Russian trouble with statistics

Rosstat HQ, Moscow, Russia (Акутагава, CC BY-SA 3.0)

There is an increasingly clear clash between the optimistic assurances of the Russian government that the economic situation is good and the feelings of analysts and ordinary Russians who believe that the situation is bad and could get even worse.

Now even official statistics no longer confirm the optimism of the government. As a result, the authorities started doctoring them. It is reasonable to ask, however, whether it is worth altering statistics in the name of illusions of growth and prosperity? The lack of real economic success and the increasing divergence between the forecasts and promises of the authorities and the reality on the ground have forced the government to take “radical” steps.

The need to achieve success as quickly as possible, which could not be guaranteed by the real economy, redirected the activity of the authorities towards “improvements” in statistics. In this regard, the authorities followed the old Russian adage — “if you can’t achieve genuine success — use the statistics”. After all, numbers can be easily manipulated.

Data exploited by the authorities

The statistics that did not confirm the government’s optimism about the rate and directions of changes in the basic indicators of socio-economic life were met with growing criticism from the country’s president, prime minister and individual ministers.

The head of Russia’s State Statistics Service (Rosstat), who had been responsible for Russian statistics since 2009, was removed from his position for the insufficiently optimistic results on 2018. The analysts emphasize that this professional statistician was submissive towards the authorities but tried to ensure that the differences between statistics and reality are not excessive. However, that approach undermined the supposed “successes” of the authorities.

Many far-reaching discrepancies between the statistics and the expectations of the authorities have been brought up in this context. This applied, for example, to the increase in agricultural production in 2017 by “only” 10.7 per cent, and not 20 per cent as expected, the increase in industrial output in the same year by 2.1 per cent and not by 3.7 per cent, the “insistence” on a decrease in the real incomes of the population in 2018, even though both the president and the prime minister were already speaking of an increase following four years of declines.

In total, at least 20 cases of such discrepancies were identified, even though Rosstat’s autonomy wasn’t particularly strengthened after it was moved in 2017 to the structures of the Ministry of Economic Development, which is responsible for drawing up programs and forecasts, and for their settlement.

In late December 2018, a Ministry of Economic Development official was appointed as the head of the Russian State Statistics Service. Within a short period of time this resulted in the verification of many basic, current and historical economic indicators: those that should be growing (according to the authorities) were revised upward, while those that should be falling were adjusted in an opposite direction.

The results exceeded even the wildest expectations of the authorities. However, they also perplexed the analysts and the scientific community — also including foreign entities (Reuters, Bloomberg and others) — and led to far-reaching critical assessments of the reliability of the statistics.

The government administration is using positive data suited to its needs in its attempt to show that it delivers on its promises. Meanwhile, analysts believe that the doctoring of statistics and the creation of a “virtual reality” should be seen as an attempt to “cover up” the incompetence of the authorities and the lack of real results.

Creative accounting

When verifying the data, the biggest discrepancies were found in the case of the basic economic indicator, that is, the rate of growth of the GDP. During the first days following the appointment of the new Rosstat head, GDP data for 2015, 2016 and 2017 were revised. In relation to 2015 data, a fourth revision in a row was carried out, and the rate of decline was reduced from 2.8 per cent to 2.5 per cent (the rate of decline originally was 3.7 per cent and fell to 3.0 per cent after an adjustment). In turn, the 2016 figures were adjusted from a decline of 0.2 per cent (with even earlier estimates indicating a decline of 0.6-0.7 per cent) to a rise of 0.3 per cent. Against this background, the year 2017 only saw a slight adjustment from 1.5 per cent to 1.6 per cent.

However, the biggest surprise concerned the economic results for 2018, which was seen as difficult for the Russian economy, in light of the intensification of sanctions and low investment activity. Many analysts predicted that the GDP growth rate would be no higher than 1.5 per cent, and the consensus forecast was 1.6-1.8 per cent. The Central Bank of Russia (CBR) projected an increase of 1.5-2.0 per cent and pointed out that additional government actions would be required to reach the upper limit. The official forecast of the Ministry of Economic Development pointed to a GDP growth rate of 1.8 per cent. The predictions and forecasts of foreign institutions and analytical units also fell within the range of 1.5 to 1.8 per cent.

The results from the first three quarters and preliminary estimates for October and November of 2018 confirmed the validity of the above-mentioned forecasts, and according to some analysts even indicated the necessity of a downward revision. Rosstat’s data from mid-December 2018 indicated that the rate of GDP growth slowed down significantly in the Q3, reaching 1.5 per cent (an earlier estimate pointed to 1.3 per cent) compared with 1.9 per cent in the Q2, and that after three quarters it amounted to 1.6 per cent. The Ministry of Economic Development estimated that economic growth reached 1.3 per cent in the Q3, and 1.6 per cent in the entire period from January to September 2018.

The turn of January and February 2019 surprised everyone with the scale of positive statistical information. On January 25th, the Ministry of Economic Development announced that Russia’s GDP growth in 2018 amounted to 2.0 per cent, that is, reached the level previously forecasted by that ministry for 2021. Just a few days later, Rosstat raised this rate to 2.3 per cent, which is the highest the rate of economic growth in Russia in six years, i.e. since 2012.

Rosstat’s creative accounting — as analysts referred to it — has drawn widespread criticism. According to popular opinion, in light of the declining economic activity recorded in the H2’18, there was no reason to revise upward the GDP growth rate, and especially to the extent that it was adjusted. It has been pointed out that Russia’s PMI economic activity index decreased significantly, from 55.3 in 2017 to 53.8 in 2018.

Changes occurring in this index are usually directly correlated with the rate of economic growth. Therefore, an increase in the rate of GDP growth from 1.6 per cent in 2017 to 2.3 per cent in 2018 would be the first instance when these indicators are moving in opposite directions. The critics’ concerns were further strengthened by the arguments that the Ministry of Economic Development used to explain the sources of the rapid improvement in the GDP growth rate.

The ministry indicated that the main driving force behind the revisions — outside other minor contributing factors (such as a verification of the decline in agricultural production from 0.7 to 0.2 per cent) — was the construction sector, which was recently among the branches of the Russian economy with a negative contribution to economic growth (a fall of 1.2 per cent was recorded in 2017).

The situation was no different in 2018. According to Rosstat, after 11 months construction posted a modest growth of 0.5 per cent. The transformation from an outsider into the driving force of the Russian economy required a tried-and-tested procedure of price revaluation, which immediately increased the rate of growth by almost 5 percentage points, up to 5.3 per cent, which is a record-high level in the past 10 years.

However, no one believed that a construction boom had occurred in Russia in 2018. However, analysts point to the lack of any correlation and significant discrepancies, including in relation to the direction of changes, between the basic indicator and the other indicators characterizing the construction sector. The same statistics of Rosstat point to a decline in the production of building materials in 2018, including cement (by 1.9 per cent), bricks (by 4.8 per cent), metal structures (by 1.5 per cent), and concrete (by 1.6 per cent). The transport of these materials (which is an extremely important factor for Russia) also fell by 6.8 per cent, including a decrease in transports of cement by 6.5 per cent. A 4.9 per cent drop was also recorded in residential construction, which is the basic component of the construction sector outside industrial construction. In this case, we could even talk of a collapse, and a return to growth is only expected after 2021.

However, the consequences of doctoring statistics for current political purposes are troublesome in the long run. In this context, commentators bring up the example of Russian agriculture, whose achievements are treated as a symbol of Russia’s success in the fight against sanctions, as well as the effectiveness and benefits of the food embargo. According to Rosstat’s data, over the last 5 years, agricultural production in Russia rose — as it was thought until recently — by 20.7 per cent. As a result of an agricultural census, at the end of 2018 this growth was revised down to 8.7 per cent, with reports on the production of potatoes reduced by 35.9 per cent, the figures on the production of vegetables — by 17.2 per cent, and data on the production of milk — by 3.4 per cent.

One fact that is particularly embarrassing for the authorities, is the decline in the real incomes of the population for the fifth year in a row. The incomes have diminished by more than 11 per cent compared with 2012. Russia did not go through such a long-lasting decline even in the very difficult period of the 1990s.

The declining indicators in this area illustrate the ineffective socio-economic policy pursued by the government and exacerbating poverty in society. This in turn leads to great nervousness and determination on the part of the authorities to reverse these unfavorable trends.

According to official announcements and the adopted programs, after four years of declines in the real incomes of the population, the year 2018 was supposed to bring a reversal of the negative trend and an increase of 3.6 per cent. In June 2018, during yet another conference-discussion with the public, President Vladimir Putin reported that Russia had entered a path of stable growth in real incomes, mentioning the expected growth rate of 3.8 per cent.

Prosperity on paper and poverty in real life

The subsequent reporting periods did not confirm the optimism of the authorities, despite Rosstat’s “favorable” approach. In early October 2018, Rosstat reported that real incomes of the population rose by 2.4 per cent. This news startled all the observers of economic life in Russia, because the indicators did not even come close to such a figure in any of the country’s federal districts. In six of them there was a decline ranging from 1.6 per cent to 0.4 per cent, and only two recorded an increase of 0.5 per cent and 2.0 per cent.

Therefore, an average value of 2.4 per cent for all of Russia is an affront to professionalism and mathematical logic in particular. Experts saw this as a genuine economic miracle, adding, that “if we were to believe Rosstat, the Russian people have learned to become more affluent even as they are getting poorer”.

Still at the beginning of December 2018, Russia’s Prime Minister Dmitry Medvedev assured that real wages would increase by 1.6 per cent. However, during a meeting with journalists at the end of that month the President’s assessment was already much more modest than half a year before. In his opinion, “a slight but positive trend of growth in the real incomes of the population” would mean a rise of 0.5 per cent. As journalists have pointed out, during that time Rosstat already reported a 0.1 per cent decline after 11 months. According to analysts, these discrepancies became the direct reason for the personnel changes in the State Statistics Service. The year 2018 ended with yet another decline in real incomes (by 0.2 per cent).

The confrontation of the unfavorable final results with the optimistic assurances of authorities presented all throughout 2018 that a stable and significant increase in real incomes would be recorded — which was supposed to be based on a rapid increase in real wages (at the end of the year they rose by 6.7 per cent, mainly due to increases in the budget sector in connection with the presidential election) — forced the Ministry of Economic Development to try to explain the discrepancies.

The ministry’s statement aroused as much doubt as its previous explanations regarding the verification of the GDP growth rate. And so, the decline in real incomes turned out to be the result of events affecting the wealthiest group of Russians, who supposedly suffered from such “calamities” as a fall in investment income, increased credit fees or even a decrease (by 2.1 per cent) in non-registered remunerations, i.e. a parameter that is typically very difficult to measure. According to the Ministry of Economic Development, the situation was much better in groups with lower earnings.

According to experts, the authorities themselves contributed to the deterioration of real income statistics by taking away more money from the people than they gained through the wage increases. Fees of various types, including those dependent on the authorities, grew by 14.8 per cent. According to analysts, this contributed to a reduction in real incomes by at least 1.0 percentage point. This applies in particular to taxes and fees (VAT, the environmental tax, real estate revaluation tax, tourist fees), as well as waste collection fees, municipal and housing fees.

Achieving an increase in the real incomes of the population may be equally difficult in 2019. According to analysts, the key element of this indicator, i.e. the real wages, may grow much more modestly than in 2018 (6.7 per cent), that is, by 1.5-2.0 per cent, while the inflation rate is expected to accelerate to at least 5.5 per cent from 4.3 per cent in 2018.

In the conditions of a further decline or a modest rise in real incomes, the authorities will face an equally difficult task in their efforts to reduce poverty. According to official declarations, its scale should be reduced in half by 2024. Poverty currently affects over 19 million people, that is 13.3 per cent of the entire population, after a further increase in 2018. At the same time, it is pointed out that in Russia the group of people considered to be affected by poverty only includes residents whose income is lower than the minimum subsistence level (an indicator dating back to the 1990s, which has remained in use without major changes) set by the authorities once every 5 years (in 2018, its verification was postponed to 2019). If Russia adopted the methodology used by the OECD (where the group considered to be at risk of poverty includes all residents whose income is lower than 60 per cent of the median income) then the scale of poverty in the country would substantially rise, reaching 22 per cent of the entire population.

Propaganda instead of reforms

In recent times, Russian authorities have been constantly talking about their successes. The economy has supposedly become immune to the sanctions and is developing better and better, poverty is falling, labor productivity is increasing and domestic output is displacing imports. The government’s effectiveness in creating these positive economic phenomena prompted analysts to joke that it does not have to implement reforms, which are not always popular, since the desired result can be achieved with less effort through doctored statistics.

However, the question remains open as to the possible results of the confrontation between the objectively increasing poverty and the statistical reports of the Russian economy’s continued success which are promoted by the authorities.

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