Why Ukraine War Has Created Russian Economy Manpower Shortage

Putin's invasion of Ukraine has created a manpower shortage in Russia, which was already facing a demographic decline in working age people.

The mobilization has taken 300,000 men who could not really be spared while the threat of conscription caused as many as twice that number to emigrate. The result is severe shortages of workers in most Russian industries. JL 

Georgi Kantchev reports in the Wall Street Journal:

The war in Ukraine has fueled Russia’s worst labor crunch in decades after hundreds of thousands of workers fled the country or were sent to the front lines, weakening the foundations of an economy weighed down by sanctions and international isolation. Two waves of emigration last year, the largest since the collapse of the Soviet Union, and the mobilization of 300,000 men have exacerbated an already tight labor market, plagued by long-term demographic decline. That has left Russian businesses short of everyone from programmers and engineers to welders and oil drillers, professions needed to boost the economy and support the war in Ukraine.

The war in Ukraine has fueled Russia’s worst labor crunch in decades after hundreds of thousands of workers fled the country or were sent to the front lines, weakening the foundations of an economy weighed down by sanctions and international isolation.

Two waves of emigration last year, the largest since the collapse of the Soviet Union, and the mobilization of around 300,000 men have exacerbated an already tight labor market, plagued by long-term demographic decline. That has left Russian businesses short of everyone from programmers and engineers to welders and oil drillers, professions needed to boost the economy and support the war effort in Ukraine.

To stem the tide, last month, President Vladimir Putin ordered officials to develop measures to reverse the population outflow, including unspecified financial and social incentives. The government had earlier offered tax breaks, cheaper loans and preferential mortgages to entice tech workers to stay.

 

Russia’s Finance Ministry unveiled proposals to tax the hundreds of thousands of people who fled when the war started but kept their Russian jobs remotely from places such as Turkey, Armenia and Central Asia. Some Russian lawmakers have threatened to seize property of Russians who have left the country, though no such laws have been passed.

 

In the first quarter of this year, Russian companies reported the biggest shortage of personnel since data collection began in 1998, according to a survey by the Russian Central Bank. The number of employees under 35 years old in Russia at the end of last year dropped by 1.3 million to its lowest level since the early 1990s, according to an analysis by consulting firm FinExpertiza. In May, Russia’s unemployment rate hit a post-Soviet low.

“The loss of human capital is a disaster for the economy and that’s on top of sanctions,” said Vasily Astrov, an economist at the Vienna Institute for International Economic Studies. “The loss of educated people, of skilled labor force, will weigh on the economic potential for years to come.”

The dearth of workers cuts across the economy. Businesses, competing for a smaller pool of available employees, are forced to raise wages, hurting corporate profits and jeopardizing investment plans. Higher wages, in turn, are pushing up inflation, the central bank has warned.

Labor shortages have plagued much of the global economy since the pandemic, fueling fast rising wages and difficult-to-contain inflation. Russia’s problems stand out, and are driven by its own homegrown factors. 

At this week’s St. Petersburg International Economic Forum, Russia’s flagship economic convention, over a dozen sessions are dedicated to the problems in the labor market. The central bank has said that amid the dearth of working-age men, manufacturing companies are increasingly hiring women and older workers.

 

Yuliya Korochkina, human resources director of Trade Systems Technonicol, a supplier of building and finishing materials, said the company was missing workers in both junior and expert roles. In response, the company has lowered requirements for some job profiles, increased remote work and automation and introduced more motivational programs for workers.

“We are learning to do the most with the least resources,” she said.

 

The Russian economy so far has resisted expectations of a deep slump following the imposition of Western sanctions, supported by a windfall from oil and gas sales, ample government stimulus and its ability to find workarounds. But a steep fall in energy revenue this year, the mounting impact of technology sanctions and the state’s slide toward economic isolation augur a troubled future.

The attrition of workers is additionally hurting economic growth, Russian officials say. 

“Such a situation in the labor market is a considerable constraint for a further expansion of output,” Elvira Nabiullina, the Central bank’s governor, said Friday. She cited shortages in machine building, metallurgy, and mining and quarrying, industries that are vital to what Russia needs on the battlefield in Ukraine. 

Touring an aircraft factory in the East Siberian city of Ulan-Ude in March, Putin said that the lack of highly qualified specialists impedes military production.

More than a million people have left Russia since the invasion last year, economists say, though some of those have returned. The movement of people ranks among the largest waves of emigration in Russia’s history, along with the period after the 1917 revolution and the demise of the Soviet Union in 1991. Emigration also picked up after Putin’s third term started in 2012.

The departures add to negative demographic trends long plaguing Russia, including low fertility, an aging population and high death rates—patterns only worsened by the Covid-19 pandemic. Russia’s population of around 145 million could shrink by over a fifth by the end of this century, the United Nations estimates.

Labor migration into Russia, especially from neighboring countries in Central Asia, has partially helped fill the gaps. While the number of labor migrants coming to Russia increased last year, the number of foreign highly qualified specialists declined by 29%, according to the central bank.

In the fourth quarter of last year there were 2.5 openings per job seeker, the highest since 2005, according to FinExpertiza. Some 35% of manufacturing firms reported staff shortages in April, the highest value since 1996 in monthly surveys by Russia’s Gaidar Institute for Economic Policy. 

Electrical equipment manufacturer EFK is having difficulty finding engineers, designers and product managers, said human-resources director Marina Petuhova. EFK has increased training and incentives for workers and hires across all age groups, including retirees.

“The labor shortage affects the ability to launch new products for the company, the productivity and the product quality, which affects sales, and the company’s brand,” she said.

More than half of businesses have experienced a personnel shortage in the IT field, while the time it takes to find a suitable candidate has nearly doubled, according to an April study by Moscow-based consulting firm Yakov & Partners and hh.ru, the country’s largest recruiting platform.

“It became more difficult to find employees with experience,” said Natalia Danina, hh.ru’s head of analysis. “This situation inevitably leads to a decrease in the productivity of a company as a whole.”