In the first half of 2024, Russians' real incomes exceeded the level of the first half of 2023 by 7.4%. Over two years, this growth will amount to 13%. Such high income growth rates have not been seen in Russia since the 2000s.
This income growth is primarily driven by a surge in wages in the corporate sector. However, income from property has also grown rapidly, fueled by high interest rates on bank deposits. Other income sources are stagnating or declining. In 2023, wage growth was observed across all sectors, but it was predictably highest in the defence-related manufacturing sector and industries forced into import substitution.
By 2024, this wage growth had spread throughout the economy, leading to significant cost increases for businesses. The impact of these rising costs was softened by high corporate profits across the economy. However, by mid-2024, profit levels had dropped significantly, and wage growth began to slow. All of this suggests that the cycle of anomalous growth may be nearing its end.
The wage-driven income surge, sparked by the labour demand frenzy, led to a rapid increase in the number of Russians with an average per capita income above 100,000 rubles per month. However, this does not indicate the formation of a new middle class – the ‘newly affluent’ do not exhibit other characteristics of the middle class and do not alter their economic behaviour accordingly, as they cannot be certain of maintaining their current income levels in the future.
In general, unlike in the 2000s when income growth was in line with the fast-paced economic growth, current income growth rates are roughly three times higher than economic growth rates (over a three-year period). This indicates a disproportionate increase in labour costs for producers. These costs are likely to soon impact companies' investment plans, and in the medium term, inflation will reverse the income growth trend.
In the first half of 2024, the real incomes of Russians grew by 7.4% compared to the first half of 2023. In the first quarter, the annual growth rate was 7.1%, and in the second quarter, it was 7.7%. By the end of 2024, the Ministry of Economic Development expects growth at the level of 7.1%, according to its updated forecast (the previous forecast was 5.2%). In 2023, according to Rosstat's latest assessment, real incomes increased by 5.6% compared to 2022. Thus, over two years, real incomes will have grown by 13%. This growth rate is reflected in the quarterly dynamics as well. Rosstat estimates that the growth in incomes in the second quarter of 2024 compared to the second quarter of 2022 was 12.7%. Such high growth rates have not been seen in the Russian economy since the 2000s. In the 2010s, real income growth was nearly zero, while wages grew at a moderate pace of 3.5% annually in real terms.
The income growth was primarily driven by a surge in wages. In the first half of 2024, according to Rosstat, the nominal average salary increased by 19.2% year-on-year, reaching 83.6 thousand rubles. Calculations by the Centre for Development at the Higher School of Economics, based on Rosstat data for the same period, show wage growth of 19.8% in nominal terms and 11% in real terms. Property income also grew at an astonishing rate, increasing by almost 30% (28.8%) in real terms in the first half of 2024 compared to the first half of 2023. This was facilitated by two factors – the overall growth in the volume of citizens' deposits in banks and the sharp increase in bank interest rates following the key rate hike.
At the same time, entrepreneurial income, according to the Centre for Development, decreased by 6.1% in real terms, social payments fell by 1.3%, and other types of income dropped by 3.7%. The last category includes incomes not accounted for by main types, and Rosstat’s salary statistics do not cover small and microbusinesses, where a decline likely occurred. Thus, in addition to overall growth, there was a certain redistribution of income in favour of the corporate sector. As a result, the share of wages in total income increased from 57.2% in 2021 to 63% in the first half of 2024, while the share of income from social payments shrank from 20.6% to 17.3%.
In 2023, wage growth was already observed in almost all sectors, with nominal wages rising by 14.6% for the year and 8.2% in real terms. According to the National Agency for Financial Research, 30% of workers received a salary increase (in addition to planned indexation) in 2023. Predictably, wages grew fastest in the manufacturing sector. Military-industrial complex enterprises fueled the wage race, which spread across much of the economy (→ Re:Russia: Windfall Revenues). In 2024, wage growth across sectors became more evenly distributed, according to experts from the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF). Leading sectors include finance (+16% in real terms year-on-year for the first six months), manufacturing (+13%), construction (+13%), mining (+12%), and administrative activities (+12%).
Such rapid wage growth could cost employers 6-7 trillion rubles annually, according to calculations by the Telegram channel ‘Solid Figures’. For comparison, the profit tax paid by organisations in 2023 amounted to 7.9 trillion rubles. Thus, the wage race nearly doubled this figure. However, until recently, profit dynamics allowed companies to bear this burden. For various reasons, the net financial result of Russian businesses (profit minus loss before taxes) increased by 35% in 2023 compared to the previous year, amounting to 33.3 trillion rubles (a nominal increase of 8.6 trillion). In the first five months of 2024, the net financial result grew by 13.6% year-on-year (totaling 13 trillion rubles). However, there was a collapse in June: profits fell 3.5 times year-on-year to 860 billion rubles. An additional burden on corporate finances will be the profit tax increase (the Ministry of Finance plans for it to reach 1.6 trillion rubles).
By mid-2024, nominal wage growth rates also began to slow: in June, growth was 15.3% compared to June of the previous year, with an 18.1% increase for the first half of the year as a whole. This slowdown can be partly attributed to the base effect as, by mid-2023, wage growth had already accelerated. However, the deterioration of companies' financial results will undoubtedly limit further wage increases. Therefore, the cycle of anomalous wage growth in the Russian economy is almost certainly coming to an end.
The CMASF experts note that income growth has been uneven. The highest-income group of Russians, whose per capita income exceeds 100,000 rubles per month, has been growing at a faster rate. While this group accounted for 5.7% of the population in 2021, by the end of 2023, it had reached 10%. According to the latest Rosstat data, published after the CMASF report, this group grew to 12.3% in the first half of 2024, meaning it more than doubled compared to the 2021 level. However, it is important to note that the purchasing power of 100,000 rubles has decreased by about a quarter during this period.
Experts suggest that the accelerated growth of high-income groups implies that 'conditions are being created in Russia for the formation of new middle-class groups'. The term 'new middle class' was first introduced a few months ago by Sberbank's chief analyst Mikhail Matovnikov: 'In three sectors [manufacturing, IT, and construction], wage growth is 25-27% year-on-year, and this is the second year of record growth. It is clear that a huge number of people have effectively doubled their incomes'. Alongside workers in 'sectors actively undergoing import substitution and experiencing rapid growth', the CMASF experts also identify another category of the 'new middle class' – participants in the war in Ukraine, whose incomes are on average 2.5 times higher than the national average monthly salary (→ Re: Russia: Three Trillion for The Living and The Dead).
There is no universally accepted definition of the middle class. For example, the World Bank, which has categorised Russia as a high-income country this year, defines the 'middle class' as those whose income exceeds 1.5 times the minimum wage (19,242 rubles in 2024). The Organisation for Economic Co-operation and Development (OECD) and experts from the HSE Institute for Social Policy focus on median per capita income. In 2023, this was approximately 40,000 rubles according to Rosstat estimates. The 'core' of the middle class, meaning its stable part, is considered to be those who meet two additional criteria: having a high socio-professional status (being a manager, professional, or specialist) and possessing higher education. In 2022, experts from HSE estimated that 9.3% of Russians met all three criteria.
The CMASF experts emphasise that a distinguishing feature of the middle class, beyond income level, is 'non-transferable human capital', which allows individuals to maintain and reproduce their income level through active participation in the labour market and investments in education, health, quality leisure, and consumption. The 'new middle class', emerging from high-income groups due to the salary anomaly of 2023-2024, lacks these characteristics, according to the experts at CMASF. Analysis of consumer spending data from Sberbank reveals no corresponding increase in spending on goods and services necessary for maintaining human capital (such as medicines, medical services, beauty salons, sports, education, books, entertainment, leisure, and travel).
On the one hand, the accelerated growth of the high-income group partly affects current consumption. For example, according to research by NTech cited by the industry publication Shopper’s, Russians are shifting to more expensive food products. For instance, cherry tomato sales increased by 34% in the first quarter of 2024, while sales of regular tomatoes, which are almost 3.5 times cheaper, decreased by 7%. Sales of short cucumbers grew by 36%, whereas long cucumbers, which are about twice as cheap, grew by only 9%. At the same time, according to the Central Bank’s July ‘Regional Economy’ report, the volume of paid medical services in comparable prices exceeded the level of Q4 2021 by 8% in March-May 2024, while the volume of all paid services grew by 12%.
Thus, economists state that the war era’s ‘new middle class’ has not yet demonstrated the expected shifts in economic behaviour patterns and is focused on resolving immediate material issues. This is not only due to the need to compensate for past lost prosperity but also due to a lack of confidence that current high incomes will be sustained in the future.
This, of course, is no coincidence. Unlike the 2000s, when high income growth rates followed high economic growth rates (averaging 7% per year), the trajectories of economic and income growth have significantly diverged today. For instance, Russia’s GDP grew by 5.4% in Q2 2024 compared to Q2 2021. Meanwhile, real monetary incomes exceeded the level of Q2 2021 by 15.6%. In economic terms, this divergence indicates an accelerated growth in labour costs in the economy. However, the recent growth in the Russian economy has largely been driven by increased budgetary demand (budgetary impulse), military production, and forced investments in infrastructure. These factors have created an artificial demand for labour, reflected in the rise in labour costs. But soon, the increased labour costs will begin to impact companies' investment plans, and in the medium term, inflation will correct the income dynamics in the opposite direction.