Russia Is Saving Jobs, but Not the Economy

8 MINS READJun 15, 2016 | 09:15 GMT
Russia Is Saving Jobs, but Not the Economy
Russia's largest carmaker is on the verge of laying off thousands of workers unless the Kremlin can find a way to stop it.
Forecast Highlights

  • The Kremlin will try to stop AvtoVAZ, Russia's largest carmaker, from laying off thousands of workers, persuading the company to shrink employee salaries and hours instead.
  • Many of Russia's biggest firms will follow suit, avoiding layoffs in an effort to align with the government's policy, which could last through 2019.
  • But as citizens' incomes decline amid rising inflation and mounting economic pressure, they could vent their frustration during parliamentary elections in the fall.
  • Moscow will try to diffuse any organized protests that threaten to destabilize the government by fueling nationalistic sentiments and initiating crackdowns.

Russia's economic downturn has left many of the country's biggest companies struggling to make ends meet. Now, AvtoVAZ, Russia's largest automobile manufacturer and the recession's latest victim, is on the verge of laying off thousands of workers unless the Kremlin can find a way to prevent it. The company, which employs some 2 million Russians, intends to let some of its people go through a "voluntary" dismissal over the next two weeks, offering hefty compensation packages to those who leave. The announcement prompted the governor of the region housing AvtoVAZ's biggest plant to meet with Russian President Vladimir Putin on June 6 to ask for the government's help. But whether the Kremlin props up Samara province's unemployed automotive workers or pressures AvtoVAZ into keeping them, it will not be able to fix the worsening economic conditions that threaten citizens' livelihoods and, by extension, the legitimacy of the government's rule.

Bending to Moscow's Policies

AvtoVAZ, like most Russian firms, is no stranger to weathering an economic slump. During the country's previous recession in 2008-2009, auto sales fell by 25 percent, resulting in a loss of $900 million in revenue for AvtoVAZ in 2008 and another $1.6 billion in 2009. Yet in those years, the Kremlin rallied behind the automaker in a series of public displays and support packages. The president and prime minister visited AvtoVAZ's flagship factory in Togliatti and praised the firm for avoiding layoffs as General Motors Co. had not. (GM let 400 employees go, sparking protests outside its factory in St. Petersburg in 2015.) In exchange for maintaining employment levels, Moscow gave AvtoVAZ $1 billion in financial assistance; Russian state-owned banks shelled out $2.6 billion more in loans. The Kremlin also implemented a car swap scheme, whereby buyers could qualify for grants if they traded in cars more than 10 years old for new ones. Putin even purchased an AvtoVAZ SUV in a 2009 publicity stunt to boost sales. Each of these measures buoyed AvtoVAZ's market share and profits, enabling the company to stay afloat in spite of its financial hardship.

But the Kremlin's help came at a price. It demanded the full restructuring and modernization of AvtoVAZ, which, despite being Eastern Europe's largest automobile manufacturer, was also one of the most inefficient. (On average, one AvtoVAZ worker produced only eight cars a year compared with 36 cars for every GM worker.) The government scaled back its ownership of the company in 2012 and allowed the Franco-Japanese alliance of Renault and Nissan to assume a majority stake in the firm. Since then, AvtoVAZ has been profitable, and it now accounts for 40 percent of the cars made in Russia. 

Now amid Russia's second recession in eight years, car sales in the country have once again plummeted, this time by 35.7 percent in 2015. Most of AvtoVAZ's rivals, including GM and SsangYong Motor, have already reduced their operations in Russia or shut them down entirely. Though AvtoVAZ expected the declining competition to improve its own fortunes, the company's revenue dropped by 8 percent last year, tripling its losses to $1.2 billion. By the end of 2015, the firm had only brought in $2.7 billion — less than its operating costs.

Hemorrhaging money, AvtoVAZ tried to lay off a third of its workforce in 2015. But the Kremlin pushed back, especially since the company's Togliatti plant employs most of the city's population. AvtoVAZ's foreign leadership has bucked Moscow's attempts to coerce it into protecting jobs, letting go of 13,000 workers over the past two years. Rostec chief and powerful Kremlin official Sergei Chemezov has since publicly criticized AvtoVAZ CEO and Swedish national Bo Andersson, saying, "They threw people out into the street. This is probably a European practice; we believe you can't do that, you need to behave more flexibly." On March 14, Andersson was replaced with Frenchman Nicolas Maure, who has extensive experience running auto companies in formerly communist states and is widely seen as more understanding of the Kremlin's position.

After taking charge of AvtoVAZ, Maure switched the company's tactics. Instead of pushing for mass layoffs, the firm cut salaries by 20 percent and shortened the workweek from five days to four. In doing so, it followed the Russian tradition of maintaining employees at all costs, a policy reminiscent of the Soviet-era ban on unemployment that prioritized social stability at the economy's expense.

Like AvtoVAZ, most of Russia's largest firms have considered laying off workers at some point. But they, too, have yielded to the government's pressure, cutting wages and hours rather than people. In 2014, for example, Russian energy giant Gazprom announced that it would slash its staff by 25 percent (about 125,000 jobs), only to reverse its decision in response to the Kremlin's disapproval. Employees at the company's research arm, Gazprom VNIIGAZ, now work five hours a day. Meanwhile, Rosneft chief Igor Sechin has announced that his company will cut projects before it cuts jobs.

Financial Strain May Generate Wider Unrest

Thanks to the Kremlin's heavy hand, Russia's unemployment level is the lowest in Eastern Europe. Today it hovers below 6 percent, a shadow of what it was during the country's 1998 financial crisis. But low unemployment masks a much larger issue: shrinking salaries. According to Sberbank, Russia's average monthly wage dropped by 9.5 percent last year compared with 2014, slipping below $450 — less than China, Serbia, Poland or Romania. Wages dropped by 10 percent at Sberbank in 2015; by 15 percent and 9 percent at VTB Group in 2014 and 2015, respectively; and by 5 percent at RusHydro in 2015. Even the Russian government has reduced civil servants' pay — including Putin's — by 10 percent. In addition, Russia's poverty rate, which measures the number of Russians living on less than $139 a month, rose by 2.2 percent in 2015, reaching 13.4 percent overall. The World Bank predicts that Russia's poverty rate will skyrocket in 2016, growing faster than it has since the 1998 recession, when nearly a third of the Russian population fell below the poverty line.

The impact low wages have had on the average Russian's spending power has only been exacerbated by rising inflation, which climbed from 6.8 percent in 2010 to 13.4 percent in 2015. This figure is higher than the inflation seen during the 2008-2009 recession, though it is still a far cry from the 27 percent hike that occurred in the 1998 financial crisis. Even so, the Central Bank of Russia has called the current inflation rate "unacceptable" and is working to bring it back under 6 percent by 2017 using adjustments to its key rate.

In the meantime, consumer demand will continue to languish as Russians tighten their belts. Moscow's strategy is taking a toll on the population; a recent report from Russia's state statistics service estimated that citizens are spending about 50 percent of their incomes on food, up from 25 percent in 2007. Such spending patterns are on par with many African countries. By comparison, Americans spend roughly 6.7 percent, the French spend 13.8 percent and the Chinese spend 26 percent. According to independent pollster Levada, some 86 percent of Russians believe their country has entered a full-blown economic crisis.

These concerns have spilled over into the political realm. Mounting financial pressure has spurred more frequent protests across Russia. Though the Kremlin has kept a tight lid on media coverage of the demonstrations, human rights groups suggest that the number of protests in Russia increased by about 40 percent in 2015. As the country's September parliamentary elections draw near, Moscow is taking steps to prevent the protests from congealing into a broader nationwide movement, cracking down on social media activity and detaining protest organizers. The government has also been fairly successful at rallying nationalist sentiment behind its military campaigns in Ukraine and Syria. Moreover, the Kremlin has plans to finesse the outcome of the elections — a vote that the ruling United Russia is not certain to win — without directly manipulating the results. In 2011 and 2012, electoral manipulation elicited mass protests in Russia. Given the growing strain on its population, the perception of impropriety could spark even wider unrest this year.

But strangely enough, Putin's approval ratings continue to sit above 80 percent, in spite of citizens' increasing frustration with the state of the economy. In part, this can be attributed to the Kremlin's success in shifting the blame for the current crisis to low oil prices and Western sanctions. Painting the West, and particularly the United States, as the source of Russia's problems has not only stirred up Russian nationalism but has also made the Russian government appear less culpable. Furthermore, Putin's role in bringing Russia out of the 1998 crisis has sustained Russians' belief that he can do it again. And so, even though the financial pressure is building — and Russian citizens are bearing the brunt of the burden — Putin's position is not yet in jeopardy. That said, the longtime leader rose to power on the promise to keep Russia prosperous and stable. More and more, that promise seems to be falling through.

Lead Analyst: Lauren Goodrich

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