Trade Battle Strains Russian City’s Mettle

Almost no one in Cherepovets took home a paycheck this year until April. Not the director of the mammoth Severstal steel factory, whose smokestacks punctuate the city skyline. Not the foundry workers, not the mayor, not the emergency room nurses.

The city’s fortunes hinge on Severstal and how many sizzling slabs of steel squirt out of its aging rollers. Last year, it was Russia’s largest steel producer. This year, a trade fight with the United States over cheap Russian steel flooding the U.S. market has stunted Severstal’s output.

“When the mill suffers, everyone in the city suffers,” said Olga Zhilovskaya, who peddles beef at a farmer’s market in Cherepovets, a northern city of 320,000 people. Packing up a pile of bloody, unsold ribs, she estimated the day’s profits: 200 rubles, about $8.

Shrugging toward her 4-year-old son, Dima, she added, “I have nothing against America, but we have to feed our children too.”

The trade debate--centered on U.S. charges that Russian producers “dumped” steel at below manufacturing cost--is not the only reason wages have been delayed in Cherepovets. But it has added to the headaches haunting Russian industry and fueled resentment of America and the economic reforms that many Russians blame for their poverty.

And it has frustrated young, Western-trained managers at factories like Severstal, who feel betrayed by the free-trade policies they embraced.

Industrial production across Russia plunged after the 1991 Soviet collapse, contributing to the country’s protracted depression. Many manufacturing giants subsist on barter with domestic customers and pay workers with goods.

Severstal, thanks to its energetic management, pulled itself out of that slump, shedding inefficient Communist-era habits and bringing in cash by boosting exports and foreign investment. And company officials say they did it without government subsidies.

But a new economic crisis consumed Russia last August and crippled many of its banks. The factory’s bank accounts and those of many of its domestic customers were frozen. Investor confidence plummeted.

Then Washington threatened to impose staggering import duties on Russian steel, prompting the Russian government to strike a deal in February to slash steel shipments 70%.

Severstal relied on exports for nearly 60% of its revenue last year, with more than a third of its foreign sales to the United States, company officials said. They’re not pleased with the export restrictions.

“Such protectionism in favor of American businesses is a violation of the ideals of a country like the United States . . . ideals that they have tried to teach us,” said Mikhail Noskov, Severstal’s financial director.

U.S. steelmakers, meanwhile, say the deal is too soft on Russia. They contend low-priced imports from Russia and other countries caused thousands of layoffs and a few bankruptcies.

The Clinton administration is struggling to satisfy the U.S. steel industry without abandoning efforts to help Russia restructure its economy--and without prompting retaliatory measures that would hurt U.S. exporters.

The European Union and other countries have pursued similar restrictions on Russian steel, but none as strict as the United States.

The United States accused Russia, Japan and several other countries of dumping steel on U.S. markets after demand in Southeast Asia and Russia plunged when they were hit by economic crises in 1997 and 1998.

Russia, which relies on steel for 7% of its gross domestic product, maintains its prices were fair. It says the U.S. industry’s troubles stemmed from mechanization and last year’s strike at General Motors, a huge steel consumer.

Russian steelmakers warn that the February agreement could lead to $1 billion in losses and the layoff of 100,000 people at Russian mills.

Adding a new problem, the Russian government is introducing a 5% tax on exports that Severstal says will cost it tens of millions of dollars a year.

Since the penalty duties were threatened by Washington in November, Russia has virtually halted exports of hot-rolled steel to the United States.

Severstal was able to pay off its huge wage arrears in April only by suspending a program to upgrade decades-old equipment and freezing expansion plans.

Grime-coated rolling machines sit idle in some of Severstal’s shops, where silence replaces the normal clamor of hisses and clangs that comes from churning out steel.

Severstal’s management is desperate to avoid layoffs because it fears social unrest. Instead, it pays for stability by delaying wages, keeping them low--the average is 2,300 rubles a month, or about $90--and maintaining a work force it admits is bloated.

The mill and its empire employ 47,000 people, nearly half the workers in Cherepovets, and its taxes make up the bulk of the city budget. When times are tough at Severstal, retirees get no pensions, the orphanage stops buying meat for its cafeteria, environmental programs to clean up the toxins coughed up by the mill’s outdated furnaces are stalled.

“We have all our eggs in one basket,” said Yuri Kuzin, the mayor’s economic advisor. “It’s not very wise, and dangerous.”

Built in 1955 in a sleepy village 360 miles north of Moscow, Severstal grew into one of the Soviet Union’s biggest producers of steel for tanks, ships and railroads.

It also grew dozens of appendages that it is now trying to spin off: a furniture factory, farms, the city’s 17 sports facilities.

The going has been slow, but analysts say Severstal has proved more adaptable than other Russian steel companies. In recent months, the mill has redirected some exports to Asia as demand picked up there with the rebound in the region’s economies.

Gennady Borisov, who works at Severstal’s blast furnace No. 5, Russia’s largest, no longer looks to his job for the stability and prestige it offered when he started 25 years ago. But he’s terrified of losing it.

Borisov, 44, spends his shift sweating over a 3,630-degree furnace that sees three or four on-the-job deaths a year. He lives in a sagging apartment building with irregular hot water and windowsills perpetually crusted with soot from the mill’s smokestacks. The potholed street outside is strewn with garbage.

Still, he says, it could be worse.

“If the [U.S. dumping charges] mean I lose my job, then I’ll have something to complain about,” he said.