Two articles are enclosed which analyze the recent performance of the Russian economy and explain why the rate of unemployment has stayed low.
1. Russian unemployment nears historic lows despite sanctions
Jon Hellevig, Awara, Aug 21, 2015
Yet Bloomberg still wants to pretend this isn’t a positive sign
The unemployment rate in Russia dropped in July to 5.3%, not far from the record low of 4.8% a year ago. Notably, the number of the economically active population (those working or looking for a job) simultaneously grew from 76.5 to 77.2 million. This shows that real gains were made on the job market.
The unemployment rate must be considered the most accurate indicator of the real health of the economy as the other core indicators are too much subject to estimations and conventions. Here we then have solid proof that not all is bad in the Russian economy as the press would have it.
According to some malicious and mendacious press reports, the low unemployment rate is a mere chimera. The Russian government has supposedly attempted to save jobs in economically unviable areas in order to protect social stability rather in the way it was done during the planned economy in the USSR.
This is what Bloomberg claims in a story of August 18 titled Putin Revives Soviet Deal of Pretend-Work-and-Pay to Hide Crisis. This comes against the better knowledge we have about a slew of announcements of downsizing and shedding of workforces at Russian state owned corporations and authorities.
Indeed the Western press has been regularly gloating during the last few months over the reports of mass redundancy with headlines like these:
- Russia hit with mass layoffs as economy worsens
- Russia’s Largest Carmaker Announces Major Layoffs
- Putin Cuts 110,000 Government Jobs
- Big Companies Cutting Staff in Gloomy Economy
At the end of this article, we will provide a brief digest of such press clippings for the education of those in doubt.
It becomes remarkably clear that unemployment has gone down against the backdrop of simultaneous mass layoffs and restructuring. The only proper way to interpret this is that the Russian economy is indeed resilient and that a real modernization of Russia’s economy is underway with new viable ventures absorbing the labor force made redundant.
Bloomberg continues its lamentation (or euphoria?) about the Russian job market by referencing to a recent OECD report on labor productivity in various countries. According to that report, Russians would be the least productive workers in Europe, as The Moscow Times interprets it. This is, of course, total nonsense, partly based on academic drivel and partly on calculation errors.
The academic drivel part lies in the entire notion behind this measure, the idea that by dividing a country’s GDP by the number of hours worked would yield the productivity of the worker. (Let’s be fair, the question is, in fact, about the productivity of the economy as a whole, including – and to a large degree – its management. By referring to low productivity of workers, The Moscow Times only wanted to add insult to the story.)
In this study from last year, we have criticized this idea of trying to derive measures of labor productivity from GDP figures. GDP measures the value of goods and services produced and not the productivity. A lot of macroeconomic actions and events affect the GDP, such as taxes that push up the general price level and hence GDP in high-tax countries.
Borrowing at all levels of the national economy, government, corporations, and households increase GDP and therefore the base for calculating this faulty labor productivity measure without any real improvement in actual labor productivity. The more leveraged an economy is, the better this skewed labor productivity looks. We could then argue that the Russian worker is particularly inept in participating in the debt-binge that is so totally defining the behavior of his Western peers.
But that’s not all. Not content with distributing such products of fantasy, the OECD also made a major calculation error. In their method, they purported to use the GDP adjusted to purchasing power (PPP). Considering the significant devaluation and the volatility of the ruble during 2014 (the year of OECD refers to), it is indeed a daunting task to determine both the base nominal price of the hour of labor and the PPP coefficient. It seems to us that the correct adjustment coefficient should be closer to three than the two which OECD used. This would radically change the ranking of Russia in this academic leisure game.
Finally, we must draw attention to one more gross error in the Bloomberg article. It claimed that “Putin” now has “some of Europe’s most restrictive labor rules”. Nothing could be further from the truth, as any practicing lawyer or business executive in Russia knows. Russia has some of the most lenient rules (from point of view of the employer) in Europe, allowing mass layoffs by a mere two-month notice, without being restricted in this by cumbersome labor union rules and legal restrictions.
What follows is a brief digest of some of the news of frequent mass layoffs at large Russian corporations and government. Reading these one wonders who is pretending, Bloomberg or Putin!
Russia hit with mass layoffs as economy worsens “Large layoffs have begun. The Moscow construction sector has seen 100,000 people being laid off. We see signs of crisis in the auto industry,” (Alexey Kudrin interviewed)
Russia’s Largest Carmaker Announces Major Layoffs “AvtoVAZ, [maker of Lada cars] will shed 27,600 jobs under an agreement negotiated with unions. Management had earlier sought to cut some 36,000 positions.”
Russia’s Putin orders cuts to Interior Ministry payroll “Russian President Vladimir Putin has signed an order reducing the maximum number of staff on the Interior Ministry payroll by 110,000, or about 10 percent, according to a document posted on a government website on Monday.”
Tens of thousands of officials will be dismissed “Prime Minister of Russia Dmitry Medvedev has ordered to reduce the number of officials at the regional and Federal levels by 10%, which is about 150 thousand people. “
Russia can’t afford to pay state employees “Russian President Vladimir Putin signed three new decrees into law that will slash government salaries — including his own and that of Prime Minister Dmitry Medvedev — by 10% from 1 May. – The government has also announced plans to cut the number of government officials by 5% to 20%.”
Big Companies Cutting Staff in Gloomy Economy “A slew of announced layoffs is rattling the domestic labor market, threatening to further undermine a weak economy. // Russia’s two largest banks, state-owned Sberbank and VTB, have joined the country’s biggest carmaker, AvtoVAZ, in declaring significant staff reductions in the upcoming months. // [VTB Group chief] Kostin said the group would consolidate some operations, leading to the layoffs. // Sberbank, the country’s largest bank by assets, said it would reduce personnel to 220,000 people over five years from the 250,000 people that it currently employs.“
Putin Cuts 110,000 Government Jobs “President Vladimir Putin fired 110,000 Interior Ministry jobs with the stroke of a pen. The Interior Ministry control the police, paramilitary security forces, and the traffic safety agency.”
Russia’s automobile manufacturers begin layoffs campaign“Russia’s automotive industry leader AvtoVAZ has launched a layoffs campaign” (see above), and, “Russia’s other automobile manufacturers have been reducing personnel, too. The General Motors plant in St. Petersburg will be working one shift a day instead of three as of October 1. Ford in Vsevolzhsk, the Leningrad Region, and Volkswagen, in the Kaluga Region, too, have declared they will be working shorter hours.”
Russia is imposing cuts on its healthcare system — and doctors aren’t happy about it “As part of cost cutting measures, authorities announced last month they plan to close dozens of hospitals and lay off up to 10,000 medical staff. “
Russia’s Rosneft facing layoffs “Russian media reported on Thursday that state-owned oil company Rosneft could shed as much as 25 percent of its staff as early as next month.”
2. Russia and the depression that wasn’t
By Anatoly Karlin, Unz Review, Aug. 21, 2015 (go to original weblink to see accompanying statistical charts)
Masha Gessen’s friends can no longer get their little Gruyères, the “legendary” (primarily for losing his clients’ money) Moscow investor Slava Rabinovich is predicting food shortages, and things are only about to get worse with oil falling to $25 per barrel and the ruble to 125/$1–at least according to the Khodorkovsky-funded Interpret Mag’s Paul Goble, who has made something of a professional career forecasting Russia’s takeover by Muslims and the Chinese.
Ambrose Evans-Pritchard, the guy who has predicted all twelve of China’s past zero recessions, amongst other forecasting accomplishments, says that Russia is “in a full-blown depression.”
One would think from all the noise that we are looking at some sort of Greece-like depression, or an imminent rerun of the collapse of the post-Soviet economy in the 1990s.
Now for the rather banal reality. Real GDP is expected to contract by around 2.7% this year according to the World Bank, but then recover to 0.7% in 2016 and 2.5% in 2017.
The reasons behind this are likewise pretty banal. They don’t have a great deal to do with Western sanctions, which hurt the ability of Russian companies to raise capital but otherwise have had little bite, and they have even less to do with any particular feature of Russia’s political system/kleptocracy/lack of economic freedoms that both anti-Russian establishment pundits like Ariel Cohen and pro-Western liberals in Russia like former Finance Minister Alexey Kudrin like to claim as dooming it to economic stagnation.
If they were right, then East-Central Europe – most of which is rated as a lot economically freer and less corrupt than Russia on the various indices that proclaim to measure such – would not also have been stuck in a relative economic rut since around 2007.
No, the reason for Russia’s recession is quite simple and boils down to the sharp collapse in oil prices from ~$100 in 2014 to ~$50 this year.
Though the Russian economy is about far more than just oil – natural resource rents are 18% of GDP – it is true that oil is the key component of Russia’s export basket. So when oil prices collapse, in the absence of massive and unsustainable interventions, the ruble devalues. This is indeed what happened. Imports went down, goods became more expensive, and inflation rose. The Central Bank jacked up interest rates in order to prevent runaway inflation, but at the price of a decline in aggregate demand and consequently a short-run decrease in the GDP. If one is really searching for a comparison, the correct one would be not to Greece (which is locked in a monetary straitjacket by the ECB) nor to the late Soviet Union (wholly irrelevant) but to the Volcker recession in the early 1980s U.S.
There is now a very substantial output gap. Dependence on Western credit is now much reduced relative to 2013, to say nothing of 2007. Meanwhile, there are active and serious efforts to develop Russia’s own financial system, which remains woefully underdeveloped for an economy of its size and scope.
Finally, even if oil prices drop permanently to $50 – which is entirely possible, given the removal of the Iran sanctions, this would not mean the Russian economy would be necessarily doomed to years of stagnation. To the contrary, econometric modeling by Russian economist Sergey Zhuravlev indicates that it would result in a ~1.5 year recession (which began in mid-2013, versus 2012 in his model; but otherwise it remains very relevant) followed by accelerated GDP growth thanks to exports.
Otherwise, macroeconomic indicators remain unremarkable. Corporate debt repayments scheduled for the second half of the year are twice lower than in the first half. The budget deficit is forecast to be 3-4% of GDP for the year and overall state debt levels continue to be very low. (Incidentally, this figure is 20% for Saudi Arabia. Which should put the nail in the coffin of the idiotic conspiracy theory that the fall in oil prices has been orchestrated by them and the U.S. to undermine Russia).
Unemployment has barely budged, not even reaching six per cent at its peak. In comparison, it was at ten per cent throughout much of the 1990s. This is almost entirely an output recession.
Now, inevitably when recessions occur, living standards tend to fall, and people have to live more frugally. Reading the Western media, one would think that the recession has led to a tsunami in worker protests, criminality, and elite intrigues against Putin.
But in statistical terms, the real impacts of the downturn have been modest. According to Levada opinion polls, the percentage of people having difficulty buying food and clothing increased to 32% this year from 21% in 2014, but this is still lower than the figure for (pre-crisis) 2012, when it was at 33%, to say nothing of the early 2000s (higher than 50%) or the 1990s (around 80%).
The percentage of Russians who spend either “almost all” or “two thirds” of their incomes on food, another measure of poverty, is 26% this year, completely unchanged from 2014, and actually lower than in 2013 (33%) or the 2000s in general (40%-50%), to again say nothing of the 1990s (consistently around 80%). These numbers have been confirmed credible by observers such as Russia Insider’s Gilbert Doctorow and Alexander Mercouris, who have personally assessed the situation on the ground, in stark contrast to the New York Times’ Masha Gessen’s reliance on her Je suis fromage liberal Russian friend.
It is deeply unfashionable to say this, but Russian living standards have improved astronomically in the 15 years of Putin’s rule – more so than the headline GDP figures. As such, even a recession like the current one only kicks living standards back by one or two years.
As such, it is not surprising – if deeply disappointing to the Western elites who want to stir up a color revolution in Russia – that Russia’s level of “protest potential” (the percentage of Russians saying they would be willing to participate in protests, or rating the likelihood of protests as being high) is currently near record lows.
Naturally, any such attempts to put the effects of an ultimately modest ~3% drop in GDP into statistical perspective will be met with accusations of callous indifferent to the plight of the Russian people, and the work of Olgino trolls to boot. I have seen this replayed numerous times on the Internet, even when the people making such arguments were Russians living in Russia, whose only sin was to recount their own (generally modest) experiences and impressions of the recession.
Make no mistake – there is a well coordinated media effort in the West to leverage any Russian economic problems to destabilize the Kremlin. Note the chorus of condemnation around the destruction of food illegally imported from the EU in contravention of Russian sanctions, even though the destruction of excess food is routine under the EU’s Common Agricultural Policy.
Naturally, this is driven by their altruistic and heartfelt commitment to the wellbeing of the Russian people. Though isn’t it just a wee bit strange that those journalists and “activists” who tend to shout loudest about the burning of European food also tended to be the ones who maintained the thickest silence about the burning of Russian people in Odessa in the new European Ukraine.
Read also: Three articles on salaries in Russia:
Russian public servants see pay raise, The Moscow Times, Aug. 23 2015
The average Russian federal public servant has earned 96,500 rubles ($1,400) per month in the first half of this year, up 4.9 percent from the same period last year, Rosstat state statistics service said in a statement Friday.
The highest-paid are the officials in the presidential administration, despite their wages slumping by 2.9 percent in the first half of the year compared to the same period last year, Rosstat said. They earn 226,200 rubles ($3,300) a month on average.
While some categories of officials saw their salaries fall due to a restrained Russian budget because of the economic crisis, some saw their wages increase. For example, the average wages of officials from the legislative branch rose by 23.7 percent to 122,200 rubles ($1,771) in the first half the year compared to the same period last year.
In July, the average monthly salary in Russia was 34,000 rubles ($500), news agency Interfax reported, citing Rosstat.
Highest Average Salary in Russia Is in Gas-Rich Siberian Town, The Moscow Times, Apr. 13 2015
The north Siberian town of Nadym, located near an abundant natural gas deposit, has Russia’s highest average salary – 90,400 rubles ($1,700) a month – according to a study by the RBC news agency released Monday.
For comparison, the average monthly salary in the city of Moscow is about 61,200 rubles ($1,150), about twice the national average for Russian city-dwellers: 36,800 rubles, the report said.
But while Nadym may have the highest average salary in nominal terms, residents of the Baltic port city of Primorsk have the most buying power, taking into account local salaries versus the cost of living.
Following Primorsk on that scale is the Moscow region industrial city of Lobnya, according to the study of 1,128 Russian cities and towns, based on salary figures from 2012 to 2014.
The city with the lowest average wage is subarctic mining hub Verkhoyansk – one of the world’s coldest cities – where residents make an average monthly salary of 21,000 rubles versus a cost of living of 13,500 rubles.
Verkhoyansk made headlines in winter 2011 when it came under attack by hundreds of wolves, prompting the regional government to announce a three-month battle against them.
Russia’s other poorest localities include the town of Sursk in the Penza region, Demidov in the Smolensk region and Vorsma in the Nizhny Novgorod region.
Salaries in Moscow Rise to $1,200 Per Month as Wage Growth Slows, The Moscow Times, Oct. 15 2014
The average Muscovite is pulling in slightly more than 50,000 ($1,200) a month this year, as wages in all sectors increase but fall behind the double-digit pay rises of recent years, a Moscow city official said Tuesday.
Workers in municipal services, construction, social services and small business will earn 50,000 rubles or more on average in 2014, news agency TASS quoted Maxim Reshetnikov, head of Moscow’s economic policy department, as saying.
Wage growth in all sectors of the city’s economy will exceed inflation, he added. Inflation has spiked this year due to the devaluation of the ruble and Russia’s ban on an array of Western food imports. Officials now say it is likely to strike 7.5 to 8 percent for the year.
But the news isn’t all good for workers in Moscow – one of the world’s most expensive cities, where a decent cup of coffee costs a good 200 rubles ($5). Salaries had risen at double the rate of inflation over the previous three years, but now “the growth rate of wages is slowing,” Reshetnikov said.
In 2013, Deputy Mayor for Social Development Leonid Pechatnikov said that Moscow’s average monthly salary far exceeded what most workers were paid, m24.ru reported.
The high average instead represented the large gap between management and employee salaries in Russia, which is among the highest in the world, according to international consulting company Hay Group.
Moscow salaries are significantly higher than the average salary across Russia, which was about 32,000 rubles ($780) per month in August of this year, business daily Vedomosti reported, citing data from state statistics service Rosstat.
Russian PM Says Russia to Boost FX Flows to Support Ruble, Reuters, Aug. 23 2015
Russia’s Prime Minister Dmitry Medvedev said on Saturday that the government and Central Bank were preparing measures to boost foreign currency sales in response to the weakening ruble. His comments suggest Russia is again putting pressure on major exporters to help buttress the ruble by selling more of their foreign currency, a tactic used last December when the government ordered state exporters to sell part of their foreign currency over an agreed time frame.
“Naturally we will help the Central Bank in the sense of additional foreign currency inflows,” Medvedev said. “In the near future we will launch foreign currency sales by our largest exporters, which will affect the ruble’s rates. So we, together with the Central Bank, will undertake a definite collection of agreed measures.”
It was not clear what demands the government has made of exporters this time nor how much difference they would make in practice. Exporters increase foreign exchange sales near the end of each month in any case because they need rubles to pay monthly taxes.
Medvedev said it was incorrect to think the government was increasing its control over exporters’ foreign currency sales. “We never weakened this control, and in future we don’t intend to weaken it,” he said, adding he had met with exporters and that the Central Bank also does so regularly to discuss their foreign exchange sales.
Such sales are the most important source of demand for the ruble, which has shed 18 percent against the dollar over the last month as the price of Russia’s main export, oil, tumbles on world markets. Now worth 69.11 per dollar, the ruble is approaching its 2015 low of 71.85 reached on Jan. 30, and its all-time low of 80 reached last December.
Russia Sees Fall in Chinese Investment as Ruble Slumps, The Moscow Times, Aug. 23 2015
Chinese direct investment in Russia dropped by 20 percent in the first seven months of this year, compared to the same period last year due to a sharp ruble devaluation, new agency TASS reported Friday, citing a top Chinese Ministry of Commerce official.
“Direct investments in the real economy are decreasing while the volume of portfolio investments is increasing. We cannot say that investment activity is decreasing, but the investors are taking the economic difficulties into account and choosing new ways to invest in the Russian economy,” TASS quoted head of the Europe and Central Asia Department of the Chinese Ministry of Commerce Lin Zhi as saying.
Russia started to significantly expand economic cooperation with China last year amid worsening ties with the West.
According to Lin Zhi, the inflow of Chinese investment in Russia is mainly constrained by a sharp ruble devaluation.
The Russian currency lost about half of its value against the U.S. dollar on the back of low oil prices – Russia’s main export – over the past year.
Despite the challenges Chinese investors face due to Russia’s ruble devaluation, they still show a positive attitude toward developing investment projects in Russia, Lin Zhi said, noting that several major Chinese investment projects in automobile industry, agriculture and infrastructure reconstruction are currently being launched.
As of Dec. 31 last year, the total amount of direct Chinese investment totaled $4 billion, TASS reported.