Russia's monotowns - evidence of an increasingly obsolete economy
THE RUSSIAN economy is in dire need of modernisation. But the bulk of the industrial base is located in company towns, known as monotowns, Soviet-era single-industry rustbelt towns.
Russia’s monolithic monotowns epitomise the federation’s countrywide industrial decline.
Today, they should be simply phased out and resources freed up for more productive ventures, writes Professor Stefan Hedlund.
But voters in the Russian rustbelt form the bedrock of political support for the regime, which fears the anger that would follow from aggressive enterprise closure.
Looking to the future, the monotowns will not only act as a continued burden on the federal budget but as a drag on modernisation.
The monotowns - often built to take advantage of local mineral or metal deposits - are evidence of an increasingly obsolete economy. They are wholly dependent on often-dying factories in crumbling infrastructure with vast immobile workforces unable to seek employment elsewhere but shored up by state funding.
Unemployment in these towns of sometimes hundreds of thousands is often double or even higher than the national average of 5.7 per cent. They embody Russia’s current predicament.
The monotowns’ growing desperation is seen by many analysts as a ticking timebomb ready to explode in a wave of nationwide protests.
A comparison between the respective track records of the Russian and the Chinese economies over the past two decades demonstrates the consequences of Russia’s reliance on its natural resources. While Beijing has achieved rapid technological change, Moscow has faced increasing ‘primitivisation’.
Russian economists fear that the Russian economy will be reduced to little more than a raw materials colony for the voracious Chinese economy.
In abstract terms, reversing this trend will require no more than a boost in investment and acquisition of cutting edge technology. But Russian political reality is far removed from an abstract exercise in what could be done.
The real challenge to Russian economic policy-makers rests in achieving a successful retooling of the ailing monotown industries.
The seemingly simple solution would be to shut down programmes of federal subsidies and allow the market to determine who survives.
Aggressive closure would be highly beneficial to the Russian economy at large. The Austrian economist Joseph Schumpeter defined such a move as ‘creative destruction’. It is only by allowing poorly performing producers to go out of business that labour and capital resources may be freed up for more productive ventures. But Russian reality cannot be reduced to a simple academic exercise.
Many of the towns were built around a single enterprise which was obliged to assume responsibility ranging from housing, childcare and pensions, to communal heating and the local hockey rink.
When the Soviet Union collapsed in 1991, and central economic planning ceased, foreign investors wishing to buy into the huge metals industries and paper mills that were put up for privatisation discovered they received more than they bargained for.
Local authorities and local residents expected the foreigners to assume responsibility for the full package of social obligations. Tensions and conflicts followed, adding negative sentiment toward foreign investors whose motives were presented by nationalist agitators as simply predatory.
The dilemma that faced foreign investors also faces Russian policy-makers. Attempts have been made to shift the financial burden to fund these monotowns onto local authorities, whose tax revenue streams have been woefully inadequate. The federal authorities have been forced to choose between lavish federal subsidies or to wind up enterprises which would shut down entire cities.
The creation of the monotowns – an example of Soviet central economic planning - defied the logic of market economy.
During the 2008 global financial crisis, the monotown industries took a severe beating. The government was faced with a hard choice between allowing them to fail and bailing them out. By opting for the latter, it conserved a structure that constitutes a chokehold on the prospects for revival of the Russian economy.
In 2010, the Ministry for Regional development said that one trillion rubles (US$33.8 billion) would be required to modernise 100 of the monotowns. Yet, the federal budget for 2010 earmarked no more than 27 billion rubles (US$872 million) to develop 27 of the towns.
Viewed as a whole, monotowns are gradually dying out. But it is a slow and very costly demise.
From a political point of view, it is tempting to allow the monotowns to muddle on, operating at a loss, providing employment and keeping the lights on in towns that do not have a future.
But from an economic angle this translates into allowing labour and capital resources to remain locked into failing enterprises, to the detriment of future economic development.
The non-decision on what to do with the monotowns provides perhaps the most important reflection on how the Russian government is searching – fruitlessly – for a new economic growth model and development strategy.