On June 4, Prime Minister Vladimir Putin traveled to the small town of Pikalyovo (200 kilometers east of St Petersburg), which had fallen into a dire economic situation. Since February, the three interdependent industrial enterprises that were the backbone of the local economy had shut down, leaving several thousand without work and substantial arrears of wages earned before the closures. In a dramatic scene broadcast on television, a terse and glowering Putin ordered the owners of the enterprises, including Oleg Deripaska, to pay arrears of wages immediately, work together and restart production.
Collapse of company town. Pikalyovo is typical of Russia's economically fragile "monotowns"--small cities dependent on one or a handful of industrial enterprises. By some estimates, up to 25 million people live in such settlements, which were often built in the Soviet era to take advantage of local mineral or metal deposits. Soviet planners had no reason to promote diversification of local economies, and these towns entered the market extremely vulnerable to price swings for their main products.
The collapse in commodity prices in the second half of 2008 has had brutal effects, as Pikalyovo's experience demonstrates:
--Deripaska's factory produces alumina, a raw material for aluminum, which has seen a price fall of more than 50% over the past year.
--In August 2008, Deripaska's Basic Element group decided to cease alumina production and convert the Pikalyovo factory to produce cement. This decision had devastating consequences for the other two plants at the same site, which had been built to produce cement and chemicals from the waste of the alumina production process.
Layoffs, enforced leave and unpaid wages left workers destitute and even hungry. They responded with vigorous efforts to attract the attention of regional and national authorities. Both President Dmitry Medvedev and a special hearing of the Duma had considered Pikalyovo's problems and instructed the three fractious owners to come to an arrangement. However, these injunctions had no effect, and workers increasingly turned to public protests. The culmination was the blockade of a major motorway on June 3, which led to a traffic jam hundreds of kilometers long.
Putin's intervention. Putin arrived in Pikalyovo the next day. In a calculated piece of political theater, he upbraided the plant owners for sacrificing workers' interests to greed and ignoring businesses' "social responsibilities." Most remarkably, he ordered a manifestly discomfited Deripaska to sign a contract for the supply of raw materials to restart alumina production. However, 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.
Popular discontent. Putin's Pikalyovo intervention reflects the seriousness with which the regime views the danger of popular unrest. This concern is well founded. It would be a mistake to conclude, on the basis of the experience of the 1990s, that Russian workers will be quiescent in the face of unpaid wages and rising unemployment. The prosperity of most of the 2000s may make both discontent and unrest more likely in the face of the current crisis. Favorable economic circumstances and active persuasion from government and advertisers encouraged Russians to acquire not just financial obligations, such as mortgage and consumer debts, but also personal ones--as reflected by rising birth rates. Inability to meet these obligations will lead to frustration and anger.
The resonance of the Pikalyovo events is likely to be significant. Though Moscow clearly hopes to avoid further unrest by pushing business to bear more of the costs of providing social protections to monotown workers, many corporate leaders will prove unwilling or simply unable to do so. If so, Putin's actions may prompt the very protests and disruptions he hoped to deter.
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