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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 

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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