KARELIA: STRIVING FOR ECONOMIC AND POLITICAL STABILITY

UNCLAS ST PETERSBURG 000030


E.O. 12958: N/A
TAGS: RS PGOV ECON
SUBJECT: KARELIA: STRIVING FOR ECONOMIC AND POLITICAL STABILITY

REF: ST. PETERSBURG 0008



1. (SBU) Summary: Worsening economic conditions and the
uncertain prospects of recovery dominated the Consul General's
meetings in Petrozavodsk. Local officials and business people
are skeptical that the regional administration can solve the
problems of the export-oriented Karelian economy, and are
counting on worldwide recovery to help restore growth. With
growing evidence of declining living standards, the government
of Karelia is anxious to maintain political stability and
prevent protest rallies. Economic and social woes will likely
be major themes in Petrozavodsk's spring mayoral elections, and
endemic corruption undermines reform. End Summary.

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Karelian Government Pessimistic about the Region's Economy
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2. (SBU) Consul General Gwaltney's visit to the Karelian
Republic's capital Petrozavodsk on March 3rd-4th revealed
Karelian officials' serious concern over the economic
difficulties the region is facing. According to Governor Sergey
Katanandov, 2007 was successful for Karelia, and the years 2008
and 2009 might have been even more successful if the Karelian
economy had not suffered damage from the world economic crisis.
Katanandov stressed that Karelia's economy was export oriented,
and that shrinking world markets have caused difficult times for
local businesses such as saw-mills and pulp and paper plants.
According to Katanandov, unemployment assistance applications
have grown by 40%. Although the official unemployment level is
just 3%, 15% to 20% of Karelians are estimated to have incomes
below the minimum wage. Katanandov said he was troubled that
these numbers could increase, and was uncertain as to what his
government could do to improve the situation, given its limited
resources. He doubts that Karelia will receive all of the
federal financial assistance that it had expected. Katanandov
said that he will reduce government expenditures by at least 10%
in 2009, but do his utmost to avoid personnel retrenchment. This
approach of reducing funding for programs but not personnel
costs was confirmed separately by lower-level officials.
Overall, Katanandov said that although the economic situation
has stabilized somewhat recently, he fears that the next waves
of the crisis will bring greater economic hardship.


3. (SBU) Nikolay Lyovin, the Speaker of Karelian Legislative
Assembly, also noted the deleterious impact of the sharp
decrease in exports, citing the demise of a U.S.-owned local
business. Pegas was a profitable, American- owned, manufacturer
of timber products for the U.S. home building industry.
However, in 2008, American home builders' demand for Karelian
timber plummeted, and the company halted production for eight
months. It was eventually sold to Russian owners, but the new
owners have still not been able to fully restore the business
even after refocusing on sales to domestic customers. Karelian
mining and construction material industries are also in decline
because of reduced market demand. Lyovin added that although
the volume of industrial production in Karelia is stabilizing,
local industries have been unable to return to their previous
levels of profitability.

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Economic Recovery Dependent on U.S. and World Economic Situation
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4. (SBU). Karelian officials are pinning their hopes for their
own economic recovery on the new U.S. administration and on the
recovery of world markets. Katanandov stressed that improvement
of the U.S. economy would certainly ease problems for other
countries and regions, including Russia and Karelia. He also
hopes for new foreign investments in the local economy,
particularly in the forestry sector. Lyovin believes that
measures taken by the Russian and Karelian governments to shore
up the economy will have limited effect. For example, the
Russian government relented on its planned increase in customs
fees for timber exports, which was helpful for Karelia, but
local businesses still suffer from losses due to the reduced
international demand for timber.

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Political Stability: The Government's Top Priority
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5. (SBU) The government of Karelia is concerned with the
possible political consequences of worsening economic conditions
and considers maintaining political stability to be its main
objective. Katanandov claimed that the citizens of Karelia fail
to understand the causes of the economic problems, and the
government has had to educate its citizenry and explain its
vision and policies to avoid discontent. Officials are
conducting outreach with industrial workers at their places of
work and with residents of Petrozavodsk and other cities in
order to prepare them for a possible decline in their living
standards. However, Katanandov insists that although the
challenge to educate and pacify the public is great, in general
the citizens of Karelia trust the government. Regarding
citizens who protest the government's policies, Katanandov
opined that "people should mind their business rather than
attend street rallies, which are useless", although he did
concede that Russian law does permit such political rallies.

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Petrozavodsk: Economic and Political Problems Together
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6. (SBU) Like Governor Katanandov and Speaker Lyovin, Acting
Petrozavodsk Mayor Anatoliy Buldakov expressed his concern with
the economy. Buldakov assumed the duties of acting mayor in
January after Mayor Viktor Maslyakov's abrupt resignation.
According to Buldakov, Petrozavodsk thus far has not suffered
any serious harm from the economic crisis, but acknowledges
there are troublesome indicators. For example, the number of
officially registered unemployed individuals grew by 300-400
persons this year compared to the last year, although the
overall official unemployment level in Petrozavodsk is still
just 1.25%. He and others in Karelia attributed some of this
increase to hidden unemployment, with people whose unemployed
status predates the crisis now applying in response to the
increase in unemployment benefits. Also, local companies are
facing twin problems of sharp hikes in energy prices plus
falling demand for their products.


7. (SBU) People's concerns about economic conditions are likely
to dominate Petrozavodsk's upcoming early mayoral elections. No
date has yet been set to fill the slot vacated unexpectedly by
former Mayor Maslyakov (reftel). The elections must be held no
later than June 7th, and the City Council is expected to
determine the date soon. Since the opposition (a disparate
grouping of A Just Russia, Yabloko, Communists, and
independents, and all of whom are opposed to United Russia)
holds a majority on the Petrozavodsk City Council, the election
has the potential for becoming competitive. Governor Katanandov
and Speaker Lyovin both belong to United Russia, and Lyovin is
considered the likely pro-government mayoral candidate whom
Katanandov, who was Petrozavodsk Mayor during the mid-1990s,
will support. Acting Mayor Buldakov, who is reportedly
unwilling to run for mayor, believes that the major election
themes will be economic stability, social security, jobs, and
routine city issues such as street cleaning, snow removal, and
public transportation. He expects candidates from both United
Russia and opposition Just Russia to run. A local political
analyst stated that while A Just Russia has a well-established
party organization in Karelia, the other opposition forces were
built by local business figures who were more concerned with
their own business projects than with political and social
issues of public significance. As a result, the analyst
believes that United Russia will likely defeat a divided
opposition.

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Governor and NGOs: Disconnect on Corruption
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8. (SBU) The Karelian opposition has been accusing Governor
Katanandov of corruption for years. Katanandov, naturally,
fiercely denies corruption accusations against both himself and
his government. In fact, Katanandov grumbled to us about the
poor work habits and petty corruption of the bureaucracy whose
members would not accept responsibility, act transparently or
seize initiative in the course of their duties. According to
him, local businesses are accustomed to bribing officials as the
only way to get things done. As a result, many young people in
the region now prefer to become bureaucrats rather than
businessmen as a more lucrative career option. Katanandov
distinguishes between the low quality of public services (which
he admits is serious, widespread and hard to resolve) and
apparent corruption (which he asserted was quite limited in
Karelia). Moreover, Katanandov alleges that whatever corruption
there is can be effectively uprooted within a few years through
the criminal court system, and he praised President Medvedev's
anti-corruption initiatives to bolster the judiciary.


9. (SBU) The Karelian opposition and non-government sector,
however, are skeptical about the government's claims regarding
the low level of corruption, insisting that corruption is
pervasive within the government of the Republic. According to
research conducted by a local NGO in cooperation with
sociologists from a local university, Karelians are accustomed
to corruption. In fact, many people believe that corruption is
not evil because it gives people a chance to expedite their
dealings with the government and to effectively influence the
decision-making process. The research shows that respondents
rank law enforcement agencies, military recruitment offices, and
the Karelian government as the most corrupt entities. However,
more highly-educated respondents and those occupying managerial
positions name the government as the primary source of
corruption in Karelia. The independent survey conducted on
corruption is noteworthy in two additional aspects. One, it is
posted on the NGO's website and two, the Karelian Government
asked for a copy of it.


10. (SBU) Comment: Like the rest of Russia, Karelia has fallen
on very hard times. Major enterprises had not yet been updated
or modernized before the economic downturn. The double effect of
aging infrastructure and technology, plus sharply rising energy
costs and credit shortages, has compounded the republic's
economic woes. The problems are further complicated, as
Katanandov told us, by the fact that the financial benefits of
Russia's oil wealth began to flow to the region only in 2007.
Karelia had hoped the next few years would help it catch up with
more prosperous areas of Russia. Now the wait will be much
longer. End comment.


GWALTNEY