Putin Revives Soviet Deal of Pretend-Work-and-Pay to Hide Crisis

Can Russia Weather a Recession Coupled With Cheap Oil?

Soviet workers knew they got a raw deal, and they played along. “We pretend to work, and they pretend to pay us,” went a popular saying.

About a million job gains into Russia’s recession, the bargain still holds, with salaries plunging at a pace unprecedented under President Vladimir Putin. Data set to be released this week will probably show unemployment holding at less than half the rate in the euro region, which has had nine consecutive quarters of growth. It’s a sign of a tacit deal that has ravaged productivity and limited economic flexibility.

With Russia in the clutches of an economic crisis as domestic demand implodes after a currency collapse and sanctions over Ukraine, the jobless rate is less than it was before the neighboring country’s conflict erupted last year. Instead of easing the consumer plight, the stretched labor market betrays an economy geared toward ensuring social stability and ill-prepared to meet the challenges of an aging and shrinking workforce, content to punt the issue until the next crisis.

“Choosing between radical reforms and stability, the government will favor stability,” said Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow. “That’s a Soviet-like choice -- to conserve the current system with its problems, though to provide stability.”

During communism, unemployment was all but outlawed. What Putin has now are some of Europe’s most restrictive labor rules and employers still stinging from the dressing-down received for idling plants during the last recession six year ago. Protections against firing individual workers are among the strictest in Europe, according to the Organization for Economic Cooperation and Development.

Low Productivity

The resulting resilience of the labor market is doing little to make up for a plunge in people’s spending power, reinforcing vulnerabilities that include the lowest productivity in Europe. Employers are opting for salary cuts, part-time work and unpaid vacations.

During the crisis in 2008-2009, unemployment peaked at 9.4 percent. While it has now risen from a record low of 4.8 percent a year ago, the effect is less dramatic. The rate grew to 5.5 percent in July from 5.4 percent a month earlier, according to the median of 18 estimates in a Bloomberg survey. The statistics office may report the data on Wednesday.

That’s where the good news ends, though, as other surveys indicate an accelerating collapse in consumption.

‘Growing Underemployment’

Real disposable incomes fell 6 percent in July from a year earlier, retail sales are down 9.8 percent and wages adjusted for inflation have plunged 7.5 percent, the polls show -- all indicating faster contractions than in June.

“There’s a problem of growing underemployment where people are being put in part time or with part-time pay or put on unpaid leave status because enterprises are trying to protect their profit margins and demand has been suppressed, so they are cutting their production,” said Charles Movit, an economist at IHS Global Insight in Washington. “So that is going to have an additional impact on consumers.”

As it slides deeper into recession, the economy keeps adding jobs -- a sign that companies are hemmed in and left to follow Putin’s lead in favoring social and political peace over improved efficiency.

“By firing people, businesses are risking pressure from the government,” said Rostislav Kapeliushnikov, the deputy head of the the Labor Research Center at the Higher School of Economics in Moscow.

Social Sentiment

All indications are that the approach is bearing fruit.

Gauges of social sentiment by state research company VTsIOM showed that 81 percent of respondents believe the situation in the country is excellent, good or fine, according to a survey conducted July 25-26. Putin’s approval rating is hovering near a record.

As the authorities shield the labor market, pressures on the economy continue to mount. Demographics and low productivity are among the biggest structural constraints that are capping Russia’s potential growth rate at as low as 0.5 percent, Alfa Bank said in a July report.

“By the end of this or the beginning of next year, we may face a shortage of employees again,” Deputy Finance Minister Maxim Oreshkin said in an interview. “If we don’t want that to happen, we should conduct an active policy in releasing workers from their duties, including by reducing the number of employees in the state sector.”

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