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Emerging Markets

A society stirred

Rising unemployment has sparked fears of social unrest across Russia. Policy must adapt for the long term to cushion the impact of rising job losses

Imagine that the single big factory on which one of Russia’s “mono-industrial” towns depends closes. Imagine that angry demonstrators occupy civic buildings and take the local governor hostage. And then imagine their example being followed in cities across the country, culminating with a revolt in Moscow.

Yevgeny Gontmakher, former head of the government’s social development department, published that scenario in Russia’s leading business newspaper, Vedomosti, in November – and the federal media inspectorate was so affronted that it wrote to the editor, reminding him of his duties under Russia’s anti-extremism laws.

But in mid-April, Gontmakher and other social policy experts received a much warmer response directly from president Dmitry Medvedev, when he met them to ask their views on how to tackle labour market problems – and in particular the rapid rise of unemployment as a result of the economic crisis.

Tatyana Maleva, director of the Independent Institute of Social Policy, who with Gontmakher led the team of experts that met Medvedev, tells Emerging Markets that she urged the president to focus on “investment in social welfare systems and education”. The provision of supplementary education to those already in the labour market is essential to overcoming Russia’s “high level of ineffective employment”, she says.

Gontmakher drove home that point with a suggestion that state-controlled Avtovaz, Russia’s largest car factory, be sold for one rouble to an investor capable of managing it more effectively. Its human resources and asset base are being wasted, he argues. The government announced last month a $1 billion interest-free loan for Avtovaz, which employs 130,000 people in the Volga city of Togliatti.

The social policy experts say that, on top of such short-term measures to stave off redundancies, the government needs to use the crisis to reorient the labour market. That will be tricky. Real unemployment in Russia stands at about 6.4 million (8.5%), and most economists reckon it will rise to nine million (12%) this year.

Social unrest?

The government clearly fears social unrest. Arkady Dvorkovich, Medvedev’s economic adviser, told journalists recently that potential trouble spots – including some of the 1,500 or so one-industry towns, many of which now face steep rises in unemployment – are being monitored; Prime minister Vladimir Putin told a recent meeting of parliamentarians that, should protesters step outside the law, “the state and society have the right to react and defend themselves”. 

And Russia’s law enforcement agencies are rarely restrained. In December, police in Vladivostok in the Russian Far East attacked and beat up protesters demanding a range of measures to soften the impact of the crisis. More than 100 were detained.

Such incidents are exceptional so far, Maleva emphasizes. “So far, social peace has been preserved”, she says. The real problem may arise if people in former mono-industrial towns are subjected to long-term unemployment.

“The problem with unemployment is not its scale but its duration. Will the mono-economic areas recover from the crisis soon? If not, social tensions will increase. So far there has been no social explosion. But one can start very quickly.”

While Russia’s senior social policy experts are concentrating on long-term measures, the World Bank has urged the government to refocus its fiscal stimulus package on poorer citizens. “Put simply, we think money must flow to people, not only to enterprises and banks”, Zeljko Bogetic, the Bank’s lead economist for Russia, tells Emerging Markets. “There is only a limited amount, and targeted social assistance will boost the economy.”

The Bank’s research has shown that vulnerable social groups, and vulnerable areas such as the mono-industrial towns, have been hit by the crisis harder and faster than anyone initially expected. Bogetic says that a larger proportion of Russia’s fiscal stimulus package – which is worth 6–7% of GDP all told – could be focused on social protection measures such as child allowances, pensions and unemployment benefit.

“This will not only cushion the social impact on Russia’s most vulnerable people – it’s also a smart macroeconomic policy,” he says. “These recipients will not buy expensive imported goods or change all their money into dollars. They will buy non-tradables and boost domestic demand.”

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