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OPINION

The “no human” factor: How Russia’s workforce shortage rolls back its industrial development

The nationwide mobilization (and the resulting outflux of qualified professionals abroad) exacerbated the crisis in the Russian labor market, already profoundly affected by the demographic decline. Russia's workforce shortage will only increase, experts warn, and may reach 4 million people by 2030. Developed economies compensate for insufficient human resources by driving labor productivity (using such tools as AI, among others), but Russia is also faced with the degradation of industrial processes due to international sanctions. Igor Lipsits, Doctor of Economics, explains how Russia's government policy has caused a labor market catastrophe and why the deteriorating educational system cannot remedy the situation.

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As a recent Higher School of Economics study suggests, the nation’s main human capital challenges include health (with the war in Ukraine claiming thousands of lives and leaving many combatants disabled) and the “brain drain.” Last year alone, human capital-related problems cost Russia around 0.5% of its GDP, which is $8.3–10 billion. If we compare Russia's human capital statistics to the West, the first striking difference is the negligible input of its qualified professionals into the creation of added value.

GDP growth factors in developed countries

  • Physical capital (buildings, facilities, equipment) – around 16%
  • Natural capital (land, forests, minerals) – around 20%
  • Human capital – around 64%

GDP growth factors in Russia

  • Physical capital – 14%
  • Natural capital – 72%
  • Human capital – 14%

This observation is shared not only by critically-minded Russian economists but also by their colleagues in major international organizations. World Bank Vice President Cyril Muller remarked that it was human capital that hampered the Russian economy's growth, thus becoming an adverse, rather than contributing, factor.

Meanwhile, Alexander Auzan, the dean of the Faculty of Economics at the Moscow State University, has stated more than once that human capital is Russia's treasure and hope. Vladimir Putin seconded him on multiple occasions. How true is this optimistic perspective? Today's Russia is still plagued by “shop-floor fetishism,” which assigns the highest importance to “walls, machines, and sweat.” In this equation, “machines” stands for industrial equipment, “walls” represents the facility housing the equipment, and “sweat” stands for the physical labor at the facility. However, in the 21st century, the focus has somewhat shifted from the number of calories spent by workers per shift to the enterprise’s ability to ensure the high quality and relevance of its product.

What's wrong with Russia's human capital?

How did Russia end up like this? Firstly, some choose to emigrate, while others get killed or become disabled in the war with Ukraine. Secondly, the professional training system is continuing to degrade. This is a painful issue because Russia has traditionally taken pride in its education, but in truth, it falls behind modern requirements more and more often.

Looking back on several centuries of evolution undergone by Russian science and education, the introduction of universal schooling, and the emergence of innumerable universities and professional training establishments, one may be tempted to say that the negative input of its human capital is impossible. However, this is precisely the case. Russia is continuing its downward slide in the Global Innovation Index, moving from the 46th to the 47th position.

Meanwhile, its education spending is mind-bogglingly low. As early as 15 years ago, when the 2020 Strategy was in the making, the debate was ongoing as to whether defense spending should be cut in favor of supporting education to prevent its decay. No practical steps were taken, though, and Russia currently ranks 82nd in the world by education spending.

Russia ranks 82nd in the world by education spending

By the number of registered patents, Russia looks good, but when it comes to investing in their realization, the country ranks below the 50th position worldwide. Even if a relevant solution presents itself, it hardly ever sees development as a business idea. It's an age-old affliction, and innovators realize that their only option is to leave because their homeland is unlikely to appreciate any of their inventions. As Vice PM Andrei Belousov recently stated, “Russia has barely any design and development infrastructure.” Kirill Varlamov, the CEO of the Internet Initiatives Development Fund (IIDF), adds: “Strictly speaking, Russia’s venture capital market died last year, or at least fell into a coma and shows no signs of life. There is no telling when it’ll bounce back.”

In the late Soviet period, progressive journalists were keen on stories about talented inventors who kept knocking on the doors of government institutions for years, offering to put their creations to use, but got rejected again and again. It happened because innovation inevitably disrupts the production pace, preventing the enterprise from meeting its targets and getting the director in trouble with the controlling authority. They could even be expelled from the Communist Party, which signified the end of their career. By contrast, if you implement nothing and maintain existing processes without a hitch, you’re in the clear. This economic model caused the USSR to approach its collapse with a massive but tremendously outdated manufacturing sector. When Russia opened its market and innovative products started flowing in, even Chinese versions immediately outshone domestic analogs.

It's history now; but how does today's Russia distribute its investment in economic growth? In 2019, fixed capital accounted for 17% of the overall investment, and the share of human capital barely reached 14%. That is, even two decades into the 21st century, the Russian government and business community still prioritize building machines and factories over training personnel. In the U.S. and Europe, large corporations take it upon themselves to sponsor professorships at major universities. Meanwhile, Russian businessmen aren't too preoccupied with education (and Potanin scholarships alone aren't making much of a difference). Admittedly, the Russian state is often gatekeeping the public education system.

Demographic losses

The next consideration is purely demographic (and therefore overlooked by many economists). Russia’s working-age population hit a record high 17 years ago, in 2006, reaching 90 million people. By 2016, it had already shrunk to 84 million and continued shrinking to today’s 77 million.

Since 2006, Russia’s working-age population has shrunk by 13 million

That is, this category is going through a rapid decline. The resulting workforce shortage will cost Russia 1-2% of its GDP each year, according to a market study by Yakov & Partners (former partners of McKinsey in Russia).

From 2018 to 2023, the number of vacancies in Russia has grown by 80%, exacerbating the shortage of human resources. By 2030, the gap will have reached 2–4 million employees. The most affected category is professionals with vocational training (1.1–2.2 million people). The shortage of specialists with a high education will vary from 700,000 to 1.4 million.

Russia is not the only nation facing depopulation. Japan, which has it the hardest, has chosen to remedy the situation through robotic engineering. By contrast, Russia is among the planet's laggards in terms of production automation, with its robotic automation pace equaling one-seventieth of the global average. According to pre-war data by the Russian Association of Robotics (today's indicators are likely even lower), annual sales of industrial robots in Russia didn't exceed 2,300 pieces, whereas Japan sold as many as 38,000 with a much smaller population. Russia ranks even lower than Mexico and Thailand. At the end of the day, Russia is both losing human resources and failing to replace them with robots; as its population is shrinking, so is the share of young workers capable of amassing human capital.

Demographic forecasts suggest that by 2031, the share of the most productive workers aged 20-39 will have shrunk by 25% compared to 2020. Even by 2035, this indicator won't have rebounded to its 2020 level. As a result, Russia's economy is that of a shrinking, aging, and poorly qualified population.

Russia's economy is that of a shrinking, aging, and poorly qualified population

Underachievers

Even before the war, one of the main pitfalls of Russia’s economic growth was the share of people whose contribution to the GDP was negative or equaled zero. In other words, those are individuals whose costs for society outweigh their benefits, so instead of being an asset to their country, they become a liability. The root cause is the generally poor quality of Russian schooling.

According to the Center for Education Quality Assessment under Russia’s Ministry of Education, around 10% of Russia's schools offer subpar tuition. That’s an optimistic assessment, considering that testing has revealed 22% of Russia's secondary school students to be low-performing. They struggle to grasp the meaning of texts and cannot objectively assess themselves. What further education path is available to such students? Sixty-six percent enter various vocational schools, 26% go to high school anyway, and 7% call it quits. They often consider joining the military as a viable option, ending up in the war with Ukraine, in which Russia is losing both its population and genetic pool.

As a result, 25-28% of Russia's adult population is more of a burden to the nation, only preventing its economic development. Society has turned its back on them despite having the means to fix the situation. Demographically, Russia has more similarities with European nations, but their share of “underachievers” is three times as low, within 6–10%. To catch up with Europe, Russia could set up a support system for young parents and offer individual tuition to underperforming primary school students, along with strengthening core education in high schools. However, the Russian state has other priorities now.

Another challenge is the disastrous professional training system. No one offers retraining for employees in their forties or older, which is nothing short of a catastrophe. In Northern and Western Europe, 70% of workers aged 40-49 are enrolled in professional retraining programs, as compared to only 20% in Russia. If you’ve crossed the 40-year threshold, you’re a “vestige of the past.” No one's in a hurry to train you, and you can't improve your qualifications. Your income prospects dwindle, and your country loses a qualified, experienced professional. Professional training for young workers is also lacking – not to mention that the system of higher professional education has to grapple with subpar applicants supplied by the deficient public schooling system.

The best universities?

One of Russia's most coveted myths is the excellent quality of its general and higher education. Reality disproves it, though.

What made the Soviet education system different from its Western counterpart? The Soviet Union had good schools, mediocre higher education, and abysmal postgraduate programs. In the U.S. and Europe, the reverse was true. Many schools were average at best, but colleges offered many solid graduate courses, and postgraduate courses were always excellent.

The further you progressed along your education path in the West, the more qualified you became. As a result, researchers from among yesterday's graduates could go on to become Nobel laureates.

The Soviet Union had good schools, mediocre higher education, and abysmal postgraduate programs. In the U.S. and Europe, the reverse was true

The Soviet Union had bright school students, who entered subpar, outdated colleges, and postgraduate courses were even worse. None of this is news; the drawbacks of Russia's postgraduate education are common knowledge. There was a solid attempt at changing the system when the Moscow Institute of Physics and Technology emerged, and many of its students quickly found employment at research facilities, but this model was never replicated.

Since then, things have only gotten worse. The quality of schooling has grown even poorer, with Russian schools ranking 31st–33rd among 79 countries, according to 2018 PISA tests in several fields. In 2022, Russia didn't participate in the study due to the war.

The quality of higher education, including the PhD level, has also dropped. Thus, from 2010 to 2021, the number of colleges offering postgraduate programs dropped by 3.4 times; the number of available Ph.D. positions decreased by 1.9 times; the Ph.D. graduation rate plunged by 2.4 times, and the number of Ph.D. students who graduated by defending a thesis fell even lower, by 6.4 times.

The Soviet legacy

The Soviet Union inherited a solid, if not vast, pool of Russian Empire's scientists and professors capable of raising new generations and thus building capacity for the young economy. To make it happen, the government had to meet several objectives that hadn't been met before 1917, namely:

  1. Ensure universal schooling
  2. Speed up urbanization
  3. Build an extensive network of scientific, project-based, and academic establishments.

The Soviet Union indeed met all of these objectives – while delivering a series of devastating blows on its human capital and causing millions of deaths due to famine, repression, and excessive losses in World War II that resulted from the Soviet military strategy. Even according to Russia’s Ministry of Defense, “the ratio of losses on the Soviet-German front should be estimated as 1.2–1.3 : 1 in the Germans’ favor.” Military historians set the first value even higher, at 1.5.

The Soviet Union delivered a series of devastating blows to its human capital, causing millions of deaths

Still, even considering the immense loss of life, the post-war USSR retained its capacity-building potential, being home to many brilliant scientists and pedagogues born at the turn of the 20th century. The 1946 directive by the Council of People's Commissars “On Raising the Salaries and Improving the Living Conditions of the Academia” also played its part. Apart from making a career in teaching and research possible, the Soviet government offered tangible benefits to those who chose it.

The situation took a tragic turn in the late 1970s – early 1980s. One by one, Soviet scientists born in the early 20th century were leaving the scene (of the most renowned Soviet physicists, only three were born after 1921: Andrei Sakharov, Nikolay Basov, and Zhores Alferov). Even then, it would already have taken a great effort to develop research establishments and colleges to keep up the level of the departing generation.

However, the government limited itself to building a handful of naukograds – small towns for researchers exploring mostly areas deemed important for the defense industry. The list of naukograds included Arzamas-16 near Gorky (currently the town of Sarov, Nizhny Novgorod Region) and Krasnoyarsk-26 (currently Zheleznogorsk). Some were exceptions to the rule, such as Dubna outside Moscow, a textbook naukograd specializing in peaceful nuclear applications and welcoming foreign researchers even in Soviet times. The most ambitious project of building civil research infrastructure from scratch is the Siberian branch of the Academy of Sciences in Novosibirsk – but that achievement dates back to 1957.

As early as in the 1970s, the overall quality of Soviet academic and teaching staff began to falter, along with their income and standing in society. In the 1990s, this stratum sustained a particularly heavy blow, which was never duly compensated. Notably, in 2021, Vladimir Putin demanded that the Minister of Finance Anton Siluanov and the Minister of Science and Higher Education Valery Falkov enforce the execution of his decree on raising academic salaries to 200% of the regional median. This happened after he received a complaint from Anastasia Proskurina, a young scientist from Novosibirsk, who informed the head of state that her monthly salary as a senior researcher amounted to $278 – or $356 including bonuses. She also explained that, following the presidential decree on the pay raise, many research associates were asked to work part-time – so that the new payroll targets could be met “within the existing budgets.”

As early as in the 1970s, the overall quality of Soviet academic and teaching staff began to falter, along with their income

Having taken the leap from a planned to a market economy in the 1990s, Russia was nevertheless stuck with a bureaucratic approach to governance in academia. Without Soviet funding and in the absence of a developed market or civil society, the state remains the main client, but the client is inefficient, retrograde, and toxic. The 2020 Accounts Chamber report on the state of Russian science backs this conclusion.

1. Ranking among the world's top five countries by the number of jobs in academia and top ten by R&D spending, Russia still lags far behind the leaders by the number of patents: the U.S. registers 16 times as many patents as Russia, and China, an amazing 38 times.

2. Although Russia's R&D spending has been on the increase, it is yet to exceed 1.1% of its GDP, whereas global leaders are spending over 3% of theirs.

3. Russian science is mostly government-funded, and the share of private funding dropped from 33% to 28% in 2000-2016. The world’s leaders are showing reverse trends.

4. Russian R&D governance is “failing to create an independent scientific and technological basis” for ambitious projects and in response to the “major challenges” faced by society and the state; nor does it “serve as a driver of social and economic development.”

Russia’s “special military operation” scores own goal

In today's Russia, the already grim landscape has been aggravated by the “special military operation” in Ukraine, which has dealt a severe blow to the system of building and expanding human capacity. Russia is doomed to see its industrial processes degrade, as confirmed by the Bank of Russia in its forecast of a “reverse industrialization”. In reality, this carefully chosen expression stands for a decay of technology, a lack of access to innovation and advice from foreign partners, and the manufacturing of outdated products with decrepit equipment, Essentially, the Bank of Russia predicts the country’s imminent descent into the past.

The Bank of Russia forecasts a “reverse industrialization”: we're moving toward the past

Industry experts have also observed a decrease in qualification requirements in the labor market. Vladimir Gimpelson, the director of the Center for Labor Market Studies at the HSE, states in his article that enterprises replicate old technologies and look for old knowledge, not innovation, in their prospective hires. That is, according to Gimpelson, we may witness the loss of a significant share of human capital that was created earlier with a view to its application in an open economy integrated into global supply chains.

To sum up, Russia's human capital is facing eight types of threats that are likely to cause its further degradation:

  • A decline in the young population for demographic reasons
  • A decline in the young population due to war losses
  • A decline in the young population due to the emigration of those unwilling to take up arms
  • Intensifying repression against scientists, high treason charges, restricted communication with foreign colleagues
  • Extremely complicated access to foreign research equipment and materials
  • A “reverse industrialization” characterized by a return to simpler technology and products
  • A decrease in real science and education spending due to an inflated military budget (in 2024, Russia is to cut the budget of its federal research infrastructure program by half)
  • A lack of deferment from the draft for Ph.D. and doctoral-level researchers and professors (“The legal directorate of the State Duma has not supported the bill on exempting candidates and doctors of scientists from mobilization”)

Two recent events aptly illustrate these factors.

First, the Russian Science Foundation canceled the grant renewal contest for research institutes and universities in 2023 due to budget constraints.

Second, Vladimir Putin met with young scientists and promised them only to raise their postgraduate scholarships. He also lamented the lack of funds to expand the young researcher support program. As he said, such an expansion would require federal funding, and allocating the necessary amount “would be a challenge.” He also added: “But the mechanism is simple: money on the table. We must tell Siluanov [the minister of finance]: ‘Give us the money.’ He’ll whine: ‘I have none.’”

As a result, the hope that Russia's human capital can compensate for deficiencies in other growth factors is vanquished. As much of an optimist professor Auzan is, even he recently stated:

“Russia has never incurred as much damage as now from the mass exodus of qualified professionals abroad. Recreating this level of professionalism, skill, and so on will take from seven to ten years, and that's if the outflux doesn’t continue on a significant scale.”

One can hardly argue with his assessment.

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