EDITORIAL: Putin in a Proper Pikalyovo

EDITORIAL

Putin in a Proper Pikalyovo

Vladimir Putin is nervous. Very nervous. Not only can’t he manage to call his counterpart from Ukraine by her correct name, or even by her Russianized name, or even by a female name, he called her by his name.  Ouch. Shades of George W. Bush.

Why so nervous, Mr. Putin? Are you in a Pikalyovo?

He is indeed. The events two weeks ago in the “montown” of Pikalyovo outside of St. Petersburg betray the fundamental weakness of the Russian economy under dictator Putin, and the mismanagement by ham-handed proud KGB spies that created that weakness.

Pikalyovo depends on aluminum manufacturing, its only commerical enterprise, and the price of aluminum has collapsed by more than half in the past year. The industry is in dire straits, and it’s not alone.  Nearly one-fifth of Russia’s population lives in such “monotowns,” and they are all facing the same fate as Russian industrial production contracts even more dramatically than the economy as a whole.  In a crazed decision last August, one local factory which had previously been producing alumina decided to shift to cement production, processing aluminum waste rather than an ingredient for the manufacturing process. 

There were two serious problems with this decision, made by Kremlin-friendly oligarch Oleg Deripaska:  (a) Pikalyovo already had a cement plant and (b) nobody wants to buy cement in Russia, because nobody is building in the wake of a horrifying contraction of GDP by nearly 10% over the past year.

With no income, Deripaska decided to adopt the classic Russian response:  Don’t pay the workers.  “They pretend to pay us, and we pretend to work,” goes the Soviet joke.  Little wonder that the USSR was, and Russia remains, one of the least productive industrial economies on the planet.

The problems were immediately apparent, and Russian “president” Dima Medvedev ordered the local firms to “come to an arrangement.”  In classic Russian fashion, they ignored him as if he were a child, and Medvedev in turn ignored them.  The situation reached the boiling point, and in early June workers seized control of a major Russian highway, causing a traffic jam that stretched over one hundred miles.

As if confirming Medvedev’s total incompetence, it was Putin who rushed to the scene to defuse the crisis.  He humiliated the owners, including Deripaska, on national television, in a manner eerily reminiscent of the tactics of Stalin.  But as Oxford Analytica reveals:  “The arrangements Putin imposed were far gentler toward the plants’ owners than his harsh rhetoric might have suggested, with substantial subsidies being provided to ease the start of production.”

In other words, it was the Kremlin who picked up the tab, because you can’t get blood from the stone of Russia’s impoverished, ruined oligarchs, wiped out by a stock market that has taken well over half their net worth and a banking crisis that his cut off credit and investment.

Can the Kremlin afford to pick up the tab for one-fifth of Russia’s population?  Of course not.  Russia’s three state-controlled energy firms (Rosneft, Taftneft and Gazprom) have a massive total of $21 billion in debt coming due in 2009 alone.  The Kremlin’s budget revenues are plummeting, and its reserve funds are rapidly plunging towards exhaustion.  The Kremlin can’t even cover its current operating expenses, faced with a 10% contraction of the economy, without going into massive debt to Western lenders.   How can it even consider paying workers to produce output nobody wants?

It can no more do so than the USSR could.  In fact, subsidizing failure and propagating inefficiency to keep up Potemkin appearances is exactly what destroyed the USSR, and it will do the same to Russia. Putin’s neo-Soviet chickens are finally coming home to roost.