Russia's Economy: The Paper Bear

Last week, a devastating report emerged from the Organization for Economic Cooperation and Development  (OECD) in Europe to puncture one of the most persistent myths out there about Russia -- namely, that the country's greatest strength lies in its large, sophisticated workforce.  In fact, the data clearly shows that Russia's workforce is part of the problem, not the solution.  After last week, it's no longer possible to believe that the Russian economy has a future.

The first myth exploded pertains to the vitality and size of Russia's workforce.  In fact, the report from the OECD reveals that in coming years, Russia will experience a sharp contraction in its workforce due to a similar contraction in the birth rate (see pages 24-25 of the report).  This same demographic problem is undermining the Russian army's ability to fill its ranks.

The raw data is stunning: Russia ranks 10th in the world for mortality rate (only nine countries in on the planet kill their citizens faster than Russia) but 152nd for life expectancy and 165th for birth rate.  As a result, the World Bank predicts that over the next four decades, the Russian population will constrict by over 17.4 million people.

The OECD concludes that a recent uptick in births is temporary -- the result of the Kremlin bribing parents to have children, causing them to give birth earlier than they otherwise would have in order to grab the cash.  And the OECD does not believe that Russia is equipped to help this coming  wave of new workers find productive outlets for their efforts.

That's because the OECD found Russia's much-ballyhooed education system operating substantially below the OECD average (see report at 39 and 109), and failing miserably in training students for jobs that were actually available and to meet national economic needs.  The World Economic Forum, the OECD points out, ranks the Russian education system a jolting 78 out of 140 world nations (see report at page 107).  The OECD concludes that Russia has created a factory education system, one that stamps out diplomas but does not really prepare students to contribute to national development.

The OECD reveals that Russians start school too late and spend less time per day studying (see report at 110) than their competitors abroad.  What's more, being able to quote Pushkin from memory and compute the area of a circle doesn't mean much, of course, next to being able to innovate and develop products the world wants to buy.  As the actor Hugh Laurie tweeted recently in response to Russia's homophobic crackdown: "I'd boycott Russian goods if I could think of a single thing they made besides the rest of the world depressed."

Moreover, the Economist magazine notes that once Russians leave school, their efforts to educate themselves come to grinding halt: "Only around 12% of workers engage in lifelong learning (LLL, meaning continuous, on-the-job learning), compared with over 70% in Sweden.  Employer expenditure on LLL in Russia was only 0.3% of payroll in 2007, compared with 1.5% in France, and is showing no tendency to increase."

According to the OECD, Russia's workforce is astoundingly oppressed.  Its GINI coefficient ranks Russia among the most inequitable of nations under the OECD's review when distributing national wealth to citizens (see page 24 of the report).  This is because, the OECD explains, while Russia has relatively low unemployment, this is due only to a plethora of "low quality jobs inherited from the Soviet period" (see pages 93-96 of the report).

Most of these jobs, the OECD points out, are outside the private sector, which is stunningly underdeveloped in Russia, and most newly created jobs are in the least productive economic sectors.  Because of the abundance of low-quality jobs, employee turnover is very high, indicating that workers have little or no commitment to their jobs or employers. 

Russia also has a critical "brain drain" problem, with many qualified workers leaving not just their current employer, but the country itself for greener pastures.  Worse still, an amazing one fifth of the Russian workforce is off the radar -- part of a gigantic shadow economy little different from what existed in Soviet times, contributing no taxes and breeding generations of corrupt Russians who disregard the law for reasons of personal survival.

The Economist quotes a young Russian scientist confirming that Russia's head remains in the past on innovation: "We do not have an innovation culture -- no experience, no traditions. Our scientists are still Soviet in their attitudes, for them business is something dirty. Our scientific culture is practically untouched by the business entrepreneurial spirit."

The OECD also explodes the myth that Russia's workforce matters.  A disturbing graphic shows that since 2007, GDP growth has closely tracked the price of Urals crude, not the efforts of the Russian workforce (see page 15 of the report).  When the price of crude rose, so did the GDP; when it fell, GDP came right down with it.  Russians are not masters of their own domain; their economic fortunes are controlled by the extent to which foreigners want their oil.

Russian GDP growth has fallen by two thirds over the past three years as oil prices have stabilized.  The Russian economy is essentially in free fall, and the Kremlin, according to the OECD, is an active part of the problem.  The OECD's data shows that Russia is the very worst offender among all countries it studied in erecting barriers to trade and investment (see page 31 of the report).  Moreover, the Kremlin has totally failed to invest in Russian infrastructure, focusing instead on Cold-War military spending and boondoggles like the Sochi Olympics.

As the New York Times pointed out in reviewing the OECD data:

The average speed of a car during rush hour in Moscow, for example, is only 10 kilometers per hour, or six miles per hour, the report notes. That means cars are only marginally more efficient than walking as a means of transportation.

Indeed, it's simply not in the Kremlin's interest to heavily develop Russia's private sector, empowering individuals and entrepreneurs.  These are exactly the people who turned out in surprising numbers to support Alexei Navalny, Putin's chief nemesis, in the former's bid to become mayor of Moscow.  That result delivered a wakeup call to Putin: he realized how important it is to keep the economic reins in the government's hands, making sure most Russians owe their livelihoods to the state, just as in Soviet times.

The flip-side of this irony is that as the Russian economy continues to stagnate, Putin will have more and more impetus to impose Soviet-style repression in order to keep his hold on power, creating a vicious circle of economic failure and repression.  Putin will also have a strong incentive to create foreign adventures, like the 2008 invasion of Georgia, that will distract the population from their financial woes.

A particularly devastating OECD chart (see pages 21-22 of the report) illustrates the relationship between labor productivity and GDP per capita.  It backs up the OECD's point that Russia's spurt in economic growth during Vladimir Putin's first two terms in office was due only to a vast amount of unused capacity that was freed by Boris Yeltsin from the constraints imposed by the USSR.  But the OECD intones ominously: "These factors appear to have run their course."  The chart shows an ever-widening gap between per-capita GDP and labor productivity. 

With a declining population, Russia can't create more capacity by adding more workers.  Its only option is to make the existing workforce more productive, but this just isn't happening.  Instead, Russian workers are slowing down, dropping out, and flying away.

Follow Kim Zigfeld on Twitter @larussophobe.

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