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Shock waves from fall of ruble reach here Laid-off steelworkers now have a vested interest in Russia Friday, September 04, 1998 By Dennis B. Roddy, Post-Gazette Staff Writer
When the Russian economy dropped like a stone into the world's pond, one ripple touched the leafy Carrick hillside where Eric Baxendell sat, out of work and suddenly aware of something called the ruble.
Three weeks earlier, U.S. Steel's Irvin Works laid him off. Losing a job in steel is a Pittsburgh experience bordering on rite of passage. When Japan's economy soared in the 1970s and 1980s, American steelmakers were overrun in their own marketplace and companies such as LTV, where Baxendell and his father had both once worked, closed plants and laid off workers.
But this time, the layoffs occurred not because another nation was doing well, but because one was falling apart. When Russia's economy slumped, its steel industry tried to export its way out of the crisis.
And in an export-sensitive business such as steel, Baxendell's chances of ever getting back inside the Irvin Works could be buried under the rubble of the ruble.
"They're selling things below the production costs," Baxendell said.
That is the short explanation, of course. The fine points of Russian politics and the vagaries of the international currency markets are intertwined. But like most Americans, Baxendell can make some sense of the narrative, but not the economics.
"I'm hearing about Yeltsin wanted his prime minister and the one he nominated just got voted down by his parliament. Yeltsin doesn't have the confidence of the people. Now, as far as the ruble, I can't say I understand everything," he said.
What Baxendell understands with painful clarity is that what he thought would be a one-week layoff has stretched into its third week and that, for some reason, the appliance makers that usually buy the huge coils of sheet metal Baxendell's plant makes, are not buying from U.S. Steel and might be getting it somewhere else.
The effects of a sometimes incomprehensible, far-off crisis on the Pittsburgh region are as hard to trace as a stray bullet on a battlefield. But businessmen and economists, union officials and ordinary workers agree the past week's market mayhem, both in Moscow and Wall Street, hint at the possibility of slowdowns in established industries and the potential for slower growth in the newer ones that were nurtured as the replacements for vanishing industries.
"Instead of selling 20 (medical imaging) units, we might end up selling 17," said John Friel, chief executive of Medrad, an Indianola-based medical technologies concern that employs 960 people, 700 of them in Allegheny County.
Friel's company was purchased by the German pharmaceuticals giant Schering AG three years ago. German companies, especially its banks, are heavily invested in the Russian economy and likely will feel some impact. Still, even though Medrad sells its equipment in Japan and, to a small extent, in Russia, the economic troubles there are likely to be reflected only in slower growth, and only if world market conditions worsen.
"Yes, there is an impact, but it's more general. It's not a dramatic and immediate impact," Friel said. "If it gets more expensive for people to buy your product in a certain market, then your sales in that market are going to slow down."
That, of course, is how economics works in America.
But Jeffrey Williams, a professor at Carnegie Mellon's graduate school of business, warns that the full implications of the Russian crisis are not clear, even as Wall Street continues to stagger amid confidence unhinged by the sight of chaos in Moscow.
"Every time we try to understand the Russian economy by our rules," Williams said, "we get it mixed up."
One thing that is clear enough to Eric Baxendell is that his job might not come back. Based on the available evidence, it began to vanish six months before he was hired.
At 26, with a bachelor's degree in criminology from Duquesne University, Baxendell had already survived one steel company. He worked for several years at the LTV Hazelwood coke plant. When it closed earlier this year, he was picked up, after a few months on unemployment, by U.S. Steel's Irvin Works.
He was hired April 13 of this year, to help produce the long sheets of steel that are rolled into huge coils and sent off, mainly to appliance makers, which turn the steel into washers, dryers and refrigerators.
"They said things might slow down come October," Baxendell said.
But it was the previous October when the real troubles began. Overnight, the Asian stock market imploded, with its important currencies going into free-fall. What had been touted by economists as the Asian miracle, a seemingly limitless market with a burgeoning population, ground to a sudden halt. Building and manufacturing, two areas that used enormous quantities of steel, were hard hit.
Korea, one of the major producers of Asian steel, suddenly had an enormous excess. According to figures at the American Iron and Steel Institute, imports of Korean steel to the American market alone have risen by 89.5 percent this year.
When the Asian market collapsed, foreign lenders became leery of other emerging markets. The steady flow of investment capital that had been reaching the world's newest market economy, Russia, slowed. In turn, Russia's heavy manufacturing and oil industries faced abrupt competition with Asian producers. Worse still, 40 percent of Russia's steel exports went to Asia, where demand had crashed.
It snapped into focus for Tom Ferrall, a U.S. Steel executive, when he was visiting the site of the company's closed South Works in Chicago. The company wants to sell the site and Ferrall was there to look it over.
Nearby, he could see a terminal for the Port of Chicago, where a Russian freighter had docked.
"They were unloading rusty looking steel coils," Ferrall said.
Andy Sharkey, president of the steel industry's trade group, the American Iron and Steel Institute, called the onslaught of Asian and Russian imports "an emerging steel trade crisis," but imports at distress prices won't likely be restricted to steel.
"If conditions stay the way they are, I think you're going to see a greater impact on specific basic industries in Pittsburgh -- industries we're good at: steel, aluminum, glass," said CMU professor Williams.
University of Pittsburgh professor Bob Donnorummo, associate director of Russian-East European Studies, said a Russian market hungry for hard currency, such as U.S. dollars, will push their largest exports onto the market in ways that will drive down commodity prices and hurt some energy companies in particular.
"Unfortunately, their greatest exports are commodities -- oil, timber, natural gas," Donnorummo said.
But while the Russian stock market captured world attention as it careened into insolvency, contributing to jitters in the American market, that is not the basic problem.
"The whole Russian stock market was half the size of the value of Home Depot," Donnorummo said. By another comparison, the Russian stock market was roughly 1/15th the size of General Electric, the biggest of the 30 stocks that comprise the famed Dow Jones industrial average, as measured by market value.
For that reason alone, American investors won't rise or fall on the Russian market alone.
The real problem in Russia, Donnorummo said, is taxes.
They can't collect them.
In the wake of independence, the Russian parliament never enacted a personal income tax. Business taxes are very high, and hardly ever paid in full. As a result, the Russian government, to avoid hyper-inflation from printing excess money to pay for itself, borrowed heavily from the west.
As the Russian government borrowed heavily, its lenders lost the value of their loans because of the devaluation of the ruble. Hit by this loss in Russia, they sold their holdings in other emerging markets to provide them with the cash to remain solvent as they write off Russian investments, adding to the cycle of depression in emerging markets.
"What we hope is that it will stabilize," Donnorummo said. "We're probably looking for two to three years of problems for emerging markets."
On a day earlier this week, when the ruble went into freefall and the New York Stock Exchange resembled the Little Bighorn, Janice Finnegan was watching the morning news. Laid off from Irvin Works the same day as Eric Baxendell, the 39-year-old Clairton woman was reliving a nightmare.
Suddenly it was 1982 all over again and she was being let go by U.S. Steel. She remembered how her first job vanished in the economic vortex of the Reagan years and how she moved out-of-state, tended bar, worked part time as a secretary, even baked cookies at home to sell.
When she landed another steel job, at long last, in 1989, she wasn't called back from layoff. She'd been gone so long she had to be rehired outright.
Now this.
There, on the screen in her living room, were President Clinton and Boris Yeltsin, two leaders of superpowers, each hobbled in his own unique way: Clinton by a sex scandal, Yeltsin by a scandalously bad economy.
"I just talked to guys at work and they said it didn't look good until the beginning of the year," Finnegan said.
She was a bit cross with Clinton, too.
"He said we're going to help Russia, but he didn't get to how we're going to help them and what we're going to do," she said.
The thought of Russian steel piling up on docks somewhere angered her.
"I do understand, you need to have imports. I understand that," she said. "But it just irritates me."
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