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Yaroslavl: A Russian Burg Turns Bearish


Tensions rise and hope diminishes in a recently robust city that finds itself grinding to a halt

Yaroslavl, Russia - Tempers are fraying at the Freedom Road job center in the Russian city of Yaroslavl. "It's not my fault your staff is incompetent!" a burly, red-faced man in a fur hat shouts at a dour woman behind a desk. People in heavy winter coats crouch over questionnaires, huddle around counters, and cram the corridors waiting their turn. There's shoving and scuffling in the crush.

The agency, it seems, isn't used to handling so many job-seekers. Until recently the biggest problem facing companies in the city of 600,000 was an acute labor shortage. That has all changed. "Companies are cutting back," says Nataliya Kuznetsova, a job counselor at the center. "Everyone who comes here is despondent."

The whole country is now reeling from what Russians call the krizis, or crisis. Moscow was hit hard and fast by the downturn. Now the pain is spreading to far-flung industrial cities such as Yaroslavl, 150 miles northeast of the capital, where auto-parts manufacturers and multinationals Eastman Kodak, Japanese heavy-equipment maker Komatsu, and German publisher Bertelsmann have set up shop.

On the surface, the 1,000-year-old city on the Volga doesn't look like it's facing hard times. Gold-domed monasteries and churches peek out from under the snow. On the busy Moscow Highway, a Home Center hypermarket, showrooms for Ford (F) and General Motors (GM), and new apartment towers stand as testament to Russia's boom.

But look more closely, and the prosperity seems to be fading. In the city center, cafés and bars are empty. Bulldozers and cranes stand idle at a half-built shopping center. And utility bills in Yaroslavl jumped by 30% in January, while inflation overall is running at about 15% annually.

On Oktober Prospekt, on the edge of town, Yaroslavl Motor Works (Avtodizel) is eerily quiet. A sign announces the plant's founding in 1916, while a digital clock and thermometer reveals that the temperature is a brisk -12C (10F) at 1 p.m. The facade still sports a large picture of Lenin, marking an award won during its Soviet heyday. Back then, the factory employed 40,000 workers. It still has 11,000, but on a recent Friday just a few office staffers are on hand. Orders for its diesel engines have fallen by 75% since the summer, forcing Avtodizel to shed 3,000 jobs—more than 20% of its workforce—last fall. Since Feb. 1 the plant has been operating just three days a week.

TWO-WHEELED CAR

The troubles reflect a nationwide industrial paralysis. Avtodizel and other local companies are suffering mightily as vehicle sales are forecast to decline by a third or more this year. "The whole auto sector is standing still," says Renat Chapes, an independent union leader at the plant. Avtodizel largely relies on orders from two big truck makers, Kamaz and MAZ, both of which are also on three-day weeks. Chapes brandishes a sheaf of statistics—management documents, he says—that indicate an additional 3,000 layoffs are in the cards. Avtodizel's management declined to be interviewed.

The woe goes far beyond autos. Yaroslavl's big chemical and metal-working plants have seen output slump by more than half over the past year, reflecting plummeting exports and a nationwide slowdown in construction. Even the city's renowned symphony orchestra was forced to dismiss three cellists and several support staff. Conductor Murad Annamamedov fumes at the "imbeciles and idiots" responsible. "To a bureaucrat, it doesn't make any difference," he says, "but it's like taking two wheels away from a car!"

Tension is rising across Russia. In many cities, including Yaroslavl, angry workers have staged demonstrations in recent weeks. Most have been small, but in Russia any protest is unusual. "You shouldn't lay off people so quickly," says Yuri Lichenko, a mechanic who just lost his job at Avtodizel. "Workers," he says as he fills in forms at the employment center, "are losing a lot." The city's blood bank, meanwhile, is doing brisk business. Donations are up by 15% as the unemployed queue to earn as much as $28 for their blood. "People have no means of support, so naturally they're coming to us," says chief doctor Anatoly Voronin.

Yet for now, at least, the discontent doesn't seem to have tarnished Russia's leaders. While opinion polls indicate that pessimism is rising, Prime Minister Vladimir Putin has an approval rating of 78% and President Dimitry Medvedev is close behind with 71%. Vladimir Savelev, a member of the regional parliament from Putin's party, plays down the risk of significant strife. Recent protests are just "PR actions by the Communists, which attract only pity," he says with a dismissive wave of his hand.

A MORALITY TALE

But some predict the anger will grow. "There'll be a merciless uprising like [the Russian Revolution] in 1917," says union activist Mikhail Golovanov. Jabbing the air with a copy of the local Communist weekly, Sovietskaya Yaroslaviya, the gray-haired laborer says, "The Russian will tolerate a lot, but if you push him too far Kaput!"

Businesspeople in Yaroslavl acknowledge that Russians themselves are largely to blame for the crisis. The underlying causes—lax lending standards and a real estate bubble—were all too evident in Yaroslavl itself. "We jumped into consumption with gusto," says Sergei Kiselyov, a dapper young executive from oil company Tatneft. Over coffee at Vanilla Sky, a trendy café on the icy riverfront, he says that a few months ago the restaurant would have been full of businessmen cutting deals and tucking into cream cakes and espressos. On a recent Thursday, it's nearly empty. "We have apartments costing $3 million in Yaroslavl, but this isn't Moscow or New York," he says.

The view of the crisis as a morality tale, in which all share blame, may explain the remarkable nonchalance with which many local businessmen seem to be facing the downturn. Of course, they're no strangers to economic turmoil: The city has been through tough times before, during the collapse of the Soviet Union and its aftermath.

Lev Molev, manager of Markon, a small maker of brake pads for cars and trucks, says January sales were down by 49% from the previous year. His factory, a concrete building in an industrial zone along the river, is unusually quiet as many workers have been furloughed. But Molev points out the potential for long-term growth: Car ownership in Russia is still only a third of the European average, and a recent 30% devaluation of the ruble should make his products more competitive with imports. In 1998, when the ruble fell by 70%, he says, sales almost doubled. "It's sad, of course," Molev says. "But on the whole we feel secure."

Optimists in Yaroslavl point to measures being taken by Moscow, which has been spending freely to ease the pain. Yuri Borodin, head of the job center, says a $15 million program will help 32,000 people get retraining or temporary jobs on farms or public works projects. "Very serious measures have been taken to support working citizens," he says.

But the impact of the crisis on Yaroslavl is only now beginning to be felt. While registered unemployment in the region is still a surprisingly low 2%, Borodin says the real number is about twice the official level and that it could double this year. Alexander Maikov, an entrepreneur who heads a local lobbying group for small businesses, says it was only in January that the city's retailers started to see sales tumble, after the big factories started laying off workers. "There are big rain clouds. At the moment it's quiet, but you can feel the tension," Maikov says. "When will the thunder come? What will the wind be? We don't yet know."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

Putin's "Social Contract"

Russians have accepted Vladimir Putin's authoritarian rule in exchange for rising living standards. But the economic crisis threatens that tacit agreement, Arkady Ostrovsky writes in Foreign Policy. As dissent spills into the streets, Ostrovsky fears "an increasingly desperate Kremlin will resort to greater violence and repression to maintain its splintering social contract."

To read the Foreign Policy article, visit http://bx.businessweek.com/russian-economy/


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