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Russia Navigates Fallout of Economic Crisis

July 1, 2009 at 6:35 PM EDT
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With its fortunes tethered to volatile natural gas and oil prices, Russia has suffered record inflation and unemployment in the global financial crisis. In the second of her series of reports from Russia, Margaret Warner examines the country's economic picture.

JIM LEHRER: Next tonight, Margaret Warner continues her reports from Russia. Tonight, how its economy is faring in the global downturn.

MARGARET WARNER: It’s the annual Vienna Ball in Moscow, where Russia’s rich and aspiring rich step out for music, waltzing, and schmoozing with other swells.

ALEXANDER SYROMYATNIKOV: This is the very new Russia, and I love it. Do you love the new Russia? She loves the new Russia.

MARGARET WARNER: The glam and glitter of the new Russia took off during the first eight years of the decade, as economic growth soared and real incomes doubled. Many urban Russians got used to the nice things in life, as a new middle class and consumer culture grew.

And until the global financial crisis hit late last year, most Russians thought the good times would keep rolling here, says Maxim Oreshkin, chief of investment bank research for the private Rosbank.

MAXIM ORESHKIN, Chief of Investment Bank Research, Rosbank: Everyone expected that the economy will continue to grow, that the wages will continue to grow. And now it changed one day, and you see the unemployment rate very, very high. You see the income falling.

MARGARET WARNER: Now, in Moscow, cranes stand dormant as the rapid construction of the boom years stalls. And the tycoons who own much of this property, the oligarchs, are feeling the pain, says Oleg Anisimov, editor of Finans magazine and its annual Russian billionaires list.

OLEG ANISIMOV, Editor, Finans Magazine (through translator): In 2008, there were more than 100 billionaires in Russia. This year, there are fewer than 50.

Unemployment spikes

MARGARET WARNER: The scene is much grimmer in Russia's fourth-largest city, Nizhny Novgorod, as middle-class people comb through the want ads at this unemployment center. Though they shared in the decade's prosperity, they've now joined the ranks of Russia's 7.5 million unemployed.

Olga Koverigina used to work at a local hotel.

OLGA KOVERIGINA (through translator): I lost my job a year ago. Psychologically, I feel panicked and lost.

MARGARET WARNER: It was once said that, if Moscow was Russia's head and St. Petersburg was its heart, then Nizhny Novgorod was its wallet. But this gritty industrial city in the Russian heartland has a lot of thinner wallets this year.

And it epitomizes what's happening throughout the country, as the stratospheric world prices for Russia's oil and gas exports crashed back to earth.

Nizhny suffers from Russia's economic dependence on exports, three times that of the U.S., and the fact that 70 percent of it is in just two commodities. As the world's number-one exporter of natural gas and number-two of oil, Russia's been whipsawed by volatile world energy prices, from $147 a barrel last summer to $32 in January.

MAXIM ORESHKIN: If you depend on the only one type of good, if you see the prices for these goods fell dramatically, then the economy hit hard and you can't do anything.

Energy, auto industry suffer

MARGARET WARNER: The people of Nizhny, 250 miles east of Moscow, are certainly feeling that now. Nizhny is not an oil and gas hub. It's built around industry. But when falling energy prices triggered a 14-point swing in Russia's GDP, that dried up customers for Nizhny's manufactured goods.

That's apparent at the Gaz Auto Plant complex. Built in 1932 with help from Henry Ford, for decades it produced the ubiquitous Russian Volga, cheap, but notoriously prone to breakdown. In recent years, the plant has been trying to overcome its Soviet-era inefficiency.

Yevgeny Gorynin, director of light trucks production, is showing off his Toyota-inspired redesigned assembly line.

YEVGENY GORYNIN, Gaz Production Manager: We see that working position is totally marked, so each worker now work its own position.

MARGARET WARNER: But the trucks are still mostly assembled by hand. The future, Gaz managers say, is in their newer plant nearby. With a gleaming new robot assembly system purchased from Chrysler, it produces the new, high-end Volga Siber.

Manager Andrey Slepushkin boasts the model's quality came as a shock to Russian buyers.

ANDREY SLEPUSHKIN, Gaz Production Manager: We got a lot of funny stories where customers which bought this car, they say, "This is impossible. We are just refilling the fuel tank, and that's all. We want to repair. We have special tools. We are always doing repairs in old Volga, but here it's absolutely another story."

MARGARET WARNER: But Gaz had the misfortune of rolling out the Siber model last September, as the world economic and credit crisis hit. Russian auto sales tumbled hard at twice the rate of the U.S.

Many areas on this floor, they were absolutely quiet. Nothing was happening. Why was that?

ANDREY SLEPUSHKIN: Unfortunately, our current situation in the market is not so good for our plant. Our current production schedule is just 40 bodies per shift instead of 200.

MARGARET WARNER: But even if they return to full capacity, they'll only need 120 workers, so Gaz just announced another 7,500 layoffs here starting this month, nearly 20 percent of its workforce.

One of those hoping not to be among them is Olga Koverigina's autoworker husband, Alexei.

ALEXEI KOVERIGINA (through translator): We used to work two or three shifts and on Saturdays, also. Now we work only two to four days a week. My job pays only half as much as it used to. But when you're older than 50, it's hard to get a new job.

Citizens struggle with inflation

MARGARET WARNER: Russia's double-digit inflation is killing them, too.

OLGA KOVERIGINA (through translator): A year ago, we were both working and able to save some money. Now we spend all our money on utilities and food. We survive on what we have: butter, jam, onion, and some eggs. That's all we have.

MARGARET WARNER: Yet the worst may be yet to come, as bad corporate loans to Russian and foreign banks come due, says billionaire retail and banking magnate Pyotr Aven. He faults Russia for becoming so exposed to two big vulnerabilities.

PYOTR AVEN, Russian Businessman: A huge dependence on export, its oil, gas, all commodities, metals, and so on and so forth. And, unfortunately, there is dependence going up, not down. That's number one. And, number two, a huge dependence on foreign money and investment.

ARKADY DVORKOVICH, Kremlin Top Economic Adviser: What is important is not whether we expected this or not, but whether we will learn the right lessons from what happened.

MARGARET WARNER: Arkady Dvorkovich, the Kremlin's top economic adviser, says the Russian government is now committed to pushing to diversify the economy.

ARKADY DVORKOVICH: When the situation is good, when prices are high, people tend to use this opportunity just to expand production, to get profits. We hope that this currently more difficult situation, low prices, motivation will be higher to increase efficiency and productivity and to diversify activities.

MARGARET WARNER: Former Finance Minister Anatoly Chubais is in the forefront of that effort. He's the new chairman of Rusnano, a government-funded corporation that invests in nanotechnology ventures with private companies.

ANATOLY CHUBAIS, CEO, Russian Corporation of Nanotechnologies: That's just an issue of the diversifying the Russian economy, which should not rely only upon the gas, oil and metals. It should be modern type of economy based on the unique human capital which we have in the country.

MARGARET WARNER: And you think nanotech and high-tech is the way to do that?

ANATOLY CHUBAIS: Yes, absolutely. Absolutely.

MARGARET WARNER: But government critics, like former Prime Minister Mikhail Kasyanov, say old habits die hard, particularly among Russia's tycoons and Kremlin pals whose interests may be threatened by reforms.

MIKHAIL KASYANOV, Former Prime Minister: Current government simply thinks that sooner or later those smart guys in U.S. and Western Europe will do something with the whole situation in the world and oil prices will come back on the same levels. And this government will continue to do nothing, not pursuing any single reform.

Public take on government response

MARGARET WARNER: For now, Prime Minister Vladimir Putin, who's running Russia's response to the economic crisis, is publicly ordering banks to step up lending and last week made a surprise visit to a Moscow grocery store to investigate complaints about the price of pork.

Two days later, we found customers singularly unimpressed.

VITALI GUREVICH (through translator): I came here to see whether the shop reacted in any way. I can state: Nothing has been done. The meat was over 300 rubles, and it still is.

LUBOV VASILYEVNA (through translator): Oh, we're so happy. The prices are so low. Thanks to our government, they're taking care of us. I just wish they had the same salaries with these prices. I honestly wish just one of them tried to survive like we do.

MARGARET WARNER: But if these older Russians sound discouraged, a lot of younger Muscovites still exude confidence.

SERGEI BABKIN (through translator): I think everything will be fine. The first few months were hard, but things are going to look up. We're not afraid of the crisis.

MARGARET WARNER: What's not clear is whether this optimism is enough to get Russia through this crisis.

JIM LEHRER: Tomorrow night, Margaret looks at the health and well-being of the Russian people.