March 1999

by Alexei Kim and Sviatoslav Bytchkov

Historically, the Northwest region of Russia has been a gateway to the country and an important link to Europe and the West. Likewise, the West has always played a significant role in the development of Northwest Russia, from ancient Greek merchants trading in the Novgorod region to foreign architects who built the Hermitage in St. Petersburg. Many centuries have passed, but the tradition is still alive. This important region which comprises 11 administrative areas, including the city of St. Petersburg still plays a vit1al role in building commercial relations between Russia and the West.

Foreign Investment Climate

Conveniently located at the crossroads of major intermodal corridors, the region connects Scandinavia, Western Europe, and Asia. This excellent location, combined with a highly educated work force and developed industries, provides a foundation for success. However, it is the progressive mentality of political and economic leaders in Northwest (NW) Russia that distinguishes it from other Russian regions. During the last three years, NW Russia has attracted more foreign investment than any other region of Russia.

Leningrad Oblast, for example, has the highest level of per capita investment in the country. Its favorable foreign investment legislation attracts Western companies to the construction, agriculture, and machine-building industries. Ford Motor Company is considering Leningrad Oblast as a potential site for the first automobile manufacturing plant in Northwest Russia. The largest oil refinery in the region is located in Kirishi, Leningrad Oblast, and development of oil and cargo ports is a high priority for the local government. The development of industry in Leningrad Oblast by leading multinational companies has been a starting point for the region's infrastructure growth. Novgorod Oblast was the first region in Northwest Russia to adopt a foreign investment law. This law provides for up to 100 percent local tax holidays for incoming investors and has already attracted large and small companies from several countries. A number of foreign firms operating in Novgorod view the region as an "investment mecca." Philip Wegh, director general of Stimorol, a Danish chewing gum manufacturer with operations in Novgorod, described the difference between support for foreign business in Novgorod and that in other Russian regions as "day and night." The Novgorod administration has a reputation for being investor friendly and for working with investors to remove obstacles.

The Komi Republic and Vologda Oblast are as well known for their pristine landscapes as they are for their natural resources. American companies are actively involved in developing oil fields in Komi, while wood processing, chemical production, and steel manufacturing are Vologda's leading industries. These regions are seeking modern Western technologies to improve the efficiency of their industries while helping preserve the environment.

Many large U.S. companies have already discovered the benefits of working in Northwest Russia. New ventures by International Paper in Leningrad Oblast and Owens Illinois in Novgorod will provide food packaging for the entire region. Consumer goods manufacturers were the first Western companies to build their production facilities in Russia. Coca-Cola, Gillette, and Wrigley, whose products have become familiar to Russian consumers, operate state-of-the-art facilities in St. Petersburg. At the same time, industrial giants like Caterpillar, Lucent Technologies, and Otis produce world-class products in St. Petersburg and Leningrad Oblast for both domestic and international markets.

Opportunities

Of the 89 regions in the Russian Federation and 11 in the Northwest, the city of St. Petersburg; Leningrad, Novgorod, and Vologda Oblasts; and the Republic of Komi are among those providing the most business friendly environment. The fact that over 200 U.S. companies are operating in Northwest Russia during these challenging times speaks for itself. Despite the commercial benefits of the Northwest region, doing business in Russia is still a challenge, requiring dedication and a long-term commitment. However, one can minimize the risks by entering the market step by step and ensuring that the first step is on solid ground.

The telecommunications sector provides many investment opportunities for U.S. companies, which already offer a wide range of services in St. Petersburg. Peterstar, a local subsidiary of New York-based PLD Telekom, installed a fiber optic network in the city. Lucent Technologies is currently assembling switches for local telephone stations. Motorola, one of the leaders in the local cellular market, has set up a research lab in St. Petersburg.

The hospitality industry has tremendous potential in St. Petersburg. As the fourth largest city in Europe after London, Paris, and Moscow St. Petersburg represents a new and largely unexploited destination for American tourists. According to UNESCO, St. Petersburg is the only city in the Russian Federation that ranks among the top 10 cities in the world for "tourism appeal."

Like all of Russia, the Northwest region has felt the impact of the August financial crisis. According to Ken Johnson, head of Arthur Andersen's legal practice in St. Petersburg, investment is still continuing in the region, but on a much lower level than before August 17, 1998. "Further, the character of investment targets appears to be narrowing to existing companies which are involved in local production and have a client base and distribution network, but are in need of capital renovation/expansion. This new focus reflects the needs of a sizeable consumer market which, following the ruble's devaluation, can no longer afford hard currency-based prices, but is otherwise underserved by ruble-based production."

For more information on Russia's Northwest Region, visit BISNIS Online at www.mac.doc.gov/bisnis/country/regions.html#Northern.

Alexei Kim represents BISNIS and is collocated with the U.S. Commercial Service/ABC in St. Petersburg.
Sviatoslav Bytchkov is the executive director of the St. Petersburg Chapter of the American Chamber of Commerce in Russia.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)