Pressures will worsen with another expected mobilization in H2
With the highest level of staff shortages since the mid-1990s, industrial output will continue to struggle and labor costs will rise, while light industry remains unable to replace consumer goods previously supplied by Western firms. As wages need to increase despite a lack of increased productivity, businesses will struggle to invest. Meanwhile, consumers will demand low prices for lower quality products, tightening margins.
Overview
- The unemployment rate reached a historic low of just 3.3% in April 2023 mainly due to large waves of emigration, mobilization, and an aging and naturally declining population.
- Alfa Bank estimated that at least 1 million people left the country in 2022—the largest exodus since the fall of the Soviet Union—with one wave after the invasion in February and another at the time of mobilization in September.
- Other sources indicate up to 1.2 million have fled, about 400,000 of whom are white-collar workers. Kazakhstan and Georgia have been the initial primary destinations, though with migrants typically moving on from there to the West, if possible.
- In response to the large exodus, President Vladimir Putin in May ordered officials to develop measures to combat mass emigration. One measure is the digital platform, set to be operational by September, that will provide mobilization notices online, helping avoid draft dodgers. Likewise, the Kremlin has raised the draft age to 30, helping obtain men who no longer have student deferment.
- An unpublished Kremlin survey found that 44% of university students described the situation in Russia as a “crisis,” and up to 24% wanted to leave the country.
Our View
Pressures are going to worsen, as the Kremlin has been intent on further raising the number of servicemen since the beginning of the year. Having already mobilized some 300,000 men in late 2022, a major campaign drive to recruit volunteers around the country since early 2023 has failed to attract the additional 400,000+ soldiers Moscow seeks. Assuming at least some moderate success of the Ukrainian counteroffensive, and no realistic chance for a ceasefire this year, Russia will have to address its continued manpower shortage and likely conduct another mobilization in H2.
However, the labor market is already under severe strain. In 2022, those employed under age 35 dropped by 1.3 million, a result of both emigration as well as mobilization to the military. A Central Bank of Russia survey noted that for every unemployed person there are 2.5 vacancies. These figures will rise further over time as the war drags on and casualties mount. Wage pressure is already significant, with the Ministry of Economic Development expecting nominal wages to rise by at least 10% YOY this year despite declining sales for businesses who will struggle to cover these labor costs.
The brain drain out of Russia will continue throughout 2023, albeit with a reduced intensity compared to 2022. The new digital platform creates disincentives to leaving, with draft dodging now harder to accomplish. Moreover, the majority of those willing and able to leave have likely already done so in 2022. On the other hand, the inflow of labor migrants to Russia will fail to fill the gaps in the labor market mainly due to a lack of highly qualified foreign specialists among them, but also the uncertain economic outlook and risk of being mobilized, discouraging more migrants from relocating to Russia.
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