Pikalyovo touches on plight of Russia’s ‘monocities’

The North western town of Pikalyovo has come to symbolize the towns across Russia for which the collapse of a major industry or employer has meant dire straits for the whole community.

Pikalyovo: Case study of a 'monocity'

Pikalyovo is a town in the Leningradskaya Oblast about 200 kilometres from St Petersburg, with a population of about 22 thousand. Before the onset of the economic downturn in 2008 about 5000 of these were employed at one of Pikalyovo’s 3 major plants.

The most recent transformation of what had once been a standard piece of soviet era economic planning began with the purchase of the Pikalyovo aluminuos plant by Oleg Deripaska’s Basic Element in 2007 to become BaselCement – Pikalyovo. In 2008 the towns two other key plants, Metakhim and Pikalyovo Cement, halted operations because they could no longer get the necessary raw materials from BaselCement – Pikalyovo. 2009 has seen Pikalyovo Cement partially restore its operations free from reliance on BaselCement – Pikalyovo, which is still closed, along with Metakhim. The shutdowns have meant the redundancy of an estimated 1500 employees, with a further 2500 estimated to be working a shortened week, or on unpaid holidays.

In June, residents of Pikalyovo have protested more than once against local authorities, seeking heating for local social institutions, including hospitals and kindergartens.

The protests drew a visit from Russian Prime Minister, Vladimir Putin, on June 4. At a meeting attended by local government officials, representatives of plant owners, and workers the Prime Minister strongly criticized both the businesspeople running the plants – “I think, you made thousands of people hostages of your ambitions, unprofessionalism or maybe mere greed.”, and “where is social responsibility of business?” – and local authorities – “Nobody will convince me that the region’s administration has done its utmost to escape this.” – in the face of claims of salaries remaining unpaid, with locals reduced to impoverishment, and rising crime rates in the town.

At the meeting the Prime Minister ordered the immediate payment of 41.2 million Roubles worth of unpaid salaries, highlighting the breakdown of the production system as a key contributor to the malaise.

“Problems started when the integrated complex was split: you winkled out raisins and left others to eat bread. And this is where it all began – production was disintegrated, and the owners sank into the mire.”

In the immediate aftermath of the meeting arrangements were made for all employees to be paid 3 months salary outstanding, with hot water and gas supplies resuming to the town within days. At the same time new contracts were signed to ensure that production resumed in the town with Phosagro agreeing to recommence shipments of nepheline to BaselCement – Pikalyovo, with Putin making it clear that the government would step in to restore a single production complex if needed. A Government working party headed by Deputy Industry and Trade Minister, Denis Manturov, came to oversee the recovery of production in the town on June 8.

The Pikalyovo experience and other Russian towns

The experience of the people of Pikalyovo, and the local authorities and businesses in it, are potentially those of a number of other Russian towns. According to Yuri Simagin from the Finance Academy of the Russian Federation the ‘monocities’ reflect the planning and economic strategies of Russia’s soviet past.

“Monocities” are really a heavy burden of the Soviet Union. They can live a decent life, with their city plants operating properly, only if it’s strictly controlled from the centre. In market conditions many of them have proved unviable. And if there is only one or two of such plants in a city, virtually all of its population can come to the edge of survival, as the majority of them become redundant and see their income shrink dramatically. In the 90’s the problem of “monocities” was burning, then it went to a shadow, arising anew today.”

Simagin adds that the legacy of centralized production processes, often located to reflect political exigencies of the day, and not contemporary modern market needs, means that the risk of situations similar to that in Pikalyovo is considerable.

“There are a lot of “monocities” and “monovillages” in Russia”. The only thing that smoothes the problem is that, as a rule, they are small in size. All together there are about 800 small cities in Russia with populations of about 50 thousand people. About half of them are “monocities” and they are coupled with another thousand urban type villages – smaller towns in the same circumstance. Should major industries or employers close down one day because of huge losses, all of these towns and cities could find themselves in a situation similar to Pikalyovo.”

Moscow State University Professor, and Chief editor of Alternativy Magazine, Alexander Buzgalin also sees the problem as being widespread across Russia adding that the economic downturn is potentially threatening an estimated 30 million.

“Different estimates show that in Russia there are about 500 small cities, so-called “monocities”, with city building plants at the heart of their economies. That makes for a population of more than 30 million, where around 90% of these people are somehow dependent on the plants. The majority of city building plants now experience a sharp decline sometimes amounting to 15-20%. Some of them are even at the verge of closing down. All of those companies have virtually the same problems: the threat of non-payment of the minimum wage to its workers, let alone bonuses that were a usual thing before the crisis; an abrupt reduction of social transfers, and, as a result, the fear of the company’s shutdown. Obviously all this could lead to a great social catastrophe.”

The issue of monocities is more pronounced in some Russian regions, with metallurgy, timber manufacturing and carmaking industries being heavily hit, leading to the cities in the Urals area near Ekaterinburg, in the Volga valley with its auto plants being particularly at risk. Tatyana Yakovlevna Chetvernina, a Doctor of Economics, and Director of the Institute of Social Processes Management at the High School of Economics, notes that the risks vary from industry to industry.

“According to Russia’s Investors Union there are 467 “monocities” plus 332 urban – type settlements with one or two key companies. Logically, the current crisis has had a different influence on such regions depending on the industry. For example, oil and gas companies suffered the less but they comprise only 20% of the total number.”

Chetvernina sees the risk of monocities becoming trapped in a poverty cycle with individual incomes being hit and unemployment rising.

“Individual incomes in Russia’s regions have been heavily hit. Today we have a 10% unemployment rate which could lead even to massive poverty in the future as I don’t see a real chance of the economic recovery. And in this situation those “monocities” are most probable to become the heart of poverty.”

The role of local authorities in combating economic stagnation

A key knock on effect of the economic downturn in these cities is the effect that the sudden closure of a major employer or industry can have on local government, limiting their ability to proactively deal with events. Standard and Poors analyst, Boris Kopeikin, notes the current crisis has hit regional budgets hard.

“Today regional budgets suffer a lot, primarily because of the lower tax revenues. For example, revenues from income taxes both individual and corporate have gone down 35% in real Rouble terms, that is letting alone inflation. This means the real downturn is even bigger. In so-called “monoregions” heavily dependent on the Income of a city – building company this becomes especially apparent and hits the whole cities.”

Kopeikin goes on to note that the reduction in revenues faced by local authorities is compounded by lack of planning when times were better.

“Local governments suffer deficit of their budgets, which limits them much. Fundamentally, they don’t have extra money for any purpose, let alone for solving individual problems of little towns which have appeared out of the blue in the crisis. If we take the very Pikalyovo, it was successful enough while aluminium and cement prices were quite favorable. Logically, no money was reserved in the St. Petersburg region’s budget for an emergency.”

This leads to response mechanisms which Tatyana Yakovlevna says don’t work well. She notes that despite the attempts by federal authorities to support local governments they find themselves limited to measures which do little to address the underlying problems.

“In fact, Government has recently given money to regional budgets, but in Pikalyovo and in other regions with a similar situation local governments are a real problem. They simply don’t have a complex plan of action. Today there are three most popular ways to solve the problem by means of Government money. They are staff retraining, support for small businesses or social activities. All of them are inefficient. Let’s take stuff retraining, for example. It doesn’t solve the problem at its core, as usually when employees return to their work place with better skills, they realize their work value hasn’t increased. Social activities also help only for a while as they are short term projects. And in the context of small businesses support, again ambiguity becomes the major obstacle. Local authorities just don’t know whether this support means easier access to the market for new businesses or support for those that are in deep trouble.”

Boris Kopeikin notes that infrastructure expenditure, which may help improve the economic outlook needs to compete against the more pressing needs in the context of declining regional revenues.

“One can’t deny the significance of infrastructure development for helping depressive regions out. But here is the problem of insufficient funds. If we look at the numbers of the consolidated regional budget, we’ll see that nominal capital expenditure was down 19% in 1Q 2009. Again, considering inflation we’ll go even deeper. Today regional budgets experience a shift in their spending. They have to allocate more funds in salaries thus leaving less for the development of infrastructure.”

The way out

Short of a major economic turnaround many experts are seeing few options for governments at any level.  Alexander Buzgalin believes that there is a definite case for the federal government to step in with non market solutions.

“I think, in this situation only non market tools could help the regions. Actually, there are two major options: either boost social responsibility of business or hand over the question to the Government.”

Buzgalin believes that legal rights and responsibilities need to become the key focus with legal changes underpinning the employer employee relationship to bring about a change in Russia’s managerial and working culture.

“As I see it, there should be federal statutory instruments obliging businesses provide for a due payment of salaries and social transfers for its workforce. Judicially, every owner of a business should sign a collective agreement with its workers for a year. According to this document, a businessman should provide an agreed salary at an agreed time by agreed means. He is to fulfill his market obligations first. He could use his own savings or some of his assets, but the money is to be there. Amazingly enough, in Russia a due payment of a salary is sometimes perceived as a kind of a social benefit, not a must. This is where we go absolutely different ways with the European countries.”

Tatyana Yakovlevna proposes a differing approach, also changing the working culture for those used to a lifetime working with a large employer, with local governments seeking to develop skills which will enable more employees to create their own businesses, giving rise to a burgeoning trades and services sector.

“I think in these circumstances we’d better concentrate on investing into human capital instead of implementing large-scale programs with vague possible results in the future. Let’s go to housing and utilities problem we have in Russia. Everybody knows that quality of services in the sector leave very much to be desired while it provides for one of the essential things people need every day. So we could invest money into the proper education of staff and get better visible results in the form of freelance employment or setting up their own business. This way having compared what we urgently need and what we can we get high economic results at a low cost. ”

Business RT: Anastasia Kostomarova, James Blake