Economy

Oligarchs And Inequality: Russia's Billionaire Problem

Russian billionaire Roman Abramovich is not alone
Russian billionaire Roman Abramovich is not alone
Kiril Zhurenkov

MOSCOW - “At the time of transition, there were hopes that Russia would transform itself into a high-skilled, high-income economy with strong social protection programs inherited from the Soviet Union era...” So starts the Credit Suisse report on Russia as part of its 2012 Global Wealth Report.

According to the bank’s experts, since 2000 the world has become about 38% wealthier, and it is expected to substantially gain more wealth in the next five years. In general, the world is getting richer.

But that is not the problem. It turns out that 39.3% of the world’s wealth is owned by a mere 29 million people, or 0.6% of the world’s population.

So who has the lion’s share of the wealth? The largest number of millionaires is in the United States, with 11,023,000 millionaires. In comparison, in all of Africa, there are only 95,000 millionaires, and there are some countries in Africa without a single one.

The researchers also looked at the distribution of wealth inside the countries – and the outlook for Russia is particularly extreme. Russia has one of the most unequal wealth distributions in the world, topped only by Caribbean tax havens.

On average worldwide, for every $194 billion in household wealth there is one billionaire. In Russia, there is a billionaire for every $15 billion. On the other hand, Russia is one of the countries that grew the fastest in average wealth creation during the first decade of the 21st century, going from an average of $2,000 per adult in 2000 to $13,600 today. But the Swiss bank did not look closely at how many poor people were left in the dust by Russian development.

Reducing social inequality

“The high level of social inequality is connected to the Russian economic structure, to the concentration of most resources in the hands of a select cross-section of the population – that much is obvious,” said Natalia Akindinova, director of the Development Center Institute. “The government is trying to reduce inequality by raising salaries for government workers and pensions. But unfortunately that just has a short-term effect. We know what works in the long term: developing different sectors of the economy, not just oil and gas.”

But that isn’t the only thing that creates wealth inequality. Russians have only had the possibility of saving for the past 20 years, and often their wealth is connected to their apartment and car, experts say.

The memory of the 1998 ruble crisis that wiped out most people’s life savings is still relatively fresh in the minds of everyone old enough to remember. To this day, few people participate in the stock market, and trust in financial markets is very low, and in fact often investing in stocks is unwise because they barely keep up with inflation - that’s why well-off Russians often put their money in real estate. On the other hand, in the West there is a long tradition of participation in the stock market. Some experts say that if Russia is going to develop into an advanced economy, financial instruments like stock market participation will have to become commonplace.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
THE LATEST
FOCUS
TRENDING TOPICS
MOST READ