Russia recovery plan hits stumbling block

03/10/2009 | Simon Pirani

Spectre of social unrest looms as government restructures industry

Avtovaz, Russia’s largest carmaker, will cut investment in half and lay off 27,600 workers by mid 2010 under a survival plan adopted by the board this week.

The threat to slash Avtovaz’s workforce highlights Russia’s recovery strategy dilemmas – about the scale and direction of investment, and how to restructure industry without provoking social protest – analysts believe.

Avtovaz, whose main owners include Renault and the state corporation Rostekhnologiya, employs more than 100,000 people in Togliatti, on the Volga, a historic centre of car production. On Tuesday its board reduced projected investment in 2010-2014 by half, to 42 billion roubles, with a focus on new Renault models.

The company has 37 billion roubles of debt outstanding, and another 25 billion roubles of 10-year quasi-sovereign notes guaranteed by Rostekhnologiya. A debt-for-equity deal under which state-owned banks take stakes may help lessen the burden.

But Natalia Orlova, chief economist at Alfa Bank in Moscow, told Emerging Markets that the Russian car industry’s problems are rooted more in weak consumer demand, and inefficiency, than in lack of financial resources.

“The government’s fiscal stimulus package made financial resources available for industry, but many of these have not been made use of”, she pointed out. The budget deficit in the first eight months of 2009 was only 4.7% of GDP, against a projected level of 8% for the year.

The government is supporting investment initiatives “hesitantly”, Orlova added. Moscow sees some private-sector projects as inefficient, while corporations are accused of using state funds to fill holes in their balance sheets instead of investing.

And the real economy is far, far from recovery. In 2009, industrial output will be down by 11% year-on-year, Orlova estimates, and in 2010 GDP will fall by a further 1% and industrial output by 3%. “Growth will not even start again until 2012”, she warned. Until then it would remain around 0 or 1%.

“There has to be investment”, Orlova said. “The Russian boom was underpinned by consumption growth, which was driven by increased salaries, which in turn were driven by capital flows – not by investment growth or production growth.” The crisis should provide a chance to address these problems.

In the tug-of-war for financial resources between Avtovaz, Rostekhnologiya and the state-owned banks, all sides remain wary of another group of stakeholders who could upset any applecart: the car workers.

Earlier warnings of job cuts, and short time imposed on Avtovaz’s entire 100,000+ workforce, sparked angry demonstrations in Togliatti. A “hands off Avtovaz” rally on 6 August demanded a moratorium on job losses, more transparent accounting and nationalisation of the factory.

Andrei Lyapin, the Interregional Union of Auto Workers coordinator in Togliatti, said in a telephone interview: “The government told us to address our demands to Rostekhnologiya. That’s no answer: this is a political issue. There is a prospect of new employment in a special economic zone being created in Togliatti, but that will be in 2012. What about the interim?” There are already more than 18,000 unemployed in Togliatti, and only 5500 vacancies.

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