Economist: Russia's economy is suffering extremely because so many skilled workers are fleeing

Getty/ALEXANDER KAZAKOV

Russia's biggest problem has nothing to do with sanctions or declining energy trade. Its biggest dilemma is losing its mostly highly skilled workforce flying in the third year of the grueling Ukraine war.

Richard Portes, an economist at the London Business School, foresees a bleak future for Russia as the country remains embroiled in a war with no end in sight.

Portes predicts that the future will be shaped largely by the countless Russians who have already fled the country, as Russia lost around a million of its own citizens in the year since invading Ukraine.

Many of these citizens belonged to Russia's youngest and most educated population: 86 percent of those who left Russia in 2022 were under 45 years old. And 80 percent of those who left the country have a higher education, according to an analysis by the French Institute of International Relations.

In 2022, Russia quickly lost $42 billion in personal savings

Many of those who left Russia also belonged to the wealthy groups of Russian society, and they took their money with them. In 2022, the country lost almost $42 billion (€38 billion) as Russians transferred their personal savings abroad.

These losses have accumulated into a brain drain of Russian talent, the effects of which are already being felt acutely, Portes said, adding that it will exacerbate other problems facing Russia, such as the growing inflation crisis.

“Regardless of the outcome of the war, in five years Russia will be exhausted, will have used up its material capital, except for the defense sector, and will have lost a huge amount of knowledge capital, human capital,” Portes told Business Insider. He added that he believes the Russian economy could deteriorate over the next decade: “What matters most in a modern economy? It's these well-educated people, no matter what sector.”

The loss of the best minds

It is difficult to replace well-educated or skilled workers. “Especially because the loss of these workers means there is no one to pass on their knowledge to the next generation,” says Portes.

Therefore, it is believed that the effects of brain drain in Russia will be felt in the long term, and it is predicted that the country's growth will soon stall as the source of innovative people is defeated.

“Take someone who invents something or develops software 10 or 15 years after graduating from college. That way, someone cannot be replaced by a new graduate,” says Portes.

The longevity of the brain drain makes the problem more serious than, say, inflation, which could be addressed by central bank maneuvers. Increasing Russia's supply of skilled and well-educated workers may be difficult, Portes said, especially as Russia loses men on the battlefield and continues to struggle with its decades-long population decline.

According to estimates by the Institute of Economics of the Russian Academy of Sciences, Russia will be short of around five million workers in 2023, with sectors such as manufacturing, construction and transport showing the largest deficits.

According to the CEIC, labor productivity in Russia also fell by more than three percent last year.

At the same time, patent applications in Russia fell by 13 percent in 2022, and patent applications from foreign applicants fell by 30 percent, according to data from the Russian Patent Office.

Russia could be “reduced to a resource economy”

“Over the next decade, the Russian economy could become one that depends mainly on its natural resources and less on the most innovative industries,” says Portes. This is also in line with the predictions of other economic experts who warn that the Russian economy could be deindustrialized by the drain on resources caused by the war.

This also means a poorer quality of life for Russians, says Portes, as the quality of all areas from education to healthcare to public services declines.

“It will be reduced to a resource economy, an economy of natural resources,” he said of Russia’s future.

Other economists have issued similarly dire warnings. According to an analysis by a European economist, Moscow's finances are currently so strained that the country probably cannot afford to win or lose the war. A UC Berkeley professor told Business Insider that Russia could enter a severe recession by the end of the year.

That's a stark contrast to what Russia was like in the 1990s and early 2000s, Portes said, when growth was strong and investment in the country was flourishing.

“Russia was highly developed in some ways,” he added. “You can go from that level of development to an economy that is rotting away, and that's not difficult if you really want to do it.” And that's exactly what's happening, unfortunately.”