During the Soviet period St. Petersburg was a major military-industrial and Scientific centre, but these sectors have shrunk dramatically during the 1990's. The city's problems include de-industrialization and a declining population, but it is nonetheless acquiring new functions in Russian foreign trade and international relations. With Russia's largest ports, the city is well placed to attract infrastructure investments. St. Petersburg has some strengths (gateway location, technological potential, qualified labour, culturally rich milieu), which may attract foreign capital and business, especially if the investment climate in the country improves. Crime, rising social problems and political instability are among the most serious risk factors.
Implications for Western Companies
Economic reform, including the liberalization of foreign trade in 1992, has created a new class of entrepreneurs, who by selling natural resources and state property have rapidly accumulated large fortunes while the impoverishment of the average citizen has continued. Western companies have been quick to tap the purchasing power of the new rich. The rapid penetration of western goods and retailers in the city has in a short space of time greatly enhanced consumer choice, even though western companies have mainly targeted only affluent buyers who can afford the high price level. At the same time domestic industry, which is suffering from a deep profitability crisis, has retreated from many markets.
For how long will the markets for western goods continue to expand in St. Petersburg? There are several hazards which may put an end to the seemingly promising boom. Macroeconomic stabilization has not been achieved by 1995, domestic output is continuing to fall in all sectors, the investment climate is not encouraging and real income levels keep declining. The floor may be reached in 1996, but purchasing power will remain low for the foreseeable future. This means that new market openings for western consumer goods will emerge very slowly as even low-priced western goods are too expensive for the average Russian.
The most promising clients for western goods will be in the highest income groups. It is possible, however, that the wealth of the new rich may he gradually depleted. Privatization of state property is likely to make it more difficult to sell abroad as freely as has been the case hitherto. This also applies to natural resources, which could dry up unless investment is made in extracting facilities. Trading regulations such as export licensing may also change. Another possibility is that the new entrepreneurs will be able to continue their trading activities without any major changes. In any case it seems that the new rich are here to stay and they will be the major clients of western consumer goods suppliers and retailers for the foreseeable future.
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