Oil and gas fail to prop up Russia’s teetering economy – Financial Times

Evgeny Sidorov knew things were bad when the heating at the factory he worked at in central Russia was switched off in midwinter. The temperature was about minus 15C and many of the building’s windows were missing.

Since then, things have only got worse at the Ormeto-YUMZ machinery factory in the city of Orsk. The facility has been closed since September, salaries for its 3,000 workers are in arrears and as its banks, lenders and management argue over its debt load, many think it may never start up again.

“There are no materials, there is no money, there are no customers,” said Mr Sidorov. “There is nothing . . . They do not care about us.” 

The Orsk factory was once a symbol of Russia’s industrial might — a manufacturing linchpin that built machinery for plants nationwide and in 30 other countries. Now it is an example of the rot in Russia’s $1.7tn economy, which is crippled by chronic under-investment, long-delayed reforms, widescale state ownership and western sanctions that are slowly squeezing its banking sector. 

Away from Moscow’s Michelin-starred restaurants, Bentley showrooms and glistening granite pavements, Russia’s regional industrial belt is struggling. Expected gross domestic product growth of about 1.7 per cent this year would be far worse without strong oil and gas revenues, suggesting other sectors of the economy are stagnant or in retreat. 

But the Kremlin’s fear of provoking public unrest means tough restructuring decisions have often been shirked in favour of stop-gap measures by state-owned banks to prop up failing businesses. 

As a result, while the official unemployment rate of 4.7 per cent is close to a historic low, cuts to real wages have been deep. Real disposable incomes have fallen each year since 2014 and were 11 per cent lower at the end of 2017 compared with four years earlier, according to official statistics. 

“Bigger problems in Russia’s real economy are the cause of the expected modest GDP growth,” said Apurva Sanghi, economist at the World Bank. “Russia’s low and declining potential growth is the binding constraint.” 

Strong crude prices have largely meant western sanctions against Moscow, levied in the wake of the 2014 annexation of Crimea, have failed to paralyse Russia as much as proponents had hoped. 

But more than four years of economic restrictions are taking their toll on swaths of the economy, where a failure by successive governments during President Vladimir Putin’s 18-year rule to enact necessary economic reforms have left enterprises such as the Orsk factory on the brink. 

The 76-year-old plant was moved 1,800km east from Ukraine to the southern Urals during the second world war as part of an effort to protect the Soviet Union’s manufacturing assets. It built equipment for foundries, steel mills and mines across Russia, Asia and Europe. 

But taken into private ownership after the collapse of the USSR, the plant’s workforce has shrunk from 12,000 about 15 years ago to 3,000 on September 12, when workers were told not to return the next morning. 

The plant has a Rbs1.3bn ($200m) unpaid electricity and heating bill, employees say, and its state-controlled lenders have refused to increase its credit. 

“Only people who deal in oil think that everything is all right in Russia,” said Vladimir Gudomarov, head of the Orsk branch of the Russian Communist party. “We are left here with the little that remains. The authorities are only interested in their own pockets . . . And they just look to oppress and suppress the public anger.” 

While investment is still flowing to gas projects in the Russian Arctic and petrochemical plants in Siberia, other Russian industrial plants have announced compulsory lay-offs in recent months. Russian employers owed their workers a total of Rbs3.2bn ($48m) in unpaid wages at the end of November, according to state statistics. 

When the Financial Times visited the Orsk factory earlier this month, smoke was drifting into the frigid, grey skies from just two of its 13 towers. Hundreds of train wagons sat idle on adjacent tracks.

The region’s governor has promised production would restart on December 3, but Mr Sidorov remains unconvinced. “I don’t believe him . . . They are shutting us down, little by little,” he said. He and his wife, who also works at the plant, saw their combined salary cut by two-thirds in September.

The factory management declined requests for comment, and employees outside its entrance said they had been warned not to speak to the FT.

Like many regional towns with Soviet-era enterprises, Orsk has lived through similar crises before. Despite promises from politicians to keep other plants running, more than 50,000 jobs at 30 factories in the city have been lost over the past two decades. 

A former confectionery factory is now a mostly deserted shopping centre, and pawn shops and loan companies dot the main street. 

“The policies, the attitudes of people are set by those at the top. And they do not care,” said Mr Gudomarov, a former employee of the Orsk factory. “It feels as if the government has given up on investing for the future. They just care about surviving today.” 

Such attitudes are a test for Mr Putin, whose popularity ratings have fallen sharply since he increased the country’s retirement age this autumn. A poll this month by the Levada Centre, Russia’s independent pollster, showed 61 per cent of Russians hold the president personally responsible for the country’s problems. 

While strong diplomatic ties with countries such as China, India and Saudi Arabia have allowed the Kremlin to maintain global clout despite the sanctions, domestic anger over jobs and livelihoods is likely to be harder to mask. 

“There is a feeling across the whole city of crisis. No money, no jobs, no hope,” said a person whose family has worked at the Orsk factory for generations. “It is a very dangerous situation for the authorities to have 3,000 angry people out on the streets.”

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