Industry Failing Under Weight of Russian Reform

The 8,500 workers of the Lenin Komsomol Electronic Device Factory are tending their home gardens instead of their machines this summer. The neighboring cash register plant closed down this month, putting another 8,000 people on forced vacations.

Of the 24 other giant factories in this mid-size Russian town, all have either shut their gates or shifted to three-day weeks since July 1.

This, Ryazan’s industrialists say, is the Russian government’s economic dream turned nightmare--the uncontrolled collapse of old Soviet industry before a shiny new capitalist system can be built.

“What’s really happening here is the deindustrialization of Russia,” said Leonid Kanayev, chairman of a new crisis committee set up by Ryazan’s factory directors and unions. “Big industry here is falling apart, particularly the defense plants.”

Across Russia, the economy has been contracting at faster annual rates than America’s did during the Great Depression, and economists expect the plunge in the key sector of industrial output to be even more catastrophic this year.

Ryazan, a conservative city of 500,000 dominated by big defense factories, has been hit harder and earlier than most, but the same slumps afflict dozens of towns like it.

Rostselmash, a behemoth of a plant on the Don River that produces most of Russia’s grain-harvesting combines, has shut down its main production line, throwing 44,000 people out of work. In St. Petersburg, the flagship Kirov factory complex has partially closed. And in Moscow, labor unions say that 90% of the capital’s massive defense plants, crippled by layoffs and effectively bankrupt, are facing imminent strikes.

Russian President Boris N. Yeltsin has made a point of shifting his economic policy in recent weeks to try to address industry’s plight, issuing a series of decrees and even bringing three former industrialists into his Cabinet.

But his top economists also preach that the country’s factories must be weaned from their old socialist-style dependence on government subsidies; they must learn to find their way in a market-driven system. For them, plant closings can be a sign of healthy reform.

“The fact that, until now, until this summer, not a single major or even medium-sized factory has closed in this country signals that economic reform has not really taken effect,” government economist Sergei Vasiliev said. “Inevitably, enterprises must close and employment must drop.”

Yevgeny Yasin, a professor and another leading Russian economist, said that, although factories could expect more support from the government in the form of loans and credits, they must be rigorously broken of their bad habits, such as refusing to lower their prices even when there is no demand for their goods.

Many factories with faltering demand “put their workers on vacations, but they don’t lower prices,” Yasin said. “And they look for other ways out, including taking bank loans to pay salaries. At the same time, they radically raise salaries for themselves and their workers.”

Government theory may make economic sense. But to Victor Namestnikov, a foreman at the Lenin Komsomol Electronic Device Factory, Yeltsin is simply out to get him. Namestnikov, whose machine-tool unit had employed 200 people but these days has only a skeleton crew, blamed Yeltsin directly for the vacant workstations on his factory’s floor. “Some people think that this is the aim of our government--to destroy the state sector,” he said angrily. “How it will end, I don’t know. If it were only us--but it’s all factories. . . .”

Plant directors make similar accusations and maintain that their main problem is not prices or dropping demand but government-condoned financial chaos and a breakdown of the credit system. “We have nothing to pay with,” said Shamil Nurmukhametov, acting director of the Lenin Komsomol factory. “If we can’t work, gradually everything will stop.”

Technically, Nurmukhametov’s factory is in the black. Customers owe it nearly $4 million, compared with the $3 million or so it owes to its suppliers. But beginning this month, Nurmukhametov said, suppliers are supposed to deliver only what has been prepaid, and there is no money for prepayment.

“It ends up that I can’t buy from you because you’re demanding payment, and I also can’t sell to someone else because he won’t have the money to pay me,” Kanayev said. “So factories are left just hanging in the air--they end up at a standstill.”

In part, this dilemma is the factories’ own fault. Trying to keep doing business in the old style, they have run up mind-boggling debts to each other of more than 2 trillion rubles--almost $20 billion--since January by continuing to buy and sell, using IOUs and counting on salvation from Yeltsin.

Now, with the government attempting to crack down on credit and with the IOU system toppling under its own weight, production is grinding to a halt.

Factory managers say they also suffer from outrageous banking practices of the country’s many new commercial banks. Once able to obtain cheap, quick credit from state banks to tide them over until money from sales came in, factories now must pay as much as 186% in interest for loans from commercial banks. And the banks often take 30 to 60 days to transfer to the factories payments collected from factories’ customers.

“It’s a wild economy,” said Vladimir Larin, union chief of the cash register factory known as SAM, the Russian acronym for Calculating-Analytical Machines. “We’re in a transitional stage where there is no control.”

The government is working frantically on all kinds of regulations for banking and trade, for bankruptcy filings and for conducting other business affairs. But Larin and his co-workers feel utterly abandoned. “The government isn’t even interested that such a large factory has closed,” he said. “We’re left to the whims of fate.”

Gennady Ivanov, craning his neck to read the notices at Ryazan’s only unemployment office, felt similarly abandoned. Out of work for three months after being laid off by a Ryazan factory, the 34-year-old tractor driver has looked far and wide for a new job, without success.

“The factories are all closing,” he said, rubbing his chin with fingers sporting the tattoos--one letter on each finger--common to provincial workers who ran wild in their youth. “Now I have to just leech off my wife. Even the kolkhozi (collective farms) don’t need a tractor driver.”

Ryazan is home to only about 3,000 jobless now, but “if the government doesn’t take serious measures, there will be massive unemployment,” Kanayev said. “Twenty-eight thousand families could end up without means of support.”

But city officials do not appear to be worried. Dmitri Chekurin, deputy chairman of the city council, said that laid-off workers can always go back to farming in the empty countryside, “returning to their roots.” Anyway, he said, the factories themselves are at fault for the town’s burgeoning unemployment, having doomed themselves because of their resistance to change.

Their directors, who won their privileged posts under the former Communist-dominated system and are accustomed to treating their plants as their own fiefdoms, are naturally doing all they can to cling to the old order, Chekurin said. If the government cannot sweeten the reforms for them, so they can feel sure of coming out relatively rich, then “nothing will come of the reforms,” he said. “And any director can provoke a strike whenever he wants.”

Defense factory officials, who were among the most enthusiastic supporters of the old Communist regime, also retain deep ideological antipathy for the idea of getting tough with industry and the working class, the former darlings of Leninism.

“The working class has become the hostage of all this change,” complained Alexei Chamkin, deputy director at the Lenin Komsomol factory. “And that’s a violation of human rights. . . . They (government officials) want us to copy your model. Well, it may be all right for America. Not for us.”

Despite such objections from within the factories, Chekurin said, the simple calculus of economics must ultimately triumph, and the layoffs must come.

Western experts have calculated that a modern factory like the SAM cash register plant should employ about 200 workers instead of the current 8,000. “Under no conditions can it be profitable,” Chekurin said.

Factory officials agree that they have to change--but not like this.

“We’re just having all the blood sucked out of us,” Nurmukhametov said.

* YELTSIN UNDER FIRE: The movement behind Boris Yeltsin threatens to split. A4