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 
 
¶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. 
 
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The Perils of a Mono-Sector Economy 
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¶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. 
 
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Maintaining Employment and Avoiding Social Unrest 
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¶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. 
 
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Keeping the Home Blast Furnaces Burning 
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¶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