Two-Track Economy Leaves Russia With 31% Unemployment on Fringes

  • Jobless numbers in remote regions contrast with 1.8% in Moscow
  • Government is seeking ways to promote labor mobility in Russia

The labor market has been the lone bright spot for Russia as its economy sank into recession -- depending on where you look.

Probing beyond the national rate of 5.5 percent, about half the euro area’s, reveals regions falling behind across the world’s biggest nation by territory. While October unemployment was near 2 percent in Moscow and St. Petersburg, it was almost 31 percent in the North Caucasus republic of Ingushetia. The rate was more than double the headline figure in areas as varied as the predominantly Buddhist republic of Kalmykia on the Caspian shore and the Zabaikalye region that borders China and Mongolia.

The splintering labor market shows more than a society warped by the booms and busts of energy cycles. What’s emerged since the Soviet breakup of 1991 is a two-speed economy where low labor mobility has become a choke point for growth. It’s part of the challenges for Russia as it contends with the collapse in oil prices and a weaker ruble that threaten to extend a recession to the longest in two decades.

“It’s a big problem,” Deputy Finance Minister Maxim Oreshkin said in an interview. “The higher the labor mobility, the greater our growth trend, because it’s allowing for faster shifts in the population from less efficient producers to those that are more efficient.”

Growth Outlook

While economic expansion averaged 7 percent during Vladimir Putin’s first two terms as president in 2000-2008, the International Monetary Fund now estimates medium-term growth at 1.5 percent a year. Gross domestic product will contract as much as 4.4 percent this year and up to 1 percent next year if oil stays at $50 a barrel, according to the central bank.

As Russia’s first recession since 2009 rolled on, unemployment fell or held steady for six months since March, remaining near last year’s record low of 4.8 percent. With the uptick in joblessness to 5.5 percent in October, strains are growing on consumer demand already decimated by runaway inflation and the steepest dropoff in real wages since 1999.

The concern over the economic outlook has been reflected in markets, with the ruble dropping more than 12 percent against the dollar this year.

Moscow, St. Petersburg

Alongside poor demographics, the central bank has cited reduced labor mobility as a “structural constraint” on the economy that will hamper its adjustment to worsening conditions abroad and act as a brake on the nation’s recovery.

Of the 2 million Russians who do move inside the country of more than 143 million each year, about 70 percent are bound for Moscow, St. Petersburg or the surrounding regions, according to the Labor Ministry.

Moscow, whose output accounts for more than 15 percent of Russian GDP, was home to more billionaires than any other city except New York. The top decile of the richest Russians controls 87 percent of all household wealth in the country, a share that’s “significantly higher” than in any other major economic power, Credit Suisse Group AG said in this year’s Global Wealth Report.

The regional disparities in unemployment draw a picture of an unbalanced economy that remains vulnerable after enjoying the spoils of the commodities boom that lifted millions out of poverty. Entrenched unemployment is one of the persistent challenges in the North Caucasus, where federal troops have fought two wars against Islamic separatists in the past quarter century.

The divide in Russia is almost as stark as inside the European Union, which has 3.5 times as many inhabitants living in countries with a range of economic histories and challenges.

Prague, Andalusia

The lowest unemployment in the trading bloc last year -- at 2.5 percent in the Czech capital, Prague, and Upper Bavaria in Germany -- contrasted with the 34.8 percent rate in the Spanish region of Andalusia. Three areas inside the EU, all in Spain, had joblessness above 30 percent last year, according to data from the bloc’s statistics office.

Thomas Piketty, the French economist whose 2013 book on wealth inequality became an international best seller, warned about the threat regional disparities pose.

‘Excessive Concentration’

“We need to have more inclusive development between regions,” he said in an interview in Moscow. “if you have excessive concentration of benefit from growth in certain areas -- as in the capital city, in financial centers or whatever -- this is certainly not good for sustainable and balanced growth in the long term.”

Russia’s local variations appeared during the collapse of the egalitarian Soviet system, with the gap between regions with the highest and lowest unemployment rates already at 12.5 percent in 1992, according to the Demography Institute at the Higher School of Economics in Moscow. A period of economic growth since 1999 hasn’t benefited all regions as discrepancies remained and joblessness actually picked up in parts of the country, it said.

The obstacles to higher worker mobility vary. Among the reasons, the Labor Ministry cites high transport costs, long distances, a weak social infrastructure, the difficulty of finding adequate housing and the relative ease of finding a job on the spot in the two biggest cities.

Manpower Needed

Other challenges include limited access to financial resources to ease life in a new place and the need for high educational qualifications and enough starting capital, according to Mikhail Kirsanov, head of the employment department at the ministry.

Almost 22 million people, or about 15 percent of the population, are living beneath subsistence level, according to the statistics office. The crisis marks the “first significant” increase in Russia’s poverty since 1998-1999, according to the World Bank.

Russia needs to address “structural questions of employment” and official statistics don’t necessarily reflect the whole picture, First Deputy Prime Minister Igor Shuvalov told lawmakers in October. To support labor mobility, authorities have chosen 15 regions where entrepreneurs hiring workers from another territory get extra funding, according to Kirsanov.

“We need manpower if the economy is to grow,” Shuvalov said. “We need a completely different, more mobile system of employment.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE