Prospects for Foreign Operations in St. Petersburg

Foreign operations can he classified according to the level of commitment to the market: non-investment forms like exports, modest forms of establishment like sales offices or warehouses and finally major long-term commitment with investment in production facilities. Most foreign companies operating in St. Petersburg have committed only modest investment there, if at all: small offices, minor inputs into joint ventures. The general investment climate in Russia has been too insecure for major projects.

St. Petersburg has certain strengths compared to most other Russian locations to attract foreign companies:

• logistically advantageous location;
• culturally attractive milieu;
• highly skilled, partly idle manpower (science, military, technology);
• several top universities, research and educational institutions;
• idle industrial capacity, especially in arms production;
• the all-Russian low level of wages.

Factors discouraging investment have more weight. These are mostly connected to the general situation in Russia, including:

• political instability;
• economic instability, including high inflation and non-convertibility of the rouble;
• frequently changing legislation, including unresolved property rights;
• persistent deficiencies in transport and communications;
• increasing crime.

Some comments are necessary on these points. The political instability is mostly connected with the increasing poverty and the deepening rift between rich and poor. This may one day erupt in unrest with unforeseeable consequences. Another issue is resurgent Russian nationalism with its roots in old slavophile ideology, which may easily turn into xenophobia. An anti-western mentality is spreading among the Russian right as many citizens connect their economic plight with the shock therapy advocated by the western advisors of the Russian government. There are also wide-spread suspicions of a Jewish-led international plot against Russia. If the economic situation does not improve anti-western attitudes are likely to gain ground, with adverse consequences for foreign companies operating in the country.

Russian government policy is in key position if investor confidence is to be boosted. If inflation is dampened the conditions for the convertibility of the rouble would improve a lot.

Constantly changing laws are undoubtedly a problem, but the situation is further complicated by the state's inability to enforce the laws, often allowing local officials to interpret them at will.

St. Petersburg is ahead of the rest of Russia in communication infrastructure development, although several major improvements (ports, ring road, rapid train connections) are still pending.

The concept of crime is in many cases fluid in the rapidly changing legal environment of Russia. The growth of serious crime (homicides, robberies) is, however, a major social problem and deterrent to foreign investors in Russia. The authorities have intensified anti-crime measures by extending the questioning and arresting powers of the police. Private firms have started to provide security services to foreign companies operating in the country. Organized crime also has a vested interest in protecting foreign companies as they may be a good source of income and often illegal organizations also offer security services to foreigners. The police force is too small and sometimes also corrupt to efficiently cope with this task. However, the proliferation of private security services has improved the situation and the risk that crime represents for foreign companies should not be exaggerated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.