Crisis-hit Russia toiling to keep factory towns alive

The hulking Soviet-era mineral refinery in Pikalyovo, one of Russia's hundreds of factory towns hit by a crippling economic crisis, has been a blessing, and at times a curse, for a place dependent on a single industry.

Standing outside hangars housing throbbing machinery, the plant's technical director concedes that the town of 20,000, located some 250 kilometres (155 miles) east of Saint Petersburg, cannot survive without its refinery that produces alumina, an oxide used in aluminium production.

"All residents are tied to the refinery in one way or another," said refinery technical director Oleg Khristich, wearing a hard helmet.

"We provide heating and electricity to the city. When the children finish their studies, they come work for us."

Pikalyovo is one of 319 Russian industrial towns classified as "monocities" because of their dependency on a single economic activity. These cities and towns are home to some 14 million people, or 10 percent of Russia's population.

Russia's "monocities" have been in steady decline since the collapse of the Soviet Union but have become all the more vulnerable as the country battles a recession spurred by low energy prices and Western sanctions over the Ukraine crisis.

At a recent government meeting, economy minister Alexei Ulyukayev enumerated the woes of Russia's "monocities": the exodus of 20 percent of their populations, unemployment rates double the national average and collapsed social institutions.

- New (KOSDAQ: 160550.KQ - news) sources of growth -

Pikalyovo is essentially a product of the Soviet Union, its Lenin monument, Palace of Culture and "Soviet Street" attesting to the town's industrial origins.

After developing around a cement factory using local limestone deposits in the early Soviet era, Pikalyovo turned to alumina production in 1959.

The Basel Cement Pikalyovo company -- which produces alumina -- today employs more than 2,100 people, or more than a tenth of the population.

The heavy industries that dominate Russian factory towns often depend heavily on the international price of oil, aluminium and coal markets, and can be victims of their volatility, said Ilya Krivogov, the head of the Russian Monocity Development Fund.

"They (monocities) often have not been modernised since the 1950s or 1960s and their competitiveness is weak," he said.

Financially strangled and plagued with disagreements among its owners during the 2008-2009 global economic crisis, Pikalyovo's industrial complex announced massive job cuts after its workers had gone unpaid for months.

After several hundred people blocked a federal highway in protest in June 2009, then-Prime Minister Vladimir Putin flew in on a helicopter to publicly castigate the complex's owners, including oligarch Oleg Deripaska, in an intervention broadcast on national television.

Putin tossed a pen on the table and forced Deripaska to sign an agreement resolving the dispute, before the Kremlin (LSE: 0Q8D.L - news) strongman snarkily asked for his pen back.

The incident increased interest from the authorities towards "monocities", leading to the creation of a federal fund for their development with some 30 billion rubles ($452 million at the current exchange rate) over three years.

The fund participates in investment projects and trains local bureaucrats and businessman to diversify their cities' single-industry economies.

"Modernising the existing enterprises is not enough," Krivogov told AFP.

"New sources of growth need to be found."

- Lowering costs -

A 2010 state-sponsored economic diversification plan has led Pikalyovo to open a greenhouse facility producing cucumbers, lettuce and tomatoes. Last month, the town inaugurated the construction site of a new industrial zone.

"We want to increase production, create products that have more added value," Maxim Volkov, the new chief executive of the alumina refinery, told AFP.

Volkov boasted that the refinery had reduced its production costs and lowered its losses, even without state assistance.

Although the paint on the refinery's hangars is chipped and its pipes rusted, major renovations have been launched and production has not slowed in spite of the crisis, Volkov said.

The refinery's workers -- who like other Russians have seen their purchasing power shrink with the collapse of the ruble and soaring inflation -- have to work overtime to make ends meet, workers union chief Svetlana Antropova said.

Social benefits have been drastically cut since the Soviet era, where the state-run firms provided workers with wide-ranging benefits, including housing and vacations in certain workplaces.

"At the time (the Soviet era), the management of the refinery strove to increase production, to develop social gains, kindergartens and cultural centres, because everything depended on it," Antropova said.

"But since then we have lost everything, little by little."