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A long time ago, back in 1990 and 1991, there was talk of St Petersburg re-emerging as Russia’s de facto capital its pre-eminence rooted this time not in Tsarist edict, but in commerce and banking. Multinational companies such as Unilever and Gillette chose the imperial capital over Moscow as Russian headquarters. So did one of the first foreign banking operations set up in Russia, a joint venture between Dresdner Bank and Crédit Lyonnais. The case for St Petersburg was based on its proximity to Europe, port facilities, and a local culture supposedly more cosmopolitan and liberal than Moscow’s. Some analysts cited the absence of Moscow’s leaden central bureaucracy as another big advantage. They were wrong. Moscow has overwhelmingly dominated the formative stage of Russian capitalism, relegating St Petersburg for the first time in its tragi- glorious history to the position of a provincial runner-up. The pace of life today is noticeably slower in the northern metropolis than the capital and job opportunities offering a ticket to the new middle class are scarcer. “People in Moscow have got used to working with large sums of money fast and accurately,” laments Semyon Golubev of SoyuzContract Consult, a division of the well known food distributor which is developing St Petersburg real estate. “That’s a difference between them and us.” The acumen with figures is not surprising, considering that Moscow handles between 75% and 80% of Russia’s financial transactions. In Soviet days, the two capitals were roughly equal in scientific and technical brain power and Leningrad ahead in advanced manufacturing. But Moscow had a lock on the skills needed to jump-start a market economy. All the state banks and foreign trade companies were headquartered there. The Leningrad intelligentsia was proud of its effete approach to life, which went badly with the grubbiness of post-Soviet business. Many of Moscow’s educated young people were the children of apparatchiks, raised in a spirit of moral pragmatism and personal ambition. But most important was that the central bureaucracy, leaden as it might be, proved indispensable to doing big business in Russia. Moscow banks have grabbed hold of Russia’s economic levers through advanced symbiosis with the state. Directors of the natural resource empires spend more time prowling ministerial corridors now than they ever did under communism some make-or-break issue of taxation, tariffs, licensing or privatization is forever to be settled in Moscow. The result is large new office buildings for Gazprom, Lukoil or Tokobank, well-paying jobs for an increasing circle of professionals, and swelling coffers for the Moscow city government under the illustrious command of Mayor Yuri Luzhkov. Moscow’s 30% levy on the profits of banks and trading companies is one of the highest rates of municipal taxation worldwide; St Petersburg contents itself with 22%, which is about average for Russia’s regions. Russian revenue collection is famous for its variance between theory and practice. But Moscow’s still collects more than twice the revenue per citizen as St Petersburg. “I don’t really know why they need a bond at all,” says Boris Vishnevsky, an adviser to St Petersburg’s budget chairman, referring to Moscow’s fund-raising plans. Rating agencies Moody’s and Standard & Poor’s followed balance-sheet logic and awarded Moscow’s forthcoming $400 million to $500 million issue provisional ratings of Ba2 and BB-, the same level as Russia’s sovereign ceiling. St Petersburg’s issue, with which city officials would like to raise $300 million, has not yet been rated. Even the simplest dealings with the Moscow and St Petersburg authorities are enough to show that they are driven by very different approaches to government. In St Petersburg, one can call the city hall switchboard and get through to an official who is courteous, knowledgeable and at least makes a good show of working selflessly for the public interest. (Calling cold and finding the person you need is a small miracle for any Russian organization.) The local legislative assembly is a rumbustious counterweight to St Petersburg’s governor (the city was run by a mayor until its unification last year with the surrounding oblast). Disputes between the administration and private business are settled by negotiation, not expropriation. In Moscow, one is quickly enveloped by a quagmire in which mid-level functionaries behave as if the minimum price of an audience is hurling oneself to one’s knees. The city duma is strictly a formality. Mayor Luzhkov, like a medieval doge, believes firmly that business in his town is conducted at his sufferance. “I don’t operate in Russia,” jokes Bernard Sacher, American proprietor of Moscow’s popular Starlite Diner. “I operate in Luzhkov.” In short, observes Valery Ostrovsky, vice-chairman of the St Petersburg legislature’s economic reform committee: “We are more democratic. Moscow is more authoritarian.” The difference is partly rooted in the two cities’ natural character: idealistic, western-looking St Petersburg as opposed to morally pragmatic, bureaucracy-bred Moscow. But it also reflects the personal contrast between Luzhkov and Anatoly Sobchak, mayor of St Petersburg from 1991 until last summer. A law professor mentored in his youth by Mikhail Gorbachev, Sobchak emerged in the late 1980s as Russian reform’s most trenchant orator. Later, he was the only ranking perestroika intellectual to endure a full administrative term. Moscow’s first mayor Gavriil Popov, whose political origins were the same as Sobchak, quit after a year. Aside from forcing the doors of government open, Sobchak’s great achievement was in small privatization. St Petersburg sold all its shops before Moscow had auctioned one-quarter of its stock. The northern capital is still ahead of the national one in commercial infrastructure offering more attractive shops and eateries with lower prices and better service. Sobchak was also popular with multinationals. Local government is a major factor in St Petersburg outpacing Moscow in industrial investment. Moscow is the champion in gross investment dollars, but most of that sum goes into setting up offices, or developing hotels and real estate. St Petersburg is a budding manufacturing nexus. Coca-Cola, PepsiCo, Wrigley’s and Rothman’s have joined Gillette and Unilever by the river Neva, either constructing new factories or buying old ones for refurbishment. Two Scandinavian brewers, Pripps and Hartwall, are developing Russia’s first national premium beer at the Baltika brewery. While consumer goods lead the way, heavier industrial interests from Otis Elevator to Sanyo’s microwave oven division have also agreed deals in St Petersburg. When the Russian market gets around to their product lines, they will be waiting. St Petersburg has also taken its place as Russia’s leading sea port, albeit largely by default. Unfortunately, Sobchak never became as good a manager as he was an advocate. While his gaze was fixed on St Petersburg’s future, present-day concerns such as pot-holes and snowdrifts were neglected. The local mafia operated with a brazenness unseen even in Moscow holding leisurely sit-downs in sidewalk cafes, and leaving corpses on crowded thoroughfares. Sobchak also struggled with the bane of most Russian liberals: apparent indifference to the catastrophe in his constituency’s industrial guts. Military-industrial plants, such as the Kirov Factory and Arsenal which drove Leningrad’s communist economy, are now federal property, in theory leaving local government with a limited role in their future. But such jurisdictional niceties have not prevented Luzhkov from fussing over Moscow’s ailing automotive giants. As a financial manager, Sobchak was nearly disastrous. His last budget had an official deficit of about $600 million, or 30% of revenue. The city was without reserves to cover its outstanding domestic bonds. Sobchak continually dug the hole deeper so say the staff of his successor, Vladimir Yakovlev by taking short-term bank credits at whopping interest rates. To this mess, Sobchak wanted to add the burden of hosting the 2004 summer Olympics. The International Olympic Committee wisely turned him down, not even including St Petersburg on the shortlist of five final candidates. In a world full of authoritarian politicians, Luzhkov is an exceptionally brilliant one. His signal achievement one that would have earned long odds four years ago is simply to have asserted authority. No one doubts that Moscow is run by its mayor, rather than by the bankers, gangsters or federal bureaucrats who might have eclipsed a lesser man. Among the 91% of Muscovite electors who voted for Luzhkov last year, the most common accolade is that he has restored order to their dangerously chaotic metropolis. The specifics of Luzhkov’s fiscal stewardship are difficult to pin down. His government published no budget at all for two years. But at least some of Moscow’s war chest is being put to good use. Roads, street lighting, snow clearance and sanitation have improved markedly over the past few years. Teachers’ pay is approaching a living wage. Moscow pensioners receive a cost-of-living increment courtesy of the city. Kindergartens and housing which hung on the balance sheets of local enterprises have shifted seamlessly to municipal management. Luzhkov believes in the free market, so long as it produces the right results. He is famous for obliterating retail kiosks which he decided marred the Moscow streetscape, or forcing shops to hang New Year’s decorations. Privatization, in Luzhkov’s book, likewise demands the right buyer. “He is the only politician in our country with sense,” says a Moscow architect, whose downtown studio Luzhkov’s administration saved from redevelopment as luxury housing. Other interventions carried a higher price tag, however. Luzhkov has involved the city as both stockholder and lender to its two largest industrial employers, auto makers Zil and Moskvich. He helped Zil’s hapless management chase away a large private investor, and bullied Moscow banks into lending to the bankrupt enterprises. The meddling is good politics but rotten economics, an expensive delay in the two plants’ inevitable takeover and restructuring. Luzhkov compares poorly here with Nizhny-Novgorod governor Boris Nemtsov, who took auto giant GAZ under his wing, but in return forced management changes that made Russia’s most market-worthy cars. Still less return is promised from Luzhkov’s authoritarian fondness for grand public works. The rebuilding of Christ the Saviour Cathedral, which Stalin dynamited in the 1930s and replaced with a public swimming pool, was a defensible if extravagant expenditure. But it whetted the mayor’s appetite for costlier and zanier projects. The planned “underground city” on Manezh Square behind the Kremlin has, predictably, run out of funding with no more than a floor or two dug. Promised new metro lines remain pencilled in on the map. Much wilder still is Luzhkov’s promise to move the million or so residents of Moscow’s Khruschevki, shaky five-story walk-ups named after the communist leader who built them, to new housing within the next decade. This pronouncement has only marred the Khruschevka-dwellers’ property rights, by knocking down their apartments’ resale value. Waiting in the wings are further prestige projects, such as rebuilding the entire Garden Ring the eight-lane highway that circles the centre of Moscow underground. But the worst sign on the horizon for Luzhkov’s Moscow is foreign investors’ distaste for the mayor. The international vice-president of a major hotel chain flew to Moscow three times for scheduled meetings with Luzhkov; three times he was stood up. A bevy of big-name multinationals lately moved into new office space off Pushkin Square, only to find their views occluded by a massive billboard for the Russkoye Bistro fast-food chain, which is owned by Luzhkov’s wife. Investors looking into Moscow factories find most of them ‘booby-trapped’ by enormous property tax burdens which are informally forgiven as long as incumbent management stays in charge, but blight the prospects for a foreign take-over. “These guys honestly think they are sitting on a gold mine which world capital is going to fight to get in on,” concludes one businessman. In fact, big-ticket industrial investors such as Mars, Procter & Gamble, Baskin-Robbins and Coca-Cola have all stayed beyond the mayor’s reach in Moscow’s environs. Last year’s elections brought triumph for Luzhkov, humiliation for Sobchak. The St Petersburg pioneer was beaten by Yakovlev, who had been his faithful deputy, in a bitterly fought run-off. Luzhkov’s overwhelming victory, by contrast, made him a figure of national significance. The mayor was one of the few politicians Boris Yeltsin saw after his coronary by-pass operation. Most of the winners in Russia’s subsequent regional elections copied Luzhkov’s style, projecting themselves as non-ideological get-it-doners. The media began to buzz about President Luzhkov in 2000 if not sooner. Yet Yakovlev, whom foreign investors already knew and liked, looks to be preserving Sobchak’s positive achievements, while ironing out the rough spots with impressive zeal. The new governor has already turned a rare political trick, improving civic services while slashing the budget deficit by more than a third. True, he was helped by a sharp drop in interest rates, which brought the annual cost of borrowing from near 100% to 35%. But Yakovlev also made a bit of reformist history in February by doubling the tiny level of rents. “The communists came out and shouted, but everybody kept paying,” observes reformist deputy Ostrovsky, a Sobchak supporter whom Yakovlev has won over. “We hear fewer speeches now, but see more action,” says Pekka Laitinen, head of ABN Amro Bank’s St Petersburg office. St Petersburg’s small business expansion continues to keep pace with Moscow’s, both cities having been energized by Yeltsin’s re-election victory. Big business also shows signs of stirring. SoyuzContract has almost filled three newly-renovated office buildings, 6,000 square metres in all, largely with big Moscow companies beefing up on the northern front. “Moscow’s got a little crowded,” Golubev explains. “And the next place to come is naturally here.” Western developers like Debenham Zadelhoff and Skanska are also hard at work in St Petersburg. “When a city has 3,000 palaces to renovate, you don’t notice the first 100 as much,” says Laitinen. Meanwhile, the new banks that fuelled Moscow’s revival seem set to grow less quickly because of financial stabilization. Luzhkov could lay on punishing nominal taxes without much complaint so long as inflation and interest rates stayed comfortably in triple figures. Banks could count on growing out of their losses, if they did not do anything foolish such as extending loans to Russian industry. In today’s quieter conditions, Luzhkov’s 30% tax looks rather more serious. The leading banks have also become much stronger lately, so the carrot of acting as a financial agent for Moscow’s budget means less to them. No-one has yet threatened to transfer back-office operations over the city line if Luzhkov does not cut taxes. But the public-private balance of power is destined to normalize, meaning the mayor will have less. While Moscow’s financial details remain murky, cracks in the armour are showing. Luzhkov who unlike Yeltsin does not usually criticize his ministers in public loudly dressed down his financial team earlier this year for unspecified but significant revenue shortfalls. The public-private consortium building the “underground city” was overhauled, amid revelations that no-one wanted retail space at the prices the city was asking. Last month Luzhkov blasted the federal finance ministry for “sabotaging” Moscow’s 850th anniversary celebration, another expensive event scheduled for this summer. This was clear political code for: “Send more money.” Even if the Eurobond, to be underwritten by Credit Suisse First Boston and Nomura, goes ahead, it will apparently not limit Moscow’s appetite for new funds. The city recently announced a syndicated loan in the works from Deutsche Morgan Grenfell, Société Générale and West Merchant Bank. St Petersburg has another advantage over Moscow: experience at raising money in a civilized fashion. The northern city operates Russia’s largest and longest-standing domestic municipal bond programme, launched in 1995 and with current obligations of Rb3.5 trillion ($614 million). Despite Sobchak’s shaky reserve arrangements, all payments have been met, and the paper has a loyal following among local banks. Moscow’s first attempt at debt financing was, characteristically, overambitious and intricate. This was the “municipal housing bond”, a security to be paid off not in cash, but in square metres of newly-built housing. A great idea in theory: the city would get money to ease its terrible housing crunch, citizens would have a means of saving for an apartment. But the details proved too devilish even for Luzhkov’s loyal corps of Moscow financiers. After two or three years of turbulently shifting consortia, the bonds still went begging on the market last winter. One reason was that Luzhkov’s people neglected to specify where they would build the flats. In theory, both Russian cities meet the first criterion of capital markets entry: reasonable expectation of increased revenue in the future. Despite all its disadvantages, Moscow can only grow as an international business centre. A recent Economist Intelligence Unit survey found 2,000 more European corporations planning to open shop there by the end of the century; the ones already there are expanding rapidly. St Petersburg will pick up as a manufacturing and transport hub, and as a tourist destination once Russia’s wild east reputation fades a little. But if Russia, and particularly the city of Moscow, wants to become a favoured rather than just inevitable destination for the world’s money, it will have to play more by the world’s rules. Mayor Luzhkov’s “controlled market” philosophy may have made more sense than liberalism in Russian capitalism’s start-up, grab-all period. Now, however, the know-it-all mayor might look north for a few lessons. |
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