R 182327Z NOV 08
FM AMCONSUL YEKATERINBURG
TO SECSTATE WASHDC 1225
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG

UNCLAS YEKATERINBURG 000072 
 
 
MOSCOW FOR FCS 
DEPARTMENT FOR EUR/RUS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EFIN PGOV RS
SUBJECT: URAL REGION BRACES FOR ECONOMIC HARD TIMES 
 
Sensitive but Unclassified. Not for Internet. Not for 
Dissemination Outside of USG. 
 
¶1. (SBU) Summary: Not long ago, Consulate interlocutors believed 
that the regional economy would not feel the full effects of the 
world crisis due to Russia's oil and gold reserves and 
relatively low levels of international investment in the region. 
 They have been proved wrong, however, as a crisis of liquidity 
in construction and instability in the banking sector have been 
the leading indicators of an emerging downturn in the Urals. 
Meanwhile, decreased demand for manufactured products has led to 
decreased production and cutbacks in scheduled work hours in 
some of the region's leading industrial enterprises.  End 
summary. 
 
Banking Sector - A Run for the Money 
------------------------------------ 
 
¶2. (SBU) Regional banks have limited exposure to the 
international financial markets due to their small size, but 
some banks are facing difficulties.  Remembering the 1998 
financial crisis, depositors began a run on the banks to 
withdraw their savings when the first signs of the crisis 
appeared in Russia in mid-October.  Despite reassuring 
statements from regional authorities and bankers, withdrawals 
have continued, though panic withdrawal seems to have abated. 
Several banks, including the Yekaterinburg branch of Citibank, 
established cash limits for withdrawals, varying from RR 
5,000-50,000 a week.  Credit cards are not accepted as widely as 
they have been in the recent past. 
 
¶3. (SBU) A few local banks reportedly received infusions of 
funds from Russia's Central Bank at the urging of Sverdlovsk 
Governor Eduard Rossel.  But others are still in trouble, with 
at least one local bank teetering on the brink of bankruptcy. 
Two other local banks, Severnaya Kazna Bank, known for its 
modern management and network of regional branches, and Tyumen 
Energy Bank may also be ripe for takeover.  Rumors of Severnaya 
Kazna bank's impending collapse fueled withdrawals, but 
Severnaya Kazna president Sergei Frolov publicly stated that the 
rumors were started by corporate raiders hoping to decrease the 
bank's market value.  Tyumen Energy bank, meanwhile, has started 
selling shares it owns in several profitable Urals enterprises 
to raise cash while reportedly looking for a potential buyer, 
according to media and business sources. 
 
Voluntary Leave and Layoffs in the Industrial Sector 
--------------------------------------------- ------- 
 
¶4. (SBU) Some metallurgical and machinery companies have 
decreased working hours and salaries, and some enterprises 
`suggested' that workers take leave without pay for undetermined 
periods of time.  The Urals Mining and Metallurgical Company 
(UMMC), headquartered in Yekaterinburg and one of Russia's 
largest non-ferrous metal products manufacturers, has decreased 
production due to decreased demand in the international market. 
Working hours and salaries were reduced by 25-40 percent. 
Management personnel were offered leave without pay for the 
first ten days of November.  A consulate contact in UMMC stated 
that all social projects such as maintenance of sports 
facilities, churches, and orphanages, payment for optional 
medical insurances and transportation costs have ceased.  Other 
metallurgical giants such as Mechel and the Magnitogorsk 
Metallurgical Combine, both located in Chelyabinsk Oblast, have 
announced decreases of production and reduction of salaries and 
financing of social projects, according to media reports. 
 
¶5. (SBU) Machinery producers have also started reducing 
production, having fewer orders from metallurgical companies. 
Yekaterinburg's Uralmash enterprise recently announced decreases 
in production and working hours of 25-30 percent. According to 
the plant's director, Uralmash will continue production of oil 
and gas drilling equipment, where he believes demand is still 
strong.  Most of the production decreases will be in the 
manufacturing sector, where buyers are having difficulty paying 
for orders. 
 
¶6. (SBU) Regional governments continue consultations with 
industrialists, hoping to avoid mass layoffs, according to media 
reports.  Many small towns in the Urals depend on enterprises 
that are major employers, taxpayers, and providers of social 
services.  Closures or mass layoffs could lead to migration to 
cities and an increase in crime, while a drop in consumption 
would create difficulties for small- and medium-sized businesses 
in the trade and service sectors.  Before September 2008 the 
official unemployment rate was 1 percent in Sverdlovsk Oblast. 
According to the forecasts of the oblast Ministry of Economy and 
Labor latent (unregistered) unemployment could reach 7 percent 
in December 2008-March 2009.  The chairman of the Chelyabinsk 
City Duma, Sergei Komyakov, recently told local reporters that 
industrialists and the largest tax paying entities of the city 
have already laid off 6,000 employees. 
 
Hard Times for Construction Sector 
---------------------------------- 
 
¶7. (SBU) The construction/real estate sector was the first to 
suffer from the unavailability of long-term credit.  As early as 
August, UMMC management acknowledged to us that the company was 
already experiencing difficulties getting loans from western 
banks for its construction projects.  Many firms are now 
experiencing difficulty in completing projects, despite falling 
prices for construction materials.  The president of a 
Russian-American joint venture, citing lack of finance, said a 
month ago that his company will freeze some projects and lay off 
about 20 percent of its 500 full-time staff and cut some 
part-time employees.  Local banks, previously the major source 
of construction finance, have stopped almost all investments in 
local construction.  Some developers are relying on cash 
reserves to complete projects.  Meanwhile, though the luxury 
apartment market still attracts its share of high end investors 
for now, an increase in mortgage interest rates to 20 percent 
and stricter borrowing terms have made home ownership 
unaffordable for the emerging middle class.  Growing 
unemployment could also limit the number of mortgage borrowers. 
 
¶8. (SBU) The commercial real estate segment has also encountered 
problems.  Just two months ago it was difficult to find 
reasonably-priced, acceptable office space in downtown 
Yekaterinburg; now developers must advertise premises in the 
most attractive locations.  Consulate contacts in two 
development companies commented that they will have to lower 
rents in business centers and probably will not undertake new 
developments in the near future.  One developer commented that 
there is a panic in the local real estate market and he predicts 
that the full crisis will reach Russia in spring 2009. 
 
Consumer Demand Expected to Drop 
-------------------------------- 
 
¶9. (SBU) As the banking panic set in and people withdrew their 
savings, consumption of luxury goods jumped.  Cars, both luxury 
and economy models, were the stars of October sales.  Since 
August, local banks have reduced the number of personal loans 
and increased interest rates to 18-22 percent annually.  Facing 
uncertain financial futures, borrowers are taking few new loans. 
Retailers forecast a decrease in consumption after the New Year 
holidays, a time of traditional sales and consumer spending. 
 
Comment 
------- 
 
¶10. (SBU) As regional governments review their 2009 budgets, we 
expect that they will have to acknowledge the true impact of the 
international financial crisis on the regional economy. 
Reductions in output will lead to lower tax revenues for local 
and regional governments, and reduced salaries will lead to a 
drop in consumption and stagnation of the regional economy.  We 
have already seen the impact on the Sverdlovsk budget.  Revenue 
estimates have been cut by RR 40 million and ministers 
reportedly have been fighting over resources in cabinet 
meetings.  Conditions are expected to worsen through the next 
six months as the crisis deepens. 
 
 
SANDUSKY