Russia's middle class in jeopardy Financial crisis wipes out gains of group that helped drive reforms

September 20, 1998|By Kathy Lally | Kathy Lally,SUN FOREIGN STAFF

MOSCOW -- Over the last few years, a small but tenacious middle class has been emerging in Russia, working hard, buying modest cars, saving for an apartment and hopeful for the future despite the best efforts of a corrupt system to undermine them.

They have managed to overcome a rapacious tax system, an avaricious banking system and ruthless organized crime. They have built up small businesses, found jobs in trade or finance, bought a microwave or a family computer. They have even taken a charter vacation to Turkey or Egypt.

And today they're watching it all disappear. As the ruble fluctuates wildly and the government sits stunned amid the rubble of a collapsed financial pyramid, the fate of Russia's emerging middle class hangs in the balance.

"Middle-level companies and the middle class are the target of this crisis," says Valery A. Korovkin, who runs a travel agency aimed at the economy-minded traveler.

Big companies and wealthy bankers have much higher dollar losses, he says, but small companies like his may never recover, and the consequences will be far-reaching.

"Almost everyone I know has lost something," says Korovkin. "I don't know one person who can say he's OK."

The new middle class has been a source of stability for Russia, the base on which President Boris N. Yeltsin has depended for political support. They are the active, energetic citizens who have everything invested in reforms, and destroying them could have unforeseen ramifications for the nation.

"This crisis liquidated the middle class, which served as the basis for the regime," argues Lillia Shevtsova, a political analyst who is a senior associate at the Carnegie Moscow Center. "With the collapse of the financial system, they are ruined. Now the regime has no safety net."

The middle-level companies employ and serve the middle class. And the financial rumbles that began with the devaluation of the ruble and governmental default on domestic and foreign loans have set off a collapse of seismic proportions for them.

In the last few weeks, owners of small businesses have been wiped out with every lurch of the currency. An importer who signed a contract to sell clothes in rubles loses everything

because he has to pay his supplier in dollars, and by the time he gets his rubles in payment, they are worth half of what they were when the contract was signed.

Many restaurants rely on imported food, and their costs soar. They raise prices, and customers stop coming. Banks are insolvent, and they freeze accounts. Small entrepreneurs can't pay their bills, and their rubles are stuck in the bank, losing value every day. They begin to fire employees. People stop spending money, except to stockpile food.

Unemployment has been rising so rapidly in the last few weeks that realistic statistics are unavailable. Banks, investment firms, department stores, importers, advertising agencies, car dealers, newspapers, magazines, travel agents, restaurants -- they're all laying off employees.

On Thursday, the city of Moscow held a job fair. City officials were shocked when 5,000 people filled out applications -- and many more stood in line, hoping for a turn. There were a few jobs available, but for unskilled work, and too many people were looking for middle-level jobs.

Many fear it will only get worse. Banking officials have already predicted that their industry might lay off as many as 150,000 employees in the next few weeks.

Russians are unsure about the size of the middle class, or even how to define it. Earlier this year, the U.S. Information Agency published a report on "Russia's Would-be Middle Class," based on research that included conversations with eight focus groups in four cities.

The new middle class, the report says, does not include teachers, doctors, pensioners and others who are paid -- underpaid, actually -- by the government. Government employees are so badly off that they are among the half of the population that falls below the poverty line.

Political elites and organized crime are in the upper classes, the report says.

"Middle class means the possibility at least of directing one's own life," a 25-year-old St. Petersburg entrepreneur told the researchers. "Lower class is the impossibility of directing anything."

The middle class are the people who began to believe that hard work would pay off, and that a decent life was possible, even in Russia.

Perhaps 17 million families, many of them concentrated in Moscow, meet that definition. They have an apartment with at least three rooms, a car, household and video appliances and a computer, according to the panelists interviewed for the report.

Smart shoes

They also have nice clothes -- moderately priced, but fashionable. You could tell fortunes were changing in Moscow a few years ago when smart shoes became available, and people had the money to buy them.

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