"Soft" nationalization - Russia’s solution to labor vs. manpower optimization problem

At the XII Congress of the Federation of Independent Trade Unions of Russia held on April 4, Putin stated that Russia needs to significantly increase labor productivity (https://www.vedomosti.ru/economics/news/2024/04/04/1029880-neobhodimosti-povishat-proizvoditelnost-truda). “We don’t have much of a choice: either import labor from abroad or significantly increase labor productivity,” Putin emphasized. He did not clarify as to how it would be achieved. Common sense dictates that there are only two ways to boost labor productivity – workforce qualifications and technology. Neither of those avenues is viable in the short term, especially considering the sanctions imposed on Russia limiting access to Western technologies. However, the statement from the political perspective indicates what the Kremlin will try to portray as an “increase in productivity” – a reduction in the number of jobs across various sectors of the economy noncontributing to the Russian war against Ukraine. It is part of the Kremlin’s solution to manpower shortages at the frontlines in Ukraine and short-staffed factories producing everything necessary for the Kremlin’s political ambitions.

In 2023 Russia’s economy experienced a labor shortage of 4.8 million employees (https://iz.ru/1624816/mariia-stroiteleva/kak-zhe-bez-ruk-defitcit-rabotnikov-v-2023-godu-sostavil-48-mln). 85% to 91% of Russian companies were reportedly understaffed (https://www.rbc.ru/economics/05/01/2024/6589738d9a794798dc106898). Nabiullina, head of the Russian Central Bank, repeatedly stated that labor shortage “constrains Russia’s economic growth” and hits the hardest “industries that exceeded [pre-full-scale invasion of Ukraine] levels of production, such as mechanical engineering and chemical industries” (https://www.vedomosti.ru/economics/articles/2023/11/10/1005070-pochemu-kadrovii-defitsit-stal-glavnoi-problemoi-ekonomiki). The labor shortage trend is unlikely to change in 2024 resulting in record low unemployment rates and increased wage growth (https://novayagazeta.eu/articles/2023/10/13/nu-chto-rabotnichki). However, following Putin’s April 4 statement, on April 5 the Russian Ministry of Economic Development forecasted an easing in labor shortage in 2024 through the “Labor Productivity” national project. The project is “expected to aid twelve thousand enterprises, or 40% of companies in non-extractive industries” (https://lenta.ru/news/2024/04/05/rossii-sprognozirovali-oslablenie-kadrovogo-goloda/).

So how is the Kremlin planning to alleviate the dearth of labor driven by mobilization, emigration, expanding industrial needs, and decreasing attractiveness of Russia for migrant workers? Labor productivity is an unlikely cover for the Kremlin’s objective of gaining control of the private sector, or what is left of it, and by extension of the labor employed. Currently, the Russians still have options when it comes to employment. However, if the options in the private sector are eliminated or severely limited, military service and war-critical manufacturing employment would remain among the few that would remain. While the Kremlin has taken measures in preparation for the second phase of mobilization, such as electronic mobilization notices (https://verstka.media/kak-vlasti-budut-prizyvat-rossiyan-v-voyska-dlia-nastupleniya-na-harkov), it is still a risky political move. The announcement of the first phase on September 21 2022 led to a six percent drop in Putin’s approval rating according to Levada (https://www.levada.ru/en/ratings/approval-of-the-authorities/). Though approval ratings in isolation do not mean much in Russia, the Kremlin still keeps track of them (e.g. https://www.vedomosti.ru/politics/articles/2019/05/30/802871-v-kremle). The Kremlin likely uses Putin’s approval ratings as one of the proxies measuring political opportunism within Russia’s power circles. The lower Putin’s approval among the masses, the more likely a potential challenge to his power (https://x.com/MuKappa/status/1667916593714667523).

The spring 2024 conscription season will callup 150K (https://www.moscowtimes.io/2024/03/31/putin-postanovil-prizvat-varmiyu-esche-150-tisyach-chelovek-a126281). However, the losses in Ukraine and the planned expansion of the Russian military put personnel needs beyond the conscription numbers (https://pism.pl/publications/russias-armed-forces-two-years-after-the-full-scale-invasion-of-ukraine#:~:text=In%202023%2C%20according%20to%20the,direct%20command%20of%20the%20Navy). The conscripts are only to supplement the ranks of the Russian army – the main drive will come through “soft mobilization” via controlled shrinkage of the Russian private sector. Contract enlistment of *new* volunteers likely exhausted the pool in 2022 and 2023 reducing it to a low natural replenishment rate driven by demographic trends (people turning 18). New volunteers only include those who had never previously served. The claimed 100K of new contract soldiers is a bloated estimate and includes those who extended their previous contracts and conscripts who signed a contract, frequently under pressure (https://argumenti.ru/army/2024/04/892575). So the Kremlin needs to boost the pool of volunteers by eliminating other employment options for the population.

Since the start of the full-scale invasion of Ukraine by Russia more than 180 private enterprises were nationalized by the Kremlin. For the most part, the nationalized companies either produced military goods or were owned by foreigners and Russians who fled the country (https://www.moscowtimes.ru/2024/03/26/putin-dal-dobro-nanatsionalizatsiyu-sobstvennosti-biznesmenov-vreditelei-a125785). However, in recent months the scale of nationalization and “soft” nationalization, transfer of control from interests domiciled outside of Russia to Russian domiciles, became larger (https://www.bloomberg.com/news/articles/2024-03-29/war-in-ukraine-assets-seizure-cases-put-putin-s-tycoons-on-high-alert). Moreover, on March 26, 2024, Putin approved the nationalization of companies belonging to “pest” businessmen, those who work “in detriment to the [Russian] state” (https://www.moscowtimes.ru/2024/03/26/putin-dal-dobro-nanatsionalizatsiyu-sobstvennosti-biznesmenov-vreditelei-a125785). The definition of “pests” is open to interpretation but nationalization is all but certain. While nationalization comes with a monetary bonus to plug the holes in the Russian federal budget, “soft” nationalization allows for control of the labor employed and jobs created by the companies as much as nationalization.

Let’s consider one of the industries as an example – retail and wholesale trade. According to Rosstat, the “Wholesale and retail trade, vehicle repair” industry employed 11.2 million making it the largest industry of the economy by headcount in 2022 (https://rosstat.gov.ru/storage/mediabank/Trud_2023.pdf). Of the 11.2 million, 4.2 million were males. In 3Q2023, the industry also had one of the largest numbers of unfilled jobs at 264K, behind only manufacturing at 335K (https://issek.hse.ru/mirror/pubs/share/882792479.pdf). Note: the Rosstat and HSE numbers are not directly comparable and only serve for illustration purposes to show the relative importance of the retail and wholesale trade industry. On March 29, 2024, VChK-OGPU leaked the causes for the “soft” nationalization of Leroy Merlin and Auchan in Russia following the terrorist attack on Crocus City Hall raising concerns about the public safety of large chains (https://t.me/vchkogpu/47115). On March 24 RBC reported Leroy Merlin’s “soft” nationalization transferring control of the Russian subsidiary to the local management (https://www.rbc.ru/business/24/03/2023/641d87d59a79475e1fa0489d). On April 3 the Russian Federal Tax Authorities reportedly considered billing Auchan 181M rubles in unpaid taxes, a move that could potentially trigger the chain’s soft nationalization (https://www.rbc.ru/business/03/04/2024/660bebb39a794755435387d9). Leroy Merlin and Auchan employ 19K and 41K in Russia respectively.

However, the biggest “soft” nationalization news most recently came from X5 Retail Group, employing 325K and the largest retailer in Russia (http://bit.ly/3J6WPCC). The control of the company was transferred from a Dutch company, where Mikhail Friedman and Petr Aven are major shareholders, to a company domiciled in Russia (https://www.bfm.ru/news/547201). Most interestingly, Raisa Polyakova was appointed CEO of Perekryostok, one of the main retail chains owned by X5. Polyakova is married to Major General Aleksandr Starunsky, deputy chief of the GRU’s Information Operations Command (https://rucriminal.info/ru/material/x5-retail-group-pod-kontrolem-gru). Major General Starunsky has been a member of the scientific council of the Russian National Security Council since 2021. The scientific council is responsible for the assessment of foreign and domestic threats to the Russian Federation. The appointment of Starusnky’s wife is likely a reward for Starunsky’s “valiant” service but comes with some strings that fit the Kremlin’s agenda of labor control.

It would not be a stretch to assume that the ongoing wave of “soft” nationalization of retail chains in Russia is to gain control of the jobs created by the industry. First, the Kremlin is likely to eliminate the vacant jobs in the retail industry and make it easier for the war-critical manufacturing sector to fill their vacancies. Second, conduct controlled shrinkage of the retail and wholesale trade industry to force employees into other jobs such as contract service with the Russian military or manufacturing. The industry-specific jobs reduction would be hailed as a success of the “Labor Productivity” program. After all, a 10% reduction in the “Wholesale and retail trade, vehicle repair” industry’s employee headcount would result in 1.1M in extra labor and manpower for the Kremlin. “Soft” nationalization also makes it easier for the Kremlin to push large companies into introducing military recruitment quotas, something that was already done on a local scale (https://t.me/fontankaspb/38781). We might never see a flashy announcement of the second phase of mobilization in Russia.