Crisis and discontent in Russia’s regions

Andrei Starodubtsev
11 February 2009


"Crisis?" my colleagues from the regions used to say, "what crisis? It's just you lot in the capitals getting up to your tricks. Here, it's all calm!" But by January 2009 these comments had stopped. I was hearing more and more about forced holidays and factories stopping work, either temporarily or for good.

The regions of Russia are so different that they are almost like separate states.  How are they reacting to the global economic crisis? Which regions are suffering most? For which is it simply more of the same? Will the global crisis affect all of Russia? Does it threaten our state?

The experts agree that the regions which have suffered most are the most developed, being the ones most connected with the global finance and the global economy.  The first victims were, as we know, the financial sphere, export-oriented oil and gas companies, and metallurgy.

In the autumn 2008 alarming news began coming in from the regions where these industries are a vital part of the economy - the Vologda, Lipetsk and Chelyabinsk Oblasts, the Yamalo-Nenets autonomous district, the Tyumen Oblast, the Republic of Komi and even Moscow. Regional budgets were suffering from the drop in tax revenues; unemployment was rising, everyone was feeling the pinch.

The Vologda Oblast and single industry cities

The Vologda Oblast is the worst-affected region in Russia. It is a classic example of a region where one production industry dominates all others. About 40% of the regional budget's tax revenue comes from OAO Severstal, whose parent company, the Cherepovets Iron and Steel Works (CISW), is located in Cherepovets, the economic centre of the oblast.

The role of Severstal is not limited to paying taxes and providing jobs. In line with our old Soviet tradition,  as well as Putin's principle of corporate social responsibility, Severstal supports social projects not only in Cherepovets but throughout the Oblast.  As a result, the Vologda Oblast is one of the most economically and socially developed regions in the country.

The crisis began in October.  Falling prices on the international market and a drop in orders led the CISW to cut production by a quarter. According to the local media, by the end of 2008 the Cherepovets employment centre had learned that 7,000 people had been laid off.  5,600 of these were from the metallurgy industry.

Cherepovets illustrates the situation that has developed in most single-industry cities. According to the Institute of Regional Policy (IRP), over 20% of the population of Russia live in single-industry cities, and the factories in these cities account for more than 40% of Russian GDP.  Before the crisis, they spent 10-15% of their profits on social programmes in these cities and the regions.  Now, as we see from Cherepovets, the factories are not making enough money to sustain the existing number of jobs.  Big companies like this will respond by abandoning some of their social responsibilities. In 2009, according to the IRP, they will no longer be financing 20% to 45% of their usual social commitments. With inflation and unemployment rising, the state may end up with around 500 "hot spots", which it will find extremely difficult to extinguish.

The blow could have been softened by diversifying regional economies. Governors have been talking about the need to do this since 2000, but such measures as have been taken, regionally or nationally have been completely ineffective.

Moscow's crisis

The present crisis demonstrates that the strength of a region may become its weakness. Moscow confirms this thesis. While St. Petersburg and other regions have developed considerably, the Russian capital remains not just the political, but the financial and economic centre of the country.  Major financial and industrial holdings have their managing companies located, or at least registered, here.  Key banks and investment companies are concentrated here. It is in Moscow that the consultancy and service spheres are most developed and major development projects are realised...

The first victims of the crisis were banks and investment companies. But whereas major Russian banks were able to gain support from the state, medium-size, small and foreign banks had to start laying off staff. The second wave of the crisis hit factories and the service sphere, which were unable to take out additional loans, and so were forced to cut costs by, among other things,  laying off  staff.

Optimisation primarily affected those services not directly connected with the company's production activities - technical staff, secretaries, PR specialists etc. This problem affects cities with a population of over 1 million whose high earning capacity in previous years has spawned an army of employees maliciously known as "office plankton". Even giants like Gazprom and Russian Railways have  announced lay-offs of administrative staff.

The public sector in Moscow is seriously threatened. The authorities say that welfare expenditure will not be reduced under any circumstances. But the revenue of the city budget will be significantly reduced.  2007 data show that 66% of city revenue came from tax on profits.  In 2009 collection rates will be much lower, so the city government will have to make a choice between investment projects and social expenditure. We can assume that the interests of preserving social and political stability will predominate over those  of development.

The power of the weak

The other regions hardest hit by the crisis are those where there is a concentration of engineering plants - the Orlov, Nizhny Novgorod, Kaliningrad, Ivanovo and Vladimir Oblasts, etc. Production has dropped, as have all associated activities. However, the economies of these regions are usually more diversified, which allows the authorities to preserve social stability.

The so-called "weak" or "depressed" regions have been least affected by the crisis. The majority of developed regions show negative figures for industrial production at the end of 2008.  In the Republic of Dagestan, however, the figure is +52.5%, and in the Kabardino-Balkaria Republic +34.1% (comparing November 2008 with November 2007). Of course, these regions should not be seen as new leaders - their absolute figures are extremely modest. Where the regional economy is small, increased production at one or two factories of average size by Russian standards gives significant results like these. But relatively speaking, these regions are in a winning situation.  They are only marginally involved in international finance and economics and depend heavily on aid from the federal budget. As long as the federal government has enough resources to cover its obligations under the current budget, the crisis will have a minimal effect on those in "weak" regions. As Natalya Zubarevich neatly put it, "if you're lying down, you've nowhere to fall".

Of course these regions do not live in a vacuum. The systemic crisis ravaging the economy may have a painful effect on growth points that have emerged over recent years in all the regions.  But the poorer regions have few such growth points. Things may be very hard for people, but it is unlikely that federal reserves will be directed to saving them. This is how success is rewarded in Russia.

The collapse of centralisation?

As can be see from the above, the hopes of the regions in the near future lie with the federal Centre. It is the federal government that helps the largest and hardest-hit enterprises and distributes financial aid among the regions. However, managing the crisis "manually" may lead to unpredictable results.

On 14 December 2008 in Vladivostok there was a big protest meeting against the increased duties on foreign cars which had just been announced by the Russian government. The automobile industry has been one of the hardest hit. Banks have either completely stopped giving loans for cars, or significantly increased interest rates, which has led to a drop in demand for cars. The government has responded with a programme to support the national automobile industry.  One of the measures was to raise customs duties on foreign cars for a nine-month period. Duties on cars that are less than five years old were to be increased by 25%-30%, and for cars older than five years by 80% (the precise figure depends on the volume of the car engine).

Protests by car-owners are common here, to the east of the Urals.  There are frequent protests against renewed attempts to prohibit right-hand drive cars, which a very common sight in Siberia.  However, this time the 1,500 people who came to the protest were not content with just a rally - it soon turned into a demonstration with anti-government slogans and the main city roads blocked. On 20-21 December it was decided to hold additional protests, but the activists were brutally dispersed by the police.  According to some reports additional forces had been specially sent from Central Russia, as the local law-enforcement agencies had allowed the spontaneous protest on 14 December to go ahead with almost no hindrance.

Why did people react so strongly? The sale of used Japanese cars is one of the most important "grey" industries of the Primorye (far east) region. Many people living in border regions of the Far East lost their jobs in the 1990s and went into this lucrative business.  According to some expert assessments there are as many as 150,000 Russians selling used cars imported from abroad. In the Far East, used foreign cars compete directly with new Russian cars.  Foreign cars are highly valued and the new duties put them out of people's reach.  Hence the universal support of the protestors.

Social explosions in the Far East are especially dangerous if only because there are always populists and radicals among the protestors, who say that Russia's policy towards the eastern part of the country is colonial and press for for Far Eastern sovereignty.  When this happened on this occasion the federal authorities tried to exploit it.

In January 2009 a report appeared in the press that the Analytical department of the State Duma Administration had prepared a briefing document.   According to this document the protests in Primorye had been initiated by "certain international forces" with the goal of separating the Far East from Russia. This was clearly an attempt to explain these incidents to Russian society.

However steps like this are potentially very dangerous. For a start, since this interpretation of the events ignores the real causes of the protest, it may cause even greater dissatisfaction with central government among the local population. Secondly, by introducing the idea of possible secession into the public discourse, Moscow may inadvertently have made the idea more real for the people in the eastern regions. Taken together with a reluctance to cancel increased duties on foreign cars such press reports seem rather short-sighted.

The situation in Primorye is further complicated by the fact that the region is experiencing the same difficulties as the other regions of the country. Falling world prices for lead, zinc and wolfram meant that the first victim of the crisis in Primorye was the mining industry. Employees are being fired from factories or sent on unpaid leave, and production suspended. So those who have been selling foreign cars have no chance of finding other paid work.

Primorye witnessed the possible consequences of this two days before the first December protest by car-owners.  In the depressed town of Spassk-Dalny a group of young people spent all night smashing shop windows. What caused this incident hardly matters - it might have been television reports of the disturbances in Greece, or a conflict between criminal groups. But there are fears that in the crisis conditions, many Primorye towns may become new Spassk-Dalnys.

However, the Primorye case illustrates the possible dangers faced by central government. Over the last ten years a new relationship has been established between the federal centre and the regions. Centralisation has been justified by the need to make the state more manageable and effective. In practice, these reforms resulted in the lack of any feedback - the banal hallmark of excessively large, complicated, centralised systems. The crisis may, in its turn, produce the means whereby public opinion is communicated to the federal authorities.

What forms will this take? Only time will tell whether the present means of governing the regions be able to cope with the dissatisfaction that has built up there.

Andrei Starodubtsev is a research associate at the Center of Modernisation Studies at the European University in St. Petersburg

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