Labor shortage, high wages plague Russia employers

The disputes -- at Swiss food giant Nestle, French retail firm Leroy Merlin, and United Company RUSAL, the world’s largest aluminium producer -- have not yet hurt production, but alarm bells are going off.

The Russian economy has been booming for the past nine years on the back of soaring world prices for oil and commodities. Workers from the coal mines to the corner offices want to be paid accordingly. “European quality, European standards, European wages,” read one of the picket signs outside Nestle’s Russia headquarters last week, as factory workers called for a 55% raise, that would take the monthly wage to about 24,000 rubles ($1,014). Andrei Bader, head of corporate affairs at Nestle Russia, said this demand was unreasonable, considering Russian cost of living and average wages in the region, which are around 12,000 rubles according to the State Statistics Service. “There needs to be a balance between the quality of the labor and its cost... Once that balance is broken, the future of this economy loses its promise,” Bader said.

Experts say the main factor helping to push that balance towards breaking point is inflation, which hit 11.9% last year and looks set for double digits in 2008. In 2007, the economy grew 8.1%, a rate that led some to say it has overheated and will require wage controls to cool the economy and combat inflation. The government wants wage growth to come into line with the growth in productivity but Russian workers have grown used to rapid income growth, as wages have grown around 10% a year in real terms since 2000.

Western investors tend to react to these wage expectations with surprise and dismay, said William Schofield, head of human resource services at PricewaterhouseCoopers in Russia. “The local human resource people make proposals, and (the investors) fall off their chairs in the West,” he said. He expected no let-up in pressure on wages as the Russian economy continues to grow. “The trend will clearly be upwards.” Euro zone nominal average gross annual earnings for industry and services grew 15% between 2000 and 2005, while in Russia nominal average wages grew almost five-fold in the same period.

ONLY GETTING TIGHTER

Ford Motor Co, one of the most vocal advocates of foreign investment in Russia, got a first-hand taste of Russian labor trends last December when a major strike brought its St. Petersburg assembly lines to a halt. Hundreds of workers initially called for a 50% raise from the US automotive giant. The demand was negotiated down to 16-21%, but the message to Ford and its peers hit home. “It is already a very competitive (labor) market out there,” said Heidi McCormack, head of new business development at General Motors in Russia. So a key question for large-scale producers is how long they can stand the wage pressure, she said. “Does your project end in eight years, or do you have long-term viability? That’s up to each manufacturer,” McCormack said.

For Russia’s umbrella group of labor unions, the All-Russia Trade Unions, the climate of high wage expectations has helped bring membership to 28 million people, or half of the working population, said the head of the organization, Mikhail Shmakov. In the next two to three years, Shmakov said average wages would reach European levels of about 70,000 rubles per month. “Will this scare away foreign investors? Yes, absolutely. This is what we need, to scare away the speculators and slave traders. The responsible employers will stay,” Shmakov said. “Russian workers are not Chinese workers. We will fight.”

Foreign investors have flocked in recent years to China and India, where an enormous supply of cheap labor has allowed them to lower costs drastically. Russia’s position is radically different with labor in short supply. “There is simply no one to work here, especially specialized workers, skilled workers. This is a systemic problem in Russia,” said Nestle’s Bader.

The data suggest it is only getting worse. The Russian population has been in decline since 1996, while the number of people older than 65 has increased by 12%, according to the State Statistics Service. Over roughly the same period, the number of man-hours lost each year to strikes has grown eightfold, reaching an average of 1,231 hours for every employer affected in 2006, when the service last published strike figures. (Reuters)