One of the typical signs of the war economy is the shortage of manpower. It is in short supply precisely when there is a need to increase production for the needs of the conflict. Russia is also facing this problem, as Elvira Nabiullina, the head of the central bank, has repeatedly warned. A shrewd technocrat she honestly described the situation. “Our ability to expand production is limited largely by labor market conditions.” She means that 42% of Russian companies, according to a July survey by Moscow’s Gaidar institute, complain about the lack of employees. This is because, as reported by the TASS agency, the number of workers under the age of 35 has reached its lowest level since the early 1990s, with the most significant drop affecting those between 25 and 29 years old. It’s a shortage that doesn’t really surprise anyone, given that the Kremlin has sent hundreds of thousands of men to the front in Ukraine. Then there are those who manage to escape the draft or simply escape from an increasingly violent and dictatorial country – a brain drain estimated at between 500,000 and one million people. Last year, writes economist Adam Tooze, emigration and mobilization may have cost the Russian workforce about 2% of male workers aged 20-49.
The Kremlin is trying to stem the damage with a whole series of incentives. Tax breaks, soft loans and other cash aid to convince Russians to stay (and work) at home. Then there is another, more extreme solution that Putin seems to want to support: child labour. The Russian president has asked for the restrictions on the employment of those under the age of eighteen to be lifted, including 14-year-old adolescents (males and females). This is what we read in the list of directives published on the Kremlin website, after a forum titled with a surreal touch: “Strong ideas for the new times”. To be employed, children will only need the consent of one of the parents and the compulsory medical examination can be replaced by a health certificate. They will also be able to be hired in temporary jobs while they continue their studies, and the companies that hire them as a team will enjoy tax relief.
Put like this it seems a sign of desperation, a grotesque move by an economy on the verge of collapse. But it also means something else: Russian production capacity, ie aggregate supply, is not keeping pace with demand. And robust demand indicates an economy that is holding up for better or worse. This is also thanks to all the fiscal stimuli that the Kremlin has put in place to stem the crisis. A sort of military-based Keynesianism, with a defense budget in 2023 increased to 100 billion dollars – in June, according to official Russian statistics, the production of vehicles, trailers and semi-trailers rose by more than 50% compared to the same month in 2022. The fact that demand is holding up is also evidenced by the increase in imports, goods entering Russia through third countries bypassing sanctions.
According to the Yermak-McFaul working group, Russian imports of critical components amounted to $26 billion in 2022, 16% less than in 2021. But this decline appears to have been caused entirely by the first impact of the sanctions between March and June 2022. In the fourth quarter, however, imports reached 33.9 billion dollars in annual terms. And if this trend were to continue through 2023, “it would mean that Russia would be importing at a faster rate than before the war,” writes Adam Tooze. The West is focusing precisely on trying to close these loopholes.
However, the sanctions have affected the other side of the current account balance: export receipts. Thanks to the oil embargo and the Western price cap, Russia’s revenues for energy exports fell 47% in the first half of 2023 compared to the previous year. As a result, the current account surplus of $124 billion – which existed between January and May 2022 – has fallen to $23 billion this year; and then run to a deficit in the following month. This is why the ruble has fallen against the dollar forcing the central bank to raise interest rates by double digits.
As mentioned, however, the economy seems to be holding up, for now. According to forecasts quoted by Reuters, inflation should end the year at 6.5% – high but not dramatic – with a growth rate of Russian GDP that could reach 1.5%. But it is growth financed by spending and deficits. In fact, several analysts expect the deficit this year to be between 6 and 8 trillion rubles, between 4 and 5% of GDP, high numbers by Russian standards. The problem is that the Kremlin appears to have several tools to sustain its war economy long enough – one of them, to increase withdrawals from the National Welfare Fund. The government, on the rough, could also raise taxes or reduce social spending. Two unpleasant alternatives because they would break the illusion that citizens’ lives can continue more or less the same despite the war.
And meanwhile the war continues. In the Zaporizhia area, the Ukrainian army managed to break through the first line of Russian fortifications, where – according to satellite photos – roughly 60% of the defense material is concentrated, 20% in the second line and another 20% in the third. Now the objective should be to widen the bridgehead to introduce armored vehicles and strengthen the offensive. A slow walk could suddenly turn into a rapid advance. It remains to be seen whether Ukraine still has enough means, men and ammunition.