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Russia: St. Petersburg, Oblast Show Economic Growth

St. Petersburg, 12 August 1998 (RFE/RL) - While the Russian economy shrank by 0.5 percent in the first half of 1998, St. Petersburg posted its largest growth of the current decade.

According to Peterburgkomstat, the city's official statistic agency, St. Petersburg's economy grew by some 2.5 percent in the first six months of 1998. Industrial output grew by 3.2 percent. Most of this growth is due to the diversification of its economy from one based on defense industries to more consumer-oriented manufacturing and services.

The city's poorer neighbor, the Leningrad Oblast, registered no change in comparison to the same period in 1997. But even this is an improvement because the Oblasts economy in previous years has only contracted. Industry in the Oblast continued to slump, posting a 4.2 percent decline.

And, when one takes into consideration the shadow economy, the region's economic situation is certainly even better than those statistics tell us.

Improving economic fortunes aside, both St. Petersburg and the Leningrad Oblast stand out for their ability to attract direct foreign investment from a number of high-profile international manufacturers.

There are several reasons for this. First, both are blessed by geographic proximity to Europe and with relatively good port, rail, and road access. Second, there is a large local market with a qualified work force. Finally, both have a rapidly improving tax climate that makes the area one of the most liberal in Russia.

"The fact that we have two regions (the city and the Oblast) in a tax competition is a good stimulus for economic development," said Jeff Robins, regional economist at MFK-Renaissance in Moscow. The Leningrad Oblast began the competition last year by passing its law on investments, and now St. Petersburg has upped the stakes with the recent passage of its investment law. Both laws free investors from most local taxes until the investment become profitable.

Since the Oblast has a much weaker budget with smaller resources, it has responded by becoming more aggressive, added Robins. This has led to tax competition.

And so far, the Oblast has snatched several lucrative deals away from the city, including a $330 million Philip Morris plant, a $50 million Caterpillar plant, and the possible $150 million Ford factory.

Russian industry, lead by Surgutneftigaz, is also expanding production in the Oblast with the $800 million modernization of its oil refinery at Kirishi and construction of a $500 million port at Bukhta Batereinaya.

"We were favorably impressed with the government's open and business-like approach," said Gilbert Holmes, the director of Caterpillar-Tosno in the Oblast.

"All administrative decisions are done twice as fast in the Oblast than the city," said Nina Oding, chief economics analyst at the Leontief Center, a local think tank.

St. Petersburg is not well administered, say analysts. Its government is highly centralized which means that all important decisions must be made by city hall, and then there is the problem of whether or not those decisions are enforced. Not to mention that more bureaucracy means more corruption.

Nevertheless, St. Petersburg continues to hold its own, able to attract a number of companies. But most projects are smaller. Since the beginning of 1997, the city's industry has gained a $80 million Rothmans cigarette plant, a $12 million Lucent Technologies plant, and a Nokia plant estimated at several million dollars.

The biggest investor is cigarette manufacturer R.J. Reynolds International, which by its own estimates, controls about 20 percent of the Russian cigarette.