Russia, which is the world's biggest energy exporter, is struggling to bring down the inflation rate to 9.5 percent this year from 11.9 percent in 2007 as money from oil and gas sales, strong wage pressures resulting from widespread labor shortages and rising global food prices fuel consumer price growth. Inflation reached 12.7 percent in February, the highest since July 2005.
Food prices rose 2 percent in March, including a 4.3 percent increase in bread, according to the Statistics Service. The cost of the staple food basket reached a monthly average of 1,993.5 rubles ($84.52) in Russia and 2,231.7 in Moscow, the country's biggest city. Central bank Chairman Sergey Ignatiev said on April 2 that it is still possible to hold inflation below 10 percent this year, but this view may well be way too optimistic. Ignatiev said the bank "doesn't exclude the possibility" of a further increase to its refinancing rate and to the mandatory reserve requirements as a means to combat inflation. The bank raised the refinancing rate by a quarter of a percentage point on Feb. 4 and increased reserve requirements for banks on March 1.
Russia's Consumer Price Index (SPI) stood was up by 0.3% between April 8 and April 14 2008, and since January 1 prices have already climbed by 5.6 percent, rising 0.8 percent from April 1 to 14, 2008, up from the 3.8 and 0.3 percent registered in the same period last year, respectively. For the whole of April 2007, inflation was reported at 0.6 percent
Prices for chicken eggs and plant oil increased the most (by 2.4 and 2.3 percent, respectively, and remember this is during only one week), while prices for bread, wheat flour and pasta rose slower, up 1.2-1.8 percent, which was slower than the 1.6-3.3 percent in the previous week.
According to Simon Shuster in this article, Russian industry is increasingly facing wage disputes from workers who are now anxious to flex their muscles given their relatively advantageous short supply situation.
Labour disputes have hit three major employers in Russia in two weeks, signalling severe tightness in the labour market that could send costs soaring for investors, said experts, employers and union leaders.
The disputes - at Swiss food giant Nestle, French retail firm Leroy Merlin, and United Company RUSAL, the world's largest aluminium producer - have not yet hurt production, but alarm bells are going off. The Russian economy has been booming for the past nine years on the back of soaring world prices for oil and commodities. Workers from the coal mines to the corner offices want to be paid accordingly. "European quality, European standards, European wages," read one of the picket signs outside Nestle's Russia headquarters last week, as factory workers called for a 55 percent raise that would take the monthly wage to about 24,000 roubles
The Russian government desperately wants wage growth to come into line with the growth in productivity but, as Schuster points out, Russian workers have grown used to rapid income growth, as wages have grown around 10 percent a year in real terms since 2000. The average monthly wage in February 2008 was Rbs15,214 ($650, €408, £327) – up 15 per cent in real terms in a year, and a sixfold nominal rise since 2000. But the rise is far from uniform and the Hay consulting group found in 2007 - reflecting rapidly rising demand for and shortages of senior executives, that managers of big industrial companies had seen annual pay jump 60 per cent in a year (to nearly $160,000).
Ford who were once one of the most vocal advocates of foreign investment in Russia, got a first-hand taste of Russian labour trends last December when a major strike brought its St. Petersburg assembly lines to a halt. Hundreds of workers initially called for a 50 percent raise from the U.S. automotive giant. The demand was negotiated down to 16-21 percent, but the message to Ford and its peers seems to be getting home.
Andrei Bader, head of corporate affairs at Nestle Russia, is quoted as saying that "There is simply no one to work here, especially specialised workers, skilled workers. This is a systemic problem in Russia,". And the data suggest it is only getting worse. In some ways the figures speak for themselves, since the Russian population has been in decline since 1996, while the number of people older than 65 has increased by 12 percent, according to the State Statistics Service. Over roughly the same period, the number of man-hours lost each year to strikes has grown eightfold, reaching an average of 1,231 hours for every employer affected in 2006, the year the statistics service last published strike figures.
And the problem isn't just a Russian one. It is becoming fairly general all over Eastern Europe. According to this article in Bloomberg this morning, Jiri Cerny, vice president of Toyot and PSA Peugeot Citroen's joint venture in the Czech Republic, says that three years after opening shop it's getting harder by the day to find workers, and he is now actively considering importing them from Mongolia.
Companies that were attracted to formerly communist nations in eastern Europe by the promise of cheap and plentiful labor are finding less of both, as faster growth drives up wages and open borders encourage emigration. Indeed there is increasing speculation that accelerating inflation may cause eastern Europe's investment- led boom to fizzle (and possibly even crash to a dead stop), with the Baltics and Balkans regions already threatened by a "hard landing" according to the International Monetary Fund and Standard & Poor's.
Stefan Wagstyl also has a very interesting piece in the Financial Times on this very topic. As he says:
Arkady Dvorkovich, President Vladimir Putin’s chief economic adviser, says the answer (to Russia's labour shortage problem) is investment in education, especially in management and engineering. Education spending has more than doubled from Rbs162bn in 2005 to a budgeted Rbs330bn this year.
Mr Dvorkovich is less concerned about the overall labour market. He says that despite recent increases, Russia’s labour productivity is very low – standing at 12 to 15 per cent of developed country standards – and the scope for redeploying labour is huge. “With increased productivity, we will not have any shortage of labour in the future,” he said.
But others are not so sure. Economists say redeployment requires more flexible labour laws. Also, given Russia’s size, poor transport and inadequate housing, people are reluctant to move. Yevgeny Gavrilenkov, chief economist at Troika Dialog, an investment bank, says the government must boost mobility through efficient infrastructure investment.
Such support will be more necessary as the population declines at rates unprecedented among industrialised nations, owing to low birth rates, poor healthcare and high levels of accidents and alcoholism. The working-age population has just passed its post-Soviet peak of 90m – out of a total of 140m – and is forecast to fall to 77m by 2020.The official employment rate is already reasonably high by developed world standards, so the scope for further gains is limited.
At this week’s congress of the dominant United Russia party, Boris Gryzlov, its leader, called for policies to boost the population to at least 200m and produce more skilled “cadres”. “We’ve simply got no one to work new equipment,” he said. Only 3m Russians had specialist industrial qualifications, while 12m were unqualified. “We need those proportions to be reversed.”
Mr Gryzlov appealed for 20m ethnic Russians living outside the country to return home. Russia has long encouraged ethnic Russian immigrants and discouraged others, reflecting widespread anti-foreigner prejudices. But, in practice, millions of illegal migrants from central Asia and the Caucasus work in low-paid jobs.
Last year, the government tightened controls by encouraging illegal residents to register while setting strict quotas for new arrivals. Mr Dvorkovich said: “Migrants are welcome on the understanding that people must be fully integrated into Russian culture and the Russian economy.”
Demographers say this approach is too cautious for the growing labour needs. Yaroslav Lissovolik, chief economist at Deutsche Bank in Russia, said: “The needs for labour are so dramatic that the former Soviet Union is probably not big enough. We must go further abroad.”