosy because this data, collected by the Federal State Statistics Office, does not include wages in the small business sector or the informal economic sector where they are lower and their dynamic is weaker.

"Loans mitigate the decline in living standards; the populace gets used to hard times and no longer has to 'tighten their belts' as they did in 2015-16."

Russia’s main economic problem is the continued decline of real disposable household income (1.3 percent in the first six months of 2019 compared to the same period in 2018). For the duration of the crisis of 2014-2018, disposable household income fell by 10 percent, based on the old methodology used by the Federal State Statistics Office, and by 8 percent based on the new one. This is a substantial and painful decline but not a critical one. Besides, one should consider the way the dynamic of real disposable income is measured in Russia. The Federal State Statistics Office takes into account mandatory expenditures, including household credit payments.

The total bank loans accumulated by the Russian people amounts to almost 17 trillion rubles (about $265 billion) as of July 2019. These loans need to be serviced and the payments have a negative effect on the dynamic of real disposable household income. The risks of a “credit bubble” are especially high in consumer loans; overdue payments on these loans exceed 8 percent of the total volume of existing consumer credit. Living on credit helps people maintain a level of consumption that they have already achieved. It is because of this credit bubble that retail trade continues to grow, if not significantly (1.6 percent in January-July 2019). Loans mitigate the decline in living standards; the populace gets used to hard times and no longer has to “tighten their belts” as they did in 2015-16. It was painful back then, but now people have gotten used to living on credit and hope against hope that somehow they will be able to repay their loans.

A sign advertising easy loans: "Money for everyone in 20 minutes. All you need is your passport. To citizens of Russia, aged 19 to 69."

It is even more difficult to assess the dynamic of household income at the regional level. The Federal State Statistics Office takes into account only real income but not mandatory expenditures, credit payments included. The drop in real income in the first six months of 2019 is not significant, a mere 0.4 percent, but it is observed in over half of all regions. These, however, are simply statistics—people do not notice a change in their income of less than one percent. What the perception comes down to is that things have not improved but also that the income situation has not gotten much worse either. People became used to stagnation; discontent still exists, but its public manifestation has grown less acute, with people cursing the government mostly in their kitchens. Russians are used to enduring hardshipsthis is our worst problem…

"The regions’ problems are solved by throwing money at them. And this mechanism is working."

Another important positive trend is a significant increase in the regions’ budget income: 15 percent in 2018 and 13 percent in the first six months of 2019. The most important contributing factor to this increase has been the rapidly rising profit tax revenue (18 percent in the first six months of 2019); over half of those revenues were derived from oil and gas producing companies. Budget transfers (non-repayable aid) to the regions have also grown: 12 percent in the first half of 2019, although in 2018 those transfers were growing even faster—by 22 percent. The regions’ problems are solved by throwing money at them, and this mechanism is working.

What matters most to people is social expenditures from the budget, and those have grown substantially in 2019; education, health care, and social welfare expenditures have grown by 10 to 11 percent. It is hard to tell whether this is a tangible rise for people in the regions, but no major failures of budgetary spending have been registered. Social expenditures dropped in only six regions, most drastically in Mordovia (by 20 percent in the first half of 2019), but no elections are scheduled in that region in the near future. All in all, things are not so bad in the regions’ economies or their budgets, and this affects the electoral behavior.

The second factor is that Russia is an electoral autocracy. Countries in this category draw on other, non-economic methods in order to ensure desired electoral outcomes. These methods proved to be fairly effective in the direct gubernatorial elections held in September 2019. The government did achieve its objective: in all of the 16 races, the incumbent or acting governors won in the first round. Why?

First, the public’s negative reaction to the government’s decision to raise the retirement age had gradually subsided. That decision, which came as a shock in August-September 2018, seems like a thing of the past in 2019.

Second, the federal authorities learned a lesson from the failures of 2018 when voters in three regions voted out the incumbent governors and, in order to prevent such a failure in the Maritime Region, the government had to call a new election and replace their chosen candidate with a new one. The Kremlin has relied even more strongly on new appointees: 13 out of 16 regions where gubernatorial elections were held in September 2019 were headed by acting governors appointed by Moscow, who were sent to the regions less than a year and sometimes just a month or two prior to the gubernatorial election. Those new leaders did not have a high negative rating just because they had only been in office for a short while, and the people in the region habitually hoped that since the governor had been dispatched “from above” (from the Kremlin), there would be additional financial transfers from the federal budget, and other such support.

Third, in regions where the Kremlin faced serious problems, such as a high likelihood of a runoff, it relied on a traditional “carrot”: budget expenditures on social welfare, mostly on benefits to individuals, were sharply increased in the first six months of 2019. In St. Petersburg, such expenditures grew by 57 percent, in the Sakhalin Region by 19 percent, and in the Vologda Region by 18 percent (compared to the same period in 2018). This budgetary maneuvering was effective in “buying” votes. Most other regions where gubernatorial races took place in September 2019 did not require manipulating budgetary resources. “Political technology,” such as disqualifying alternative candidates who had a high chance of winning, reduced the competition to a minimum and ensured the desired results even without budgetary “carrots” in the form of higher social benefits.

In Vologda, budget expenditures on social welfare increased by 18 percent in the first six months of 2019 in the leadup to the gubernatorial election (credit). 

"In local elections, public discontent continues to affect electoral outcomes because the races are too numerous for the political technologists to ensure victories in every case."

At the municipal elections held in September 2019, the government suffered substantial losses; the number of seats gained by United Russia fell by 15-16 percent on average, according to Alexander Kynev. In local elections, public discontent continues to affect electoral outcomes because the races are too numerous for the political technologists to ensure victories in every case. Regional authorities resorted to different policies. For example, in St. Petersburg they went all out to achieve the needed results, which led to massive violations of the electoral legislation and vote counting rules. However, illegal manipulations notwithstanding, the overall number of United Russia municipal deputies in St. Petersburg was reduced by more than 200 after the September 2019 elections. It should be pointed out, however, that local elections are of much less importance for the Russian government since local governments have minimal budgetary resources and very limited discretionary powers. In addition, municipal administrations are critically dependent on transfers from regional budgets and are thus much easier to control.

The municipal election results of 2019 can be by no means explained by the level or the dynamics of the regions’ economic development. In the regions where political technologies were less effective or too heavy-handed, election results demonstrated a marked drop in United Russia’s ratings. United Russia is losing trust, but at this point, its losses in regional elections are not yet critical, especially in the less developed regions that live off of federal subsidies.

Moscow Is Not Russia. Why Is This True?

Nothing that has been said above about economic-political linkages is applicable to Moscow. The economic situation in the capital is far better than elsewhere. In the first half of 2019, 14 percent of all investment was made in Moscow, and investment in the Moscow agglomeration amounted to 20 percent; that is, every fifth ruble invested in Russia was invested there. In January-July 2019, completion of new housing in Moscow grew 2.2 times. Nominal wages (unadjusted for inflation) in the Russian capital went up 10 percent during the same period—much faster than the national average (7 percent). Moscow pay rates are twice as high as the national average and 3-4 times that of Central Russia or the southern regions, most regions of the North-West, and the Volga regions. This disparity promotes a substantial inflow of migrants to the Russian capital. The unemployment rate in Moscow is a mere 1.3 percent.

"Per-capita income of the Moscow budget is 2.5 times higher than the Russian regional average. Moscow is not just rich; it is filthy rich!"

In addition, Moscow’s budget income has grown at a tremendous rate: by 13 percent in 2018 and by 17 percent in the first half of 2019. This growth resulted, first and foremost, from the rise in profit tax revenues (by 25 percent in the first half of 2019). The main payers of this tax are large banks and state-owned companies, with Sberbank and Rosneft among the leading contributors. The second source is personal income tax (these revenues grew by 11 percent), because the highest paying jobs in large companies, the government, and in law-enforcement agencies are all concentrated in Moscow. Collectively, these two sources accounted for over 75 percent of the total income of Moscow’s enormous budget. The Moscow budget comprises one fifth of the total income of all the Russian regions’ budgets, while the population of Moscow makes up just 8.5 percent of the total Russian population. Per-capita income of the Moscow budget is 2.5 times higher than the Russian regional average. Moscow is not just rich; it is filthy rich!

The Moscow administration has learned from its earlier mistakes. When Mayor Sergey Sobianin’s team first came to power, it sought to rein in social spending. In the first half of 2019, however, the dynamic of budget spending was geared toward social goals; expenditures on education, health care, and social programs grew by 10-11 percent compared to 8 percent for expenditures as a whole. There’s a “fly in the ointment” though: the funds spent on beautification (the never-ending paving of streets and sidewalks, improving parks and public spaces, etc.) have seen much greater growth—35 percent. Big-time milking of the capital city budget continues…

"The 2019 Moscow City Council election demonstrated that the city’s rapidly growing wealth has not been converted into public support for the Moscow government; rather, the opposite happened."

The Moscow administration is forced to spend as much as possible so that the federal government will not impinge on the enormous revenues of the Moscow budget and demand that the city share its wealth. Moreover, since spending on renovation programs cannot be increased very fast—this being a long process that includes locating sites for new construction—the city administration opts for the usual cost-intensive beautification projects. In the first half of 2019, beautification expenditures accounted for 15 percent of all Moscow budget expenses and reached almost 152 billion rubles (about $2.4 billion) which far exceeds the total budget expenditures of the Sverdlovsk Region or Tatarstan, for example. What Moscow spends on beautification amounts to 71 percent of what all Russian regions together spend on such projects. Other regions can only be jealous of this insane spending spree, or curse it.

The Moscow budget may be rolling in money, but how has it affected Muscovites’ electoral behavior? The 2019 Moscow City Council election demonstrated that the city’s rapidly growing wealth has not been converted into public support for the Moscow government; rather, the opposite happened. One can discuss at length the effectiveness of “smart votinglaunched by Aleksey Navalny’s team after the city authorities had disqualified almost all opposition candidates from running. “Smart voting” proved quite effective overall, but the causes of the Muscovites’ electoral behavior appear to be more important than the actual election results.

Sergei Sobyanin, mayor of Moscow, whose city is rolling in money (credit).

For now, Moscow is Russia’s only city where two fundamental prerequisites for modernization of behavior and values have been achieved. These are much higher incomes (Moscow’s average wage is 1.5 times that of St. Petersburg and twice the national average) and higher level of education (according to the 2010 census, 44 percent of adult Muscovites have college degrees). The capital has the largest middle-class segment (educated citizens with higher incomes and more modernized values). The middle class tends to demand political representation, but the government’s policy of disqualifying undesirable candidates from the September race has effectively denied it to them. It could have been expected that this would trigger public protests. Neither the national nor the city authorities seemed to understand that they would have to reckon with the interests of the middle class. Instead, they sought to halt the process of politicization by using force and monetary handouts. Another factor of politicization is generational change: Moscow has the highest concentration of “the never whipped” generation of young Russians, those who are unfamiliar with the Soviet realities and grew up within the consumer economy. They know how to evaluate and select goods and services, and they demand the same in the political realm, but they are denied that choice.

"The wealthier and more educated residents of large urban centers demand institutional change, while those in less developed regions acquiesce to the existing rules of the game and lay their expectations on their governors."

Two trends have taken shape in Russia: the wealthier and more educated residents of large urban centers demand institutional change, while those in less developed regions acquiesce to the existing rules of the game and lay their expectations on their governors. The ratings of these new governors will likely begin to decline in the years to come, since technocrats usually do not know how to deal with citizens or regional elites. They were dispatched from above to meet certain goals set by the federal government and do not know how to look after their regions’ interests. This means that the risks and conflicts in the regions will rise because political manipulation will be ineffective in alleviating them.

The distribution of political preferences across the Russian territory remains fairly stable and, at this point, only Moscow demonstrates a new model of electoral behavior. Objective trends, such as the concentration of educated, high-income constituencies in the largest urban centers, contribute to the modernization of values and institutions, including in the electoral realm. The government strongly resists this dynamic, and the results of modernization are unlikely to manifest themselves in the near future. The expansion of modern values from large urban centers to less developed regions is a lengthy process, but it has already begun.


 

Natalia Zubarevich is Director of the Regions Program at the Independent Institute of Social Policy.

Top image credit.


The publication of Point & Counterpoint has come to an end. I would like to thank the Carnegie Corporation of New York for financial support and my dear friends and colleagues at PONARS Eurasia and the Institute for European, Russian and Eurasian Studies (IERES) for their kind assistance. I am grateful to those who contributed to Point & Counterpoint and those who read it. I hope to meet you again online, on paper, or in person!

– Maria Lipman