Forums

Site map
Search
0The virtual community for English-speaking expats and Russians
  Main page   Make it home   Expat card   Our partners   About the site   FAQ
Please log in:
login:
password:
To register  Forgotten your password?   
  Survival Guide   Calendars
  Phone Directory   Dining Out
  Employment   Going Out
  Real Estate   Children
   Saturday
   December 7
News Links
Business Calendar
Phone Directory
 Latest Articles
 Archived Articles
Analysis & Opinion
24.12.08 Hope On The Banks Of The Neva
By Graham Stack

St. Petersburg’s middle class look hard hit by the financial crisis. But the city’s huge industrial sector, from carmakers to the defense sector, looks set to benefit in the crisis years from a whole range of recent investment commitments.

First the bad news: As one of the Russian regions most integrated into global finance, St. Petersburg’s financial, retail and real estate sectors have swiftly felt the effects of the current crisis.

St. Petersburg’s middle class are feeling the pinch more than elsewhere in Russia, and more than other classes in the city.

Petersburgers rank among the national leaders in terms of per capita indebtedness, with an average of 45,000 rubles debt per head, according to figures supplied by St. Petersburg’s Gorodskoi Hypotechny Bank. This compares with a national average of 28,000 rubles.

Moreover, it seems that those with loans may be the most at risk of being laid off in the economic downturn.

Sources in the St. Petersburg administration said in December that the city’s companies were firing one thousand employees per week. Most of these, according to deputy governor Mikhail Oseevsky, are office staff, rather than shop floor workers or technical specialists, for whom there are still many vacancies open.

If this is the case, job losses will affect precisely those most likely to have run up debts for cars and apartments.
According to a new public opinion survey by ‘Tvoi opinion’, 35 percent of Petersburgers are now feeling the impact of the crisis and have changed their lifestyle accordingly. Seventeen percent have postponed large purchases.
St. Petersburg’s troubled finances were epitomized when upwardly mobile St. Petersburg-rooted bank KIT Finance became one of the first victims of the financial meltdown in October.

As in Moscow, the real estate sector has also hit the skids, with new construction being put on hold. This week the first St. Petersburg developer looks likely to fold. Stroimontazh, one of the city’s largest real developers, failed to pay on its bond obligation last week, and is being sued for $30m by one of the city’s main corporate lenders, Baltiiski Bank.

St. Petersburg’s retail revolution turns sour

St. Petersburg feels like Russia’s ‘most European’ city not just due to its baroque architecture. Its service culture is also far more European than anywhere else in Russia.

According to retail analyst Natalia Zagovzdina, the share of “modern food retail formats,” i.e. supermarkets, chain stores and hypermarkets, as distinct from traditional kiosks, small shops and open-air markets in St. Petersburg, is already nearly 80 percent. That compares to only 40 percent even in Moscow. One chain alone, X5, has around a 35% market share in food retailing.

But retail expansion is similar to real estate in being basically a land grab fuelled by credit up front. Now that credit has dried up and debts are being called in, the sector is looking very shaky and financially massively overextended.
And the worst is yet to come for the sector. Alexei Bobrov, director of St. Petersburg chain Lenta, was quoted this week as saying he expects a sharp downturn in sales when Christmas shopping subsides and the impact of job losses spreads.

Meanwhile, city hall is putting pressure on the retail chains to pay their suppliers promptly, to prevent a domino effect of non-payments building up in the city’s economy.

At the same time, the federal government has made clear it will not bail out retail as it has done industrial giants.
The most likely outcome is a wave of M&A in the sector. Global giants such as Walmart, heard complaining earlier in the year that they had left it too late to enter Russia, may now decide this is the perfect opportunity to do just that.
And most analysts regard St. Petersburg chain Lenta as the most likely candidate for foreign acquisition. So retail in Russia’s most European city might soon be getting a whole lot more European.

The good news: Investment guaranteed for industry

But the big sucking sound in retail, finance and real estate will be partly cushioned by guaranteed new investment in St. Petersburg’s manufacturing industry.

The crisis has come at the ‘right time’ for St. Petersburg’s industry. In car production, power engineering, defense and infrastructure, private sector investment commitments signed 2007-2008 and surging budget expenditure from the expansionist 2009-11 budget should create a strong countercyclical effect.

St. Petersburg is probably the only place in the world looking to the car industry to help ride out 2009. The crisis years 2008-2010 will see the birth of an entire new industrial sector in the city employing upwards of 10,000.

With Russia becoming Europe’s largest car market this year, a Ministry of Economy program to persuade foreign car makers to set up production in Russia came just at the right time.

St. Petersburg has been one of the prime beneficiaries of this development, with seven of the world’s leading automotive producers now setting up shop in St. Petersburg.

Ford has been running a large plant in Leningrad region since 2001, but it was only at the end of 2007 that the first car plant was set up in St. Petersburg itself – with Toyota launching production at its $150m plant with a workforce of 4000.

Then November 7, 2008, despite the crisis at its headquarters in Detroit, General Motors opened a $300m plant with a workforce of 1000.

Plants are currently also being built in St. Petersburg by Nissan (115m, Suzuki Motor, and Hyundai, with Nissan and Suzuki due to go online in 2009, and Hyundai in 2011.

Inevitably due to the crisis, the time scale for these plants to move to full capacity has been lengthened, and projected sales slashed. But no projects have been abandoned.

Hyundai confirmed in December that the company would be developing a special low-cost model for the Russian market.

Equally significantly, the South Korean company signed an agreement to set up seven individual car component plants in St. Petersburg at a cost of around $150 million.

This marks the start of the second stage in the development of the St. Petersburg automotive cluster: the arrival of car part manufacturers.

Following Hyundai, Canadian car components giant Magna announced in December it would launch a plant in St. Petersburg in 2010, but start production in January 2009 on premises leased from a St. Petersburg industrial plant.
Other car component producers who have declared a definite interest in joining the St. Petersburg cluster, as the new car plants implement localization stipulations, include Japan’s Tenneco, Denso and T-Rad, as well as Britain’s Stadco.

Car sales are plummeting in Russia as everywhere else, but the Russian government has undertaken to protect local car producers with increased import tariffs adding to the devaluing ruble. Prime Minister Vladimir Putin has stated clearly that ‘foreign producers based in Russia count as Russian.’

So St. Petersburg’s automotive revolution is still on the road.

Power sector investment secured just in time

“We were very lucky. because if everything that has happened on the world’s financial markets had not taken place this autumn, but half a year earlier, we would never have been able to complete reform of the electricity sector, and there would have been no $36 billion in investment for the power generation sector,”former reformist energy tsar Anatoly Chubais told business daily Vedomosti on December 16.

The credit crisis has impacted on the electricity sector’s investment plans. The original power sector agreement with St. Petersburg committed over $10 billion to be invested through 2012. Last week, the schedule was significantly downsized, with only $6 billion now to be invested by 2012, the rest by 2015.

But St. Petersburg will benefit not just directly from this investment. The city’s huge power engineering industry will also be a major winner. According to Renaissance Capital analysts, “the power engineering sector is in the early stages of its long cycle. Equipment manufacturers started to receive orders in 2007, and their order books are set to expand rapidly over the next two-to-three years.”

St. Petersburg likes to boast that ten percent of the world’s power turbines are turned out by the city’s power engineering companies, most of which are now united in the Power Machines holding owned by oligarch Alexei Mordashov.

Power Machines, one of the city’s largest employers, has 60 percent of the Russian market, so it will take a lion’s share of the forthcoming power sector demand.

On December 18th, Power Machines announced $36m of investments in 2009 to continue designing a new plant for the production of power engineering equipment in St. Petersburg.

Defense spending surge on the cards

A third source of consolation for St. Petersburg business is a massive surge in Russian defense spending as part of the three year budget running 2009-2011.

The federal budget stipulates an increase in the state defense order to $42 billion for 2009, up from $40 billion in 2008 and $35 billion in 2007. The defense order is set to reach $52 billion by 2011.

The government has promised that next year’s budget will be executed as planned, even if transfers from the stabilization fund are required to cover the deficit.

St. Petersburg, one of the main centers of the Russian defense industry, with companies ranging from shipbuilding to metallurgy to radio-electronics, is also set to benefit from this spending surge. Almost all St. Petersburg’s Soviet-era industrial plants have defense sector production lines.

Moreover, as a sign of St. Petersburg’s historical significance as the birthplace of Russia’s navy, in 2009 the headquarters of the navy will move back to St. Petersburg from Moscow, following the move of the Constitutional Court from Moscow to St. Petersburg in 2008.

And, as one of the first spin-offs for the city’s economy of the move, on December 22, city authorities announced a major construction project in the adjoining port town of Kronstadt to create a single central naval training college for Russia’s fleet.

Infrastructure wobbles

Things strangely enough do not look so rosy for St. Petersburg infrastructure investments. While Barack Obama’s and Gordon Brown’s New Deal is set to pump trillions into Keynesian infrastructural investment, the St. Petersburg government in December canceled a number of large infrastructure projects to avoid a looming budget deficit for 2009.
St. Petersburg city hall is anticipating a 25 percent cut in budget expenditure in 2009, taking the budget back to 2006 levels, as a result of falling tax revenues.

First to go in this case will be expensive infrastructure projects rather than social spending crucial to Governor Valentina Matvienko’s popularity rating.

Consequently, in December, city hall announced the postponement or downsizing of a number of major projects in 2009, such as an express rail link, a new airport runway, and a major tunnel construction project with a total investment volume of around $3 billion.

An additional problem is that many infrastructure projects were conceived as public-private partnerships. Even where the public sector is able to find the cash, often the original planned private investments are now in doubt. Question marks have gathered in December around one major St. Petersburg project, the South Circular highway, with a planned investment volume of $1 billion, half of it from the private sector.

This scrapping of infrastructural projects on a local level runs counter to economic sense and federal policy. According to Renaissance Capital analyst Paul Rogers, “the time is right for implementation of the major overhaul of public infrastructure.”

Revamping public infrastructure” says Rogers, “is key to maintaining economic transformation. In 2009, Russia’s public sector must compensate for the anticipated nosedive in private sector investment. Longer term, private sector expansion requires an upgrade of Russia’s dilapidated infrastructure, which has actually deteriorated since the Soviet era, despite the past decade of economic growth.”

Prime minister Putin also has spoken of the need to bring forward public sector infrastructure investment, rather than postpone it, as St. Petersburg city hall is doing. In this light, St. Petersburg city hall may be angling for a federal ‘bail out’ of regional infrastructure projects – which arguably, according to VTB Capital’s Elena Sakhanova, would be a better use of funds than channeling them to obsolete Soviet-era carmaker Avtovaz.

However, for Petersburgers there is one bright side to the city’s tightfistedness in infrastructure spending: the dreaded Gazprom City skyscraper complex, that was planned to tower over the old town like a stake in its heart, and to be co-financed by the city, has also disappeared from the 2009 budget.
The source
Copyright © The Moscow Expat Site, 1999-2024Editor  Sales  Webmaster +7 (903) 722-38-02