Services account for nearly 60% of St Petersburg’s economic activity and the fastest growing segment of this sector is tourism. The city now attracts 3.5 million visitors a year, ranking it ninth in Europe and well ahead of Moscow’s 2.9 million tourists. According to industry experts, though, the city’s cultural and arts heritage is under-utilised. A report by UK Trade and Investment estimates that $1.5bn of private sector investment will be required in the next five to six years to meet the government’s target for new hotel capacity.

“The hotel business in the city is characterised by low levels of competitiveness and extremely high prices in the four-star and five-star bracket,” according to a study by Boston Consulting Group. The company points out that in the three-to-four-star category, hotel rates are 20%-30% higher than in other European cities, partly because of a longer pay-back period compared with residential and commercial real estate projects and large investments, as well as the numerous approvals required to complete a project.

Advertisement

The city government is prepared to make initial investments of $4m-$8m to establish the City Marketing Agency, whose prime task is to promote St Petersburg in the global tourist market. The city also provides administrative and regulatory support for investors. Another issue on the agenda is the need to reduce red tape barriers for new business creation, and this applies particularly to the tourism industry.

“Although the overall conditions for the successful development of St Petersburg’s tourism industry are favourable, the city’s infrastructure is not sufficiently developed,” says Stephan Dertnig, vice-president of Boston Consulting. “Finding accommodation is the main problem. The big hotels are unable to cope with the 465,000 visitors who arrive in the high season. There are only 0.27 restaurants per 1000 tourists, compared with 0.75 in Barcelona and 1.15 in Montreal. Tourism is vital for the city, with foreign visitors adding about $1.7bn directly to the economy. The potential for growth is enormous.”

Land marked up

Anton Rassadin, member services manager at the American Chamber of Commerce in St Petersburg, says that, for the first time since the Soviet era, the authorities have passed a zoning law assigning specific usage to each district, whether for commercial, residential or manufacturing purposes. “They are freeing up sites for specific purposes – and tourism is a high priority – by relocating industrial facilities out of the city’s historical districts,” he says. “This has freed up huge tracts of land for redevelopment and there are some major projects under way.”

The new sea passenger terminal will have a capacity of 1.2 million visitors a year and will require the reclamation of more than 1000 acres of land, with the subsequent creation of nearly 11 million square feet of residential and office space, including a yacht club and marina.

One of the most ambitious urban renewal projects is the $2bn Western High-Speed Diameter motorway, which is due to be completed in 2009. Nearly half of the 30-mile road will cross the inner city area via two tunnels under the Neva River and 72 bridges and flyovers. It is one of St Petersburg’s major private-public partnership (PPP) projects currently in progress.

The state-owned gas company, Gazprom, is investing $250m in a new football stadium with a capacity for 50,000 people, meeting Union of European Football Associations and Fédération Internationale de Football Association requirements. Architects GMP of Germany, Kisho Kurokawa of Japan and Portugal’s JSC are the stadium’s designers, along with two Russian firms.

Cultural development

British architect Norman Foster recently won the tender for the New Holland Island Redevelopment competition, a $500m project to provide 250,000 square metres of mixed cultural development, including an indoor theatre, conference facilities, galleries, a hotel, shops, flats and restaurants, in the heart of the city. “The project will regenerate the 18th-century New Holland Island, presenting a unique opportunity to transform the city of St Petersburg into the foremost venue for performance and visual arts in the world,” says Foster and Partners spokeswoman Jo Cutts.

Luxembourg-registered Thema Productions has signed up with St Petersburg property developer Sistema-Hals North-West to build a $20m motion picture studio in St Petersburg. City officials hope to promote the local cinema industry with one of Europe’s most picturesque cities as a natural back-drop.

Another significant project aimed at boosting the city’s reputation as an historic European cultural centre is the new Mariinsky Opera and Ballet Theatre. French architect Dominique Perro was commissioned to design the €250m theatre, which will have a 40,000 square metre stage and capacity for an audience of 2000 people.

Freeing up space

The relocation of industry out of the city centre has also opened up the possibility of refurbishing a number of 19th-century warehouses along the waterfront. Russian developer Etalon-LenSpetsSMU is building a $60m, 280-room, four-star facility on the site of a former wine merchants’ warehouse. The hotel will be owned by London & Regional Properties and operated by Finland’s Holiday Club.

The St Petersburg administration plans to build the city’s largest office centre by 2016, designed to accommodate companies setting up in the region. “Major companies, including Sovkomflot, Vneshtorgbank, Sibneft and Transneft, have applied for plots of land on which to build office facilities,” says the city’s deputy governor, Aleksandr Vakhistrov. “This is why we’ve decided to build the office complex to offer these companies commercial premises in the heart of the city.”

The PPP project requires a $300m outlay, a third of which is to be provided by private investors.

The city government took a big step towards improving international access to St Petersburg this year with the separation of state-owned Pulkovo’s airline and airport. Previously, the international airport and regional airline operated as a single entity. The Pulkovo airline was merged with state-owned Rossiya, giving the airport independent status and raising hopes among foreign carriers of smoother negotiations over slots with airport authorities.

In May, Finnair laid on additional flights to St Petersburg, bringing its weekly total of direct connections to 10. Finnair vice-president Petteri Kostermaa says that the Finnish carrier was operating below capacity on its St Petersburg route. “An extra flight will allow business people to make a daily return trip to St Petersburg or Helsinki,” he says.

“At the moment, about 75% of all passengers travelling from St Petersburg to Helsinki are transit passengers, going on to New York and other American or Asian destinations. Taking into consideration the size of St Petersburg and its proximity to Helsinki, the ideal number of daily flights to St Petersburg could be as many as four. We are still negotiating with the authorities,” says Mr Kostermaa.

British Airways, the only EU carrier that flies direct from London to St Petersburg, says the airline-airport split will encourage changes in infrastructure and open up competition. Russian airspace remains heavily regulated by state authorities, whose policy is often influenced by lobbying from national carriers. As a result, foreign carriers complain that local airlines get better slots and block international carriers from increasing their flights.

“Russia is one of our best markets, and St Petersburg and Moscow are among the top six destinations for British Airways (BA) on the whole,” says Andrew Hammans, BA regional commercial director for eastern Europe. Last year, BA flights from the UK to Russia increased by 15% overall, while St Petersburg traffic was up by 17%. “If it is found that other carriers are open for additional business, I would suggest we could expand the market in about a year,” says Mr Hammans.

The European Bank for Reconstruction and Development (EBRD) has undertaken a significant part of the initiative and the funding for these urban development projects. Alain Pilloux, the EBRD’s director for Russia, says the bank has recently approved a new strategic plan for Russia. “The EBRD will pursue projects in the regions more actively, and the St Petersburg region remains a high priority,” he says.

“We have done quite a lot in the region but we shall do more in fast-growing sectors. It is likely that St Petersburg will become an important automotive hub. We are working with major automotive manufacturers and component makers that want to set up in the region. This sector will become more important in developing the economy and providing jobs in the region. The region will also be important in the development of infrastructure, particularly in private sector involvement in the development and operation of infrastructure under the Russian Investment Fund,” he says.

Motorway projects

The EBRD is involved in two projects in particular that it has approved for St Petersburg. One is the Western High-Speed Diameter motorway and the other involves the bank working with the Russian authorities on providing support for the St Petersburg-Moscow motorway. “Equally important are projects that have a positive impact on the environment in the St Petersburg area,” says Mr Pilloux. “There is the finalisation of the St Petersburg flood barrier and there is also the Neva Discharge Project, which is a waste treatment project. There will be more projects in waste management, urban transport and other sectors.”

The first Northern Dimension Environmental Partnership project, the South-West Wastewater Treatment Plant, has been in full operation since September 2005 and has enabled the city of St Petersburg to treat 85% of its waste water.

“There will also be a further development of the retail industry,” says Mr Pilloux. “The EBRD is an investor in the cash-and-carry Lenta and in Okey, which is an emerging group of supermarkets and hypermarkets. We have just approved a project through which we will provide the Bank of St Petersburg the means to lend significant funds to small and medium-sized enterprises.”