Approaching Economic Realities

Times are changing in Yuzhno-Sakhalinsk, and proof of this comes in the form of something I have never seen before in the town, and a few people I have spoken to on the subject say the same thing: a large banner in the centre of town advertising expatriate housing.  A year or two ago this would have been unheard of, and prices for expatriate housing just seemed to be spiralling eternally upward.  So what’s changed?  Firstly, Exxon have finished their main construction project.  Typically, it takes about 10%-20% of the number of people to operate and maintain a facility than to construct it.  There were also a lot of subcontractors involved in the construction, who have now packed up and left or downsized.  In addition, Exxon completed the construction of their new housing complex, meaning several dozen well-paid expats moved out of their apartments in town.

The process of demobilisation from the island of large numbers of foreign workers which Exxon has started marks the beginning of the end of the boom which Sakhalin has experienced for the last five years.  This process will gather pace and become a flood as the construction phase of the gigantic Sakhalin II project nears completion at the end of 2008.  Our company alone is looking to reduce its workforce on the island from about one thousand to fifty or sixty.  Almost every other contractor and subcontractor will be doing the same, many of whom will leave altogether.  It is highly likely that the number of foreigners working and living in Sakhalin in 2009 will have gone from the tens of thousands at the peak a year ago to just a few thousand.  This cannot fail to have an enormous effect on the local economy.

What is true for rented housing is true for office space.  The lease on our office is due to expire on 31st January 2008, and the landlord called me up last week gleefully telling me he would have to increase the rent if we wanted to renew.  He didn’t want to send me a proposal with the new rates, he said we should meet to discuss it.  No, he couldn’t come to my office, I should come to see him.  In an apartment somewhere.  No thanks, I said.  With that, he started shouting that plenty of other people want the office space and he’ll simply rent it to them.  I doubt it.  It took a morning of looking to find two suitable office spaces, in buildings newer than our current one, and for a cheaper rate.  We are paying well above market rate for out current office, largely because last year we were caught in a vice between workload and the expiry of our lease.  Not so this year.  We are about to take a better, cheaper office, and our current landlord can find some other mug to rent from him at 25% over market rate.  The availability of office space in Yuzhno-Sakhalinsk shot up when Exxon finally moved into their enormous new office building, freeing up whole floors all over the town.  And as the contracting companies downsize or leave, yet more becomes available.  Furthermore, one or two new office blocks have either recently been built or are due to be completed shortly.

Russians have never been too strong on economics ever since they spent 80 years pretending the laws of such didn’t apply to them.  Many of the residents of Yuzhno-Sakhalinsk are probably no better informed now.  The town witnessed an extraordinary boom as the giant oil and gas projects kicked off on the island, and the residents benefitted enormously in the form of salaries several times the national average, rental prices on a par with Moscow, and business opportunities in abundance.  A year or two ago, landlords could demand any price they wished for a property, suppliers of goods and services set out the rules and changed them at will, inviting any company who complained to go elsewhere, and if you were Russian and spoke a smattering of English you could get a well paid job, sit and do nothing, and move to a better job a month or so later.  In itself, none of this was a bad thing for Yuzhno-Sakhalinsk, in fact I think it was a very good thing.  But as any Russian should know, such excess brings with it a nasty hangover, and I don’t think anyone in the town is prepared for it – least of all our office landlord.  The mood amongst the local population is generally that the good times will last forever, and the economic power they had two years ago will last forever.  I can’t figure out if they are in denial, or they are simply blundering along in ignorance.

Take another example.   A year or two ago it was almost impossible to find a decent canditate for any position in a company.  Anyone who was any good at anything was employed already, and their employers made sure they kept them.  Those who did find themselves on the job market usually demonstrated why within a week of starting a new job.  That was then, this is now.  These days, CVs are starting to drop through our door, CVs of people with experience who have worked for foreign companies.  Two years ago, nobody had any experience and you had to take a chance that they’d turn out okay.  Nowadays, people come with experience, history, and a reference.  In the last four months, we have taken on two members of staff who have been demobilised from a construction project, have come with a good reference from their previous employers, and the expectations we had of them have largely been met.  Yuzhno-Sakhalinsk is a small town, and for years many of the local Russians seemed to think that reputation in the job market didn’t matter, as those were the days when being Russian and having a pulse almost guaranteed a job.   Employees used to stomp out of the door waving two fingers at the management, and start afresh in another company right away.  These days, I get phone calls from managers in other companies saying an ex-employee of mine has swung through the door applying for a job, and what did I think?  Some of the local Russians have been extremely smart in adapting to this shift in the balance of power, making sure that they build up a good reputation with an employer who then passes on his or her CV to a friend in another company with the recommendation they take the individual on.  Others are still stuck with the Soviet-like belief that they are entitled to a job under any terms they demand.

And yet another example.  The number of suppliers of goods and services has increased, and competition has entered the marketplace.  Nowadays, companies can demand to be treated like customers and not beggars, and supplier assessments are possible.  Suppliers can now be blacklisted, and are.  Three quotes can be obtained for most purchases, something which was nigh on impossible two years ago.

These patterns are only going to intensify and solidify until Yuzhno-Sakhalinsk becomes a normal market economy, where customers are treated as such and suppliers chase their business.  For many, the economic correction is going to be harsh: salaries will drop, no longer will they be able to depend on $30,000 per year income from renting out their apartment, and they will have to work to keep their jobs.  Any random group of Russians contains at least a few extremely smart and hard working individuals, and these will be the winners of the new reality.  But the days when everyone was a winner in Yuzhno-Sakhalinsk are quickly coming to an end.

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6 Responses to Approaching Economic Realities

  1. yellerKat says:

    Oddly enough, the same thing is happening to BTL scum in McCavity Broon’s Miracle Economy! See these guys!

  2. Alisa says:

    They have smoking/non-smoking over there?

  3. Pingback: Global Voices Online » Russia: Sakhalin’s Expats and Economy

  4. Stu says:

    BP here on the island are moving out also.

  5. Becca says:

    Hi, just ran across your blog about a week ago, when I discovered how fascinating Sakhalin Island is, historically and geologically, and hope for the opportunity to visit it someday. I’m an American who spend her teenage years in Silicon Valley, in the San Francisco Bay Area in California during the tech boom in the 1990s. I mention this because what you’re describing about the soon-to-be deflating oil boom in Yuzhno-Sakhalinsk sounds a lot like the dot.com crash of 2001, and the failure of many people to see that kind of thing coming is something I’m far too familiar with.

    Back in the 90s, there were so many jobs open in technology that companies practically took people in off the streets, often with no real computer experience other than running Microsoft Office. I had high school classmates who worked part-time at companies like Sun Microsystems and Lockheed-Martin, doing boring number crunching or data entry jobs that paid $17/hr (back when the dollar was actually worth something). People switched jobs every 6 months, from start-up to start-up, without it being a big deal. Then 9/11 happened, and everything crashed (even though it was on the way out anyway). My husband was lucky enough to be in an industry that was highly specialized and skilled, and he’s been employed continuously since 2000, when he first came to California. But there was a definite correction that took place in 2001 after the dot.com crash.

    Now, you actually have to know something about computers to get and keep a job in Silicon Valley, because there aren’t the number of start-ups there were before, and most of them are in solid sectors like semiconductors or hardware, rather than predominantly in the dot.com market. There were several years immediately following the “bubble burst” where it was very quiet, with significantly few major product releases, IPOs, job availability, the whole nine yards. Tons of people moved out of the state to other states with technological centers (like Colorado or Texas), because they couldn’t get rehired in the Valley, or could only get jobs that didn’t pay enough to sustain their lifestyles. Currently, things on the way up in the Valley again, but that’s taking place alongside the housing meltdown that recently shook this country last fall, so people still aren’t making as much as they did back in the tech boom days, and man people have lost their homes or found their houses decreasing in value beyond what they’ve put into them, since we’re also coming off of a huge home remodeling trend nation-wide. So things are kind of readjusting again, but not back up to the insane degree of prosperity during the 1990s. Those days are gone forever, I think.

    Anyway, I really appreciated reading this blog post to see how many of the same kinds of economic scenarios are playing out in other parts of the world, particularly areas to which most Americans have little exposure. Thanks for all of your informative posts!

  6. Tim Newman says:

    Thanks for your comment Becca, this is interesting stuff indeed. I guess the lesson which lies therein is that the laws of economics apply no matter where you are on the face of the earth.

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