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. Last Updated: 07/27/2016

Crippled by Credit in the Rust Belt

ReutersA worker welding a pipe last month in the Urals town of Karabash, dubbed one of the dirtiest towns on the planet.
KARABASH, Chelyabinsk Region — Each weekend, copper worker Sergei Begutov cuts stones from this toxic, frozen hillside and sells them for 5 rubles (15 cents) each to help fund car loan repayments that now exceed his wages.

Like workers across Russia, he has been thrust into poverty by the economic crisis as plunging wages render repayments unaffordable for loans that had offered a taste of a better life.

Last year, Russian banks doled out more than 1 trillion rubles ($29.4 billion) in mortgages and consumer loans in a flood of easy money that reached every corner of this vast country.

After 80 years of communism and the economic collapse that characterized Russia in the 1990s, a consumer spending spree brought home-cinema systems and flat-pack Swedish furniture into Soviet-era tower blocks.

Total consumer debt at 3.8 trillion rubles ($111.8 billion), or 9.1 percent of gross domestic product according to Central Bank, is only about half the average of emerging economies. But it is almost double the level of four years ago, said Natalya Orlova, chief economist at Alfa Bank.

And in a place where winter temperatures fall to minus 40 degrees Celsius, the pain of the crunch is acute. Sweeping through this desolate town of 16,000 and the Urals Mountains rust belt surrounding it, the economic downturn is leaving deep social scars that may undermine Kremlin efforts to contain a crisis aggravated by weak oil prices.

"Everyone here has credit," said Begutov, a pale 23-year-old, leaning his ax on the snow-covered hillside. "On the wages we earn … if you don't take credit you can't get anything."

By his side stood a shivering co-worker who helps sell the stones to a local builder to pay his own debt: an 80,000 ruble bank loan to repair his dilapidated wooden cottage.

Since a metals boom ended last year, Begutov says the privately owned copper works has canceled overtime and cut wages, slashing his monthly pay to 6,500 rubles ($190) from more than 16,000 — less than the 7,000 rubles he pays for his car loan.

"I'm only surviving because my wife helps," he said.

Many miners and metal workers are struggling to pay back loans after wage cuts that averaged 30 percent to 35 percent, said Andrei Shvedov, the deputy head of the million-member Mining and Metallurgical Union.

"It's an acute problem," he said.

In Karabash, a copper-smelting town dubbed one of the dirtiest on the planet by environmentalists for sulfur dioxide and heavy metals, every second store still has a sign offering credit, though shopkeepers say demand for loans has dried up.

Vyacheslav Kuznetsov, the owner of the local electronics store, said 70 percent of sales last year were taken on credit as four banks jostled to give out loans of up to 40,000 rubles at interest rates of up to 40 percent.

Thomas Peter / Reuters
Former truck driver Yevgeny Dereguzov sitting in his kitchen last month in the Urals steel mill town of Zlatoust.
The banks demanded just two proofs of identity and none of income. "If they said they earned a million, we'd write a million," he said of his customer's declarations.

He has no idea how many are now struggling to pay off their loans. "Thankfully, that's not my problem," he said.

A one-company town where the local branch of Shvedov's union toes the company line by denying that workers' pay has been cut, Karabash has not seen social upheaval emerge from its boom.

But in nearby Zlatoust, an industrial city of 200,000, the strains are starting to show. Last month, 16 steel workers captured national attention by holding a five-day hunger strike, the first by Russian workers in a decade. The leader of the strike said every one of the strikers was struggling to repay loans.

The strike was called off after employers agreed to pay wage arrears, but workers are threatening to resume it if pay is not doubled to two-thirds of their precrisis levels.

The Zlatoust steel mill's director, Sergei Khomyanin, dismissed the strikers as extremists but agreed that credit problems would make the current crisis more painful for workers than the economic collapse of 1998.

"Of course it will be worse, because credit has entered the equation," he said. "The social problem is far more acute."

The town's mayor, Dmitry Migashkin, is worried that people struggling with credit may turn to crime. "It's dangerous," he said.

Yevgeny Dereguzov, an unemployed 53-year-old single father of two and veteran of the Soviet war in Afghanistan, has received threatening letters from the bank and is expecting a visit from bailiffs.

"I even bought my kettle on credit," he said in his three-room apartment in an aging wooden apartment block near the steel plant. It is crammed with the fruits of loans, down to its faded, brown-velvet living-room suite.

"The bank gave me everything," Dereguzov said.

Last year, the trucking company that had been paying him up to 18,000 rubles per month as a driver closed their doors. Now, he makes no more than 300 rubles or 400 rubles for a 14-hour day driving an unlicensed cab.

He is three months and 26,000 rubles behind on repayments of a loan for 129,000 rubles that he used to buy PVC windows to protect his two children against the winter cold. The bank charges annual interest of 39 percent.

"I was someone they respected. Now, I'm on their blacklist. It's not my fault," he said. "If they come I don't know what will happen, from a fight to God knows what. I'll defend my property. I'd rather go to prison than lose it."