KEEPING A WARY EYE ON THE STREETS: THE CRISIS

C O N F I D E N T I A L MOSCOW 003476

SIPDIS

STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR TOGERSON
DOC FOR 4231/MAC/EUR/JBROUGHER
NSC FOR NELSON

E.O. 12958: DECL: 12/03/2018
TAGS: EFIN ECON ELAB SOCI RS
SUBJECT: KEEPING A WARY EYE ON THE STREETS: THE CRISIS
HITS THE REAL ECONOMY

Classified By: Ambassador JBeyrle, Reasons 1.4 (b,d)

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Summary
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1. (C) Government statements and measures to contain the
effects of the economic crisis are beginning to reflect
official concern that a prolonged economic downturn could
lead to social unrest as was the case in 1998. Senior
analysts at two of Russia's leading research institutes claim
that a sharp increase in unemployment could trigger social
turmoil, but noted many Russians had learned to adapt to
adverse economic conditions in the late 1990's and were
preparing to adjust their life styles and consumption habits
to the present situation. Psychologically, however, it was
important for Russians to have to least nominal employment.
Thus, instead of laying off workers, many companies were
placing workers on administrative leave, delaying salary
payments and reducing hours. Depending on the duration of
the crisis, the analysts predicted that more Russians would
end up at or below the poverty threshold. In the meantime,
defaults on consumer credits would aggravate the liquidity
crisis, and domestic demand for dollars - as a hedge against
popular fears of a 1998-style banking collapse - will
continue to put pressure on the ruble. End Summary.

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The Ghost of 1998
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2 (C) In recent weeks, Prime Minister Putin and other
senior Russian officials (CB Chairman Ignatiev/Finance
Minister Kudrin) have reinforced their message to the public
that Russian economy will survive the economic crisis - owing
in large part to distribution throughout the "real economy"
of a multi-billion dollar bail out package financed out of
state reserves (see septels). Putin unveiled new measures to
cushion the effects of the crisis on broad segments of the
population, including corporate tax cuts, higher welfare
payments, and promises to defend the ruble. In both its
statements and actions, the government appeared determined to
avoid a repeat of 1998, when the country nearly defaulted on
its domestic debt, banks collapsed, and industrial production
came to a standstill, forcing unemployed workers and bankrupt
depositors to take to the streets.


3. (C) Behind Putin's public bravado lies a concern that
prolonged economic crisis could trigger social unrest,
particularly if slow or negative growth leads to a dramatic
growth in unemployment. Consequently, both Medvedev and
Putin have called for more state control over the flow of
funds to ensure they reach key sectors, and have threatened
punitive sanctions against banks hoarding state funds (or
trading them for dollars) instead of investing them in
domestic assets. Moreover, Medvedev has ordered law
enforcement authorities to clamp down on any social unrest or
crimes arising from the financial crisis.

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Dim Public Awareness of the Crisis
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4. (C) To get a better understanding of public attitudes
towards the crisis and what economic tripwires may in fact
trigger social unrest, we met with Maria Krasilnikova, Senior
Economist of the independent Levada Polling and Analytical
Center, and separately with Irina Denisova, Senior Researcher
of the Center of Financial and Economic Research (CEFIR),
affiliated with the Academy of Sciences. According to
Krasilnikova, as of September and October, the financial
crisis had yet not affected the majority of Russians; less
than five percent Russians were involved in either the stock
exchange or mortgage markets. Furthermore, her research
indicated that only one fifth of the population had savings
in banks. Inflation - rather than the financial crisis per
se - remained the chief concern of most Russians as late as
the end of the October, but, she added, expectations of high
inflation were always considerable - particularly in the
period of rapid economic growth preceding the crisis. (Note.
A separate poll by the government's VTsIOM public opinion
agency, released in early November, appeared to substantiate
Krasilnikova's findings: more than 60 percent of the 1,600
Russians surveyed stated they were not directly affected by

the crisis nor had no idea of its causes - and nearly 20
percent of the respondents were sold on to the government's
line that the crisis was brought about by the U.S. and the
world superpowers' mismanagement of social and economic
policy.)

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Unemployment - Recipe for Social Unrest
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5. (C) Krasilnikova stated that the most likely tripwire for
social unrest would be widespread unemployment - or when
unemployment became a "personal, household issue". Irina
Denisova - in a separate conversation - came to the same the
conclusion. Both analysts maintained, however, that even if
unemployment increased dramatically, the population's
threshold for tolerating economic hardship was now higher
than was the case in 1998. Krasilnikova explained that the
population had developed a certain degree of resistance to
hard economic times during the 1990s and in one way or
another had learned to adapt to adverse conditions. This
time, therefore, people (at least the Muscovites) would adapt
to the crisis by adjusting their consumption habits (i.e.,
taking fewer vacations abroad) or supplementing food
purchases with "potatoes grown on their private dacha plots
(ogorody)." Psychologically, however, it was important for
people to have at least nominal employment. Most companies,
she pointed out, understood this: thus, in lieu of lay-offs,
companies tended to place workers on administrative leave,
reduce hours, delay salary payments or even cut salaries.


6. (C) According to what we are hearing from our contacts,
an increasing number of companies are in fact sending their
employees on unpaid vacations, slashing salaries or delaying
payments. One investment banker told us that the credit
crunch has forced numerous firms to resort to barter (as they
did on the 1990s) to effect payments. Ilya Yurov, principal
shareholder of Moscow's National Bank Trust told us that many
of his clients (particularly in the regions) are radically
scaling down their production plans and forcing employees to
take leave without pay.


7. (C) We note that the problems of wage arrears and
reduction of work hours have been the cause celebre of the
Federation of Independent Trade Unions in Russia. The
Federation is calling on the government to cut the migration
quota for 2009 and is monitoring the situation very closely
in single-company towns - i.e., the steel-producing
Magnitogrosk in the Urals or coal mining areas in the
Kuzbass. As for actual unemployment, Klaus Roland, Director
of the World Bank's Moscow office, told us that figure was
expected to increase slightly in 2009 (from 5.3 to 5.9
percent) with lost jobs mostly in the labor intensive
industries, such as construction, and in the white collar
professions, i.e., banking and finance.

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Low Sense of Material Well-Being
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8. (C) While the employment situation was unlikely to drive
people to the streets any time soon, Krasilnikova reported
that the so-called "index of societal mood" - a measure of
people's sense of material well-being - had decreased
significantly in September-October, as compared to the
beginning of the summer. Respondents had most recently
described the economic situation as "sluggish"- rather than
"stable" - and expressed pessimism that the situation would
improve. Her polling data also revealed that Russians
continued to favor a paternalistic state, and 83 percent of
Russians supported state intervention to support the economy
- even though paradoxically the majority of Russians
distrusted the government as an institution.

9 (C) CEFIR's Denisova suggested that the most acute phase
of the crisis would be over in a year - without major social
unrest - but the recession, with all of its attendant
socio-economic consequences, would continue for at least
three years. In her view, one of the direct effects of the
crisis would be the increase in percentage of the population
at or near the poverty line - from about 10 to 15 percent.
(Note: The World bank predicts in its November report on the
Russian economy that with a 3.5 percent growth rate in 2009 -
scaled down from 6.5 percent in 2008 - the percent of the

population at or below the poverty line would be about 10.4
percent.)


10. (C) Denisova said "social cushions" protecting the
poorest of the poor were underdeveloped or, in some regions,
non-existent. Monetization of social benefits, she claimed,
had been poorly implemented and had failed to keep pace with
the rising cost of most public services. Another problem
associated with an extended period of economic contraction,
she noted, would be the "vicious liquidity circle"; that is,
as people's salaries and incomes decreased, fewer would be
able to pay their debts to the banks, thereby aggravating the
liquidity crisis. An official of Russkiy Standart Bank --
Russia's largest issuer of credit cards -- told us that the
rate of defaults on consumer loans has increased
significantly over the past several months - a trend that is
likely to continue. Denisova also observed that the lack of
a credible public policy in dealing with the crisis and
rumors of an impending major devaluation of the ruble were
forcing ordinary Russians to convert whatever ruble savings
they had into dollars as a "hedge against uncertainty", thus
putting downward pressure on the ruble.

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Comment
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11. (C) It is too early to gauge the full socio-economic
impact of the economic downturn - much of that would on the
duration of the crisis. There are few indications that
economically motivated social unrest - characteristic of the
late 1990's - is on the near horizon. That said, the fact
that the government is burning through billions in reserves
to forestall a sharp ruble devaluation shows that the "mood
on the street" is still a worry. And with reason: we are now
seeing the symptoms of a deep recession. Much of Moscow's
previously booming construction activity looks to be at a
standstill, a situation mirrored in cities like Yekaterinburg
and Vladivostok; major retail chains have no access to credit
and are reducing their inventories; and Russians are
feverishly changing their rubles into dollars in anticipation
of an imminent currency devaluation. In 1998, the economic
slump dragged on for five successive quarters. The current
economic slowdown, by Finance Minister Kudrin's own
admission, is likely to continue through 2010. Short-term
macroeconomic stabilization measures, financed out of ever
shrinking reserves, may not be sufficient to cushion the
population - or at least the more vulnerable segments - from
the adverse socio-economic consequences of recession: poverty
and unemployment.
BEYRLE