Since 1998, the decline in Russians' incomes has sharply outpaced the rate of economic recession. By January, wages were down 40 percent in real terms compared with the same period last year. At the same time, production fell by just 4.5 percent. For the previous five years, there had been no decline in people's earnings. In a situation like this, it is impossible to use the import restriction/domestic production policy as a univeral panacea for all ecomomic problems. Without a gradual income indexation, there will be no increase in consumer demand. Moreover, the relationship between incomes and the cost of living also inspires very little optimism.

In January, the average per capita income was 137 percent of the cost of living. Just one month earlier it stood at 196 percent. The decline in real term wages has been fast and furious.

This overall picture of impoverishment is overlapped with an unusual situation in Russia, whereby the gap in earnings between different social classes has narrowed. The income of the average Russian has moved closer to the cost of living. At the same time, the difference between the incomes of the top 10 percent richest and the bottom's 10 percent poorest families has decreased by one-third. At the beginning of last year, there were 13 times as many people in the upper bracket as there were in the lowest section of the population. Now that figure stands at 10.3 percent. Taking into consideration that at the end of last year the Ginni's ratio, which determines income differential, did not significantly change, it is clear that the crisis has affected the whole of Russia's middle class.

The situation is complicated by the gross inefficiency of Russia's social security system. Officially, there are 1.9 million people registered as unemployed in Russia. But in reality the figure is nearer 9 million. And this rapid increase in the number of "new poor" and "new unemployed" cannot be explained purely as a consequence of the August crisis. If the current trend continues and the government persists with its passive economic policy, the situation could very soon turn into a political disaster.

The decline in earnings is reflected in the structure of expenditure. The share of consumer expenses has risen dramatically. According to the Bank of Russia, in 1998 the cost of living was 78.3 percent of total income, up 10.4 percent compared with 1997. The share of savings in deposits and securities throughout 1998 was 1.1 percent of personal income, compared with 2.2 percent the previous year.

The consolidation of this trend may lead to a chronic long-term shortage of investment in the country's economic future. This is normally the case when there is a trend for consumption rather than accumulation.

In the Soviet Union most of the population had practically no reason for personal savings. People saved money for cooperative flats, cars and TV sets, but they did not invest their money in order to increase their future consumer power. The main reason for this was the suppression of private economic activity. It was seen as the responsibility of the state, not the individual, to provide for the future. This philosophy discouraged long-term financial planning. The compulsory pension security, medical insurance, unemployment benefits - in fact, the entire state-sponsored system of paternalism -discouraged individual investment.

The current situation contains a central paradox embodied in the state's failure on two fronts: first, to eliminate the Soviet heritage (two-thirds of the population still enjoy certain benefits); and second, to give people an opportunity to invest their own money on their own terms.

According to the Central Bank, the specific weight of social transfers in incomes has decreased from 14.9 percent to 13.3 percent, but the share of wages and social payments has increased from 39.9 percent in 1997 to 42.4 percent in 1998. But to reiterate, this occurred due to poverty.

The state, which is responsible for social transfers, has become even poorer. And the poor are less inclined to invest in the future. The result? There is no longer any money coming from anywhere.