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Low labor costs in Russia as an opportunity for business development?

The impending crisis and the devaluation of the ruble as a result of lower oil prices and the influence of the coronavirus may weaken the labor market in Russia, which will even more negatively affect the average wage in Russia, and even more so the disposable income. Even if the wages in rubles remain practically unchanged, in dollars the decrease will be more significant.

It is already clear that even by the end of 2021 there will be no real way out of the crisis in Russia. The indicators of the nationwide economic recovery plan will be achieved, but wage growth will occur due to increased unemployment – those who save their place will receive a little more. It is also worth noting that the data on Russia's GDP for May 2020 will not be disclosed, because the Ministry of Finance decided not to publish an estimate of the nominal volume of GDP. A decrease in business activity will lead to the fact that the working population will become smaller, and only a small fraction of the population will increase salaries. In addition to reducing the industrial production index and devaluation of the national currency, the Russian labor market is additionally pressured by its openness to labor migration from the Central Asian republics.

Given the relatively high qualifications of the population of the industrial regions of Russia, as well as the availability of cheaper natural resources and raw materials, the territories of Russia are becoming interesting for the transfer and localization of export-oriented foreign industries, products of various industries. Russia, of course, would be interested in the development of high-tech industries, and above all in mechanical engineering, instrument making, electronics, i.e. in industries where our technological lag is most noticeable.

When creating a favorable investment climate, a factor of relatively cheap and relatively skilled labor could become a driver of new economic growth. In 2019, the average salary in the regions of the Central Federal District on average in 2019 was $350-530, with the exception of Moscow and Moscow Region, which is less than the average salary in China – $750.

Considering that companies pay a significant percentage of their labor costs, the use of Russia's labor resources in investing and setting up joint ventures is beneficial for both parties. For example, earlier Chinese companies announced their desire to transfer part of the production to the Russian Far East. Chinese manufacturers prefer to import their workers to their production facilities opened in other countries.

It is also worth noting that in June 2020, the Deputies sent a bill to the government on the introduction of a lower threshold for hourly wages (POT) for those who work under fixed-term contracts and part-time, which will allow attracting part-time employees. In the long run, this measure will increase labor productivity in Russia, which is 2-3 times lower than in China or any other developing economy, but salary ambitions are much higher. But in general, Russians are characterized by a high level of education of the population and a well-developed system of training specialized high-class personnel, whose potential can be realized with greater efficiency. Efficiency and productivity, low qualification of performers and other important moments for a global investor play a minus.

This is also not quite what foreigners would like to see in their foreign production. Do not overestimate the low cost of labor. Economic growth due to the factor of lower average wages in reality is not worth counting. Wages became low only in dollars, but not in the main currency. The dollar, as it strengthened against the ruble, can also weaken, that is, there is a high likelihood of reverse dynamics, at which the cost of labor will rise again. There is also a reduction in the workforce in Russia due to a reduction in the number of Russians within the working age due to the consequences of the so-called “demographic pit” of the early 1990s.

Accordingly, potential investors today cannot consider low Russian salaries in dollar terms as a fundamental factor of attractiveness, which would be guaranteed to “work” on a long time horizon of five years or more.

The transfer of production capacities to Russia will not become mass unless there is some stability in the Russian economy, including with the ruble exchange rate. There will be single exceptions related mainly to resources (oil, forest, fish, etc.). The construction of a new enterprise requires substantial investments, which will not pay off immediately and will not pay off soon, so it makes sense to build a new enterprise if the benefits are substantial. The price of labor can be an occasion for investment by countries, not just with more expensive, but with significantly more expensive labor. In theory, cheap labor can help boost export potential, but in practice, for now, talking about cheap labor in Russia as a fundamental advantage for export potential and attracting foreign investment is premature.

There are difficulties with the investment climate in Russia. The point here is not even to reduce the tax burden and all kinds of benefits and preferences for the industrial sector, but to radically liberalize domestic legislation and restore friendly foreign policy.

News
The international rating agency S&P has approved a long-term rating of Russia for liabilities in foreign currency at BBB- with a stable outlook.
The unemployment rate in Russian regions at the end of Q2 2020 increased by an average of 30% compared to the same period last year, writes Kommersant, citing Rosstat.
The share of unprofitable organizations in the Russian Federation in January-May 2020 increased by 3.8 pp compared to the same period last year and amounted to 36%, Rosstat reports.
Inflation in Russia in the period from June 30 to July 6 jumped to 0.3% after zero value reached a week earlier, according to Rosstat data.
Rosstat published the full structure of all consumer income and expenses for Q2 2020.
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