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Cablegate: Ural Region Braces for Economic Hard Times

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

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