RUSSIA'S FLOURISHING NORTHWEST REGION

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**March 1999**
by Alexei Kim and Sviatoslav Bytchkov
Historically, the Northwest region of Russia has been a gateway to the country and an important link toEurope and the West. Likewise, the West has always played a significant role in the development ofNorthwest Russia, from ancient Greek merchants trading in the Novgorod region to foreign architects whobuilt the Hermitage in St. Petersburg. Many centuries have passed, but the tradition is still alive. Thisimportant region which comprises 11 administrative areas, including the city of St. Petersburg still playsa vit1al role in building commercial relations between Russia and the West.
**Foreign Investment Climate**
Conveniently located at the crossroads of major intermodal corridors, the region connects Scandinavia,Western Europe, and Asia. This excellent location, combined with a highly educated work force anddeveloped industries, provides a foundation for success. However, it is the progressive mentality of politicaland economic leaders in Northwest (NW) Russia that distinguishes it from other Russian regions. Duringthe last three years, NW Russia has attracted more foreign investment than any other region of Russia. 
Leningrad Oblast, for example, has the highest level of per capita investment in the country. Its favorableforeign investment legislation attracts Western companies to the construction, agriculture, and machine-building industries. Ford Motor Company is considering Leningrad Oblast as a potential site for the firstautomobile manufacturing plant in Northwest Russia. The largest oil refinery in the region is located inKirishi, Leningrad Oblast, and development of oil and cargo ports is a high priority for the local government.The development of industry in Leningrad Oblast by leading multinational companies has been a startingpoint for the region's infrastructure growth.Novgorod Oblast was the first region in Northwest Russia to adopt a foreign investment law. This lawprovides for up to 100 percent local tax holidays for incoming investors and has already attracted large andsmall companies from several countries. A number of foreign firms operating in Novgorod view the regionas an "investment mecca." Philip Wegh, director general of Stimorol, a Danish chewing gum manufacturerwith operations in Novgorod, described the difference between support for foreign business in Novgorod andthat in other Russian regions as "day and night." The Novgorod administration has a reputation for beinginvestor friendly and for working with investors to remove obstacles.
The Komi Republic and Vologda Oblast are as well known for their pristine landscapes as they are fortheir natural resources. American companies are actively involved in developing oil fields in Komi, whilewood processing, chemical production, and steel manufacturing are Vologda's leading industries. Theseregions are seeking modern Western technologies to improve the efficiency of their industries while helpingpreserve the environment. 
Many large U.S. companies have already discovered the benefits of working in Northwest Russia. Newventures by International Paper in Leningrad Oblast and Owens Illinois in Novgorod will provide foodpackaging for the entire region. Consumer goods manufacturers were the first Western companies to buildtheir production facilities in Russia. Coca-Cola, Gillette, and Wrigley, whose products have becomefamiliar to Russian consumers, operate state-of-the-art facilities in St. Petersburg. At the same time,industrial giants like Caterpillar, Lucent Technologies, and Otis produce world-class products in St.Petersburg and Leningrad Oblast for both domestic and international markets. 
**Opportunities**
Of the 89 regions in the Russian Federation and 11 in the Northwest, the city of St. Petersburg;Leningrad, Novgorod, and Vologda Oblasts; and the Republic of Komi are among those providing the mostbusiness friendly environment. The fact that over 200 U.S. companies are operating in Northwest Russiaduring these challenging times speaks for itself. Despite the commercial benefits of the Northwest region,doing business in Russia is still a challenge, requiring dedication and a long-term commitment. However,one can minimize the risks by entering the market step by step and ensuring that the first step is on solidground. 
The telecommunications sector provides many investment opportunities for U.S. companies, whichalready offer a wide range of services in St. Petersburg. Peterstar, a local subsidiary of New York-basedPLD Telekom, installed a fiber optic network in the city. Lucent Technologies is currently assemblingswitches for local telephone stations. Motorola, one of the leaders in the local cellular market, has set upa research lab in St. Petersburg.
The hospitality industry has tremendous potential in St. Petersburg. As the fourth largest city inEurope after London, Paris, and Moscow St. Petersburg represents a new and largely unexploiteddestination for American tourists. According to UNESCO, St. Petersburg is the only city in the RussianFederation that ranks among the top 10 cities in the world for "tourism appeal."
 Like all of Russia, the Northwest region has felt the impact of the August financial crisis. According toKen Johnson, head of Arthur Andersen's legal practice in St. Petersburg, investment is still continuing inthe region, but on a much lower level than before August 17, 1998. "Further, the character of investmenttargets appears to be narrowing to existing companies which are involved in local production and have aclient base and distribution network, but are in need of capital renovation/expansion. This new focus reflectsthe needs of a sizeable consumer market which, following the ruble's devaluation, can no longer afford hardcurrency-based prices, but is otherwise underserved by ruble-based production."
For more information on Russia's Northwest Region, visit BISNIS Online atwww.mac.doc.gov/bisnis/country/regions.html#Northern.
Alexei Kim represents BISNIS and is collocated with the U.S. Commercial Service/ABC in St. Petersburg.