Daniel Lubetzky

This article provides some proof that, Putin’s KGBesque bravado aside, Russia’s economy is a house of cards waiting to fall.

October 17, 2009

Op-Ed Contributor

Darkness on the Edge of Monotown

By LEON ARON

Washington

VIEWED from the outside, things have been going quite well for Russia recently. The United States has scrapped, at least for now, the plan to base missile defense sites in Poland and the Czech Republic. Germany and Russia seem to have overcome opposition in Europe to their Nord Stream pipeline, despite fears that it will solidify Russia’s dominance of the European natural gas supplies. Oil prices have recovered from the disastrously low — for Russia — levels of last winter. And, far from buckling under pressure from the United States over sanctions against Iran, Russian leaders felt confident enough to concede almost nothing to Secretary of State Hillary Clinton during her visit to Moscow this week.

Yet on the inside the country remains dangerously close to a serious breakdown of authority. In addition to the Muslim North Caucasus, which is already barely governable, the most vulnerable places are the company towns, which could catalyze a nationwide explosion of political turmoil.

Products of Stalinist industrialization, an estimated 460 company towns grew around a single plant or factory. Hence their Russian designation: “monotowns” (monogoroda). Most were erected, often by prison labor, in the middle of nowhere and in complete disregard for long-term urban viability, not to mention the needs and conveniences of the workers and their families. In addition to being the single employer, these “town-forming enterprises” are responsible for providing all social services and amenities, from clinics and schools to heat, water and electricity, for populations of 5,000 to 700,000. (There are also more than 1,000 similar but smaller “workers’ settlements.”)

These crumbling monotowns seem frozen in the 1930s or ’50s; the fat years of 2000 to 2008 have passed them by. Worse yet, many of these places were among the first victims of the plunge in industrial output last year, when production fell by almost 20 percent — a rate of decrease unseen since 1941 and 1942, the years of the Nazi onslaught. As a result, the “town-forming enterprises” have begun laying off or furloughing workers, and salaries have been cut, delayed or unpaid for months.

For most Russian workers, there are unemployment benefits from 850 rubles to 4,900 rubles ($29 to $167) per month. (For those in the severe climate zones of the Far East, Far North and some regions of Siberia, the payments are as much as twice these amounts.) As many as two-thirds of the unemployed seem to be unaware they are even eligible for these payments, so of the estimated 6.5 million unemployed in Russia (nearly 10 percent of the work force) in July, only 2.194 million registered for benefits. And not one of the many reports about or from the monotowns that I have read so much has mentioned unemployment benefits as a source of sustenance.

At the same time, the local administrations in many regions have been of little help, having been bled dry by recentralization efforts during the presidency of Vladimir Putin that redirected 70 percent of local revenues to Moscow. As a result, some grocery stores have been forced to stop offering credit to customers who have not been paid for months. In particularly hard-hit monotowns, people are reported to be eating potato peels and spending their days foraging in forests for roots and berries to consume or sell for a pittance.

In Pikalevo, a monotown of 22,000 near St. Petersburg, citizens grew desperate after the shuttering of their plant, which produced cement, aluminum and potash. There were no prospects for work; people were without assistance of any kind. A resident told a reporter over the summer: “We are eating — excuse me — grass. It’s shameful.” But when the town’s heat and hot water were shut off in May — the cement company had stopped paying the bills — it was the last straw. After an occupation of the mayor’s office brought no relief, angry Pikalevians blocked a major highway.

A few days later, Prime Minister Putin traveled by helicopter to Pikalevo. Russian crisis management techniques haven’t changed much since the days when czars threw boyars off the Kremlin walls to be torn, limb from limb, by rebellious hoi polloi below. With national television cameras rolling, Mr. Putin berated the local administration, plant managers and the plant’s owner, Oleg Deripaska, formerly Russia’s richest man, whose BaselCement conglomerate is now almost $30 billion in debt. He then ordered them to sign a pledge to reopen the plant. “I did not see you sign!” Mr. Putin barked at Mr. Deripaska. “Come here and sign!” (“And return the pen!” Mr. Putin snapped afterward.)

Of course, neither Mr. Deripaska nor the local government will be able to keep an all-but-bankrupt enterprise open for long. And while the Kremlin’s iron grip on the national news media has helped keep the monotowns out of the spotlight, Mr. Putin’s very public intervention in Pikalevo is likely to encourage more protests across the country.

This could be catastrophic: after all, a quarter of the urban population — 25 million people — live in monotowns and produce up to 40 percent of Russia’s G.D.P. And these struggling workers embody Russia’s work force: largely immobile, because the lack of affordable housing makes it impossible to seek employment elsewhere, and sadly inflexible, thanks to their overdependence on these paternalistic, enterprise-based social services, part of what President Medvedev has denounced as the “Soviet-style social sphere.” Indeed, the monotowns seem more and more a bellwether of the national trend toward deepening impoverishment and further job losses.

According to the World Bank, this year the number of Russians below the poverty level has grown by 7.5 million to 24.6 million, or 17 percent of the population. An additional 21 percent, or almost 30 million, have incomes less than 50 percent over the poverty level. Together, that’s 4 out of 10 Russians. The Federation of Independent Trade Unions predicts that up to 400,000 more Russians may become unemployed in the next three months, while the World Bank projects that the unemployment rate there will reach as high as 13 percent by the end of the year.

Moscow has only one obvious option: increase its financial assistance to the monotowns many times over. But there are numerous impediments to making this happen. First, with the memories of the hyperinflationary 1990s still fresh in everyone’s mind, the Kremlin is wisely reluctant to print money and will instead try to stretch its remaining hard currency reserves to plug the growing budget deficit.

Second, though Russia already plans to raise $17 billion by issuing Eurobonds and to borrow billions more from the World Bank, the money will not materialize until next summer at the earliest. The other Group of 20 nations are themselves too strapped for cash — and too politically skittish — to produce an emergency assistance package.

Finally, even if the needed money was miraculously available today, it would take some time to disperse such enormous amounts among the hundreds of monotowns. Which is why the government’s mid-August decision to appropriate 10 billion rubles, or $340 million, for assistance to just half of the communities was not only too little but is too late.

There may, in fact, be nothing that can be done to prevent these ticking time bombs from exploding. And as the Iranian protests recently proved, in an age of cellphone cameras and the Internet, one demonstration in one monotown could ignite a wave of nationwide protests that Russia’s news media could not cover up, its riot police could not properly contain and its government may not be able to survive.

Certainly, this crisis sends a message of utmost urgency to a country still groggy from the oil-boom intoxication of the past eight years: go back to the decentralization and democratization reforms of the 1990s and early 2000s — or face the political, economic and social calamity of the monotowns on a national scale.

In fact, President Medvedev recently outlined a strategic reform agenda to break Russia of its “humiliating dependence” on oil and gas exports and transform an economy incapable of invention and innovation into a world leader in “new technologies.”

Just as helpful for the country’s stability and progress would be the next item on Mr. Medvedev’s agenda: developing a political system that is “open, flexible and internally complex.” This would be a Russia far different from the one that Vladimir Putin bequeathed to Mr. Medvedev — a nation stripped of the much-needed shock absorbers of democracy, including an uncensored news media, a responsible and viable political opposition in the national Parliament and genuine local self-governance.

Mr. Medvedev should act on these plans decisively, now, or else no foreign policy advances or new gas pipelines will prevent the disaster of the monotowns from consuming all of Russia.

Leon Aron, the director of Russian studies at the American Enterprise Institute, is the author, most recently, of “Russia’s Revolution: Essays 1989-2006.”