RUDNIK MATROSOVA, Russia -- Throughout a factory filled with the din of machines grinding rocks, female guards tote rifles and shotguns, like a small militia of Annie Oakleys.
Surveying the vast room, one might conclude that this factory, which lies in the subarctic taiga 250 miles north of the Pacific port city of Magadan, exists only to create mud. Tons of rocks are pulverized every day and flushed through a series of ridged basins, where the heavier sediment sinks.
But in that sediment swirl glints of something more valuable: gold.
Magadan is the name of a city and a vast region whose gold and silver mines -- once part of the Soviet Union's dreaded Kolyma Gulag system -- were opened in the 1930s by Josef Stalin's slave laborers.
In recent years, Magadan has won a new notoriety, as destitute villages turn into ghost towns and regional capital residents go without indoor heating while the outdoor temperature drops to minus-50 degrees.
In the midst of another brutal winter, Magadan's leadership is hoping that gold and silver, along with a little creative administration, will reverse the decline into poverty and isolation.
After all, Magadan Oblast, like other mineral-rich but struggling regions in the Russian Far East, sits on enormous potential wealth.
"There are the three richest [gold] deposits in the world here," says Vladislav Feoktistov, general director of the ultra-modern new Kolyma Gold Refinery, which allows Magadan to process its precious metals to world standards. "Foreigners know all about this. But they won't invest."
There are reasons for that. Some investors hold back for fear of Russia's corruption and lack of respect for the rule of law.
And gold has conspired against Magadan lately. Its price on the world market has fallen from a high of $375 a troy ounce in 1996 to $255 in the summer, a loss of $200 million a year in revenues for the Russian-Canadian venture Omolon Mining Co., said its Canadian general director, Bill Fotheringham. (The price was back up to $286 this week.)
Seventy percent of the Magadan region's industrial output lies in the extraction and processing of raw materials.
The economic base is so narrow that it is unusually vulnerable to zigzags of world gold and silver trading.
"Forty percent of the tax base of the Oblast comes from my company alone," says Fotheringham. "It just shows you how desperate the area is for development."
Convicts began arriving in the Magadan region in 1932, and the city of Magadan was founded 60 years ago.
It spent the year trumpeting the anniversary as a celebration of hopes for the future. In the summer, the Russian federal government approved a plan to create a free economic zone in the city of Magadan, allowing it to import equipment and other goods duty-free. The city administration immediately expanded its borders to extend the benefits to an enormous swath of surrounding territory.
The zone has brought in an additional 11 million rubles ($400,000) in registration fees as companies enter the market, Vice Gov. Antonina Lukina says. Twenty-seven trading companies have signed contracts to do business in Magadan. Prices of some consumer goods have dropped by 58 percent.
"We now actively import construction materials, industrial equipment, small boats, furniture, cars and food from all over the world," Lukina says.
Rudnik Matrosova, however, lies outside the free economic zone, and such talk stirs little excitement.
Olga Zhidenko, 24, is a schoolteacher who often goes unpaid, so on the side she runs a small shop out of a shipping container.
The shelves are sparsely lined with potato chips, candy bars, Korean noodles, and bottles of vodka and beer. Her husband works in the mines, and they barely survive on their wages. "We have been married for three years, and we barely even have enough money for food," Zhidenko says.
She says that Magadan's free economic zone may cause food prices to rise in Rudnik Matrosova.
Goods, including food, go through customs at a "border post" 50 miles from Magadan. "You'll have to `import' things from the zone, and you'll have to pay customs and taxes," she says.
Until 10 years ago, most of the gold in Magadan Oblast was mined from placer deposits, says Ilya Rosenblum, Omolon's board chairman.
These alluvial deposits were easy to get at, and the production cost was low.
In the early 1990s, a crisis hit Magadan mining. Privatization threw the stagnant state mining industries into turmoil, even as the easy deposits were exhausted. The main options were the more expensive rock-crushing procedures, such as those at the gulag-era Rudnik Matrosova, or distant arctic mines in the permafrost.
