Ukraine’s despair index, which indicates the amount of pain felt by the bottom third of society, has spiked in the last two months, driven up by soaring inflation, rising unemployment and increasing poverty levels, while that for Russia peaked in April, but appears to be falling again.

Invented by bne IntelliNews several years ago, the despair index is a rough measure of the amount of pain the more vulnerable parts of society in emerging economies feel during crises. It is simply the addition of inflation rates, unemployment levels and poverty levels.

Poverty has been increasing in Russia as the economy faces a prolonged recession. In the first quarter of 2022, the number of Russians living below the poverty line grew by 69%, Rosstat reported in June.

The number of Russians living below the poverty line was 20.9mn people against 12.4mn a year earlier, according to RosStat estimates, an increase of 8.5mn in only the first three months of 2022.

However, the level of poverty remains relatively modest in Russia and on a par with the lower end of most EU countries when purchasing power parity is taken into account. The poverty line in Russia is set at RUB12,916 ($221.26) against the national average income of $765 per month in the last quarter of last year.

Russia had a poverty ratio of 14.5% before the war in Ukraine started, which compares favourably with the EU average of 21.7% in 2020 before the various crises hit the globe. Indeed, in May 2020, when bne IntelliNews last surveyed despair in Emerging Europe (see chart), Russia’s poverty rate was even lower than most of the EU and US levels at 12.9%.

With high inflation and an 8%-15% economic contraction anticipated this year, the Russian poverty rate is expected to rise. The government, anticipating problems, is in the course of rolling out a social spending programme of up to RUB4 trillion to cushion the blow.

Compared to the fourth quarter of 2021, the average income of Russians decreased from RUB47,694 to RUB36,234, a drop of 24%, although part of that fall has been offset by the incredibly strong rally in the value of the ruble, which is up by about 30% thanks to swift and stringent action by the Central Bank of Russia (CBR) after Russian troops crossed Ukraine’s border.

Average salaries have also decreased from RUB62,828 to RUB60,101, or by 4.3% in the same period, reports RFE/RL, and unemployment has risen by 800,000. But here too, the increase in unemployment remains modest and overall unemployment is currently 4.2%, according to the most recent data, close to the all-time post-Soviet lows.

Despair index

Taken together, the results allow a fresh calculation of bne IntelliNews’ despair index.

bne IntelliNews' despair index is based on the so-called “misery index”, which is simply the addition of inflation and unemployment. Crises increase both these variables, which disproportionately hurt the lower income strata of society.

To the misery index, bne IntelliNews added poverty to better capture the pain on societies in emerging markets which don’t have well developed social welfare networks.

An ideal despair index should score below a value of ten if residual indicators are taken into account: inflation (2%) + residual unemployment (4%) + poverty (0%).

Unfortunately, while 2% inflation and 4% unemployment are regularly reported, no countries have ever managed to eradicate poverty, which runs at least 12% in the developed world and averages in the mid-teens or above in most developing countries.

Of course, where you set the bar for poverty makes a big difference and each country has a different level, making direct comparisons between countries problematic, but the despair index remains a useful indicator of how much a country is suffering from economic problems.

At the end of last year Russia posted a very modest 21.1 despair index. Compared to bne IntelliNews’ last despair index survey in May 2020 that put Russia ahead of all of Western Europe, where all the countries were reporting results in the high-20s to mid-30s.

Since the start of this year Russia’s despair index has started to climb, mainly driven up by soaring inflation. The economic shock to the system has yet to have an impact on poverty levels or unemployment. In the first quarter of this year the despair index was up to 30.2, but adding in the recent peak inflation rate of 20% set in May and assuming a jump in unemployment to 8% – the peak value during the coronavirus (COVID-19) pandemic – then that lifts the despair index to an uncomfortably high 42.5.

Stagflation

The rapid intervention by the CBR into the economy has successfully contained much of the pain. The central bank cut rates for the fourth time last week, bring the prime rate back to 9.5%, where it was before the war started, saying that inflation pressure had been successfully curbed. Industrial production has slowed, but in the last PMI survey, companies are not reporting an increase in dismissals this year. It seems likely that in the next quarter the despair index will fall back to 30, whereas strongly rising inflation will be pushing up the rest of the world’s despair indices to comparable or higher levels.

The poverty rate in the US was 14.4% in February – on a par with Russia’s poverty rate now – and unemployment was 3.6%, giving it a misery rating of 18. But with inflation soaring to 7.3% in March and 7.4% in April, the US despair index rate has climbed to 27.4, which was almost exactly the same as Russia’s despair rate in the first quarter of this year.

This week the Fed indicated that it has not tamed inflation and will probably hike rates by 75bp as the US looks like it is entering into a phase of stagflation – high inflation and high interest rates that will slow the economy and also send unemployment up. The Fed, like many central banks, needs to hike rates aggressively to contain the situation.

In other countries it may already be too late to prevent a nasty bought of stagflation. Czechia broke another record this week, posting inflation up to 16% – its highest level since December 1993 – which is showing no sign of slowing down. With a prime rate of 5.75%, Czechia’s real interest rates are already deeply negative and it seems impossible for the central bank to reverse the trend without some massive rate hikes.

Currently Czechia’s unemployment rate of only 3.3% currently means it has a misery rate of 18.3%, and the country also has a modest poverty level of 12.2%, according to the last bne IntelliNews survey, but thanks to the high inflation rate it now has a despair index value of an uncomfortably high 30.5%. That’s on a par with Russia, but while the Russian despair index value is expected to fall in the short term, that for Czechia will almost certainly rise once the central bank is forced to hike rates. Both Czechia and the US are now anticipated to go into a recession as a result of the stagflation, says Charlie Robertson, chief economist at Renaissance Capital.

Ukraine despair

Despair is unfortunately well known in Ukraine and the war is expected to inflict a lot of pain on the population. Inflation has spiked in Ukraine like everywhere else, reaching 16.4% in April, before falling back somewhat to 12.9% in May.

But the inflationary pressures are very strong, leading the National Bank of Ukraine (NBU) to put through a massive hike at the start of June to bring the prime rate to 25% from 10% in one step. That will have a heavy toll on growth, where the economy was already expected to contract by 30% or more this year due to the war.

Unemployment was already running at 10.6% in the last quarter of 2021, but it is anyone’s guess where it is now. At least a third of Ukraine’s firms shut down in the first months of the war and over 90% say they have been affected. Now the country is starting to come back to life after Russia withdrew from most of its territory. While 42% of Ukrainian entrepreneurs did not work in March and 26% in April, only 17% of SMEs are currently out of work as of the start of June.

Still the impact on unemployment will be high. Assuming a modest 11% for May then Ukraine has a misery score of at least 24% in May and probably closer to 30% in reality.

The poverty level is more difficult to gauge. Officially Ukraine had a poverty rate of only 1.1% before the war, but that is based on a count of the number of people living on less than $5.5-$13 a day, or $165-$390 a month. Poverty is still so high in Ukraine that the poverty level is measure in terms of a dollar-a-day numbers rather than a minimum salary.

As bne IntelliNews reported, average incomes in Ukraine have been growing fast in the last two years, and dramatically closing the gap with Russia, but Ukraine remains one of the poorest countries in Europe, whereas Russia’s $765 average wage, in purchasing power parity terms, is on a par with the lower end of the EU.

Ukraine had a poverty level of 27% in bne IntelliNews’ last survey, which would give it a despair rating of around 55 now, guesstimating the actual inflation and unemployment. But UNDP said last week that poverty could reach 90% as a result of the war, which would drive the despair index up to 115, even taking the current estimates for inflation and poverty into account.

That is an extremely high result, but not quite as bad as the worst of the chaos of the 1990s, when the despair index went over 200. In Russia the despair index went over 200 in those years as it seems the total collapse of the economy, sustained over several years, causes more despair than just a war.

Ukrainians have to look forward to a lot more suffering until the war is over. There is the prospect for a rapid bounce-back if the West follows through on its promise of a multi-billion dollar Marshall Plan, but in the meantime life will be very hard.

		4Q 2020	1Q 2021	2Q 2021	3Q 2021	4Q 2021	1Q 2022	1Q 2022
Russia	poverty	13.50	14.20	12.50	11.00	8.50	14.50	14.50
	inflation	4.44	5.55	6	6.86	8.31	11.5	20
	unemployment	6.7	5.6	4.97	4.4	4.3	4.2	8
	despair	24.64	25.35	23.47	22.26	21.11	30.20	42.50
Ukraine	poverty	1.1	2	2	2	2	2	90
	inflation	6.2	8.8	9.97	10.73	9.9	14.67	14.67
	unemployment	10	10	11	9	9	11	11
	despair	16.8	20.9	22.47	22.03	21.1	27.27	115.27