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Russia: Steel Mill Town Struggles To Keep Afloat

Cherepovets, Russia; 2 July 1997 (RFE/RL) -- At first glance, this provincial Russian city looks like any other one-factory Soviet town -- gray buildings, decrepit public transport, and a line of smokestacks on the horizon belching pinkish, yellow fumes. But here, at least, the local enterprise pays its salaries more or less on time.

The 300,000 residents of Cherepovets, located some 600 kilometers north of Moscow, depend on the local steel mill, Severstal, for survival. It employs one out of every six of the city's inhabitants, and dozens of local businesses rely on the health of the enterprise.

The steel mill, one of Russia's largest, has managed to ward off economic collapse by aggressively drumming up business in foreign markets. Now almost 60 percent of its production is sold abroad.

Alexei Mordashov, the dynamic 31-year old general director of the mill, says the collapse of domestic demand forced the company to look beyond Russia. As he put it: "We had to find new markets for our production due to the decline in the Russian market."

The company, however, has been embroiled in several legal battles with foreign governments who charge that it has been dumping steel at bargain-basement prices on world markets. The company hopes the cases will not cause their hard-won export markets to dry up.

For now, the company stands in stark contrast to the rest of Russia's heavy metals industry, which has been a free-fall for several years. Last year, Severstal managed to boost production and sales, thanks to its export markets.

At the steel mill, an aging behemoth, workers toil around the clock to churn out steel for a growing list of foreign countries, including China, United States, and Southeast Asian nations.

Gennady Vasenev, who is in charge of operations at Blast Furnace Number Five, explains amid the roar of the mill's operations that it is working at about 70 percent capacity. "We work only when we have orders," he explained, giving a clear indication that the enterprise is doing better than most in Russia.

But the plant is a far cry from its heyday during Soviet times, when it served the Soviet military-industrial complex, rolling out steel for the defense industry and Moscow's ambitious space program.

Vladimir Krainov, deputy head of Severstal's export department, says management has worked hard to adapt to the sudden economic changes associated with privatizing the mill and withdrawing state support.

"Before the main criteria was implementing the plan based on tonnage," says Krainov. "Now we are trying to serve the customer."

The company is attempting to modernize and streamline production, gearing output to the demands of foreign markets. It has begun to phase out older technology, such as its energy guzzling open hearth furnaces, in an attempt to cut costs and minimize pollution.

But its investment plans have been stymied by the difficulties of raising funds. Severstal was privatized in 1993 and turned into a joint stock company, almost half of which is owned by its employees. Management had planned to invest more than $1billion in upgrading operations, but was forced to scale back the plan due to financial difficulties.

The company's net profits after paying sky high taxes plunged in 1996 to just $4.7 million, a poor performance over 1995 results of $125 million. Analysts say that the poor profit results could be caused by declining world prices for steel and rising costs at home.

Severstal has tried to spin off some of the enterprise's old operations, including responsibility for maintaining city apartments. But Cherepovets is still struggling with the legacy of being a one-factory Soviet town, where the enterprise took care of everything.

At a meeting to celebrate "Youth Day," Mordashov, the enterprise's director, fended off questions from young employees about why Severstal had not invested more into community services and local infrastructure.

Sounding exasperated, Mordashov explained that Severstal still invests in social projects, but could not afford to spend more. As he put it: "Before Severstal invested money into everything and everything was maintained by the factory, but now things have changed."