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Analysis of Russia’s Financial and Labour Crisis

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Thu, 18 Jan 2018

INTRODUCTION

In 2003, major economic organisations and key economists predicted that within a decade, the Russian Economy will face a human capital and labour crisis that will be unable to meet the growing demands of the country. This prediction came true and Russia slowly witnessed diminishing labour market performance following the Global Financial Crisis starting in 2009.

The Russian Federation has a very flexible labour market. Cutting wages, reducing working hours and minimising non-wage labour costs are some of the policies adopted by most of the companies to adjust to the economic scenario. The workers respond to this – by changing jobs. Hence, there exists a high and stable overall employment rate, but also high wage inequality, informality and labour turnover, due to which firms do not have the incentive to invest in human capital and productivity improvements. Hence, the growth figures of the Russian Economy rarely indicate how the economic performance is impacting the average man.

Problems in the labour market of Russia slowly became noticeable following the Global Financial Crisis that started in 2008. The global financial crisis had a significant impact on the Russian economy and its labour market. According to OECD Database, in 2009, the decline in the GDP was −7.9% (World Bank Economic Outlook, 2009). However, since the latter half of 2009, Russia showed economic recovery. There was 4.5% growth rate in 2010 (World Bank Economic Outlook, 2010), and 4.3% in 2011 (World Bank Economic Outlook, 2011).

The graph above indicates the changes in the unemployment rate and GDP of Russia during 2008-09. Russia was the third country along with Slovenia in the list with highest downfall in the GDP after Estonia and Finland. The unemployment rate increased, although it was stable as compared to other countries

This period saw a fall in the output generation of goods. Working hours and wages were reduced to adjust to the scenario. The Youth of the country were the most affected by the sudden increase in unemployment.

As shown in the diagram, from 2009 to 2012, unemployment rate was the highest for people aged 15-24.

The labour market strengthened a little in early 2013. Unemployment in the months of January, February, and March lowered by 0.4% than the rate prevalent in 2012. But the second quarter of 2013 again saw a reversal of this trend, with unemployment again growing up by 0.1% compared to 2012 (OECD Economic Survey- Russian Federation, 2013) This marked the advent of an Economic Slump in the Russian Economy that is discussed in the succeeding chapter.

Russian Economic Slump: How and Why?

Russia suffered from major economic slump in 2012 and tried to make efforts to recover from it using the oil and gas revenues. However the living standards and productivity was below those of advanced BRIICS countries. Growth in 2012 slowed not only because of cyclical factors but also due to slow down of potential output growth. The Ministry of Economic Development, in November 2013, projected long-term average growth to 2.5% (OECD Survey 2013) down from 4.3% (ibid) projected in April, warning that Russian growth until 2030 would lag behind the global average. The reason that led to the emergence of slump is the heavy dependence on natural resources and the challenge lies in reduction of dependence on exhaustible natural resources, strengthen sustainable, productivity-driven, regionally balanced and broad-based growth.

The abovementioned Economic slump emerged in late 2012 and into 2013, resulting in the recent Russian Economic crisis triggered by stagnant terms of trade due to inefficient labour market reforms. The temporary factors that earlier boosted growth slowed down, reducing investment mostly driven by natural resource related sectors and public expenditures.

The employment and capacity utilization rates are near their pre-crisis records. The unemployment rate has fallen because of employment gains, a fall in labour force, high wage flexibility and extremely low unemployment benefits. Inflation rose above the central bank target range of 5-6% (Ibid).

Although this rapid rise was driven mostly by high food prices due to the poor 2012 harvest and headline inflation, the second half of 2013 was on a downward trend and inflation expectations are sticky. These factors structurally limited growth , slowing potential growth below 3% (ibid)

This Russian economic slowdown led to several changes in the society and some significant trends were seen:

  1. Partial employment increase
  2. No demand for radical life changes or political changes
  3. Dormant discontent against crisis situation
  4. unique adjustment function of the Russian labor market suppressed the impact of the economic crisis on the workers and they did not express their discontent in the form of strikes

The policies and reforms for this slump are given in further chapters as discussed by the OECD report on Russian Economic Crisis.

OECD ECONOMIC REPORT: REFORMS AND POLICIES

Previously we studied the background of Russia and the possible reasons that triggered the current Russian economic slump. OECD is a world organisation that has come up with a report about the changes required for the current economic slump.

The Organization of economic cooperation and development (OECD) is a forum founded in 1961 that discusses economic growth and world trade of its 34 member countries. It provides answers to common problems, identify practices in favour of these countries and also provide coordination between the domestic and international policies. It gives assistance in economic, environmental and social issues.

Objectives of the OECD-

  1. To promote sustainable development in economic growth and employment, giving a rise in standard of living along with the maintenance of financial sector.
  2. To provide economic expansion to member countries in order to promote development in world economies.
  3. To carry out this expansion on a non-discriminatory basis.

OECD: Russian Labour Market

The Russian Labour market is in segments even though the global financial crisis ended the long period economic growth .The labour market faces a number of problems like unequal earnings, lack of enforcement of effective labour laws and underdeveloped collective bargaining.

To improve this imbalance between labour market flexibility and the protection of workers the Russian federation needs to impose favourable labour market institutions. This imbalance can be improved by shifting to a more sustainable based growth from dependence on revenues from natural resources such as oil (main relying natural resource) by making it attractive place to invest, study and work. Russia should ensure growth beyond natural endowment.

BOOSTING PRODUCTIVITY

Stronger and more sustainable growth is not possible without better use of skills and stronger innovation. Considerable resources are employed in low‑productivity activities. Lifelong learning, activation programmes and temporary income support remain underdeveloped.

Key Recommendations:

  1. Better market oriented training.
  2. Strengthening the quality of the education system
  3. Improve the governance of higher education.

IMPROVING THE BUSINESS CLIMATE

The business climate in Russia is turning out to be risky as rule of law is weak and widespread corruption along with widespread state involvement. The implications are widespread such as low level of entrepreneurship and investment. Thus a stronger policy initiative along with stronger financial sector is required to match the skills of labour.

Key Recommendations-

  1. Identify risks to integrity for particular jobs, work and project.
  2. Strengthening the rule of law by enhancing the quality of law instead of increasing the number of laws and regulations thus giving rise to judicial independence.
  3. Incorporating accountability and transparency of public institutions through promotion of media freedom.

COMPETITION FRAMEWORK IN RUSSIA

Russia has the highest barriers to competition when compared with any OECD country or emerging country. This halts the diffusion of technology and hampers the speed with which the labour productivity catch up with best performers. As suggested by OECD product market regulation (PMR) indicator, it suggests that Russia’s PMR is very restrictive as compared to any other OECD country. A PMR indicator tells the state involvement extent and administrative barrier to developing new enterprises. This high rate is reflected in Small and Medium sized enterprises sector in Russia.

Key Recommendations-

  1. Lowering administrative burden on firms by cutting ‘red tape’, introducing deemed clearance regime and carrying out systematic Regulatory Impact Analysis and Stake Holder consultations.
  2. Strengthen the competition by eliminating subsidies to large firms, prioritize resources only to important cases and liberalization of foreign trade and investment policy.
  3. Widening scope of competition by taking WTO accession as an opportunity and supporting the concerned firms with framework measures rather than imposing entry barriers.

POLICY IMPLICATIONS

The basic problem in the Russian Economy is that it is still heavily dependent on the communist age infrastructure and economic mechanisms. No innovations or new methods of economic development have significantly evolved after the communist era collapsed. The economy still uses capitalist management styles that were used in the erstwhile USSR.

The economy is heavily dependent on gas reservoirs and their rising prices. This leaves the domestic market open to major jolts due to the fluctuating world market prices of gas and other natural resources. Growth in 2013 slowed to 1.3 percent, the lowest in a decade other than during the global recession in 2009 (OECD Economic Indicators Report 2013).

As mentioned in the previous chapter, the economic resilience of the economy can be raised through structural reforms. Making the economy more balanced, and less dependent on the volatile revenue from the energy market is one of the main challenges. This challenge can only be met by higher productivity of labour and energy efficiency which further, can by increasing competition in the market and investment in the structural economy.

The improvement of the political economy and implementation of structural reforms is crucial to revive the Russian Economy. The society and not natural resources needs to partake in Russia’s transformation. And so there is need for investments in infrastructure, innovation and human resources.

Russia needs to step up its governance and address the increasing inter-regional disparity. The OECD survey indicates that the Federation is doing well in numerous areas but future growth and development is being retarded by poor governance and laws.

Russia faces major transport bottlenecks that hinder the infrastructural growth in many potential regions. The irony is that a majority of the Russian population- about a million, are engaged in the railways with most of them being disguisedly unemployed in the process.

The Russian Federation has one of the highest shares of tertiary educated population in the world, but the education system has had difficulties in providing the education according to the needs of the market and the firms. The education system of the country is outdated. It needs to be revamped to suit the modern sensibilities and economic conditions. Education will have to target higher paying and more intellectual jobs (white collar jobs). Public spending on education is low and the high inequality of educational opportunities adds to the problem.

Major public and private sector investments in the education sector, especially in backward areas should be a national priority. Better quality of market oriented vocational training and an improved technical curriculum is also the need of the hour.

Another good way to increase the labour force of the nation is to decrease the gender gap in the labour market. Education and training focused solely on women would be beneficial. The Government should also increase the retirement age of women to equal to that of men.

A boost in education and skill in turn will increase opportunities and investments in Research and Development that will bring the much needed innovation and further enhance the business climate.

Flexibility in the Russian labour market has helped the economy achieve very low levels of unemployment. However, firms lose the incentive to invest in human resource due to the high labour turnover. This causes high wage inequality. The OECD encourages better communication between employers and labour, encouragement to engage in long term training programmes and temporary income support from the Government.

One industry that has a lot of potential in the Russian economy and will benefit out of the recommended labour changes by OECD is the automobile industry. This will not only give a much required push to the economy but also solve the transportation bottleneck that the nation is facing.

The Russian Federation will also benefit by strengthening its Immigration policies. There is a large influx of unskilled labour from countries that were part of the former Soviet Union, who come in the search for better employment opportunities and standards of living. They are seen to be putting additional burden on the Government’s diminished welfare schemes such as free education and healthcare systems. This is happening due to the easy immigration policy of the state. Hence the welfare labour policies that are already functional in the State cannot give quality output due to this additional burden put on them.

CONCLUSION

It can be asserted that the economic slump in Russia is a temporary bottleneck in its path of growth and development and can the removed by focusing on the improvement of the labour market performance by implementing the measures given in the OECD Economic Report on the Russian Federation 2013.

As suggested by the OECD, encouraging lifelong learning among skilled workers, training and targeting the youth for inculcating better skills, developing advanced Information Technology in this arena, reducing the gender gap in the work force, reforms in the education system and promoting innovation and technology can take the nation a long way.

However other measures such as State support in welfare schemes that boost labour performance and privatisation of firms can be beneficial. Encouraging better Human Resource policies in Russian Firms and stronger collective bargaining power of the workers can also help promote the right balance between wages and productivity. Russia also needs to look into its immigration policy to stop the rapid rise in immigrants who are unskilled and ultimately become a burden on the state.


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