R 120813Z JAN 09
FM AMCONSUL ST PETERSBURG
TO SECSTATE WASHDC 2658
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG

UNCLAS ST PETERSBURG 000002 
 
 
EEB/IFP/OMA;EEB/EPPD 
 
E.O. 12958: N/A 
TAGS: RS ECON
SUBJECT: GLOBAL ECONOMIC DOWNTURN HITS ST. PETERSBURG 
 
¶1. (SBU) Summary.  The ongoing economic downturn is increasingly 
being felt in St Petersburg and threatens to jeopardize many of 
the achievements of St. Petersburg's economic development over 
the last several years.  The city government has been forced to 
recalculate its budget, several ambitious infrastructure 
projects have been downsized or postponed, various industrial 
companies have suspended their production, and staff cuts are 
beginning to be discussed more and more frequently.  Although 
some local analysts predict the crisis may stimulate healthier 
economic growth in the long run, the current negative trends can 
be expected to continue well into 2009. 
 
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Public Mood Has Drastically Changed Since the Summer 
-------------------- 
 
¶2. (SBU) The consequences of the global financial crisis have 
become increasingly apparent in St. Petersburg recently, as a 
quick glance at the headlines in any local newspaper reveals. 
In August and September of this year, analysts and journalists 
were still very upbeat - discussing ongoing infrastructure 
development, new investment projects, outlooks for growth and 
the challenges of a very tight labor situation.  Today, however, 
the most popular words in the printed media are "reduction", 
"contraction", "suspension" and "staff separation." 
 
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Government's Infrastructure Spending Plans Affected 
-------------------- 
 
¶3. (SBU) The lack of investment capital and increased interest 
rates has hit various multi-billion dollar development projects, 
which the city administration had hoped to accomplish through 
public/private partnerships with major Russian and foreign 
investors.  Foreseeing a significant decline in revenue, the 
city administration has reviewed several programs, and cut the 
overall city budget planned expenditures for 2009 by 10 percent. 
 According to public statements of St. Petersburg government 
officials, several high-profile projects are likely to be 
postponed, such as the as "Elevated Express" (construction of an 
elevated tram line which would connect the southern outskirts of 
the city with the main public transportation network, estimated 
cost US$1.4 billion), the "Orlovskiy Tunnel" (a toll tunnel for 
cars under the Neva river, $1.1 billion), the Western High Speed 
Diameter road (a toll highway connecting the southern and the 
northern parts of the city, $9.0 billion) and reconstruction of 
Pulkovo airport ($1.0 billion).  Independent market observers 
have been speculating in the press that this list is not 
exhaustive, arguing that many of the government's other 
initiatives, such as "Morskoy Fasad" (construction of a sea 
passenger terminal and an accompanying commercial/residential 
complex, $1.4 billion) and various other real estate development 
projects also seem to be in jeopardy. 
 
¶4. (SBU) The city has already decided to cancel its 
participation in the Okhta Center, one of the highest profile 
and most controversial real estate projects in the city, which 
entails the construction of a 1300 foot tall office building 
jointly financed by Gazprom.  The city government has officially 
ended its participation in the project, to which it had 
previously pledged around $330 million over next three years. 
Gazprom's leadership, regardless, still claims it will continue 
on with the project without government assistance if necessary. 
 
¶5. (SBU) Another high-profile consequence of the downturn has 
been the suspension of the South-West Heat Power Plant (HPP) in 
St. Petersburg.  This $500 million project was considered by 
City Hall to be a key part to its overall city development plan. 
 However, Sintez Group, the project's main private investor, has 
recently experienced serious difficulties in construction 
financing and has suspended the project.  This suspension has 
ramifications for another of the city's strategic projects - 
Baltic Pearl.  This $3.0 billion construction project, financed 
by Chinese investors, was one of the first large foreign 
investments which Governor Valentina Matviyenko's administration 
secured for the city.  The project plans to create a large 
commercial complex and accompanying residential districts which 
would house thirty thousand residents in the southern outskirts 
of the city.  Local economic observers fear that the delay in 
the construction of the South-West HPP, along with the 
suspension of "Elevated Express" which would connect Baltic 
Pearl with downtown, threatens the completion of Baltic Pearl as 
well. 
 
¶6. (SBU) The overall development plan for the city's overtaxed 
electrical grid network is also being downsized.  The plan was 
initiated by both the city administration and the Russian 
electrical power monopoly RAO UES in 2006 and called for a total 
investment of about $11 billion into St. Petersburg's energy 
complex.  However, according to recent announced revisions, OAO 
Lenenergo, the local distribution network operator, will only 
invest $1.6 billion into the modernization of its facilities, 
instead of the $2.8 billion as originally planned.  Similarly, 
TGK-1, the local electricity generating company, intends to 
postpone the commissioning of various new power generating 
facilities for up to four years. 
 
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Manufacturers Also Being Hit 
-------------------- 
 
¶7. (SBU) Private businesses are being affected by the global 
downturn as well as government promoted infrastructure projects. 
 One of the most prominently affected industries has been the 
automotive industry.  In response to a sharp decline in demand, 
the Ford Motor plant in Vsevolozhsk, Leningrad oblast, has 
announced plans to halt production for about one month, resuming 
production in late January, 2009.  Similarly, the new GM plant 
which opened in St. Petersburg in early November announced that 
it would not reach its design production capacity in the near 
future.  The plant will not operate through mid-February 2009, 
after which production will commence only three days per week 
for an unspecified period of time.  Also, both Hyundai and 
Suzuki, who recently signed agreements to construct plants in 
St. Petersburg, are both considering postponing their projects 
until the economic climate improves. 
 
¶8. (SBU) Other industries also provide a growing number of 
similar examples of business retrenchment.  Flextronics, a 
Singapore-based producer of high-end electronics for major U.S. 
computer manufacturers, which had planned to start production at 
its assembly plant in St. Petersburg in 2008, has decided to 
suspend production for an undetermined period.  Fosforit 
company, a large producer of mineral fertilizers based in 
Leningrad oblast, has suspended production following a sharp 
decline in the demand for its products.  Another Leningrad 
oblast-based company, Pobeda Knauf, a Russian-German joint 
venture which manufactures construction materials, has also 
announced a two-month production freeze.  Many construction 
companies have frozen their current projects and are reviewing 
or even cancelling their investment plans for the future.  City 
government officials have noted that in November and December 
almost no new construction projects have been started throughout 
the city. 
 
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Banking Sector: Next-in-Line? 
-------------------- 
 
¶9. (SBU) Against the deteriorating manufacturing background, the 
banking sector of St. Petersburg appears to be in relatively 
good shape.  The only significant problem in this sector thus 
far has been the St. Petersburg-based VEFK Bank bankruptcy 
threat.  This bankruptcy could have potentially had serious 
repercussions on the economic and social situation in the 
region, because VEFK has the fifth largest retail network in 
northwest Russia, and works with many thousands of individual 
clients, including pensioners who receive their pensions through 
the bank.  Heading off bankruptcy, federal authorities replaced 
the bank's administration and provided the bank with a $290 
million cash infusion - measures which prevented financial 
losses for VEFK clients and generally reassured the small 
depositors of other banks as well.  Overall, although there are 
still concerns about the stability of the banking system, St. 
Petersburg banks have been operating without major failures so 
far. 
 
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Average Ivan Starting to Feel the Pinch 
-------------------- 
 
¶10. (SBU) More and more ordinary people seem to have begun 
feeling the impact of the crisis in their everyday life. 
According to the St. Petersburg administration's Vice-Governor 
for Economic Development Mikhail Oseyevskiy, 1000 people are 
losing their jobs in the city every week, with many more 
companies reducing their employees' compensation packages and/or 
considering staff cuts as a real possibility.  Also, in 
expectation of a decline in consumer purchasing power, some 
shops are beginning to shift to cheaper and lower-quality goods. 
 Several popular retail food chains have announced a 50% 
reduction in the variety of articles they keep in stock on their 
shelves.  But there seemed to be little slowdown in spending in 
the run-up to New Year's, the biggest holiday of the year for 
most Russian families.  Some observers commented that Russians 
would not stint in their New Year's purchases, but would start 
to feel the financial pinch in January and February. 
 
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Yet, Crisis May Provide Opportunity for Future Growth 
-------------------- 
 
¶11. (SBU) Optimistic business analysts, however, expect that the 
crisis will be instrumental in bringing eventual improvements to 
the city's business environment.  They argue that the crisis 
will open more space in the marketplace for the development of 
stronger companies, as their less efficient competitors will be 
forced out.  The cooling labor market should also relieve the 
staffing shortages and turnover problems for businesses.  The 
head of a major U.S. company told us that staff turnover has 
decreased from the pre-crisis figure of 40 or so people each 
month to only one per month in December.  Lower economic growth 
rates should make the infrastructure development concerns 
somewhat less pressing.  Analysts also point out that St. 
Petersburg has one of the most diversified economies in Russia 
-- a key policy objective of Governor Matviyenko -- and hope 
that the slowdown in some branches of its economy would be 
compensated by the growth in others. 
 
¶12. (SBU) Comment.  The spreading economic downturn is becoming 
a serious test for St. Petersburg's economy, as it threatens 
many of the economic achievements which have occurred over the 
past five years.  Although some of the optimistic expectations 
are not unrealistic in the long run, in the shorter term, St. 
Petersburg's economy will likely experience significant 
dislocations which will negatively impact both businesses and 
people alike. 
 
 
GWALTNEY