Identifier
Created
Classification
Origin
09STPETERSBURG27
2009-03-10 11:27:00
UNCLASSIFIED
Consulate St Petersburg
Cable title:  

VOLOGDA OBLAST: KEEPING AFLOAT - SO FAR

Tags:  PGOV RS ECON EIND 
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R 101127Z MAR 09
FM AMCONSUL ST PETERSBURG
TO SECSTATE WASHDC 2724
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG
UNCLAS ST PETERSBURG 000027 


E.O. 12958: N/A
TAGS: PGOV RS ECON EIND
SUBJECT: VOLOGDA OBLAST: KEEPING AFLOAT - SO FAR

UNCLAS ST PETERSBURG 000027


E.O. 12958: N/A
TAGS: PGOV RS ECON EIND
SUBJECT: VOLOGDA OBLAST: KEEPING AFLOAT - SO FAR


1. (SBU) Summary. While Vologda Oblast's dependence on the
ferrous metallurgy industry -- particularly steel exports --
renders it vulnerable to the global economic downturn, regional
authorities thus far have managed to mitigate much of the impact
thanks to Moscow's financial assistance and the oblast's own
rainy day fund. Through increased unemployment benefits,
retraining for displaced workers, and encouraging employers to
cut hours rather than staff, Vologda oblast and city authorities
have managed to largely insulate this key oblast from the
economic downturn, at least, as they acknowledge, for the
present. The goal, as one local official blurted out, is to
prevent social unrest. End Summary.

--------------
The Perils of a Mono-Sector Economy
--------------


2. (SBU) Consul General and a Consulate team visited the Vologda
oblast February 25-27 to assess the repercussions of the global
economic crisis. Vologda Oblast is located in the northern part
of European Russia and its administrative center, Vologda, is
400 miles east-southeast of St. Petersburg. The oblast has a
population of around 1.5 million people and, being second in per
capita industrial output in Russia, is relatively prosperous.
Ferrous metallurgy directly and indirectly accounts for about 80
percent of the region's GDP, despite relatively successful
efforts by regional authorities to diversify the oblast's
economic base by developing enterprises in the, timber, and food
processing, and glass and plastic bottle industries.


3. (SBU) The sharp reduction in international demand for steel
and steel products has hit the oblast particularly hard.
Governor Vyacheslav Pozgalov stated that 4,000 people (out of a
total of 30,000 employees at the end of 2008) have already lost
their jobs at the steel giant Severstal. However, he also said
that that this number was reduced from an initial estimate of
13,500 due to Severstal's coordination efforts with the
government. Governor Pozgalov pointed out that his government's
overall development strategy, which aims to diversify further
the oblast's economy, has remained unchanged, and could even
benefit in a narrow sense from the global economic crisis.
Pozgalov said that during the past few years around $2.5bln had
been invested into the development of local infrastructure and
that the oblast as such was well positioned for rapid

development. In the short run, however, Pozgalov said that
maintaining social stability in the oblast during the crisis was
a top priority. As such, his administration's key objectives
are to minimize staff cuts at local enterprises, create new jobs
for workers displaced by the economic downturn, support
development of small and medium enterprises, and ensure the
social safety net is able to support all those whose lives are
disrupted by the economic situation.

--------------
Maintaining Employment and Avoiding Social Unrest
--------------


4. (SBU) As part of its efforts to maintain social stability,
the oblast administration has banded together with trade unions
and the management of major enterprises in an effort to replace
staff cuts with various other cost savings measures, such as
salary cuts, shortened work weeks, and encouragement of unpaid
leaves of absence (with the guarantee to employees of being able
to return to their jobs when desired). The government has also
established a special agency which re-trains unemployed workers
and/or employs them in various public work projects.


5. (SBU) A key program is supporting the development of small
and medium enterprises. According to Governor Pozgalov, the
oblast administration is subsidizing interest rates on
commercial loans and providing grants of up to RUR300,000
($8,300) to small businesses. The federal government also has
kicked in RUR1bln ($27.6mln) for SME development. Among other
steps to encourage business development is a ten-percent
reduction in tax rates for local small businesses. Nikolay
Tikhomirov, Speaker of the Vologda Oblast Legislative Assembly
said that, in addition to the tax break, unemployed people who
start their own businesses would be entitled to receive a year's
worth of unemployment benefits as a lump sum to invest into
their new businesses. According to Tikhomirov, during the past
couple of months, as many as 800 people have decided to start
their own businesses in Vologda Oblast. Overall, the
authorities hope that these measures will help create 3,500 new
jobs. Other measures also include providing free land and
below-market rate lumber to anyone wishing to build a home
literally from scratch. Participants in this program can sell
the homes, if they wish, or sell the lumber itself and use the
proceeds to start a business.

--------------
Keeping the Home Blast Furnaces Burning
--------------


6. (SBU) Nikolay Kutovskiy, the Acting Mayor of Cherepovets (a
city more populous and economically important than the capital
Vologda itself and home to Severstal's huge steel plant),was a
little less optimistic regarding the prospect that small
businesses could help alleviate the unemployment uptick expected
in the oblast. He explained that many small businesses in his
city provided services to the metallurgical plant, and so the
sharp reduction of output at Severstal itself was thus affecting
those smaller businesses as well. According to Kutovskiy,
unemployment figures in Cherepovets grew from zero to two
percent over the past three months, and he expected it to rise
further in the near future. He said that consequently the city
government planned to create around 9,000 new jobs in public
works and believed that the measures being taken by the regional
and the city governments would help avoid any serious social
unrest. He underscored that the most important thing was to
ensure social order and keep people out of the streets.


7. (SBU) According to Andrey Lutsenko, the Technical Director of
Severstal's plant in Cherepovets, Severstal company has
experienced a very sharp drop in demand since November 2008. As
a result, it has shut down three of its five blast furnaces
(representing about 45% of its capacity) as well as its
open-hearth furnace. He added that, although there was some
growth in demand in the first quarter of 2009 compared to the
fourth quarter of 2008, he does not expect any considerable
recovery in production in the near future, as all the main
consumers of ferrous metallurgical products remain in a deep
crisis both in Russia and abroad. Lutsenko said that, given
this situation, some cost cutting has been and will be
inevitable. However, he underscored that Severstal supported
the regional government's efforts to protect the labor market
and thus the cost-cutting emphasis has been on reducing outlays
on capital equipment investment and attempting to increase
production efficiency. (Note: Severstal's main blast furnace,
which is still operating, underwent a major overhaul in 2006,
and as such already is very efficient.) To minimize staffing
cuts, Severstal has introduced a reduced working week and begun
encouraging early retirement for its employees.


8. (SBU) As was the case in other areas of Russia, the Vologda
Oblast had, until the crisis began, faced a severe shortage of
qualified workers. Yevgeniy Shulepov, the Mayor of Vologda,
said that even today the number of unemployed in the city is
equal to the current number of job vacancies. Marina Romanova,
head of foreign economic relations for the small municipality of
Kirillov (a small provincial town not far from Vologda city),
said that the increase in unemployment benefits has revealed
previously hidden unemployment. People who heretofore had not
bothered to sign up for unemployment because the paid benefit
was so low have recently come out of the woodwork. Now, her
local administration also is able to fill low-paying city jobs
that previously went begging for applicants.


9. (SBU) Comment. Vologda Oblast is akin to a company oblast,
not simply a company town. Most senior officials, from the
oblast governor to the city mayors and their teams, came from
Severstal. Efforts to diversify the oblast's economy have made
an impact, but Severstal remains the keystone industry.
Vologda's rainy-day fund will help the oblast and its major
cities weather the economic crisis for a while, but as one
deputy mayor underscored, regional and local authorities do not
know how hard the steel industry will be hit or how long the
downturn will last, so they're feeling very uncertain about the
future.


GWALTNEY