Global Investing

Russia’s people problem

President Vladimir Putin is generally fond of blaming the West for the ills besetting Russia. This week though, he admitted in his State of the Nation speech that the roots of Russia’s sluggish economy may lie at home rather than abroad.  The government expects the economy to expand a measly 1.4 percent this year (less than half of the growth the US is likely to see) and long-term growth estimates have been trimmed to 2.5 percent a year.

Much of that is down to the lack of reform which has left many big companies in the state’s (generally wasteful) hands, weak rule of law that deters investment and capital flight to the tune of tens of billions of dollars a year. Yet there is another factor that could be harder to fix — Russia’s poor demographic profile. The population started declining sharply in the early 1990s amid political and economic turmoil, falling by 3.4 million in the 2000-2010 decade, according to census data. The impact is set to be felt sharply from now on, exactly when children born in 1990s would have started entering the workforce.

The consequences are already being felt. Russia will close more than 700 schools this year for lack of pupils and the jobless rate has dipped to a record low of around 5 percent, not because the economy is booming but because the country is running out of people who can take the jobs.

Russian bank VTB estimates that the labour force will shrink at the rate of 0.3-0.5 percent a year over the next decade. And Natalia Orlova, chief economist at another Russian bank, Alfa, (the source of the above graphic) says that in 2013, the labour force will have shrunk by 800,000,  a decline that she expects will gather momentum and ultimately end up at 2 million a year.  Not only will the labour force shrink by 3 percent between 2013-2016, but the share of skilled employees in the workforce has halved over the past decade, she says:

The demographic wave is coming into the market. For the past five years, it was not felt by companies. Now we will see the impact of the population decline as more people become pensioners and fewer young people come to the jobs market. The growth rates of the past decade coincided with better demographics of the 1980s. So we have at least 10 years ahead that should be very painful.

Perfect storm brewing for the rouble

A perfect storm seems to be brewing for the Russian rouble. It has tumbled to four-year lows against a euro-dollar basket. Against the dollar, it has lost around 7 percent so far this year, faring better than many other emerging currencies. But signs are that next year will bring more turmoil.

While oil prices, the mainstay of Russia’s economy, are holding up, Russian growth is not. It is running at 1.3 percent so far this year and capital outflows continue unabated — $48 billion is estimated to have fled the country in the first nine months of 2013 compared with $55 billion in 2012. Russia’s mighty current account surplus has shrunk to barely nothing and could fall into deficit by the middle of next year, reckons Alfa Bank economist Natalia Orlova. Finally, the rouble can no longer count on the central bank for wholehearted day-to-day support. FX market interventions cost the bank $3.5 billion last month  but it also shifted the exchange-rate corridor upwards six times, indicating it is keen to move to a fully flexible currency.

Orlove also estimates that around $150 billion in overseas debt payments are due in 2014 for Russian corporates. She adds: