Russia Piles Pressure on Companies as Unemployment Crisis Looms

(Bloomberg) -- The next economic jolt to Russia will likely arrive by way of the labor market, building in intensity over the coming months and bringing new hardships for a nation already waylaid by a series of shocks.

Joblessness this year is set to more than double from the first quarter and exceed 9% for the first time in more than a decade, according to a Bloomberg survey of analysts in March. 

“This is reminiscent of the early 90s, when reforms began and factories were being closed,” said Evgeny Gontmakher, a former government official and a prominent Russian economist. 

The Center for Strategic Research in Moscow estimates that about 2 million jobs may be at risk this year as the labor market adapts before a possible recovery in 2023. Russia had just over 3 million unemployed at the end of February, near a record low.

International condemnation followed by rounds of sanctions after President Vladimir Putin’s invasion of Ukraine have put the economy on course for one of the deepest recessions in its modern history. The upheaval is leaving employers to face a downsized future as inflation guts household budgets, foreign businesses scale back operations and penalties limit Russia’s access to technology and finance.

So far, consumers have faced surging prices and shuttered foreign-owned stores, but little of the turmoil and deprivation seen in the 1990s after the Soviet economy collapsed. Retail sales probably dropped about 10% in March, according to Goldman Sachs, while the heavily import-dependent auto sector plunged by more than 60%.

The creeping jobs crisis will play out gradually, in part because previous downturns have given Putin a playbook he’s likely to use again in hard times. Under pressure from authorities, firms may opt for salary cuts, part-time work or unpaid vacations over layoffs. Many foreign companies that announced plans to leave Russia are continuing to pay salaries for now.  

What Bloomberg Economics Says...

“There’s likely to be a big blow to hours and incomes in the coming months. Outright layoffs may only become pervasive as sanctions are perceived as being longer lasting. As a result the rise in joblessness could be more gradual and the peak lower than we might expect for an economic shock of this magnitude.”

-- Scott Johnson. Russia economist

“Underemployment is the magic wand of the Russian labor market,” said Natalya Zubarevich, a specialist on the economy of Russian regions at Moscow State University. 

The government has allocated 39 billion rubles ($466 million) for benefits, temporary employment and public works.

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For now, major manufacturers are idling plants, with automaker AvtoVaz announcing plans to rebuild inventories of car parts. Moscow’s Sheremetyevo airport, the country’s largest, is paying a fifth of its employees two-thirds of their salary to sit home.

The Labor Ministry estimates that almost 100,000 workers were furloughed in late March and only 14,000 people have had to take unpaid leave. Employers are so far planning to lay off a total of just around 50,000, it said.

Poor demographics and the departure of hundreds of thousands in search of better opportunities abroad will pile even more pressure on the labor market, especially if Russia becomes a less desirable destination for migrant workers. 

“The situation in the labor market is in a standstill,” said Alexei Zakharov, president of online recruiter Superjob.ru. “The only thing we hear from employers is that they will keep every last person and don’t want to fire anyone.”

Some Russians aren’t waiting for the labor market to bounce back.

Irina worked kitchen jobs at a McDonald’s in St. Petersburg before being furloughed last month when the company announced it was temporarily closing all 850 locations in Russia following the invasion. 

“It’s been almost a month and there’s no longer any hope that we’ll return to McDonald’s,” the 21-year-old said, asking to be identified only by first name to speak openly about her situation. She has taken a side job at a local cafe, and is receiving two salaries for the time being.

Even with a safety net in place, the labor market has already taken a turn for the worse. 

The number of vacancies open in mid-to-late March plunged by a fifth from a month earlier, with the sharpest declines seen in Moscow, St. Petersburg and the surrounding regions, according to data compiled by the Center for Macroeconomic Analysis and Short-Term Forecasting, a Moscow based think tank.

Alongside inflation, unemployment is now a top concern for Russians. As recently as February, job loss registered near the bottom of the ranking of “fears” in a monthly index compiled by state-run pollster VTsIOM. 

Any fallout will vary greatly across the country. Consumer-facing businesses will have no choice but to downsize and adjust to shrinking demand, while major employers and state companies will be under pressure to keep payrolls largely intact.

But for the most developed regions like Kaluga near Moscow or the exclave of Kaliningrad on the Baltic -- where Volkswagen and Mercedes cars were assembled -- the scarring may be permanent as Russia finds itself increasingly walled off from the global economy.

“Regions linked with the most advanced technologies will be hit the hardest by unemployment,” Zubarevich said. “The best ones will suffer the most.”

©2022 Bloomberg L.P.

With assistance from Bloomberg