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St. Petersburg's Investment and Financial Strategy

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3.1 Economy and Finance

A severe economic crisis which beset Russia in August 1998 adversely affected all spheres of life in Russia and St. Petersburg. From mid-August to the end of 1998, the exchange rate of the rouble to the US dollar dropped by 3.3 times. Over the same period, prices for consumer and industrial goods in St. Petersburg increased by 2 to 4 times. The buying power of the population significantly decreased, as rouble earnings remained virtually unchanged.

The reduction in the population's disposable income led to a considerable reduction in business activities in St. Petersburg and a consequent deceleration in the investment process. However, despite the financial crisis, St. Petersburg remained an attractive region in terms of investment. An increase in the flow of foreign investment into St. Petersburg's economy was seen in 1998, as compared to the previous year.

The economic situation in 1999 and at the beginning of 2000 was marked by the stabilisation of major macroeconomic indicators in both financial and industrial areas. In the first six months of 1999, the decrease in industrial output slowed down and, by the beginning of 2000, a tendency was observed toward industrial growth. As the economic situation in St. Petersburg continues to improve, foreign investors will show more and more interest in this region.

3.2 Foreign Investment in St. Petersburg

According to the data of the St. Petersburg Statistics Bureau, for the period from January to September 1999, total foreign investment in hard currency amounted to 337.8 million USD and rouble receipts were equal to 939.0 million roubles. The growth in foreign investment amounted to 80%, compared to 27.4% over the same period in 1998.

In St. Petersburg, investments made in the form of international financial loans and trade and other loans predominate (not including loans received from foreign co-owners of enterprises). These investments made up 79.7% of the total hard currency investment for the period from January to September 1999. In Leningrad Oblast, direct forms of investment predominate and make up 76.3% of total invested capital.

Foreign Countries Investing in St Petersburg

January-September 1999, the following countries emerged as the major investors in St. Petersburg: the USA - 114.4 million dollars (33.9% of total dollar contributions to foreign investment), Finland - 70.1 million dollars (20.8%), Luxembourg - 35.4 million dollars (10.5%) and Great Britain - 29.4 million dollars (8.7%).

The biggest rouble investments in St. Petersburg were made by Finland -534.5 million roubles (56.9% of the total rouble investment), the Netherlands - 291.7 million roubles (31.1%) and the USA - 20.2 million roubles (2.1%).

3.4 ST. PETERSBURG'S STRATEGIC PLAN

It was extremely important for St. Petersburg to determine its role in the current situation and to identify key prospects for the city's development. To this end, the City Administration initiated the development of the Strategic Plan of St. Petersburg, adopted on 1 December 1997.

The primary objective of the Plan is to improve the standard of living of St. Petersburg's population. The Plan focuses on the following strategic areas:

  • creating a favourable living environment;
  • creating a favourable cultural and industrial environment; and
  • integrating the city into the world economy.

Plan developers assumed that cities, like companies, compete with each other for investments, for discovering and developing prospective industries and creating new jobs. The Plan out-lines key priorities for businesses, potential investors, governmental authorities and the local public and is meant to assist them in the decision-making process.

The Plan neither replaces nor abolishes other existing plans. It identifies the key directions for city development in priority areas. Despite the long-term nature of the Plan, it includes specific measures that are to be taken in the near future, stipulates completion cri-teria for most of the objectives and estimates costs and effectiveness.

The Plan is intended to be adjusted and amended in the future, as the major objectives and priorities change.

3.5 Programme for the Stabilisation and Further Development of the St Petersburg Economy in 1997-2000, Approved by Resolution of the Government of St. Petersburg 4 of 23 JANUARY 1997

The volume of capital investment intended for the city economy is effectively the same as the volume of shortterm loans which cover the budget deficit of St. Petersburg. In this connection, the city urgently needs to transfer the financing of their investment programme to one that uses long-term and medium-term loans.

To this end, the city has defined new principles for its investment policy:

  • transferring to loan financing of the investment programme;
  • transferring from annual planning to intermediate and long-term planning;
  • starting gradually to use loan and equity financing in municipal investments by including an investment component in public utilities tariffs;
  • living priority to projects with a high return on investent and to projects which attract significant amounts of private investment;
  • stimulating activities aimed at attracting long-term loans from the European Bank for Reconstruction and Development and the World Bank for funding city projects;
  • forming investment structures controlled by the city administration (city investment bank, a number of major city investment funds, financial and investment companies) in order to attract and use the funds of individuals and legal entities;
  • developing a leasing framework backed by city guarantees; and
  • providing tax concessions for investors at the local level.

In order to support the investment requirements of the municipal economy and the community's social needs, to secure the long-term financial position of St. Petersburg and to acquire permanent access to borrowed funds, the Administration of St. Petersburg has issued eurobonds in the amount of 300 million US dollars for a period of 2 to 5 years. Eurobonds are national bonds which have a fixed interest rate, lump-sum repayment, and have a par value expressed in hard currency In accordance with current legislation, the eurobonds are being primarily placed outside the Russian Federation. Interest paid to eurobond holders is tax exempt with respect to taxes paid to the budget of St. Petersburg.

In accordance with the Civil Code of the Russian Federation, St. Petersburg is responsible for backing its eurobonds with its own assets, except for assets held by legal entities under operational management and those which, according to the legislation, may only be owned by the state or municipal authorities.

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