Economic Darkness Descends on Putin's Russia

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Ivan Grankin / APF / Getty

Consumers shop in a Moscow grocery store

The friend giving me a ride swapped just a couple of grim words with his wife on his cell phone, then turned to me. "They fired her," he said sadly. "There go our plans." The wife, who had enjoyed a cushy bank job, then joined the tens of thousands of Russia's new middle class who have found themselves newly unemployed.

Later, I found another friend pacing his office atop one of the newly built skyscrapers of "Moscow City," the real estate symbol of Prime Minister Vladimir Putin's ambitions of turning the Russian capital into a new world financial center. Several major companies had already moved out of these costly quarters to way beyond the city's municipal boundaries, where they still can afford the rent. My friend's company will soon follow. The Vneshtorgbank (VTB), a major state-run bank, has just canceled its long-planned relocation to the Federation Tower, the tallest of the Moscow City towers. Soon they will stand empty, symbols of failure.

In a nearly empty restaurant — which until quite recently would have been tightly packed at lunch by officials, business executives, entertainers and journalists — a key Moscow banker tells me quietly, "They admit privately at the top that the crisis has moved into economics. Their most likely answer is tightening the screws, as they're running out of other means." In the near future, he envisages Russia's becoming a country whose dwindling population is mired in deepening poverty, an increasingly authoritarian state, run by a handful of immensely rich people, their despotism mediated only by their wish to be accepted in the West.

The hydrocarbon windfall that fueled the Russian state's recent revival appears unable to offer a solution to the crisis. Russian foreign-currency reserves that stood at almost $600 billion last August have shrunk to $485 billion as the state has been forced to spend to bail out state-run banks and prevent abrupt devaluation of the weakening ruble. There is no telling if the policy has worked, though, and there's worse to come: major state-run corporations such as Gazprom and Rosneft, as well as Russia's regional governments, have accumulated debts amounting to some $448 billion that can't be paid without the help of the federal government. Deputy Prime Minister Igor Sechin has just called for another $100 billion to bail out major companies, which can expect to jump ahead of the regions in the line for government assistance. If the federal government declines to bail out the regions, however, the consequence could be the "soft" disintegration of the Russian Federation, says one savvy business executive — the regions could begin to withhold some of the taxes they collect on Moscow's behalf. Already, some regions in Russia's far east are more integrated into the Chinese economy than into the Russian one.

Privately, bankers and businessmen warn of a lack of currency to import food and the failure of local producers to replace imports. The supplies of foodstuffs available on Moscow supermarket shelves are shrinking as importers struggle to raise credit to replenish their stocks. Even the vodka has disappeared from the shelves of my two village stores — they can't raise credit to pay their supplier. And at least two major national alcohol producers have recently folded.

Although public talk of a "crisis" is taboo unless applied to "the collapsing West," one sure sign of the state of things is the fare on offer at local antique stores — usually unimpressive when things are going well. Moscow's major annual antique fair had stunning pieces on offer last month, though there didn't seem to be many takers. That's hardly surprising, of course: while banks and companies are laying off managers and white-collar staff by the hundreds, heavy industries are laying off blue-collar workers by the thousands. The GAZ auto works in Nizhni Novgorod has shut down its assembly lines; the giant Magnitogorsk Iron and Steel Works in the Urals has placed 3,000 workers on forced leave.

Last year, 6.1% of Russians (4.6 million people) were unemployed, according to Yevgeny Gontmakher, director of the Social Studies Center of the Institute of the Economics of the Russian Academy of Sciences. Gontmakher expects this figure to double next year.

Putin's instinct is to desperately seek to reassert control. Last week he unveiled a plan to stanch the capital flow out of Russia, blocking banks from turning bailout funds from the government into foreign currency. But it's not clear that such moves will stop the political cronies long installed in key economic and financial positions from prioritizing their own personal interests, and some fear that restrictions now being clamped onto the financial system will harm the business environment in the long run.

In the Siberian city of Barnaul, pensioners, angry with rapidly declining living standards and rapidly rising bills, last week stormed and occupied the Regional Administration Building, demanding more money. Russian sociologists are expecting a massive wave of similar protests and strikes to roll throughout Russia, not unlike those that shook the country in the 1990s, with angry coal miners blocking railways in Siberia and unpaid workers striking in the cities. Now some enterprises are again failing to pay their workers, while others simply go out of business. But disruptive protests would contravene a new labor code passed under Putin in 2001, which sets tight restrictions on the forms of protest available to trade unions. But a Russian state that narrows the options of legal protest available to its people during a major national crisis may be courting serious trouble — it's certainly a principle that Czar Nicholas II failed to understand.

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