“Modernization” Of Russian Monocities: Meaningless And Merciless

20.10.2009 — Analysis

Sverdlovsk Oblast authorities decided not to give financial support to industrial enterprises located in monoprofile cities. Official reason is the lack of money in the budget. The RusBusinessNews observer found out through unofficial talks that regional officials want to shift the burden of the modernization of old industrial districts onto the Federal Government. The experts are unanimous: if, when the fate of monocities is decided, authorities of all levels and business act disjointedly, the "modernisation" may turn into desolation of many populated areas.

For almost twenty years Russian authorities have been working with the problem of old industrial districts yet there is still neither a definition of a monoprofile city/town, nor a decision regarding their future, nor, more to the point, an intelligible action plan. The Ministry of Regional Development of the RF in the meantime has counted 400 monocities out of which a half is in a disastrous state, in a hundred of the situation is almost explosive. No less than a quarter of population in these areas work at enterprises which in the crisis turned bankrupt. Moreover, the proprietors of more than twenty of them do not even try to revive the business.

The Urals Federal District has 55 potentially dangerous cities/towns with the total population of 4 million people. The problem is at its worst in the Sverdlovsk Oblast (20 monocities) and the Khanty-Mansiysk Autonomous Okrug (16 monocities). Metals sector dominates the former, oil industry - the latter.

The problems began in the Mid Urals in the nineties when the domestic demand for metal dropped rapidly and aggravated in 2000's when the traditional export markets (South East Asia) started collapsing. Nothing is threatening exports from Ugra yet but according to Aleksey Pasynkov, a senior researcher of the Institute of Economics of the UB of RAS, in ten years time oil production is going to decrease and today is already the time to start thinking of where to move the excessive labour resources.

No expert can be certain whether any work in this direction has already begun. The topic of monocities itself has appeared in the Russian information space in the summer 2009 when workers in Pikalyovo blocked a trunk road and the Prime Minister Putin made a public show of meting punishment to Oleg Deripaska, the proprietor, for the non-payment of wages. This is the incident after which the Sverdlovsk Oblast authorities have passed at the first reading the bill on the provision of assistance to the economic mainstays of the region in the format of providing state guarantees when obtaining loans, subsidies to cover interest on loans, deferments on rent payments etc.

They decided to discontinue the support when the Ministry of Regional Development concerned itself with fate of monocities - the Ministry with the help of Federal targeted programmes decided to finance the modernisation of old industrial districts. The amount of investment has not been calculated yet but what is clear is that it will be large: just before the crisis monocities were responsible for 30% of the gross domestic product of the country. Some experts express doubts whether the resources for this can be found. Moreover, some specialists question the further actions of officials.

Stepan Sulakshin, the Head of the Centre for Problem Analysis and State Governance Design, reckons that the Federal targeted programmes have proved inefficient as a tool for solving economic problems. Those administering resources, in his view, are even more susceptible to corruption than the Oblast officials. Today, according to the expert's insider information, no less than 30% of money booked as the "State Defence Contract" is stolen. In the road building industry officials appropriate a whole half of the budget allocated for the construction.

Stepan Sulakshin is convinced that a law on monocities has to be passed and that this law must narrow the field for the officials' tyranny. Ten years ago such a bill has been drafted but not passed. This may be due to the fact that it envisaged the division of areas of responsibility for the fate of monocities between the regional and federal levels of authority, suggested a special mode of budget financing, and even special property relationships in the housing and services system. Today, however, according to regulation practices, monocities, including nuclear, are being measured by the same budget measure. Mr. Sulakshin reckons that all this might lead to the repeat of the situation that arose in Pikalyovo.

Oksana Dmitriyeva, a Deputy of the State Duma, former Minister of Labour, is convinced that the Pikalyovo incident demonstrated that inefficient use of property must be clearly dissociated from objective causes of decreased production. Monocities dominated by raw materials or the production of the first processing stage (this includes the majority of Russian cities-factories) have no cause to stop production. In her opinion stopping the production is possible only in special cases, for instance when the raw material being extracted runs out or when the product is totally out of date and there is absolutely no demand for it.

Experience shows that companies which survived the 1990s and were working at the time of the 2008 crisis still have future. Cities/towns where these companies are located have to revive the existing production. Even in the machine building industry which traditionally is considered non-competitive, only some sectors, like automotive, demand, in Mrs Dmitriyeva's view, a cardinal production restructuring with the use of the accumulated human resource potential.

Authorities should think about the production, and not about proprietors, reckons the expert. In the opinion of Oksana Dmitriyeva enterprises which are managed outright poorly must be bankrupted without fear. It is no use giving these monocities money - it will not go to the enterprise, but to the inefficient proprietor.

Judging by the statement made by the Deputy Head of the Ministry of Regional Development Yuri Osintsev Federal authorities are going to employ all the practices available globally in the sphere of making the economies of monoprofile cities sustainable. Experts, however, point out that the goal will not be achieved if the Ministry simply "puts the fires out" in some municipalities using the money out of the Investment Fund.

Monocities modernisation attempts have already been undertaken in the Urals before. In Gubakha, the Perm Krai, unprofitable coalmines had been shut down in the 1990s, the authorities began giving out flats in the city of Perm to the miners, but the relocation had not happened: coal miners rented out the housing in the Krai's capital and came back to Gubakha. The money allocated for the establishment of different kinds of production bore no fruit, miners had not agreed to work there.

Aleksey Pasynkov  says that the authors of the programme in Gubakha have not accounted for the psychology of the people: miners have a peculiar mentality, they would never work at a machine building plant. Moreover, the scenario with the establishment of a different production is not always possible. In Ugra, for instance, it is unprofitable to establish petroleum chemistry enterprises as it is cheaper to pump the oil to the existing refineries which are near where the key petrol and mazut consumers are. It is also impossible to set up a small innovation company in taiga, as the conditions are very specific here and there is the lack of relevant specialists. They, of course, can be attracted by high salaries, but this, in the expert's opinion, is best not done, innovations best take roots in areas where the production needs new technologies. In oil cities, as the oil production peak passes, so will stop the innovation companies' work.

This is why Mr. Pasynkov reckons that some cities/towns in Ugra have to be "disbanded" and the relocation process has to start already today. In the future, when developing new fields in the Eastern Siberia, for instance, we have to think if we should build so many cities. It might be better to just build the state of the art shift camps designed to last about 30 years. 

Yevgheniy Animitsa, a Professor at the Urals University of Economics, stresses that the state has to not only make a correct decision in a timely fashion, but also provide for the well-coordinated work of federal, regional, and municipal authorities and economic mainstays on making monocities' economies sustainable. In real life, however, this cooperation does not happen exactly like the academia plans it.

Severouralsk with its bauxite deposits causes a lot of the authorities' concern. The talks of the inefficiency of the enterprise had begun as early as in the beginning of the 1990s, but still no decision as of what should be done has been made. It is unclear whether it is better to establish new mines and work on expensive bauxites or relocate people in the nearest 15-20 years.

Roman Lukichev, the regional representative of the proprietor (UC RUSAL), does not see any cause for concern: "Severouralsk is an active city, it has not only RUSAL's enterprises, but other business too, the North and Polar Urals direction is being developed, roads are being built etc. As far as I know there are no plans to desert the city."

In the meantime Yuri Osintsev made a statement in the Federation Council that "in the conditions of crisis the proprietor of the economic mainstay (UC RUSAL) is considering options of resolving the situation, including tough measures - among them shutting down the production". 8 thousand people work at the bauxite deposit, this is 77% of employees of the industrial sector in the Severouralsk urban district which causes the city to be listed amongst those with most severe problems in Russia. Aleksey Pasynkov  claims that the collapse may happen as soon as in ten years time. 

It is possible that the proprietor of the deposit has not yet decided on further actions, it is also possible that the company does not want to agitate the mining community of Severouralsk known to be active in terms of civil actions. In any case it may play a dirty trick on the city: people living in problematic areas should clearly understand the fate of their areas and have to accept, jointly with authorities and entrepreneurs, a certain share of the responsibility for their future. "Playing blind" will most likely result in that the diversification of economy of old industrial districts of Russia will be the same as all domestic reforms have been - meaningless and merciless.

Vladimir Terletski