Russia: The Trouble with Putinomics

If you want to take the pulse of Russia as its oil and gas boom of the past few years comes to a sudden and wrenching stop, leave behind the garish consumerism of Moscow and drive 220 miles (355 km) southwest to the small Russian town of Lyudinovo. For the first part of the five-hour trip, the road is a smooth four-lane highway that whisks you past gleaming gas stations and a brand-new Samsung TV factory. Then everything slows down. The highway turns single-track and becomes progressively rougher. For the last 20 miles (32 km), you bump along the ruts, distracted only by the swaying rows of silver birch trees that flank the road.

There's nothing flashy about Lyudinovo (pop. 47,000), whose name translates roughly as People's Town. The central square is a traffic island with a Soviet T-34 tank on a pedestal, a World War II memorial. Next to it is a farmers' market, where local babushkas with woolly hats and dodgy teeth sell homegrown carrots and potatoes for 10¢ a kilo. But look closer and it's clear that even Lyudinovo isn't frozen in time. An emporium that opened a year ago sells South Korean refrigerators, French yogurt and fake Italian pumps. Several houses are being built on the outskirts--the first new residential construction in more than a decade. And until recently, there was plenty of work for everyone at the five factories that employ the bulk of the townsfolk.

No longer. In early November, four of the five factories abruptly informed their workers that they were switching to a three-day week. Then the layoffs started. The cast-iron foundry, which pays the best wages, cut 80 of its 1,200 workers, and managers announced they might have to fire up to 600 more. The cable factory laid off 40 people and cut pay 15% for those who remained. At least they're being paid: the machinery factory nearby is two months in arrears. "People woke up one day, and everything had changed," says Ivan Pronin, editor of the local paper, the Lyudinovo Worker. "It's like a hurricane blew through here."

As the world financial crisis buffets country after country, Russia hasn't been spared. It's in much better shape than it was during the last financial crisis, in 1998, when the ruble collapsed and the country defaulted. This time, Russia has $450 billion in foreign reserves left from the $600 billion it had amassed thanks to the soaring energy prices of the past few years. Its biggest banks, all of them state-controlled, appear to have largely avoided the toxic assets that have been the downfall of so many of their counterparts in the U.S. and Western Europe. Yet the drop in energy and commodity prices since the summer is exposing Russia's fragility: gas and metals account for more than three-quarters of export earnings. The boom, it turns out, was built on expensive oil and precious little else. Economic growth, which averaged more than 7% for the past five years, has tumbled, and the government now expects the economy to contract 0.2% this year. And for the first time since the collapse of the Soviet Union in 1991, the threat of large-scale unemployment looms. "Money was falling from the sky in the past two to three years," says Maxim Oreshkin, the head of research at private-sector Rosbank in Moscow. "Now it's stopped falling."