St. Petersburg was founded as the capital of Russia and as a window on Europe. It fulfilled these functions for over 200 years, but during the communist period lost its political and international roles to Moscow. The new political situation in Russia has given mote autonomy to the city, which is consciously developing its historical role as a gateway between Russia and western Europe. To this end major investments in infrastructure are being made or planned. At the same time, however, industrial production, investment, real incomes and many social services have collapsed, and to most inhabitants of the city the economic reforms started in 1992 have meant only a lower standard of living and insecurity. The economic policy of the Russian government has certainly created new opportunities for many, but since poverty has increased dramatically social tensions are also mounting. There is as yet no sign in Russia of the economic turnaround that has already occurred in some transition countries like Poland and the Czech Republic. The future role of St. Petersburg will largely be determined by how Russia's economy and foreign trade develop, but the city's own strategies will also he very significant.
What is the outlook for the Russian economy? In the following, two scenarios are presented an optimistic and a pessimistic scenario, together with their implications for the city.
Optimistic scenario
The Russian government will, after a period of half-hearted reforms, decline and rapid inflation, ultimately succeed in stabilizing the macroeconomic situation by radically reducing the budget deficit and curtailing easy credit to unprofitable companies. Inflation will slow and interest rates will fall. After privatization is completed in late 1995 the new owners will start investing as confidence is restored in economic policy. The emerging economic growth is accompanied by the disappearance of non-competitive producers, bringing bankruptcies and unemployment.
Companies gradually develop competitive products for world markets, the structure of Russian exports diversifies and the conditions for making the rouble convertible improve. Social tensions will increase as unemployment grows, but on the other hand the new entrepreneurial class will get richer.
For St. Petersburg this means that the conversion of the defence industry will succeed at least partially, while the scientific and technological potential of the city is converted into marketable production. The city's role in Russian foreign trade will he strengthened as investments are made in ports and other communication infrastructure come on stream. Banking, insurance and forwarding will be increasingly attracted to the city. Tourism will also be a strong growth area. The confidence of foreign investors in Russia's economy will be strengthened and investment will pour into St. Petersburg. Russian capital is also increasingly repatriated.
Pessimistic scenario
The Russian government and central bank continue to yield to pressures from industry and the population and provide them with easy credit and social benefits, thus maintaining large budget deficits and high inflation. This will keep interest rates prohibitively high for investors. Easy credit to companies is largely explained by the necessity to maintain employment but it also helps to prop up the old, often uncompetitive production structure, thus postponing any real reforms.
The successful element of the reform process, privatization, creates a new class of entrepreneurs, who due to the adverse investment climate in the country show little interest in investing domestically. They continue to trade in Russian raw materials and fuel while industrial capacity continues to shrink. Much of the currency earned is transferred abroad. Unemployment rises, though possibly not as fast as in the optimistic, market-led scenario.
Social tensions mount. The economic elite, who control raw materials and foreign trade get richer while the living standards of the majority stagnate or decline further. Many essential public services formerly taken care of by the state or state-owned enterprises either start charging or vanish. The tax revenues of the public sector are only sufficient to cover part of the necessary expenditure. Especially hard hit are scientific research (largely financed from the military budget) and universities.
For St. Petersburg this means a gradual loss of its scientific and technological potential and further decline in manufacturing industry. Nonetheless the gateway functions of the city are developed as the infrastructural improvements create better conditions for foreign trade operations. The city and its surroundings are in a good position to capture a growing share of Russia's foreign trade flows, especially seabound. Supporting functions (banking, insurance, forwarding) are developed and major Russian export companies establish their headquarters and sales units in the city.
SUMMARY AND CONCLUSIONS
Since the collapse of the Soviet Union several negative demographic and economic trends have taken a turn for the worse in St. Petersburg. The city's population is declining due to a lower birth rate, rising mortality and migration to the countryside. The dramatic drop in industrial and building activity has, with a lag of some years, led to rising unemployment, which is likely to reach 400,000 (over 15%). Low consumer and especially investment demand, the shrinking role of the state and the army as well as the loss of many traditional markets have paralysed much of manufacturing industry, in which human and physical capital is becoming obsolete. Privatization is likely to bring about bankruptcies in the short run, but may later spur investment activity. However, deindustrialization is progressing, and how much industrial activity remains in the city is largely dependent on the success of the conversion of the military hardware producers.
The city's emerging gateway functions in Russian foreign trade are creating new opportunities and jobs. St. Petersburg has become Russian's largest port and international funding can be expected to be allocated to the region's transport and communications facilities. Private small business, the retail trade, banking, insurance and to some extent also tourism are expanding.
The city's efforts to attract foreign investment have not been very successful, and foreign companies have so far preferred Moscow and resource-rich regions. Greenfield investment in manufacturing industry has been slight compared to acquisitions of companies or shares.
The future of the city will largely be shaped by how the Russian economy and investment climate develop. Still, the city has some strengths such as a culturally attractive milieu, the presence of high-level educational institutions, a skilled work force and engineering capacity in addition to its gateway location, which may attract investors even if the overall Russian prospects remain uncertain.
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