News that employees at various Russian companies are suffering wage arrears hit the national headlines in Russia – a worrying sign from a government that claims to have stabilized the economy in the face of Western sanctions. In Yekaterinburg, the Ural Compressor Plant was months behind schedule in paying its employees due to failed export contracts and frozen partner accounts. Then she decided to cut wages from October. The Inskoy coal mine in the Kemerovo region went bankrupt in part due to sanctions against Russia’s coal industry and financial transactions. Medical workers in the Altai Territory and construction workers in the Irkutsk region complained about late payments. Drivers at a transport company in St. Petersburg protested in July after the company halved their wages. In late August, employees at CNII Electronica, a contractor for state tech giant Rostec, sent a wage arrears lawsuit to Vladimir Putin himself. The State Air Traffic Management Corporation said it may not be able to hand over due to Western sanctions and the ongoing impact of the COVID crisis has the funds to pay salaries due in September.
Wage arrears are nothing new in Russia. If you look at the statistics from the state statistics agency Rosstat, they don’t even pose a particularly big problem right now. On August 1, the total amount of wage arrears was 732 million rubles, compared to over 1 billion in April, which is itself less than half of what was recorded during the height of the COVID crisis, let alone the 1990s. While Rosstat’s figures are often questionable — the agency has changed the way it calculates inflation or real income in recent years — there’s no reason to think wage arrears are a significantly bigger problem in monetary terms than they are now a year ago.
Apart from sporadic protests and strikes in recent months, the economic situation had little impact on the campaigns ahead of the September 9-11 regional and local elections, although some of the voting took place in regions where industries had already been hit by western sanctions are, like Kaliningrad or Udmurtia. In any case, unions in Russia today generally remain weak institutions. Labor protests, as specialists such as Stephen Crowley pointed out, were mostly local. Over the past two years, the authorities have systematically and ruthlessly destroyed opposition structures that previously served as a conduit for frustration over economic problems. Polls suggested – and experience has shown – that Russians see elections as a way to relieve frustration, even if they are unfair and undemocratic. Now the Kremlin will not face another election for at least another year.
So why can growing wage arrears still pose a threat to the Kremlin? We are probably just seeing the beginning of a wave of wage arrears. In most industries, employers have so far been able to rely on savings and temporary measures such as furloughs and wage cuts in the hope that things will improve in the near future. A survey by the Levada Center in August found that most Russians still expect the economy to improve. The elites from politics and business have also postponed decisions about a major restructuring of the economy, probably in the hope that the sanctions will be relaxed at some point. But the European gas market is slipping away from Gazprom; Russian metallurgy is facing a slump in international demand and export-oriented companies are generally losing markets. With a deficit skyrocketing in the summer months, the government is considering a 10 percent cut in budget spending; Pensions, public sector wages and military spending will remain unaffected, so large development projects are likely to suffer, exacerbating the negative feedback loop in the economy.
Unemployment, which is currently officially below 4 percent, will almost certainly increase. Even Vladimir Putin himself stressed that 234,000 workers were at risk of being laid off, but the numbers could be significantly higher given the spillover effects from industries facing declining demand at home and abroad. This would hit Russian society after nearly a decade of stagnant real wages and depleted savings for most Russians. Difficulties in repaying consumer loans are increasing: in July, the total value of overdue payments reached 1 trillion rubles, a sign of upcoming troubles. The proportion of people living in poverty could reach 25 to 30 percent (from the current 18 percent), according to Abel Aganbegyan, a prominent economist.
From the perspective of the Russian authorities, three potential risks that may arise from labor protests, wage arrears and rising unemployment. The first is what we might call the “Pikalyovo trap”. In 2009, at the height of the Great Depression, protests erupted in Pikalyovo, east of St Petersburg, after three local factories were shut down. Pikalyovo was close enough to be noticed by the media, so Putin himself flew to the site to publicly berate and lecture the three owners, even hinting that one of them, Oleg Deripaska, had tried to steal him to steal a pen. Putin’s government has since attempted to reproduce this effect, including through the annual presidential call-in show, which also serves as a grand overview of the issues frustrating the populace. But as actual representative institutions are being eroded, this has strongly pushed Russians to look to the president as the arbiter of even small issues, like the recent examples of CNII Electronica and , where workers sent a direct address to Putin rather than to lower ones to contact -officials. The increase in such calls could therefore challenge the President’s authority and strain his resources. Putin has in recent years outsourced much of that responsibility to the government, where economists are tasked with proactively responding to problems.
The Kremlin has also come to rely more heavily on governors, tasked with keeping their region quiet and taking responsibility for unpopular decisions — even mobilizations — on behalf of the president. However, this system has not been stress tested in anything like the crisis that will hit Russia. Provincial officials are not immune to blind spots created by massed data and selective reporting by officials, who are assessed based on the benchmarks they report. It is also highly questionable whether, alongside currently skyrocketing military spending, the government will have the money to deal with a social crisis prioritized amidst a government budget that is rapidly turning into a deficit.
The second type of risk can be local. The economic crisis triggered by the war will eventually affect most of the Russian economy, but will affect different industries and regions other times. It is therefore likely that we will first see layoffs and wage arrears in certain regions. The data from Rosstat already gives an idea of this: Regions such as Ingushetia, Kaliningrad, Leningrad, Kaluga, but also the manufacturing and construction industries were confronted with rapidly increasing wage arrears from August. Due to the weakness of institutions such as unions and strikes, discontent often takes the form of spontaneous protests (of which a database curated by Petr Bizyukov and Jan Matti Dollbaum has collected several hundred in recent years). These can provide incentives for local elites to challenge Kremlin-appointed officials in those regions. So far, the authorities have managed these conflicts successfully, as the Kremlin tightened its control over the appointment of key regional and even local officials, while enacting repressive martial laws that make political action more costly. But as the crisis spreads and governors must rely on the business elite to share the burden of growing spending, that calculus may change.
The third risk lies in sectors affected by wage arrears. One of the reasons the above issues have made it into more than just local and regional newspapers is the importance of the sectors involved, either for their strategic value (like microelectronics or air traffic control) or for their societal importance and lobbying power (coal) . Just as in Europe, where the political impact of sanctions depends not only on how much GDP is lost, but which sectors (e.g. metallurgy) are most affected, acute problems in key sectors can also lead to bottlenecks and serious problems in Russia to lead.
Whether these risks become dangerous depends on the perception of where the journey is going. Many Russians hope that they will win the war and that the economy will improve as a result. Others believe that Russia will win and are therefore politically apathetic. Independent election observation organization Golos highlighted intimidation and paralysis as key factors stifling political competition ahead of September’s elections. However, if the Russian public loses confidence that their country will win the war, the early warning signs highlighted above, while they may look muted now, could still turn into a political minefield.
The views expressed in this article are solely those of the author and do not necessarily reflect the position of the Foreign Policy Research Institute, a nonpartisan organization that strives to publish well-argued, policy-oriented articles about American foreign policy and national security priorities.