Plague of Russian Monocities

20.11.2009 — Analysis

Russian President Dmitri Medvedev has obliged the Government to approve programs of assistance to monocities within six months. A RusBusinessNews analyst has found out that the RF Ministry for Regional Development has already stacked integrated area development plans worth many a million dollars. A look at some of them suggests that the budget funds will be spent but problems will remain. This is the case since Russia has virtually no business that can create surplus product. In order for them to appear, the medieval way of life must be discarded, which is not included in the Russian elite's plans.

Russia has a total of about 400 monocities that were established around timber processing, machine building, food, fuel, and metal manufacturing industry plants. Nearly 10 % of Russia's population live in these cities. Many plants and factories are obsolete and outdated; it's been a long time since they were making products that the market demands; thus, they lived on credit. The borrowed life was halted by the 2008 banking crisis. The challenge of losing job started looming large for 16 million men and women.

The increased social tension forced the federal authorities to look for opportunities of employing jobless lumbermen, miners, and steel makers. Moscow promised the investors to provide governmental guarantees and even provide substantial funds for creation of new jobs. In 2010, the amount of assistance may total 10 billion roubles. Moreover, some of the cities must be relocated - there is no chance to rescue them. However, relocation of one medium-sized monocity would require about 20 billion roubles. Thus, the funds provided can barely cover even a modest "funeral".

Meanwhile, local officials sensed the smell of money, so it didn't take them long to scribble their ideas of how to employ the unemployed in the future. The Sverdlovsk Oblast which includes 32 monocities has not become an exception to the rules. In particular, the Kachkanar administration has submitted an integrated area development plan to the RF Ministry for Regional Development.

Kachkanar, located 250 kilometres north of Ekaterinburg, is a classical monocity, since it was built in 1957 next to an integrated mining and processing plant that supplied raw material for metal manufacturing. There is no cause to worry about its mid-term destiny: according to the data quoted by Alexei Pasynkov, senior research assistant at the Institute of Economics of the Urals Branch of RAS, the Vanadium Mining Complex (GOK), which is the local economic mainstay, is developing due to the possession of a reasonable ore base. The reserves of the Gusevogorskoye deposit will last 30 years, whilst the Kachkanarskoye itself adds another 100 years or so.

However, the crisis has shown that the economic life of such monocities is extremely unstable - it solely depends on the fluctuations of metal and raw material price. Kachkanar's 2009 budget has been experiencing extreme difficulties; thus, in order to find additional income as well as create new jobs the Mayor's office initiated the development of economy diversification options. The authorities propose to start extracting scandium from waste piles, processing industrial and household waste, housing construction, and developing mountain skiing. The monocity's leaders would like to reduce the dependence on the local economic mainstay from 86 % to 55 %, on account of attracting tourists and establishing an industrial cluster.

Extraction of scandium underpins the integrated plan. The Kachkanar technogenic deposit is of the magmatic type which concentrates the largest resources of scandium. Samples have shown that the content of the rare metal is sometimes as high as 150 grams per ton. In addition to scandium, the ores contain titanium, vanadium, platinum, gold, silver, and other elements. The amount of sludge in the discharges is about 1.2 billion tons, with further 24 million tons added annually.

The GOK's economists forecast a growing demand for vanadium, of which Russia is estimated to have a 5 thousand tons' reserve. Manufacturers of pipes for oil and gas well drilling may rank among reliable consumers of the metal. The pipes are made of scandium-containing aluminium alloy. The Kachkanar integrated plant holds a patent for this type of manufacturing. A vacant plot of land, railway tracks, and power transmission lines are available for the establishment of an industrial park. Alexei Garshin, first deputy head of the district, says that the "Russian Scandium" project, which suggests producing about 12 tons of the rare metal annually and creation of 440 jobs, will increase the budget revenue by 363 million roubles a year.

Meanwhile, experts believe that the state should not provide funds for such projects. The state must merely help the investors by either providing guarantees and subsidies or investing in utilities. Finding funds for building an efficient production facility is not a problem: business has always been short of innovative ideas and sites. In case the investors sense profits, they are prepared to carry the project's risks. However, they wouldn't get involved in just any project.

Specialists note that at the basis of scandium extraction there must be a proprietary technology which would make the project interesting. Once the GOK presents such a technology, the money will be found immediately. Anatoli Filippenkov, Doctor of Technical Sciences, claims that Russia has neither technology nor equipment for extracting scandium from waste piles. Therefore it would be more correct to involve foreign investors at the initial stage, establish a joint venture, and learn from more advanced peers how to extract rare metals.

Sergei Makushev, lead dresser of the Kachkanar GOK, corrects the scientist's point: Russia does have technology for scandium extraction. It has been developed by Uralmekhanobr JSC with the involvement of specialists from Moscow. The problem is that it makes no sense applying in so far, since it does not ensure profitable extraction. So it turns out that Anatoli Filippenkov is right: it's as if the technology is not there, so foreign process engineers who normally bring along their own investors must be invited. Accordingly, as long as there are no new calculations it is senseless to discuss the cost of the project, all the more so to finance the construction of a dressing plant. Nevertheless, the municipal authorities as the state to take part in the construction of a new plant worth 3.7 billion roubles.

The project for the construction of a sports and recreation centre worth 2.2 billion roubles causes experts' doubts as well. Alexei Pasynkov asks himself this: will the 600 metres elevation change on Mount Kachkanar, where it is supposed to build "alpine type" pistes with a total length in excess of 100 kilometres, be enough to get mountain skiing fans from all over Russia, the more so from abroad, coming here?

Russians, Mr Pasynkov says, are frequently mistaken in respect of foreigners' love of wilderness, therefore there appears a great many of projects for the construction of recreation centres, hunting and fishing lodges, horse barns and rafting companies in our country. Their authors forget that Russia will never become a country of tourism pilgrimage: it hasn't got the right climate, the right history, nor unique monuments of nature and civilisation.

The Urals Mountains are still not the Alps, not even Elbrus, to get a person travelling hundreds and even thousands kilometres away from home. In addition to this, many a mountain skiing facility have appeared in the Perm Krai, the Sverdlovsk and Chelyabinsk oblasts in the past few years. This, before the "Urals Extreme" project is offered to investors, Sergei Nabokikh, head of the urban district, master of sports in mountain skiing, should calculate how many fans of skiing on a unique traverse will be coming, from where, and how much money they are going to spend at that. Experts doubt that there will be as many of them as in the Alps.

Experts are certain that monocities must place their key stake on the small and medium business development. The factory town which are predominant in Russia have had a poorly developed services sector since the Soviet time. This business sector creates a little added value but many jobs.

One of the goals declared by the integrated investment plan for the development of Kachkanar is to create a service package that would ensure its integration into national and global economy. However, the actions advertised by the local administration are predominantly aimed at finding a private investor who would agree to invest in the "Urals Extreme" project. For example, it has been promised that the initiating investor will be allocated plots of land, granted tax benefits, and provided with lower tariffs for connecting to power facilities. There is one concession, though: this procedure will only cover the project implementation period. In mid-November Kachkanar welcomed an Italian-Austrian delegation and made an attempt to persuade the guests that the Urals project is a promising one. 

Experts say that, should Russian monocities encourage the investment activity of business in a daily non-selective manner, the authorities wouldn't have to look for investment in order to diversify the economy of old industrial settlements. The fact that they are looking for money means there is no small business in the country. It cannot exist in statute labour-based patriarchal societies. In Russia, virtually all investment is made either by officials or business people who use budget funds in the officials' company.

President Dmitri Medvedev called upon leaders of monocities to "create conditions for the application of people's capabilities in most diverse sectors, and incentives for private investment", thus essentially suggesting that the centuries-old tradition be broken. One might believe his words were serious if it were not for the reality that surrounds us. In one of Russia's regions, Sweden's IKEA cannot launch the centre it has already built for many years now because its principle is not to bribe local officials. As to federal authorities, they pretend nothing is happening.

Vladimir Terletski