Putin Faces Growing Unrest in Russia's Rust Belt

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.

The question may be academic. Moscow's rescue plans depend on money saved up from the boom years, but there's too little left to go around. The ruble has lost more than 25 percent of its value since August, while foreign-currency reserves have plunged from more than $700 billion to less than $400 billion. The country's 2009 budget would balance if oil were $70 a barrel, but the current price is closer to half that. Worse, the government is now reallocating some $40 billion of the bailout money to save hundreds of banks from failure—and even then, the Central Bank says up to half the country's private banks will be gone in a year's time. Though most small depositors' savings are government guaranteed, many businesses are set to suffer, as will confidence in the banking system in general.

It may be too late anyway to avoid real trouble in the monotowns. The government is planning to raise utility prices for all homeowners this year. A similar increase was the cause of the last serious round of social unrest in 2005. This past November the only two industries in Verkhny Ufalei, a town of 70,000 not far from Magnitogorsk, stopped paying salaries. Workers who protested were told they were lucky to have jobs at all. "All it takes is one spark for the entire Urals to catch fire," says Magnitogorsk labor activist Sergei Vasilyev. Yuri Babylyev, an activist with the Magnitogorsk City Organization of Workers, reports that the authorities' indifference to the plight of laid-off workers is fueling resentment and driving more and more onto the streets. "The plant's managers treat us like domestic animals, like slaves," he says. "Their corruption is pushing us toward massive public protests." In a recent poll by the Moscow-based Levada Center, 20 percent said they were ready to join public protests in the coming months. "The time has come for us to act," says Vasilyev. "Our employers force us to sign papers saying that we quit our jobs voluntarily. The courts are corrupt, and nobody defends workers' rights. Putin cares for oligarchs and their pockets more than for us."

Economists have warned for decades that Russia's system of company towns was dangerously vulnerable to market fluctuations. Even so, the Kremlin failed to help them diversify while times were flush. Some residents worried that the boom wouldn't last. Bulat Stolyarov, director of the Institute of Regional Policy in Moscow, says leaders in several monotowns, including Chelyabinsk, Krasnoyarsk and Magnitogorsk, sought permission from the central government to use budget surpluses to create citywide stabilization funds—but Moscow refused.

Sometimes even ordinary people could sense how fragile their prosperity was. Vitaly Polishuk, a window-frame maker in Magnitogorsk, says he consciously took comfort from the sight of the steel mills' smoke-belching chimneys. "We could see our breadwinner breathing," he recalls. Now half the chimneys in town have fallen idle. "When the smoke disappears, fear comes," says Polishuk. It's coming to millions across Russia who face unemployment and poverty. And it's coming to the Kremlin, which fears that all its troops and rescue funds won't be enough to control angry people who believed in their leaders' promises of wealth, national greatness and political stability.

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