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. Last Updated: 07/27/2016

Lots of Work but Too Few Workers

MTConstruction workers crossing the Garden Ring near Prospekt Mira. Russia is facing a severe labor shortage that could end the current economic boom.
YUZHNO-SAKHALINSK -- Railway boss Vyacheslav Steklyevich had just seen the first train roll over a new bridge he oversaw being built, a 10-meter stretch of iron and concrete that was only the beginning of the hundreds of kilometers of train track still needed around the island.

It was, Steklyevich conceded, just a drop in the ocean compared to the huge building works happening across the country -- and it was obvious what the main difficulties ahead would be.

"So far we are OK for labor, but when we start on the bigger infrastructure projects then it's possible that it will be much more difficult to get enough workers," said Steklyevich, the deputy head of innovation for Sakhalin Railways.

In the island's capital of Yuzhno-Sakhalinsk, Governor Alexander Khoroshavin had an easy answer for the problem: Throw money at it.

Pointing to the massive oil and gas projects on the island, Khoroshavin said that 16,000 laborers and specialists from around the world had already flooded onto Sakhalin.

"At IBM, they have a saying: Whatever people tell you, it's all about money in the end. And with money, we can solve even this," he said.

But Khoroshavin's is only the simplest solution to a complex question and one of the most fundamental threats to Russia's continuing economic growth.

From Sakhalin to Sochi and from top executives to manual laborers, Russia is facing a severe labor shortage that could put the brakes on the current economic boom.

Across the globe, countless countries, from the developed economies of Western Europe to rising behemoths, such as India, are feeling the pinch of the worker drought. But for Russia -- with its combination of rapid economic expansion, $570 billion infrastructure plans and shrinking population -- the problem is particularly severe.

Forecasts estimate that the country's work force will fall by 8 million over the next seven years and by up to 19 million by 2025, Russian demographers said in a recent UN-sponsored report. Between 2010 and 2014, the work force will decrease by 1.3 million per year, the report said.

In the first four months of this year, the work force was down 300,000 on the same period last year, the State Statistics Service said.

"This problem is greater than any other facing us over the next 10 years," said Yevgeny Yasin, an academic adviser at Moscow's prestigious Higher School of Economics and a former economy minister under President Boris Yeltsin.

"Starting from this year, we are seeing the number of people of working age start to go down," Yasin said. "This is a colossal task because Russia has never had to deal with it before."

As the country has enjoyed years of sustained economic growth on the back of soaring global oil prices, critics argue that little has been done to address the causes or come up with solutions for the looming labor shortage.

Vladimir Filonov / MT
Tajik workers assisting in the construction Thursday of the Federation Towers.
"In reality, the Putin-era policies were for the most part a step backward, so that hasn't given much cause for hope," Yasin said.

Now, with President Dmitry Medvedev at the helm and Vladimir Putin as prime minister, the government has been making increasingly positive noises and has made solving the issue a central plank of its vision, Yasin said.

"But it's still too early to draw any conclusions. So far it's only been words, and they still have to really do something," Yasin said. "If you'd asked me 10 years ago, I would have said we could solve this by now. But now, I am not so sure."

Since his inauguration in May, Medvedev has not shied away from confronting the country's labor shortage.

"It is already being felt fully and in a lot of sectors," Medvedev told a meeting of leading business figures in June.

One solution, Medvedev and Putin argue, lies in the buzzword of the moment -- innovation. In a bid to counter the labor deficit, they contend that the country needs to boost both the efficiency and productivity of its existing work force.

Previously, comparatively low energy and raw material costs have meant that the labor issue was swept under the carpet. But now with prices and wages rising, Russia needs to address the fact that its labor productivity is far lower than the productivity of most of its competitors.

As part of this, Medvedev argued, the country needs to overhaul the current malfunctioning system for training personnel and specialists from scratch.

"The problem of the labor famine can only solved by the government and business working together," Medvedev told the country's most influential business leaders.

Managerial Talent

But the new president's words were nothing new for businesses operating in Russia. Already struggling to find talented candidates and manpower, companies have been forced to come up with their own solutions.

"There are issues at every level of the labor market, but in Russia the biggest problem is with managerial talent at the top," said Wilfried Vanhonacker, the Belgian-born dean of Moscow's Skolkovo Business School.

Billed as the Russian version of Harvard Business School, Skolkovo has financial backing from some of Russia's biggest business names, including Roman Abramovich and Troika Dialog boss Ruben Vardanyan. Construction was ceremonially started in 2006 by then-President Putin, and President Medvedev chairs its international advisory board.

But progress is slow, and even when the school is in full swing in five years' time, it will produce just 250 graduates per year, a figure that Vanhonacker conceded is just "a drop in the ocean" for Russia.

"If you look at China, then Russia's management training is 10 to 15 years behind them," said Vanhonacker, who has spent 20 years setting up business schools in China.

Skolkovo only offers one piece of the jigsaw to a pressing problem -- one that companies' human resources departments across the country are struggling to come to terms with.

"This is certainly peak season for hiring and retaining people," said Olga Molina, HR manager at Ernst & Young.

Increasing competition for talent has seen salaries in the country skyrocket, further turning up the heat on the economy.

Executive pay at large Russian companies can be up to 15 percent higher than at the big multinationals, a recent report by employment agency Antal International said. Average basic salaries for general directors in the retail sector are $25,000 per month, the study said.

"It is not uncommon for top managers to be poached with significant salary increases. This compounds the problem of rising salary costs in an inflationary market," said Neil Cooper, director of the Russo-British Chamber of Commerce.

"Employers continue to face significantly rising cost pressure on wages," he said.

While projects such as Skolkovo might be the most striking examples, across the country, foreign companies from carmakers to oil firms are frantically setting up training programs for local workers to plug the skills gap they face.

In a bid to get access to potential employees at an early stage, Ernst & Young has teamed up with the Higher School of Economics. If the experiment proves a success, then a lot of other leading firms will look to try to copy it, said Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs, the country's main big business lobby.

Amid the mud and construction work at General Motors' future factory at Shushary, on the outskirts of St. Petersburg, bosses from the U.S. car giant last month opened a $1 million training center. With sales slumping in the United States and Europe, GM is increasingly turning to Russia's booming consumer market to pick up the slack.

With the factory set to start work in November, the company is looking to boost its work force from 700 to 2,000 by next year. That will require some 20,000 hours of training and GM has already teamed up with local universities to find future employees.

But it's not just leading private-sector firms that are fishing for future employees. Last month also saw the first batch of graduates finish a course set up by state-run behemoth Russian Technologies and the Moscow State Institute for International Relations.

"We need a new generation of specialists if we are going to develop the competitiveness of domestic industry and create promising military and civilian production models," Russian Technologies chief Sergei Chemezov said at the event.

Future Generations

But even delving into the country's universities might not help stave off the shortage.

"I read recently that the number of candidates for universities is only just equal to the number of places on offer now," said Molina, of Ernst & Young. "So imagine what the situation for business will be a few years' time" when the economy is growing and the population is shrinking, Molina said.

A snapshot of the next generation of Russian workers suggests that it is steady earning rather than invention or innovation that is most important.

A recent study of 5,000 Russians aged 16 to 25 showed that the Putin-era "generation of stability" lacks much of the ambition and drive that characterized those who grew up in the fluid, poverty-stricken 1990s.

One-fifth of future workers see themselves being what the survey called "office plankton" -- low-level clerks with little responsibility -- while 17 percent want to work as manual laborers, the study from the Fund for Social and Marketing Research.

That means that many look set to add to the already-bloated ranks of low-qualified office workers. Less than one-fifth of those questioned said they wanted to go into business for themselves, almost the same number as those eyeing up government service.

John Wendle / MT
Builder Djomi Davlatov standing by Moskva-City's Eastern Federation Tower.
Although labor resources are tight, employment actually rose in the first few months of 2008, partly fueled by a glut of poorly qualified middle-ranking office workers and the seasonal wintertime dip. And despite the rising wages, the country's embryonic middle class views the newfound stability with skepticism and yearns for the quality of life in the West, said a study by the Levada Center, an independent polling agency.

A total of 75 percent of the survey's respondents under 35 said they were ready to emigrate, while one-third of all respondents said they were thinking about sending their children abroad permanently. Over 60 percent said they wanted to send their children abroad to study. Despite banner headlines about increasing numbers of highly skilled Russian professionals returning to the motherland, the reality is a continuing brain drain that has seen officials face demands for tough action.

As the country's education system and business training inches toward European levels, the country faces a tricky Catch-22 situation: The better-trained Russian managers are, the more attractive they become to foreign employers.

"You may think that handing out European-standard diplomas is a stimulus for our citizens finding jobs abroad," Prime Minister Vladimir Putin told Federation Council Speaker Sergei Mironov at a July 16 meeting.

"But rather than introduce limits, we need to create the best conditions for keeping our youth working in Russia -- that's raising wages and living conditions," Putin said, in response to ideas mooted by Mironov to limit the rights of university graduates to leave the country.

As the population shrinks and the average age of the working population rises -- currently 39.5 years, according to the latest statistics -- experts say that the country's low retirement age (55 for women, and 60 for men) will inevitably be pushed higher.

A combination of traditional and contemporary social ills -- alcoholism, smoking, cardiovascular disease, AIDS and drug addiction -- are gnawing away at the country's work force.

While alcohol costs untold man-hours each year and has annually caused over 400,000 deaths for the past 20 years, inadequate or outmoded treatment for the country's up to 6 million drug users means that few ever receive treatment, let alone recover and go back to full-time work.

Although the Russian AIDS epidemic is nowhere near the scale of sub-Saharan Africa, worst-case predictions say HIV prevalence rates here could reach 10 percent by 2020. But the major issue for Russia is that, unlike in other countries, the AIDS epidemic is young.

Most of those infected are aged between 18 and 35, said Dominique Moran, a lecturer at the University of Birmingham, England.

"This suggests that the long-term impact on the current and, critically, future work force could be very significant," Moran said.

Now one in five Russians is over working age, a report from market research firm Comcon said.

Since 2001, the proportion of people over 55 in work has risen from 22 percent to 36 percent, according to Comcon. Average life expectancy for men in Russia hovers around 59.

At the other end of the scale, the percentage of people between 16 and 24 has risen to over half, the study said.

From Abroad

Russia's Labor Crunch

What the Government Has Done:
  • In a bid to make up for the deficit in personnel, the government is pushing for greater innovation to boost labor productivity.
  • Putin and Medvedev have backed projects such as the Skolkovo Business School and pledged to reshape the country's education system to better train specialists.
  • In a bid to cut the huge number of working days per year lost to alcohol and drug-related diseases, the government has promoted healthy lifestyle choices, which include encouraging young people to take up sports.
  • In early 2007, the government moved to liberalize some of the migration regulations, making some progress to peg policy to the country's economic needs.
  • The government has come up with long-term measures to try to resolve the country's demographic crisis, including cash incentives for families to have more children.
Possible Solutions:
  • Offer greater incentives, such as tax breaks, startup capital and low-interest loans for small and medium-sized companies attempting to boost productivity through innovation.
  • Avoid simply pushing up wages to attract and retain workers. Growing wages are a central element in the country's overheating economy.
  • Streamline and simplify the migration system and quota arrangements to allow greater flexibility in dealing with the constantly changing demands of small and medium-sized businesses.
  • Ease visa and work-permit regulations for key specialists and managers.
  • Set up one-stop licensing agencies, both inside the country and in countries supplying migrant labor, to help bring in workers legally and direct them to the regions and sectors hardest-hit by labor shortages.
  • Offer an amnesty to illegal immigrants working in the country for them to register legally, while increasing penalties for companies who continue to employ workers illegally.
  • Work to improve the country's image to help attract talented foreign executives to Russia and Russian graduates back to the country.
  • Modernize the way the country treats alcoholism, drug addiction and AIDS to boost the number of people able to return to work.
  • Restructure the pension system to allow the government to tap into the potential of the country's aging work force.
If Russians don't want to stay in the country, then specialists and managers from abroad don't really want to come here, either.

Despite stability and higher wages, attracting foreign specialists from developed economies is becoming harder, due in part to Russia's negative image in the West and the prohibitive cost of living in some cities.

"Over the past 10 years, the tendency has been for foreign companies to phase out expatriates, since their main purpose is to transfer professional skills to local employees over a limited period of, say, a three- to five-year assignment," said Cooper, of the Russo-British Chamber of Commerce.

But more than anything else, the biggest stumbling block preventing the country from attracting the workers it needs is its often contradictory, Byzantine and outmoded migration policies.

Just this May, businesses in Moscow were hit hard after the Federal Migration Service stopped issuing work permits, and officials were left scrambling to justify the chaos. The reason, a spokesman for the service said, was that the quota of about 300,000 for 2008 had been used up.

The Health and Social Development Ministry hastily drew up additional quotas, admitting that businesses had been damaged across many regions but downplaying the severity of the situation and shifting responsibility.

"Talk of a work-force deficit is, at the very least, premature," Deputy Health and Social Development Minister Alexander Safonov said as he announced the additional quotas in late June. The average take-up for regional quotas was only 47 percent and as low as 17 percent in some regions, Safonov said.

The problem is, in part, due to the disjointed web of ministries, regional administrations and migration authorities that are responsible for setting the conditions and numbers for work permits and visas. Employees hand in requests for quotas to regional authorities, who in turn pass them to the Health and Social Development Ministry, who then hand them on to the Federal Migration Service.

This means that inflexibility and confusion are often hallmarks of the system. CEOs at major companies are required to get leprosy tests for work permits and businesses can't bring workers in on short notice.

"Small business is in shock," said Gavkhar Dzhurayeva, head of the Migration and Law project. "On the one hand, the government is pushing to develop small business, but on the other bureaucrats' demands seriously limit the mobility of small businesses."

Unlike many developed countries, Russia does not yet have a special program for attracting skilled professionals from abroad and no mechanism for selecting migrants based on the skills needed in the economy, the UN-sponsored report said.

As an example of the possibilities, earlier this month the German government introduced a raft of new measures aimed at liberalizing entrance requirements and attracting about 400,000 skilled workers into the economy.

The move would allow foreigners who earned over 63,000 euros ($98,000) last year into the country to work with no further vetting but still caps the number of low-level workers from new EU members. German business has criticized the government for not going far enough.

The Bottom Rung

But it is at the other end of the spectrum that the damage from Russia's migration policies, in both business and human costs, is most severe.

Currently under construction at the heart of the capital's nascent business zone, Moskva-City, the Eastern Federation Tower will one day be Europe's tallest building and a potent symbol of Russia's economic growth.

It is also a symbol of the country's reliance on cheap, imported labor -- and employs foreign workers from a wide arc of neighboring countries. A full two-fifths of migrant laborers work in construction, mostly from China, the Central Asian and Caucasus republics, Turkey and Ukraine.

In the bare concrete shell of the 25th floor reached by a rattling cage elevator, a small group of Tajik workers stood looking out at the spectacular view of the city. Once the top-end office and apartment complex is finished, space will sell for $35,000 per square meter.

"There is no work back [home] and the pay is very small," said Djomi Davlatov, 38, a craggy-faced Tajik who had worked selling household goods in a bazaar before coming to Moscow 18 months ago.

Davlatov said he earns 17,000 rubles ($730) per month, far more than he could ever make back home. He sends 15,000 rubles of his salary back to his wife and four children in Kulob, a city of 80,000 in southwest Tajikistan. Regular phone calls home dampen the pain of separation, he said.

"Who knows how long we'll be here? Maybe another year on this site, and then we'll move on to another building," said Saidvali Kuvatov, a 19-year-old co-worker.

But these workers were among the lucky ones. While there are around 2 million migrant laborers working legally in the country, the number of illegal workers is estimated at up to 8 million, a spokesman for the Federal Migration Service said.

And if executives from the West have to cope with inconvenience, then Russia's immigration policies mean many ordinary laborers face blatant exploitation.

Russia has visa-free travel with most former Soviet republics, but no coordinated way of bringing in workers to match the country's needs. Forced to rely on often-unscrupulous traffickers, once they reach Russia they are forced to work long hours, for low wages and in inhuman conditions.

Most illegal laborers head for the big cities, meaning that the chronic labor shortages that emerged in the 1990s in certain regions go unplugged. From petty discrimination to violent attacks, this helps fuel the rising tide of xenophobia in the country.

In 2006, average pay for migrant laborers was close to the national average of 11,000 rubles per month, but migrants work far more hours than local workers, the International Organization of Migration said in a report.

"The problem of labor shortage is very acute," said Gulnara Safarova, a specialist at Cushman & Wakefield Stiles & Riabokobylko. "The constant restrictions in legalizing migration labor lead to more illegal workers on sites."

Given the huge potential profits and rampant corruption among officials, fines of 2,000 to 8,000 rubles for each illegal migrant don't do much to deter construction firms hiring illegal workers.

"Even the biggest well-known companies take the risks and use illegal workers on their constriction sites," Safarova said. "This year, Russia has about 1 million illegal workers on its sites," she said. "The construction boom has just started -- in coming years the number will only increase."

In May, Prime Minister Vladimir Putin launched a countrywide $570 billion spending program on infrastructure. In the Black Sea resort of Sochi, an estimated 186,000 workers will be needed to build venues for the 2014 Winter Olympics.

"Without [illegal migrant] workers, it's impossible now to imagine any building process, because Russian labor resources are so limited," Safarova said.

Editor's note: This is the ninth in a series of reports about the key challenges facing Russia today. Previous reports can be found at