Yevgeny Khokhlov

In the late 1980s – early 90s Russian sociologists found an effective way to predict political processes. As it turned out, any significant changes in the mood of the electorate and in the behavior of the society as a whole showed themselves in Moscow first and then, after a certain period of time, they became dominant in the rest of the country.
A decade later the similar relationship between events demonstrated itself in the economic sphere as well. At present the Sverdlovsk region, industrially one of the most powerful in Russia, is in the vanguard of changes. The Sverdlovsk region recorded the first signs of the industrial production recovery and shaped positive trends that gave grounds to believe in a successful completion of market reforms.


RUSSIAN ROLLER COASTER AS A FORM OF MOVEMENT
In 1998 the Severdlovsk region’s industry overcame the crisis and stagnation. Rates of production growth, which lasted till August 17 of that year, amounted to 101.6 %. On that day the government of the Russian Federation declared default. The financial and banking system collapsed and the national currency was severely devalued jumping from 6 rubles to 24 rubles for $1. The Sverdlovsk region’s economy withstood the blow with relative ease. The «dipping» did not last long: already in April 1999 the volume of industrial output reached the same level as a year ago. And half a year later Eduard Rossel, who was reelected the region’s governor for a second term, in an interview with Metally Evrazii (No.6, 1999) enthusiastically stated: «The region’s industry is developing at such rates that can be seen nowhere in the Russian Federation. The growth of industrial output amounts to 114 % and it is still going up. We are placed second by the volume of the GDP right after the Tyumen region». At the same time the governor was stressing that the high GDP in the Tyumen region, which has the richest oil and gas fields, is formed as if all by itself, «whereas it is formed here by the work of metals and machine-building enterprises as well as enterprises of other processing industries».

The residence of the Sverdlovsk region's governor is a comfortable mansion in downtown Ekaterinburg. The mansion contains a museum with the splendid collection of historical relics and works of Ural craftsmen.

It is important to note the sequence of events: the start of the recovery preceded the default! This fact alone gives reason to challenge the widespread opinion on the nature of economic growth that is taking shape in Russia. As is known, most analysts believe that there is no real basis for such a growth and that just only a short-term jump in production happened because of the ruble devaluation. However, there are, at least, two objections to these arguments that cannot be ignored. First, signs of the economic recovery in industries and regions became evident before August 17. Second, the devaluation’s impact should have run out in a year and a half or two years. Meanwhile, the positive dynamics of the GDP has been evident for four years already. Besides, national commodity producers keep raising volumes of their products with the ruble getting relatively stronger, inflation rates going down and traditional exports being reduced (in case of oil due to demands by OPEC and in case of rolled steel because of protectionist measures by the U.S. administration).
Still, it should be acknowledged that rates of the Russia’s economic growth did slow down. And in the Sverdlovsk region, which serves as a kind of indicator, the impressive rise seems to be over. According to the state statistical data for the first half of this year, the dynamics of the industrial production volumes in this region are as follows: 2001 – 114.6 %, 2002 – 101.7 %.

NEW DISCOVERY OF URALS
But before trying to answer the question about reasons for the decline of rates it would be appropriate to generally describe the economy of the Sverdlovsk region and its current trends.
By its structure the region’s industrial complex is self-sufficient. Despite the fact that the intense mining of mineral resources in the Ural Mountains has been going on for over four centuries now, ore reserves there are far from being exhausted. They provide the base for operation of the country’s most powerful metals industry. It is represented by 72 enterprises including 24 steel companies (production of crude and rolled steel, pipes, ferroalloys, refractories) and 17 non-ferrous metals companies (mainly, copper, aluminum and their processing). The largest consumers of metals – machine-building enterprises – are located there as well. Existing engineering and production capacities concentrated in science-intensive sectors, the defense industry in the first place, guarantee the development of high technologies. The region’s scientific potential is exceptionally high: there are 18 institutes of the Urals division of the Russian Academy of Sciences and over 60 research organizations working for the needs of different industries.
In the time of the deepest slump, which in the 1990s hit all Russian industry, except for the oil-and-gas sector, authorities of the Sverdlovsk region showed a strong will, responsibility and pragmatism. In the words of Eduard Rossel, their major task, as they saw it, was «to maintain the capacity for work of this unique diversified complex, to prevent mass bankruptcies of enterprises and gradually bring out of crisis specific production facilities, industries, markets». The region’s administration acted as an ally of big business and promoted setting up integrated companies of the holding type. Not all liked it. Political opponents and local public were outraged by the prospect of having those, whom they described as «Moscow’s oligarchs», at the helm. They resolutely opposed the change of owners. But going exactly this way it was possible to restore pretty soon disrupted cooperative ties, to normalize the production cycle and financial position of dozens of enterprises.
Also, there was a need to overcome the tendency towards autarky by stimulating in every way possible the integration with economies of other regions and countries. Representative delegations led by the governor himself made several trips abroad. It is noteworthy that he proved to be a skillful lobbyist. The talks in Seattle with the president of Boeing in 1999 were just one striking example of this. They signed a long-term (10 years) agreement on titanium shipments that provided guaranteed orders for the Verkhnyaya Salda Metallurgical Production Association that employed 17,000 workers.
Brisk foreign economic activities continue. And now there is a reciprocal movement from the other side as well. CEOs of world major companies and foreign diplomats are coming to Ekaterinburg for business talks. These visits prove to be rather fruitful. For example, in the talks of the governor with the French ambassador both sides admitted that the foreign trade turnover (which, by the way, amounts to $50M a year) between the Sverdlovsk region and France was absolutely inadequate. And Eduard Rossel was immediately invited to visit Paris in March 2003 and bring to the French capital a delegation of businessmen to fully represent the region.
To a large extent international successes are explained by the fact that the business elite of the Sverdlovsk region consists of Russia’s major companies. They include EvrazHolding, SUAL-Holding and Ural Mining & Metallurgical Company (UMMC) that have main production facilities in the region. That is why the development of business relations is not something abstract and has definite participants. For example, the emergence of Voest-Alpine technologies and credits of Bayerishe Landesbank on the Ural soil is connected with the start of constructing a plant to produce large-diameter pipes (the project is being implemented by EvrazHolding). Codelco and officials from Chile are interested in the copper business of UMMC.

ON THRESHOLD OF STRUCTURAL CHANGES
During one of his press conferences Eduard Rossel went straight to the point, when he reminded his audience: «Ours is the most metal-producing region in Russia. Metals industry accounts for 52% of our gross production». So, it is not too difficult to conclude that the region’s economy directly depends on the health of this very industry.

R    E    F    E    R    E    N    C    E  The Sverdlovsk region belongs to the most urbanized regions of Russia. The region’s industry employs over 90 % of its able-bodied population. According to the state statistical data, as of July 1, 2002, there are 666 large and medium-sized enterprises operating in the region. Their number can inspire not only a mystical trepidation but also a feeling of respect for so impressive a production strength. These enterprises are concentrated on a territory that is comparatively small by Russian standards. It spans about 195,000 square kilometers. By the way, this is much less than territories of such European states as the U.K., Italy, Romania, Poland, let alone France and Germany.

In the first half of this year the production index of the steel industry did not change remaining at the last year level. The same index for the non-ferrous metals industry went down by 1.2 %. The rate reduction can be considered unavoidable taking into account the fact that most facilities are oriented on foreign markets but at present world market conditions are not favorable to metal sellers. What is more, there are factors peculiar to the Russian economy and because of them costs of metal production are constantly rising. As a result, the quantitative growth does not make any sense. Here is a typical example: volumes of copper and aluminum production in the Sverdlovsk region have already exceeded cap indicators for all previous years but the profitability of enterprises has fallen down.

The Ural State University in Ekaterinburg is considered one of the country�s best institutions of higher education.

The Union of the Metallurgical Complex Enterprises of the Sverdlovsk region (the non-commercial regional association) is carefully keeping track of the trend that is now taking shape. According to the data provided by the Union’s president Andrei Kozitsyn, almost half (47 %) of large and medium-sized metal-producing enterprises became less profitless and, as a whole, in the first six months the total profit volume plummeted from 5 billion rubles to 3 billion rubles (from $158M to $98M).
The main items of metal export shipments are still products with low added value. But leading companies are starting to change their strategy. In particular, leaders of UMMC announced their intention to radically reduce the share of cathode copper in the sales structure. Other companies are undertaking certain changes as well. All this became evident in the dynamics of statistical data. For example, in the same period the production of rolled copper increased 2.4 times. Similar trends are also taking shape in the steel industry as the production of rolled steel is growing at priority rates. The destination of this product is mainly the domestic market.
Thus, the conclusion is that the metals industry is entering the phase of structural transformations and in case they are successfully completed the industry will get a new impetus for developing.
Now let us look at machine-building, the other most important sector of the region’s economy.
This sector shows the highest rates of growth, which amount to 16.5 %. However, dynamics of manufactu-
ring specific types of machine-building products is extremely unstable and controversial. For example, manufacturing of the woodworking equipment, motorcycles and bicycles increased 2 times but at the same time there was a steep downfall in manufacture of metal-cutting machine tools (by 83 %), diesel engines and diesel generators, motor vehicles and trailers (by 60 %). The reason for such downfalls can be explained with low production volumes and weakness of markets.
There is one more interesting figure: manufacturing of products for the military complex by machine-building enterprises exceeded the last year level by 2.4 times. And this change is worth mentioning in more detail.

PARA BELLUM
Keeping in mind the well-known Latin expression «Si vis pacem, para bellum» (if you want peace, prepare for war) one might describe the prospects for reviving the Ural and, in a wider sense, the whole Russian economy with a formula that is close to this expression by its meaning: if you strive for progress, develop arms production.
Historically the Urals’ industry was developing in such a way that arms production was always at its center. As a matter of fact, the industrial metallurgy was started there 300 years ago because Peter the Great needed guns to fight the Swedes.
The accelerated build-up of the USSR defense potential was replaced with the actual refusal of the government of the new Russia to support the defense industry. The world did not become a safer place because of it and the market of arms was not deserted. But the economy of the Sverdlovsk region suffered a great damage. The major high-capacity, technically perfect enterprises with highly skilled personnel were all but stopped. The wave of non-payments, industrial slump and contraction of markets started exactly there. So, the conclusion made by the region’s administration seemed quite logical: «...as far as our region is concerned, restraining crisis processes and expanding the industry mean, above all, the upturn of the military industrial complex».
With the absence of the state defense order and extremely insignificant volumes of arms export shipments there was a need to load idle capacities with manufacturing «peaceful» products. On the whole, the conversion program was successfully implemented. In 1999 Uralvagonzavod, the tank-building giant (the city of Nizhny Tagil) reached the 1989 level by the production volume. The only difference was that in the late 80s it constructed 2,000 tanks but this time the enterprise did not build a single one. The current year seems to be even more successful. It signed a protocol with the Ministry of railways to supply 1300 gondola cars and 6000 railroad tanks. There was no such a large order yet during the whole period of reforms.

P    R    O    F    I    L    E  Eduard Rossel Governor Rossel is a distinguished veteran of the Russian political Olympus and is, undoubtedly, one of its brightest and most outstanding politicians. In the early 1990s many regarded him as a separatist because of his quest to form the Ural republic independent of the federal center but later he supported strengthening the unitary state. The reason for such a change is explicable: being a passionate patriot of the Urals Eduard Rossel proceeds, above all, from the interests of his region. Born on October 8, 1937. Career civil engineer. Has a 27-year experience of working in this field. Headed Glavsreduralstroi, the region’s largest contract organization. Became close with Boris Yeltsin, his predecessor in the governor’s office and fellow-townsman. By order of the president of the Russian Federation was appointed head of the Sverdlovsk region administration in 1991. Two years later was removed from the office «for separatism». During free elections was elected: chairman of the region’s Duma (legislative assembly) in 1994, governor of the Sverdlovsk region in August 1995. In 1999 he again won the gubernatorial election. Intends to run for a third term as well. Despite formal restrictions, the Russian laws have enough loopholes to do it. Married, has one daughter, grandson and granddaughter. Has a wide range of interests and a number of professional certificates and diplomas. He enjoys farm work and wood engraving. Eduard Rossel is also a connoisseur of fine wines.

Nevertheless, the lack of equivalence in transformation is obvious. A railroad car is an ordinary product while a modern tank is an embodiment of the latest engineering developments, technologies and materials. For example, by the degree of computerization and automation as well as by the availability of various electronic devices the Russia T-90C tank is second to none among the most prestigious and expensive cars in the world.
The conversion does not mean the destruction of the potential, which, as Eduard Rossel said recently, «is preserved 100%: the region’s military industrial complex is able to start operating at full capacity in 24 hours». The governor reported that enterprises are working out new types of arms and they have enough resources of their own to do designing.
So as to ensure a necessary volume of orders, as far back as five years enterprises of the defense industry proposed to build in the vicinities of Nizhny Tagil a demonstration and exhibition center of military equipment and arms, i.e. to set up kind of the Urals’ Abu Dhaby. Despite the seemingly fantastic nature of this idea, the region’s administration supported it. Having no budget funds and help from federal structures the initiators of the project managed to implement it in just a few years. In June 1999 the first international Uralexpoarms exhibition was held at the range with the area of 250 km, although only two months earlier it was a wasteland with no roads. It was a success and Eurasian Metals reporters, who were there, can attest to it.
The interest in the exhibition keeps growing. In 2002 representatives of 51 foreign states visited it. With new pavilions and open demonstration sites the exhibition’s space doubled. So did the number of its participants that rose from 107 to 198 Russian defense enterprises.
The same Uralvagonzavod can serve as an example of how efforts like these contribute to advancing their products. In August another shipment of the T-90C tanks was sent to India for its armed forces. The contract provides for supplying 310 tanks, of which 124 are to be shipped and the rest complete as accessories.
The export growth has a tremendous importance but the future of the defense machine-building sector is, nevertheless, connected with reequipping the Russian army. The need for modernization has been evident for a long time. All depends on the size of the military budget that has already started rising.