Cars Lead Parade of Investors To St. Pete

ST. PETERSBURG — The comparison seems to roll off everybody's lips. St. Petersburg, the second city, is becoming the self-styled Detroit of Russia, in other words the car-making capital of the country.

As South Korea's Hyundai laid the foundation stone for the latest plant on the outskirts of the city, Governor Valentina Matviyenko reiterated the city's growing importance as one of the world's car-making capitals.

With a growing skilled labor force in the automotive sector, its attractive port location, and a local administration keen to capitalize on its home-grown successes, St. Petersburg is hoping to emerge as a center of innovation and diversification.

"The administration is very active in attracting investment to the region," said Yury Balatkin, head of the St. Petersburg office of the Russo-British Chamber of Commerce.

Investment, he noted, has poured into the automotive, construction and retail industries. "In many ways, this is a tribute to the St. Petersburg administration. They have been very helpful."

Hyundai launched its groundbreaking ceremony amid much fanfare Thursday, inviting journalists, dealers and local dignitaries to the event. The mood was ebullient, as the administration noted that Hyundai was the fifth carmaker to come to the region, following Toyota, Nissan, General Motors and Suzuki.

The automaker will invest 330 million euros, ($515 million) in the construction of the plant, and will churn out its first cars in 2011.

As part of the incentives, Jake Jang, Hyundai's deputy general manager, said the carmaker would receive various tax breaks, which it believes will give it considerable competitive advantages.

In return, the South Korean company will create many new jobs and help cement the city's position as an industrial center.

While St. Petersburg might feel it has stolen some of Detroit's thunder, it aspires to much more.

"The city administration has this idea that if they are to develop industry in St. Petersburg, they will have to be high-tech. The city has a great educational base," said Balatkin. "The technoparks that will be and are being created will be targets for that. It is like a mini Silicon Valley."

St. Petersburg has had something of a mixed reputation for investment. Beset by anecdotal evidence of criminalization and difficulties in getting projects past the administration, the city has shrugged off many of the associations of the 1990s.

Aileen Exeter, the American owner of City Bar, a popular expat hangout, recalls an incident when a local group she had been having trouble with paid a visit to her bar during working hours. They started to get angry, she said, and indicated that they were armed. Her reaction, she said, was to tough it out in front of her customers.

"Being a woman was a little bit easier than being a man during that period," she said. "The difference between a U.S. woman and a mafia guy is that you can negotiate with a mafia guy."

While the authorities might go out of their way to attract large and strategic investors, it can be much harder for smaller businesses, which receive little official support. There is often the perception that the little fish have to pay bribes to get things done, and many small and medium-sized business owners complain about corrupt officials.

Exeter says her experience has been different.

"You can do things legally here. It might take more time, it usually takes the same," she said. "It costs less money, but means more strain on you."

Nonetheless, St. Petersburg in the 1990s and early 2000s had a reputation as a place where the risks of doing business were considerably higher than in Moscow, something that acted as a considerable deterrent to some companies.

While things have changed, it may take longer for perceptions to catch up. "Companies say to us: 'We expected criminal pressure, but when we started here, there was nothing like that,'" said the RBCC's Balatkin.

The corporate risks still exist, however.

At the end of last year, supermarket chain Lenta hit headlines when co-owners Oleg Zherebtsov and August Meyer clashed over strategic development of the chain. The depth of the disagreement first came to the public eye in early January, when Zherebtsov fired some of the staff at the firm's St. Petersburg office, including chief executive Sergei Yushchenko, and had security escort senior managers from the building.

Meyer proceeded to file suit in the British Virgin Islands, claiming that the company had been "stolen away" from him. Zherebtsov filed a countersuit, claiming that Yushchenko had helped prepare documents to sell the company without his knowledge or approval.

But it is not only corporate scandals that threaten St. Petersburg's, as well as Russia's, investment image. While St. Petersburg can offer much in terms of geographic location and a receptive administration, there is an acute labor shortage, both of skilled blue-collar workers and of top-end managerial staff.

"The deficit of high-caliber managers is the major bottleneck to the growth of companies here," said Valery Katkalo, dean of St. Petersburg's Graduate School of Management.

He points to logistical considerations, which have become an integral part of any big enterprise, as an example.

"We are talking about a different scale and scope. We are only now starting to realize how important organizational behavior and the HR functions are," he said. "It's not only about how you run the finances of your company, or about how you build your brand. It's how you build competitive and sustainable organizations."

Nevertheless, to some the benefits outweigh the risks. Last year, foreign direct investment coming into St. Petersburg rose by 20 percent, reaching around $6.3 billion. Much of that, said the local administration, is going into carmaking and automobile components, but also into other technologies.

Part of the city's success may come from having copied the practices of the surrounding Leningrad region, where the local administration attracted major investors with a combination of tax incentives and a proactive attitude toward dealing with investors.

At the turn of the century, the Leningrad Region had a much better reputation for attracting investment than St. Petersburg.

The city administration plans to showcase two major investment projects at this weekend's International Economic Forum, including the construction of a new football stadium for home team Zenit, which last year won the league championship and then added the UEFA Cup in May.

The other project is the construction of a new passenger-ship terminal, part of a $1.2 billion development plan that will include hotels, apartments, office complexes and other facilities.

Alexei Sergeyev, head of the city's Economic Development, Industrial Policy and Trade Committee, notes that the city is growing in stature, not only because of its favorable geography, but also for its growing political stability.

"We are one team," he said. "There are discussions and arguments, but essentially it is one team. This is a factor that influences investors. … When you study all this and more, it's the most attractive place to invest in Russia."

"We understand that it's not easy," he said. "There are environmental issues, customs difficulties, and so on. But we can overcome any problem."