Fear Comes to the Russian Heartland

Traces of the boom years linger in Magnitogorsk, a steel town of nearly 500,000 straddling the Ural River, about 900 miles east of Moscow. Boutiques, beauty salons and sushi bars remain open along grimy downtown avenues named for Lenin, Marx and Engels. A vast poster of Prime Minister Vladimir Putin—until recently the symbol of the nation's prosperity and stability—covers the façade of a brand-new shopping mall, overshadowed by the Magnitogorsk Metallurgical Plant. But prosperity and stability are vanishing fast in Magnitogorsk. World steel prices have fallen by half since last summer. Four of the city's eight giant steel smelters have been shut down, their workers placed on indefinite leave. In Magnitogorsk and other hard-hit cities across the Russian heartland, Putin is becoming a symbol of something else: the Kremlin's failed promises.

While the global economy was pushing oil prices to new highs, Putin could do no wrong. Many Russians only shrugged as he crushed democratic opposition and strangled the independent media. Now serious unrest seems imminent despite those autocratic moves. "We are expecting mass unemployment and mass riots," says Gennady Gudkov, a former KGB colonel and current chairman of the Duma's Security Committee. "There will be not enough police to stop people's protests by force."

The biggest threat lies in cities like Magnitogorsk—company towns that are dominated by a single industry. Russia has an unusually high number of them: a quarter of the population is estimated to live and work in one of roughly 1,500 "monotowns," as they are called. They're relics of the old Soviet-era command economy, dating back to Stalin's efforts to create an industrialized nation overnight. They are especially vulnerable in this frightening global downturn. "Our plant has been the main employer in this city for 80 years," says MMK (the steel plant's Russian initials) spokeswoman Elena Azovtseva. "When this plant stops, everything here stops."

The fear is that the slowdown may have only begun. "Every second ruble earned in this city is made at the metal plant," says Boris Shtelter, a consultant for small businesses in Magnitogorsk. "The plant also provides most of the heating, electricity and water supplies for the city." Workers in hundreds of one-company towns are protesting job losses, inflation, government corruption and unpaid wages. The anger is spreading. In December, riot police had to be flown to Vladivostok, on Russia's Pacific coast, to crush demonstrations against new taxes on imported cars. Within the past two weeks, thousands have taken to the streets in Moscow, Vladivostok, Novosibirsk, Volgograd and Ulan-Ude. In Vladivostok they stood, shouting anti-Putin slogans, in temperatures of close to zero Fahrenheit.

The Kremlin evidently sees worse trouble ahead. In December it shelved plans to retire 280,000 Army officers (part of a sweeping military reform). A long-expected reduction in the number of Interior Ministry troops was also abruptly canceled. At the same time, the Interior Ministry set up a special command center in Moscow, packed with surveillance equipment designed to deal with street unrest. The Duma, on Kremlin instructions, added seven new articles to the criminal code. One expands the definition of high treason and espionage to include advisory "and other" assistance to foreign and international organizations; another makes "participating in mass disorders" such as the one in Vladivostok a "crime against the state." More sinister still, defendants accused of the new crimes can only be tried by a special court of three judges, not by a jury—a system reminiscent of the Stalin-era troika courts that sent millions to the Gulag. "This is a very dangerous development," says Lyudmila Alexeyeva, a veteran human-rights activist and head of the independent Moscow Helsinki Group. "It returns the Russian justice system to the norms of the 1920s."

Putin isn't relying solely on brute force. The government has handed out more than $13.5 billion in soft loans to Russian companies since October. Last month Putin unveiled an additional $7.6 billion bailout plan aimed at nearly 300 of the biggest monotowns. Major beneficiaries of both handouts include oligarchs like MMK's owner, Victor Rashnikov, and Russia's current No. 1 billionaire, Oleg Deripaska, owner of the AvtoVaz auto plant. But those efforts are fatally mired in corruption, says Gudkov. "We already hear angry towns complaining that bureaucrats are demanding kickbacks in exchange for aid," he says. "In a country where everybody steals, the government should not be pumping cash into the monotowns." Instead, he suggests, the funds would be more wisely spent on tax cuts and cheaper credit.