Russia’s acute labor shortage
Hello! Welcome to your weekly guide to the Russian economy — written by Alexander Kolyandr and Alexandra Prokopenko and brought to you by The Bell. Our top story is a deep dive into Russia’s wartime labor shortage, and what’s driving it. We also look at some Western successes targeting Russia’s “shadow” oil tanker fleet.
No good options for the Kremlin amid unrelenting labor shortfall
After two-and-a-half years of fighting in Ukraine, Russia’s labor shortage has emerged as the root of most of the country’s economic problems. President Vladimir Putin might boast that Russia has “almost no unemployment” as he did during a visit to China in May. But for many officials, it’s a cause for concern, not pride. Russia’s economy, which has been overheated by military spending, is desperate for more workers. The result is rampant inflation and, ultimately, weaker economic growth and lower standards of living.
War-driven demand
Since the full-scale invasion of Ukraine in 2022, Russia has dramatically increased spending, particularly on the military. Even if the budget passed last year anticipates that this spending will start to fall in 2025, in reality, such an outcome is deeply unlikely. And that means demand for workers in the defense industry will continue to rise.
The defense sector is short of about 160,000 specialists, Deputy Prime Minister Denis Manturov said last month – and this is despite 500,000 workers switching from the civilian sector to defense-related firms over the last 18 months.
In a bid to attract workers, defense sector companies have hiked salaries, which fuels consumer demand across the whole economy. Salaries are increasing fastest in Russia’s industrial regions on the Volga, and in the Ural Mountains, where there is a large concentration of arms manufacturers. But the labor shortage affects all Russian regions, and almost every industry. There is “a significant shortage of highly-qualified specialists and low-skilled workers alike” all across Russia, the Central Bank stated in a May report.
Nobody to work
The shortfall is not only due to increased demand, but also dwindling supply. Prior to the war, Russia already had a declining number of workers. In June, Deputy Prime Minister Dmitry Chernyshenko said a decrease in the number of high school and university graduates suggested that Russia was falling into a demographic hole. The Labor Ministry predicts that, by 2030, Russia will be lacking 2.4 million workers.
However, such gloomy demographic prognoses are not news. A shrinking workforce has already prompted the government to impose its most unpopular reform of the last decade – raising the pension age in 2018. You can find more details in this article by economist Rostislav Kapelyushnikov about the future of Russia’s workforce.
The only thing that has succeeded in increasing the size of Russia’s workforce in recent years has been the war in Ukraine. In 2023, Russia saw an influx of people from occupied territories who took Russian citizenship – many of whom entered the workforce. The effect of raising the pension age is also being felt. But even these increases can’t meet the needs of Russia’s booming economy. It’s clear the problems are not down to demography alone. But what other factors are there?
Firstly, there are likely fewer labor migrants. Russia’s natural population decline was traditionally balanced by migrant labor. However, migration in 2023 was at its lowest level since pandemic-hit 2020. And this year, there could be even fewer: following the March terrorist attack on Moscow’s Crocus City Hall, Russia imposed tighter checks on migrants entering the country, and there was aggressive anti-migrant rhetoric from several officials.
Secondly, the Russian army is recruiting tens of thousands of working-age men. While the Kremlin remains reluctant to impose another round of mobilization, the army has to compete with all other employers. At present, somewhere between 10,000 and 30,000 workers join the army every month – about 0.5 percent of the total supply. As time passes, it becomes harder to recruit more men, which means they have to be enticed by ever higher salaries, sign-on payments, and other bonuses.
Thirdly, many people left Russia after the invasion of Ukraine – because they were anti-war, or because they feared being made to fight. Most of them are probably still included in official statistics, but this outflow undoubtedly dented the labor market.
The authorities face a tough choice. There are social and political risks in allowing more migrants into the country. And limiting military recruitment is hardly possible when there’s a war on. Nor are there many more workers left in occupied Ukraine. If we dismiss fantastical plans like recruiting workers from North Korea, the Kremlin has few options.
Structural change
Russia’s economy is undergoing structural changes as labor-intensive industries play a bigger and bigger role. Previously, Russia’s exports were mostly capital-intensive (such as mining), and the labor force required to produce them was minimal. In good years, the authorities spoke of the need to increase the role of labor in the economy and, ultimately, in wages. But wage growth happens either because an economy becomes more sophisticated (spending on education, healthcare, science and, as a consequence, getting increased labor productivity), or when it degenerates – causing labor to displace capital. In Russia, the latter process is the one underway at the moment.
Twentieth century New Zealand economist William Phillips was the first to put forward a correlation between unemployment and wages. He showed that, when unemployment is low and productivity high, wages grow faster (along with inflation).
Today, there is a belief that governments can improve either inflation, or productivity, at the expense of the other – but not for long. The theory of a natural rate of unemployment (i.e. the level of unemployment at which inflation is steady and there is no upward or downward pressure on prices) – reckoned to be 4% in Russia – assumes that, everything else being equal, the economy will return to its average levels. Russia’s economic potential could be higher if it could increase productivity, perhaps with innovation. However, this is hindered by Western technology sanctions, and the relatively small size of the Russian market.
Why the world should care
To ensure stability, the Russian authorities seem set on using all instruments at their disposal to stimulate economic growth. This will continue to increase the demand for labor, and boost salaries. But it can’t last forever. Bringing in workers from abroad is politically sensitive. And spending cuts leading to increased unemployment and stagnant – or even falling – real incomes – is also something the Kremlin wants to avoid (at least until it can achieve something that can be sold as a military victory in Ukraine).
Sanctions knock out Russia’s shadow tankers
Of the 53 tankers placed under Western sanctions since October for transporting Russian oil in breach of the Group of Seven price cap on Moscow’s oil exports, only three have found new loads, Bloomberg reported Wednesday. Of these 53, 41 are designed to carry oil.
This shows that Western countries have an effective lever to reduce Russian profits from oil exports. Tankers that cannot find loads because of sanctions are an investment loss. And removing the remaining “gray” tankers from Russia’s export system would cause further losses, which hits company profits. Moreover, each time a tanker is disabled, Russia has to buy a new one – possibly at inflated prices. All this means Moscow is paying more to export crude oil.
On the other, Russia’s losses are relatively small. According to S&P, the current Russian “gray fleet” amounts to some 591 vessels – up a third from last year. Thus, less than 7% of the fleet is currently dry-docked due to Western sanctions.
Why the world should care
Successfully disabling tankers in this way is a big win for those in the West who support strong measures against Russia’s shadow fleet. However, we’re unlikely to see a sudden flurry of more such sanctions. According to The New York Times, the White House is anxious about triggering gasoline price rises ahead of the U.S. presidential elections.
Figures of the week
Russia’s coffers will be replenished by an unexpected 173 billion rubles ($2 billion), which had not been included in budget forecasts. Most of this money is coming from the Central Bank. Last year, for the first time in seven years, the Central Bank made a profit – 140.4 billion rubles. According to Russian law, 75% of this must go to the government.
Between January and June, Russia recorded a deficit of 929 billion rubles (0.5% of GDP), according to the Finance Ministry. This figure is less than planned – in the budget for this year, Russia was envisaged to see a deficit of 2.12 trillion rubles (1.1% of GDP). Revenues for the first half of the year were 38% higher than expected.
Weekly inflation in Russia between July 2 and July 8 dropped to 0.27% (from 0.66% the week before), according to the Economic Development Ministry. Annual inflation went up from 9.22% to 9.25%.
The Central Bank is reportedly preparing to remove several banks from its list of “systemically important” credit organizations. These may include Austria’s Raiffeisenbank, which has been heavily criticized for continuing its operations in Russia amid the war in Ukraine. A Central Bank source told newspaper Vedomosti that the bank was doing less business in Russia, which meant it was less important to the country’s banking system.
Further reading
Western Sanctions Are Pushing Russian Metals Producers Into China’s Arms
Assessing Russian plans for military regeneration
NATO’s Biggest Test Since the Cold War Is Still Ahead
Russia Sees Signs of Diplomatic Rehabilitation in Orbán Visit
