COMMENT: Why a shrinking Russian workforce might let Putin off easy

By bne IntelliNews October 21, 2014

Mark Adomanis in Washington -


Russia’s economy is a mess right now: inflation is above target and rising, capital flight shows no signs of slowing down, consensus projections on full-year economic growth have been repeatedly lowered towards zero, major state-owned companies have been frozen out of Western capital markets, and the ruble has fallen to its lowest ever levels against both the euro and dollar. Oh, and as if all of that wasn’t enough, the price of oil has gotten clobbered over the past month, suggesting that Russia’s previously (roughly) balanced budget could be thrown into significant deficit. In such a bleak situation optimism doesn’t seem merely unwarranted, but actively foolish.

Despite all of this bad news, however, Russians haven’t turned against their government. Poll after poll has shown that Russians remain supportive of President Putin’s aggressive policy towards Ukraine, and Vladimir Vladimirovich’s approval numbers remain in the stratosphere (the latest Levada poll has him at 86% support). Other polls have indicated general support for the ban on Western produce, and even expectations that sanctions will have a salutary effect on Russia’s economic development.  

At first glance this might appear completely irrational: why would Russians, who have so enthusiastically embraced Western consumer culture, be supportive of a leader who is taking them straight towards economic stagnation and ruin? Why aren’t they upset that Russia’s fitful attempts at economic integration with the West are now moving in reverse?

Russia’s relatively upbeat public opinion makes a lot more sense when you look at the condition of the labour market. Despite the litany of ills I’ve catalogued above, Russia’s unemployment rate has actually been decreasing in recent months. The trend of decreasing unemployment continued unabated even after the introduction of sanctions and an obvious reduction in the economy’s total growth rate. The latest data from Rosstat showed that, over the summer, Russia was at 4.8% unemployment – a level that could reasonably be argued is actually above full employment.

How is this possible? How could unemployment continue to march downward when Russia’s economy was so clearly misfiring? The answer lies in the demographics of Russia’s labour force.

Where did the workers go?

I’ve written widely on the recent improvements in Russia’s demography. These improvements are real, and they mean that rather than naturally shrinking by 700,000 or 800,000 people a year, Russia’s population has actually experienced modest growth over the past several years. The future remains highly uncertain – population forecasts over the next 30 years range from 120m to 150m – but the improvements of the past several years are real and important. Despite the moniker of being a “dying nation,” by 2014 Russian life expectancy was at an all-time high and the total fertility rate was marginally higher than the all-EU average (and substantially higher than the EU’s newest members in Central and Eastern Europe).  

But how could the workforce shrink if the overall population is growing? Precise definitions vary, but  the “active workforce” is generally defined as the number of people between 20 and 65. It’s true that this is a somewhat crude definition. Even in Russia, college has become the norm and people do not generally get their first job until they are 22 or 23. On the other side of the spectrum, Russian law allows people to retire when they are in their mid-50s (though in practice a great number of “pensioners” continue to work other jobs). Looking at this chunk of the population though does give one a sense of the maximum possible number of citizens that could be engaged in economically productive activity. And even though Russia’s overall population is growing, the workforce has been shrinking since late 2012 and will continue to shrink for at least the next five years.

Put simply, the children born during the recent (and rather modest) “baby boom” won’t enter the workforce until the late 2020s or the early 2030s. And the recent improvements in life expectancy mean that more and more Russians (though still far too few!) are living past 65.

Perfect demographic storm

In the meantime there is a perfect demographic storm. The cohort leaving the labour force is the large one born during the post-war years, the last time that Russia had substantially above-replacement fertility, while the cohort entering the labour force is the tiny one born during the “demographic hole” of the 1990’s. There are simply too few young people to replace all of the old ones leaving the labour market.

This all suggests that Russia will continue to experience full employment even in the absence of strong economic growth. Given the basics of supply and demand (ie. a shrinking supply of workers) wages will grow and employers will have to offer more and more attractive deals simply to retain their existing employees. To the man on the street, then, the Russian economy will feel as if it’s performing reasonably well.

The overall economic costs to Russia from a shrinking labour force are real, and I do not intend to discount them. In the long term, Russia will have to find a way to address the issue, most likely through increased importation of labour from Central Asia and “the near abroad.” But in the short term, the shrinking labour force strongly suggests that the anti-Putin uprising many Western commentators have been predicting will not occur. The “pain” from Western sanctions and from Russia’s own policy miscalculations will only cause mass dissatisfaction if negatively impacts the labour market – and the odds are firmly against that occurring. 

Mark Adomanis is an MA/MBA candidate at the Lauder Institute at the University of Pennsylvania. He regularly contributes Russia-related writings to a range of outlets such as True/Slant, Salon, Forbes and The National Interest.

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