UNEMPLOYMENT AND DECLINE IN REAL WAGES HIT

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000538

SIPDIS

STATE FOR EUR/RUS, DRL
NSC FOR ELLISON
DOL FOR BRUMSFIELD

E.O. 12958: DECL: 03/05/2019
TAGS: ELAB ECON EIND PGOV SOCI RS
SUBJECT: UNEMPLOYMENT AND DECLINE IN REAL WAGES HIT
RUSSIA'S RUST BELT

Classified By: EconMinCouns Eric T. Schultz, Reasons 1.4 (b,d)

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SUMMARY
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1. (C) By most accounts, unemployment in Russia has reached
6.1 million. In addition, almost two thousand corporations
plan to reduce their work forces in the course of the year.
Hardest hit are twenty-five million residents of the
single-company towns - primarily in the manufacturing and
extraction sectors ) which are reeling from a nearly 20
percent plunge in industrial output. Experts contend that
given employers, tendency to reduce hours and lower or delay
salaries rather than lay off workers, the decline in real
wages is a more accurate indicator than unemployment levels
of how the crisis is affecting the work force. Meanwhile,
the government's 43 billion ruble package to subsidize
regional employment programs is unlikely to improve the
situation owing, among other things, to unrealistic job
creation targets and widespread corruption at local levels.
Experts do not anticipate widespread labor unrest over the
short-term, but do not exclude the possibility of social
upheaval if the crisis is protracted and unemployment and
underemployment rise significantly. End Summary.

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SCOPE OF UNEMPLOYMENT
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2. (U) According to recent data from the government
statistical service (Rosstat),the number of unemployed
workers in Russia had climbed as of January to 6.1 million,
or 8.1 percent of the economically active population
(approximately 70 million). Unemployment is currently 23.1
percent higher than in January 2008. Estimates for
unemployment by the end of this year range from ten to twelve
million workers. Since October of last year, unemployment
has grown by approximately 360,000 workers each month. Of
the six million unemployed, only 1.8 million have registered
officially with the Ministry of Public Health and Social
Development. The Minister of Public Health and Social
Development, Tatiana Golikova, told the Federation Council
that figure could rise to 2.8 million this year.


3. (C) We are told that terminated employees often fail to
register because the meager size of the unemployment
allowance they would receive is simply not worth their time
and trouble. In addition, employers commonly pressure
employees to sign documents stating they left of their own
volition to avoid paying separation benefits. In a meeting on
February 24, Independent Institute of Social Politics (ISP)
Regional Program Director Natalya Zubarevich told us that
self-employed (farmers, SME workers) encounter bureaucratic
difficulties in documenting their termination. She added
that local labor and employment services often further
complicate the process by establishing bureaucratic barriers
to registration when they have insufficient funds to pay
unemployment benefits.


4. (U) Adding to current levels of unemployment, 1,950
organizations announced plans to reduce the size of their
work forces at the end of January. By February 11, 470,000
workers had received notices of imminent termination. Also,
more than one thousand enterprises plan to transfer some of
their staff to part-time hours, mandatory leave, or idle
time, affecting over 920,000 workers. During a conference
devoted to the labor market situation at the beginning of
February, Deputy Prime Minister Alexander Zhukov stated the
number of idle employees increased by 15,000, to 821,000, in
the first week of the month alone.

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UNEMPLOYMENT BROKEN DOWN BY SECTOR
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5. (C) Russia's labor force currently consists of
approximately 70 million workers divided into four sectors:
20 million industrial workers, 20 million workers paid from
the government budget, 10 million small business workers, and
20 million informal sector workers. (Note: the "informal
sector" is often referred to as a gray area between legal and
illegal business activity; most often involving retail trade
and unregistered intermediary or "middleman" services between

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firms).


6. (C) ISP's Zubarevich believes that workers paid from the
government budget; teachers, doctors, or the so-called
"budgetniki" would enjoy employment stability in the absence
of any legislative missteps. However, she said employment in
the small business sector would definitely decrease with the
widespread collapse of SME's and most of those workers would
shift to the informal sector. In turn, many current informal
sector workers would eventually leave the economically active
population as the crisis lengthened. (Note: Zubarevich
described a common Russian phenomenon, "the dacha effect," in
which workers cease formal labor market activities in favor
of meeting their needs through a combination of home
agriculture, unemployment benefits, and spousal employment.)


7. (C) Zubarevich concluded that the 20 million workers in
the industrial sector would be would be the most vulnerable
to lay-offs and suffer the most from the crisis. Employment
in this sector was already declining during years of economic
growth as many firms were &streamlining8 and
&down-sizing.8 Zubarevich estimated that this year's 20
percent decrease in industrial output would result in an
employment drop of approximately ten percent of industrial
workers, or two million workers.

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SINGLE COMPANY TOWNS FACE HIGHER RISK
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8. (SBU) The employment situation for industrial workers is
notably dire in Russia's single company towns, where one
industrial facility constitutes the majority of the local
economy. In a recent study, ISP's Regional Policies
Institute reported 25 million people live in 460 such towns
in Russia. The study claimed that metallurgy towns in Urals,
auto-manufacturing towns in central Russia, and less
developed areas of southern Siberia are most likely to suffer
from the crisis.


9. (C) Zubarevich told us the threat of a sharp decline in
unemployment is especially high for the 160 single company
towns whose industries belong to large conglomerates, for
instance Magnitogorsk, which is 100 percent dependent on
Magnitogorsk Steel and Iron Company (Magnitka). She
asserted, however, that the government would do all it could
to prevent companies in areas where employees had no
alternatives for work, to lay off large numbers of workers,
even those that are facing financial difficulties.

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WAGES, NOT EMPLOYMENT, INDICATE CRISIS SEVERITY
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10. (C) In a separate meeting with us, Deputy Director of the
Higher School of Economics, Vladimir Gimpelson, explained
that the overall decline in real wages (and consequently
purchasing power) was a better measure of the effect of the
crisis on the well-being of Russia's work force than
unemployment levels. During the 1998 economic crisis, he
noted, the unemployment level increased only marginally while
wages fell substantially. In the present crisis as well,
Gimpelson anticipated a universal decline in wages as opposed
to massive unemployment.


11. (C) Gimpelson observed that Russian companies were more
likely to cut employees, hours, wages and bonuses than
reduce the size of their work forces. Echoing Zubarevich, he
said the major corporations were under pressure by the
federal and regional governments as well as the official
unions to hold back on layoffs. Furthermore, management was
required by law to pay employees facing dismissal costly
separation packages (usually the equivalent of three months
of their salaries),which they would not have to pay to the
underemployed.


12. (SBU) As evidence that this process is gathering steam in
Russia, wage arrears in Russia increased by 49 percent from
2.29 billion rubles at the beginning of January to 6.96
billion rubles at the beginning of February. In Moscow
alone, employers, salary obligations doubled to 101 million
rubles. According to the Federal State Statistics Service,
private sector enterprises, especially in the processing
production, transport, construction, and agricultural

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sectors, owe employees another 6.6 billion rubles. The
government itself owes 378 million rubles to employees paid
from its budget. The problem of arrears, especially in the
private sector, is likely to persist owing to the
credit-liquidity crunch and the virtual freeze on bank
landing to the corporate sector.


13. (U) Purchasing power is also declining rapidly. If
workers receive their salaries, they face considerably
reduced purchasing power compared to last year. Real wages
shrank by 6.7 percent last month according to the government
statistics service. Nominal wages increased by only three
percent between January 2008 and January 2009, compared with
27.5 percent the previous year. The Ministry of Economic
Development reported real incomes would fall for the first
time in ten years in 2009. It currently estimates annual
real income loss will total 8.3 percent in 2009.

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REGIONAL PROGRAMS UNLIKELY TO REDUCE LABOR MARKET STRESS
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14. (C) At the end of last year, in another anti-crisis
measure aimed at containing social tension, the Russian
federal government allocated 43.7 billion rubles to subsidize
regional programs intended to reduce labor market stress.
The federal government plans to establish agreements with
each region through which it will provide 95 percent of
program funding if the regional government supplies the
remaining five percent from its budget. Program activities
will include advanced professional training, employment and
internship placement, relocation support, as well as
technical and financial assistance to enable unemployed
workers to start small businesses. Nationwide, the federal
government plans to create one million positions, train
160,000 workers, generate 50,000 jobs through small
businesses, provide relocation assistance to 27,000 workers,
and place 9,000 university graduates in internships.


15. (C) We will assess the effectiveness of the government's
regional employment problems in more detail in a septel.
Suffice it to say that most experts and financial analysts
with whom we have spoken are skeptical about prospects for
regional programs to stimulate employment, citing inter alia
widespread corruption at regional levels and the high
probably that the funds will be misappropriated and misspent.

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COMMENT
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16. (C) While unemployment is gradually increasing, we do not
anticipate massive layoffs over the short term. For the time
being, under pressure from the government and the unions to
preserve jobs, employers are more likely to reduce or delay
wages, implement part-time work regimes, or force employees
to take leave. Workers have already begun to adjust
consumption patterns, and, thus far, are still apparently
able to meet their basic needs even with reduced incomes.
Nevertheless, the likely spread of unemployment, combined
with diminishing wages and persistent inflation, could be
catalysts for severe social discontent later in the year. As
the crisis deepens and intensifies, and if the government is
forced to make major cuts in social expenditures, the
economic crisis could very well evolve into a social crisis.
End Comment.
BEYRLE