By Published by the Foreign Policy Research Institute
By András Tóth-Czifra*
(FPRI) — News that employees of various Russian companies are suffering wage arrears are making into Russia’s national news—a worrisome sign for a government that claims to have stabilized the economy in the face of Western sanctions. In Yekaterinburg, the Ural Compressor Plant was late in paying wages to its employees for months due to failed export contracts and frozen partner accounts. Then it decided to reduce wages from October on. The Inskoy coal mine in the Kemerovo region went bankrupt in part due to sanctions affecting the Russian coal industry and financial transactions. Medical workers in the Altai Territory and construction workers in the Irkutsk Region complained of late payments. The drivers of a transportation firm in St. Petersburg mounted a protest in July after the company cut their wages in half. In late August, the employees of CNII Electronica, a contractor of the state-owned technology giant Rostec, sent a complaint over wage arrears to Vladimir Putin himself. The State Air Traffic Management Corporation announced that it may not have the funds to pay salaries due in September due to Western sanctions and the lingering effects of the COVID crisis.
Wage arrears are not a novelty in Russia. If one looks at statistics provided by Rosstat, the state statistical agency, they do not even represent a particularly big problem right now. As of August 1, the total amount of wage arrears was 732 million rubles, down from over 1 billion in April, which itself is less than half of what was recorded during the height of the COVID crisis, let alone the 1990s. While Rosstat’s numbers are often questionable – in recent years, the agency has repeatedlychanged the way it calculates inflation or real incomes – there is no reason to suspect that in monetary terms, wage arrears represent a significantly larger issue now than a year ago.
Apart from sporadic protests and strikes over the past months, the state of the economy barely made an impact on the campaigns that preceded regional and municipal elections held September 9-11, even though some of the votes have been held in regions where industries were already affected by Western sanctions, such as Kaliningrad or Udmurtia. In any case, labor unions, in general, remain weak institutions in contemporary Russia. Labor protests, as specialists like Stephen Crowley have pointed out, mostly remained localized. Over the past two years the authorities have systematically and ruthlessly destroyed opposition structures that previously served as a conduit of frustration over economic problems. Surveys suggested – and experience has shown – that Russians regard elections as a means to vent frustrations, even if they are unfair and undemocratic. Now, the Kremlin will not face another election for at least another year.
Why, then, may growing wage arrears still signal danger for the Kremlin? We’re likely just seeing the beginning of a wave of wage arrears. In most industries, employers have been able to rely on reserves and temporary measures such as furloughing and reduced wages so far, in a hope that the circumstances will improve in the near future. A survey by the Levada Center in August suggested that most Russians still expected things to improve in the economy. The political and business elite, likewise, have put off decisions on a major reorganization of the economy, no doubt hoping that sanctions will at some point be loosened. But he European gas market is slipping away from Gazprom; Russian metallurgy faces a collapse in international demand, and export-oriented firms in general are losing markets. In the face of a ballooning deficit over the summer months, the government is considering cutting budgetary expenses by 10 percent; pensions, public sector wages and military expenses are untouched, thus grand development projects will likely suffer, exacerbating the negative feedback loop in the economy.
Unemployment, currently officially below 4 percent, will almost certainly grow. Even Vladimir Putin himself highlighted that 234,000 workers were facing the risk of dismissal, but the numbers could be significantly higher, given spillover effects from industries that face declining demand domestically and abroad. This would hit Russian society after close to a decade of stagnating real wages and, for most Russians, exhausted savings. Difficulties repaying consumer loans is growing: as of July, the total value of overdue payments reached 1 trillion rubles, a sign of troubles ahead. The proportion of people living in poverty could reach 25-30 percent (from a current 18 percent) according to Abel Aganbegyan, a prominent economist.
From the point of view of the Russian authorities, three potential risks that can arise from labor protests, wage arrears and growing unemployment. First is what we could call the “Pikalyovo trap.” In 2009, at the height of the global economic crisis, protests erupted in Pikalyovo, east of St. Petersburg, after the closure of three local factories. Pikalyovo was close enough for media outlets to take notice, and thus Putin himself flew to the place to publicly scold and lecture the three owners, even alluding that one of them, Oleg Deripaska, tried to steal a pen from him. Putin’s administration has since tried to replicate this effect, including through the president’s yearly call-in show, which also serves as a grand survey of the problems that frustrate the population. But as actual representative institutions are hollowed out, this has strongly conditioned Russians to look to the president as the arbiter of even small problems, as the recent examples of CNII Electronica and , where workers sent a direct address to Putin, instead of turning to lower-level officials. The proliferation of such calls could thus represent a challenge to the president’s authority and put a strain on his resources. Putin has, in recent years, outsourced much of this responsibility to the government, where economic specialists are supposed to proactively react to problems.
The Kremlin has also relied more heavily on governors who are tasked with keeping their region quiet and taking responsibility for unpopular decisions on the president’s behalf – even mobilization. This system, however, has not been stress-tested on anything like the crisis that is about to hit Russia. Provincial officials are not immune to blind spots created by massaged data and selective reporting by officials who are evaluated based on the benchmarks they report. It is also highly questionable whether the government will have the money to address a social crisis alongside ballooning military expenses, which are currently prioritized amid a government budget quickly turning into deficit.
The second kind of risks may arise locally. The economic crisis triggered by the war will eventually affect most of Russia’s economy, but it hits various industries and regions at different times. It is thus likely that we will see layoffs and wage arrears in certain regions first. Rosstat’s data already suggests this: as of August, regions such as Ingushetia, Kaliningrad, Leningrad, Kaluga, as well as manufacturing industries and construction were facing rapidly increasing wage arrears. Due to the weakness of institutions such as labor unions and strikes, dissatisfaction often materializes in the form of spontaneous protests (of which a database curated by Petr Bizyukov and Jan Matti Dollbaum has collected several hundreds over the past years). These may provide incentives to local elites to challenge Kremlin-appointed officials in these regions. So far, the authorities have managed these conflicts successfully, as the Kremlin strengthened its control over the appointment of key regional and even local officials while passing repressive wartime laws that make political action more costly. But as the crisis spreads and governors will need to rely on business elites to share the burden of growing expenses, this calculus can change.
The third risk lies in the sectors that wage arrears hit. One of the reasons why the above-mentioned issues made it into more than just local and regional papers is the importance of the affected sectors, either due to their strategic value (like microelectronics or air traffic control) or because of their social importance and lobbying power (coal). Just like in Europe, where the political impact of sanctions will not only be decided by how much GDP is lost, but what sectors (e.g. metallurgy) are hit hardest, acute problems key sectors can create bottlenecks and serious problems in Russia as well.
Whether these risks turn dangerous will depend on the perception of where things are headed. Many Russians hope they will win the war and that the economy will improve as a result. Others think that Russia will win, and are thus politically apathetic as a result. The independent election monitoring organization Golos highlighted intimidation and paralysis as major factors stifling political competition before the September elections. Yet if the Russian public looses confidence that their country will win the war, the early warning signs highlighted above, though they may look muted now, may still turn into a political minefield.
The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.
*About the author: András Tóth-Czifra is a political analyst from Hungary, based in New York City.
Source: This article was published by FPRI
Published by the Foreign Policy Research Institute
Founded in 1955, FPRI (http://www.fpri.org/) is a 501(c)(3) non-profit organization devoted to bringing the insights of scholarship to bear on the development of policies that advance U.S. national interests and seeks to add perspective to events by fitting them into the larger historical and cultural context of international politics.