R 190830Z MAR 09
FM AMCONSUL ST PETERSBURG
TO SECSTATE WASHDC 2729
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG

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