Ukrainian Steel Town Tries to Hang On

ReutersA backstreet in Mariupol, Ukraine
MARIUPOL, Ukraine -- Vladimir Boiko has sat in the director's chair of Ukraine's second-largest steel mill for 18 years but now feels the weight of the world as never before.

The Ilyich steelworks has cut production by 70 percent as demand slumps in the global crisis. Boiko is fretting about his 54,000 staff -- 20 percent of the working population in this town on the Sea of Azov.

"With the money we have, we have the possibility to withstand the crisis for five, six months. After that? God only knows," Boiko said.

Ilyich, a sort of co-operative owned by 30,000 of its workers, is one of two steelworks in Mariupol. The other, Azovstal, is the country's third-largest.

Puffing smokestacks from the two plants -- powerhouses of communist and post-Soviet times -- dominate the skyline in the town, a focal point in the heavily industrial, Russian-speaking eastern region of Ukraine.

The economy has grown an average of 7 percent annually since 2000 thanks to higher prices for steel; Ukraine is the world's eighth-largest producer, and the sector contributes 30 percent to the country's gross domestic product. But now people fear a new bout of recession as the global crisis spreads to Ukraine. The hryvnia currency hit a historic low in October, and the International Monetary Fund approved a $16.4 billion loan to shore up the banking system.

The first decade of independence from Soviet rule for Ukraine was chaotic, marked by deep recession, hyperinflation, a currency crisis and a disregard for commercial and political legal norms.

Although Soviet days are a distant past for many, people want and expect the kind of social protection that was offered under communism -- cheap housing, employment and health care as well as sports clubs and children's day care.

In good times, the absence of that safety net was less marked. Disposable incomes in Mariupol rose in the past two years to become second only to the capital Kiev, reported one rating agency.

But residents now feel the impact. Boiko has seen no redundancies but has cut salaries by 40 percent on average, and many workers are now sitting at home.

That creates endless personal catastrophes.

Inflation stands at 25 percent annually. Many took advantage of the retail banking boom by taking out loans to buy new apartments or cars. Adding to their woes, many in eastern Ukraine deposited their savings in Prominvestbank, which spent two months in receivership after rumors of a shady takeover caused a run.

Just when they need cash, depositors are barred from making withdrawals. Ilyich now buys cash in Kiev and makes it available to employees at local Prominvestbank branches.

The slump in the steel sector led to a 20 percent plunge in industrial output in October, and the economy shrank for the first time since 2005. The government cut its steel production forecast to 37 million tons from 46 million earlier.

The country's largest steel complex, owned by the world's biggest steelmaker, ArcelorMittal, and Azovstal owner Metinvest, have both halved production in recent months.

Ministers froze electricity and transport rates to help, but in return producers had to promise not to make any layoffs.

Analysts say any improvement depends on a better financing situation to relaunch the building and infrastructure sectors.

But Mariupol Mayor Yuri Hotlubei is anything but a pessimist. He calls for boosted domestic demand for steel, as he predicts that the Euro 2012 soccer tournament, to be co-hosted with Poland, will be a key driver for building hotels, airports and infrastructure.

Local authorities, he says, could create demand and jobs if the government gives them cheap credit from the IMF loan.

Hotlubei's second plan is longer term. "If before, we were getting enough from our steel mills and machine manufacturers, now the crisis is pushing us toward the process of creating new sectors in the economy of our town."

For Boiko, however, the strategy is "to survive."

"There is no other strategy. Just to live through this," he said.