The G8 summit held in St Petersburg in July was an endorsement of the city’s status as Russia’s fastest growing economic and business centre. Russia’s old imperial capital, which has already been declared a Unesco world heritage site, underwent a complete facelift prior to the arrival of the leaders of the world’s most powerful nations. New Latinised street signs were put up, the buildings in the historic centre were spruced up, and multilingual tourist guides known as ‘Angels’ were deployed in the street – all of which enhanced St Petersburg’s reputation as Russia’s most European city.
St Petersburg is the home of Russia’s president, Vladimir Putin, who was determined to give his birthplace pride of place as Russia’s window on the EU. “Mr Putin has done all he can to raise St Petersburg’s status and restore its former grandeur,” says the city’s governor, Valentina Matviyenko, who two years ago was the first woman to be elected to the post of governor.
City rivalry
As deputy mayor of the city in the early 1990s, Mr Putin had a dream to turn St Petersburg into Russia’s financial capital as well as a hub of foreign investment. For years, the city looked on in envy as western money poured instead into its booming rival, Moscow.
Now the tables have turned. Mr Putin, who was born and raised in Leningrad, as St Petersburg was then called, is leveraging Kremlin power to revitalise the city of his birth.
Three hundred years ago, as Peter the Great stood on the edge of what was a vast swampland on the Baltic coast, so the legend goes, an eagle swooped from the sky to alight on his shoulder. The Tsar took this as a sign to build his imperial capital on the site and create an opening to the west, thereby dragging his backward nation into the modern age. Today, the grandiose palaces, canals and elegant Belle Epoque boulevards give St Petersburg a more European flavour than any other Russian city.
“St Petersburg is not only a window on Europe, as Peter the Great wanted, but, without exaggeration, a window on the whole world,” Russian finance minister Alexei Kudrin announced proudly after the G8 meeting.
The results of the efforts to turn St Petersburg into a major economic centre are clearly bearing fruit. Last year, the city’s industrial output rose 18% to $54bn, while the level of capital investment grew 9.7% to $5.4bn. As could be expected, the economic boom is fuelling inflation, which stood at 12% in 2005, although prices are showing a downward trend from previous years.
The city’s political and economic stability has attracted favourable ratings from the major agencies. Standard & Poor’s (S&P) rates St Petersburg BB+, Moody’s Baa2 and Fitch BBB-, all with a stable to positive outlook.
“The ratings reflect the city’s increased commitment to address its most urgent infrastructure needs, as highlighted by rising capital expenditures and long-term investment plans,” says S&P analyst Boris Kopeykin. “St Petersburg’s low debt, good debt management and sound finances, combined with strong financial performance and growing revenue, also support the rating.”
Brisk trade
The city has always had strong trade links to the outside world. Last year, foreign trade turnover was $14.1bn, which was 4% of the country’s total.
In the same period, exports grew by 22.3% and the city was trading with 172 countries, mainly the US, China, Germany and Finland. The major export items are machinery, industrial equipment and metals. Imports are mainly food, state-of-the-art machinery and chemical products.
St Petersburg has historically been an important manufacturing centre. It is also the largest port in north-west Russia and therefore a strategic gateway for trade with the western markets.
As in other regions of Russia, St Petersburg’s economy has undergone fundamental structural changes in the past 15 years. In the Soviet period, the local economy was dominated by the defence industry. The 1998 crisis and the sharp devaluation of the rouble gave a boost to local manufacturing industries, such as cosmetics, pharmaceuticals, clothing, food and drink, thus providing an alternative to imports.
The industrial sector underwent a structural shift from machine building and metallurgy to food processing and other light industries producing consumer goods. The city now accounts for nearly 10% of Russia’s foodstuff output. This has opened a number of new opportunities for suppliers of plant equipment, industrial project management and consulting services, among others.
St Petersburg’s industrial output is now dominated by machine building and metal processing (35.6%), followed by food processing (27.6%). It is also set to become a significant crude oil producer by 2010. JSC Petersburg Oil Terminal operates one of the largest Russian terminals for petro-chemicals in the Baltic Sea region. It provides trans-shipment and storage of petroleum products for export, as well as bunkering facilities for tankers.
Skills shortage
At the same time, the service sector has been undergoing rapid expansion, with an increase of about 100% in the past three years. This rapid growth rate is likely to pose a future problem in the supply of skilled workers. The Russian population is decreasing at an alarming rate and could decline to between 75 million and 100 million people by the middle of the century, compared with 143 million now.
In St Petersburg, this problem has reached a critical level, with the decline in the population growth rate accelerating at 0.95% per annum. Due to evolving demographic and economic trends, the city faces a pressing need to generate an influx of highly qualified and experienced professionals to fill gaps in the emerging structural unemployment situation. The problem is that Russians are generally reluctant to migrate from their home region for career purposes, though there are signs that the population is becoming more mobile.
Thanks to efforts by the federal and city governments, St Petersburg’s overall economy has returned to growth after several years of decline. The beginning of 2002 was marked by an increase in industrial output, which by mid-year had grown by 29.4% compared with the same period a year previously. Output slowed in the next two years to a less spectacular but more sustainable growth level, with an increase of 6.9% by the end of 2004 against 2003. Most of this has been achieved on the back of Ms Matviyenko’s determination to attract large-scale investment to the region, to the detriment of the traditional small and medium-sized enterprise sector, a strategy that is helping her to meet her target of doubling the city’s revenue by 2008.
Mayor’s mark
Ms Matviyenko has successfully negotiated investment projects with a number of large Russian and multinational firms, from Russia’s state gas monopoly Gazprom to Toyota Corporation. She was also successful in bringing in giant auto manufacturers Nissan and General Motors, and there are rumours that Volkswagen, which recently dropped plans to build a $500m assembly plant outside Moscow, is considering St Petersburg as an alternative location.
Industrial sites now occupy nearly half of St Petersburg’s land, leaving a vast resource for redevelopment as the factories are relocated to outlying areas of the city.
The municipal government’s master plan has laid down guidelines for the city’s economy to 2015. Under the guidelines approved last year, more than 1200 acres will be earmarked for industrial development on the city’s outskirts in order to free up land for residential housing and commercial premises. In a second stage, 2700 acres will be made available for industry on these newly developed outlying sites.
Port facilities
The port is the heart of St Petersburg’s economic life. The city is located in the Neva River delta and port facilities are being developed along the entire stretch of the Neva Bay within the city and in some adjacent coastal areas, including the flood protection barrier. The strategy of the Greater Port of St Petersburg authority calls for deepening the main maritime canal to 43 feet and widening it to 426 feet by the end of this year to allow vessels of up to 80,000 tons to dock at the port. This is twice the current tonnage.
The JSC Sea Port of St Petersburg is the main gateway of Russian trade in the north-west. It is a key component of the 9th International Transport Corridor, which connects Russia to the EU. The JSC incorporates four stevedoring companies, and the port has 53 berths with a total length of 27,500 feet that can accommodate vessels with a capacity of up to 60,000dwt and 38 foot draft. The company handles more than 15 million tons of cargo a year.
The city of St Petersburg is surrounded by a region called the Leningrad Oblast, which has 1.7 million inhabitants and a separate local authority. Although officials play down the notion that the two regions are in deadly competition to attract investment, the government of the oblast has repeatedly turned a deaf ear to suggestions that the two areas merge.
The Leningrad Oblast is rich in raw material resources, which are the mainstay of its economy. These include bauxite, phosphates, shale, quarts, granite and, above all, forests. The region’s industrial output is dominated by non-ferrous metallurgy, pulp and paper, chemicals and petro-chemicals, shipbuilding and repair, and the production of building materials. Roughly one-third of the oblast’s workforce is employed in the industrial sector.
The oblast has been successful in attracting a broad mix of investment. A number of multinational companies have set up manufacturing facilities there, among them Philip Morris, Kraft Foods, Cress Neva, Caterpillar and Ford – the only car manufacturer with an assembly plant outside St Petersburg.
Transit point
The break-up of the Soviet Union, with the loss of the Baltic ports and Finland’s membership of the EU, have increased this region’s importance as a transit point for trade with Europe. The disappearance of the Soviet regime triggered a rapid expansion of the oblast’s existing ports and the building of new facilities; the construction of a free economic zone near Ust-Luga is under negotiation.
Attracting foreign investment to the region is one of the oblast’s top priorities and it has been a leader in implementing investor-friendly policies. Several companies, including LG Electronics, Robert Bosch and Alpha, are considering investment in the region.
A number of Russian companies have also chosen to relocate theirheadquarters in St Petersburg. The state shipping company Sovkomflot, Russia’s largest, recently re-registered in the city. The country’s largest car manufacturer, AvtoVAZ, has also shifted its headquarters from Samara to St Petersburg, as have Gazprom Neft, the oil production subsidiary of Russia’s natural gas monopoly Gazprom, and Transnefteproduct, the oil products pipeline company.
