Steel City: Between Ruin and Bankruptcy

LYSVA, Ural Mountains -- The factory stands idle, smothered by debt. The city is flat broke. And everyone with a garden is out planting potatoes to see them through the coming winter. Two-and-a-half years after the collapse of the Soviet Union, the grimy old steel town of Lysva, with a population of 94,000, is a requiem for socialism. Capitalism never had a chance to transform this typical company town on the western flank of the Ural Mountains; Russia's lurch toward a free market killed Lysva from afar. The Lysva metallurgical factory, which employs one out of every eight residents here, has halted its operations because it cannot pay the $780,000 in back wages owed to its 12,000 workers. While Moscow officials put the finishing touches on a bankruptcy law, small cities like Lysva across the Russian heartland are becoming ever more desperate. "A woman came to my office last week and begged me to pay her back wages," the factory president, Oleg Ananin, said. "She said she hadn't eaten anything but grass in two days." Lysva residents cannot understand why their factory is going under. During World War II the plant made Soviet army helmets, but in the 1960s it converted to peacetime production and began churning out kitchen stoves, enamel pots and pans and other metal products. But it is so inefficient that the steel coming out of the factory is worth at least 15 percent less than the raw materials and energy that went into producing it, said Mikhail Balan, the company's marketing director. Workers are not the only ones going unpaid. The factory is far behind on the city, regional and federal taxes that consume up to 90 percent of its meager profits. It cannot pay the energy bills that have risen 2,000 percent in the last three years. It cannot even buy raw materials. The insolvent factory cannot begin to pay for its daycare centers or maintain its apartments, in which 70 percent of all city residents still live. Nor can the silent plant finance its medical clinics, summer camps, swimming pool, hotel, gym, stadium, skiing center or Palace of Culture -- all perks that workers came to expect under socialism but that make the factory uncompetitive. In short, the factory that was founded in 1785 and won the Order of Lenin in 1942, is now bankrupt. And since the giant smoke-belcher once provided up to 67 percent of the city's tax base, as well as most of its social services, the city of Lysva has gone bust too. The city owes $1.1 million in unpaid wages and utility bills. With its poverty, aging brick buildings and disastrous balance sheet, Lysva is typical of thousands of small Russian cities that were built around one industry. When it fails residents have nowhere to turn. Since Russia passed its first bankruptcy law last year, 30 enterprises have registered as bankrupt, and at least 1,200 more are considered insolvent, according to Sergei Belyayev, head of the newly created Federal Bankruptcy Agency. Only in the last several weeks, however, has the government begun issuing concrete instructions on how the bankruptcy law is to be implemented. And it is not yet known which factories will be bailed out and which will shut down or be sold. Officials say the bankruptcy process will give factories such as Lysva's a structured way to reorganize, settle debts and possibly attract fresh capital. Unless creditors can be assured payment, at least by a bankruptcy court, no one will invest here, they note. But it will not be easy to persuade Russians that bankruptcy means anything less than meltdown. "They think bankruptcy means the end, that the factory doors will be nailed shut, and no one will ever be let in again," said Viktor Golubev, the deputy director of the bankruptcy agency. Lysva officials believe that bankruptcy will only give foreigners and the Russian mafia a chance to buy up their plant at rock-bottom prices. "A small group of people in this country are now amassing a huge amount of capital," Ananin said. "Once it becomes profitable to invest here ... they'll buy out our plant. I think this is being masterminded." But local officials believe that the factory could be profitable if it had a temporary tax holiday and was relieved of the expense of all its social services. "Of course, all of this raises our cost of production and lowers our competitiveness," said Ananin. "We still have a mixture of socialism and a market system."