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Vladimir Knyaginin, Director of the Center for Strategic Research “North-West” Foundation, spoke with the DP correspondent about the necessity of cooperative development strategy for St. Petersburg and Leningrad Oblast.
Development trends for Leningrad Oblast development were so straight-forward and clearly outlined that all it had to do was to swim with the tide. As soon as Baltic seaports broke away from the USSR and North-West Europe became our main partner all cargo flows and investments were presented to St. Petersburg and Leningrad Oblast on a silver platter. Ukrainian ports dominate in the south (Il’ichevsk is the fastest growing Black Sea port), sea ports in Russia’s Far East are located just too far away and can hardly play an important role for Russia. So, Baltic Sea region remains the most important strategic direction. Russian market is growing, logistics facilities are being developed and Leningrad Oblast and St. Petersburg have no other option but to expand their port services business. Murmansk and Arkhangelsk are making their first steps in this process.
Obviously, the explosive growth of transport and logistics sector in the North-West provokes the “port-city” conflict. St. Petersburg can not expand its port capacities endlessly; most likely the city would have to reduce these capacities and concentrate on transportation of expensive cargos. Leningrad Oblast would attempt primarily to take over the cargos pushed out of the city. It is important to note that the status of the country and the pattern of global trade have changed. The cargo-carrying complex has also changed – cargo boats have different draft and carry different types of cargo, the containerization of cargos is growing. Leningrad Oblast has succeeded in building specialized ports that comply with the new requirements. Concrete investors were involved in the project, the government was concerned with securing Russian transit and the geopolitical situation was favorable. All these factors determined the main directions for Leningrad Oblast development.
Proximity to centers of commodity markets and centers of logistic capabilities plays a key role in manufacturing sites selection. Large-scale economy is usually based on maritime transportation, hence, the strategic importance of sea ports. First come industries that react quickly to consumer market growth , like food and tobacco manufacturers. They are followed by more complicated branches, such as automobile assembly and auto component industries. Modernization of transport engineering and shipbuilding sectors is currently underway. The launch of shelf projects creates demand for heavy lift ocean barges. It looks like Russia has lost the battle for shipbuilding to China’s and Korea’s manufacturers, however diversification and segmentation of the growing market creates separate niches inside it. Demand for sea boats and platforms is growing and this is where our services can prove useful.
- Do we have the ability to build oil production platforms?
- We can participate in the process. A platform is one of the most complicated engineering structures. British and Norwegian shipbuilders are highly qualified in this sphere, but there is a demand for dozens oil and gas production platforms and we have to build them. It is impossible to perform transfer of our partners’ technologies as such, so British and Norwegian companies will never dominate Russian market. Northern region conditions require extra safety, therefore require use of special metals, autonomous power supply. There is a need for the whole complex of supplies and services, for R&D. It is necessary to conduct the whole research cycle over again. St. Petersburg has good chances of winning R&D contracts, Leningrad Oblast – of winning manufacturing contracts. Some of the contracts would go to St. Petersburg, some to Vyborg and some – to Sevmash plant in Arkhangelsk.
Oil production on the continental shelf and in the Arctic zone requires unique technological solutions. Possibly, Russian engineers will have to look for these solutions all by themselves. So, Russia’s Northwest finds itself in the unique situation: there is a major task and a major challenge. The question is whether we will be able to cope with the challenge.
- Does it depend on political will?
- It also depends on business logics of companies. Political will is not everything. A lot depends on companies: whether they are interested in extraction and production of oil themselves or whether they see their key competence in selling oil on the global market and leave development and technologies to professionals.
- What are they inclined to do at present?
- I think they are evaluating their strategy. Everything depends on corporative strategy, on the way companies evaluate their market for oil production. Moreover, there is an established services market in Russia and global corporations are already operating in this market. There is a political decision that foreign companies can control no more than 20% of the services market. Research and development contracts are oriented primarily at St. Petersburg but Leningrad Oblast can also get its share of manufacturing. Plants can be located in the Northwest and along the sea coast: in Arkhangelsk, Murmansk and Leningrad Oblast. There is no shortage for skilled workers.
- Is there a competition between Arkhangelsk, Murmansk and Leningrad Oblast?
- I believe in this case any competition is counterproductive. There is a huge market. The best way to commensurate with its scale is to create a network together with competitors. Synergetic effect can be reached through use of cooperative strategies.
So far we see only competition.
Conflicts attract more attention than quiet cooperation processes. Look at development of port complex. Containerized cargos, the most expensive to process, will be handled in St. Petersburg, other types of cargo will be processed in ports located in areas where land is less expensive or in areas that do not experience major problems with transportation. Procession of cargos in Leningrad Oblast ports is in the best interests of St. Petersburg sea port. Ports should join forces.
- Does it mean that the regions should unite?
- I don’t think it is necessary for regions, but sea ports should consolidate.
For example, three Japanese seaports have recently joined their forces and formed a powerful unit with the capacity of 4 million TEU. All Chinese sea ports (about 150) have been pooled into five clusters. We do see some examples in of partnership between sea ports that have different management but maintain close cooperation, have coordinated specialization and interconnected infrastructure. It is possible that coordination would become stricter. State support would be vital for solving large-scale problems.
Leningrad Oblast does not handle incoming cargos all by itself; actually, the City and the Oblast are doing it together. All investments flow to the Oblast from St. Petersburg. Foreign investors regard the City and the Oblast as one area. A company chooses a location in the area irrespective of administrative borders. Site selection depends solely upon land price, proximity to logistics centers and labor market situation. I am not sure there would have been any automobile plants in the Oblast without the City’s strategic decision to create an automobile cluster. 67% of Russia’s high quality warehouse facilities are located in Moscow and Moscow Oblast and 11% - in St. Petersburg and Leningrad Oblast. The whole auto assembly process is based on complicated logistics. So, St. Petersburg and Leningrad Oblast is the best site for location of auto assembly and auto parts manufacturing companies.
- Is it possible to find a compromise between moving industrial plants out of the city and ecological requirements for country house communities in Leningrad Oblast in terms of cooperative strategy?
- Business logics of companies dictate concern with land value and land value is determined by market. Industrial enterprises are moved from Moscow because land there is very expensive. An undervalued land can be used by anyone. As soon as the land goes up in value to the point when redevelopment becomes profitable industrial enterprises would be moved out of the Oblast. As soon as land plots owners realize the benefits of owing land they would behave exactly as city residents do today: “You can build anywhere but in my yard”. Russia will get one more valued asset. The value of land depends on its quality and its quality is determined by the quality of the natural environment. The time when market forces will be committed to environmental protection is approaching.
St. Petersburg is the main driving force behind Northwest’s real estate market development. This process may include certain conflicts inside the city and between the city and the oblast. Market forces are focused on gaining immediate profits. From time to time power authorities try to slow down the process as they realize that it needs time for development.
- Are there any examples of joint activities of St. Petersburg and Leningrad Oblast in the sphere of development?
- In terms of cooperation logic it is expedient to join efforts to develop labor market. This market is unified but unbalanced. Like any market is has a center and a periphery. Part of the Oblast within the pendulum reach is the periphery and the city is the center. Economic growth leads to emergence of subcenters. This is exactly what’s currently happening in Moscow Oblast where we see formation of separate labor markets and emergence of towns with population of over 100,000. These towns are competitive in terms of housing, lifestyles as well as in diversity of job offers and compensations. Their residents can easily change job or find new professional opportunities.
Strategy for development of a town’s or an oblast’s labor market depends upon the situation with housing and commercial real estate. One day it would become important to St. Petersburg that the Oblast residents have jobs. R&D studies performed in St. Petersburg institutions require manufacturing facilities. So, St. Petersburg will have to invest in development of towns like Vyborg.
- Does it mean that Vyborg would become the first Oblast’s subcenter?
- I don’t’ think so. A lot will depend upon plans for the future of Ust Luga sea port: to spend billions of rubles on development of a new town or to use existing human resources, including those in St. Petersburg and simply improve transportation
- Are there human resources available for solving such large-scale projects?
- It is similar to the situation in China, where any specific industrial plant experiences shortage of workers with required qualifications. The problem can be solved by concentration of several similar enterprises, like sea ports, in the same area. Resignation of several qualified experts would not be critical for a company: experts that have stayed with the company will train new workers. This is why the cluster approach is so important. Labor market can be pulled along only by join efforts of cluster enterprises.
If you need a welder offer him a 30 percent higher salary. There will be plenty of welders. You can not afford it? Your business margin is too low. Or the business policy is wrong. There is no shortage of skilled labor at the present labor market. A business with low profits can not afford to hire expensive qualified workers. Low profitability signifies that business can not survive in this particular place or with this particular management.
Enterprises that are coming to Leningrad Oblast require workers possessing specific qualifications which are currently non-existent or will disappear soon. It is important to make a strategic decision regarding the necessary to keep the old qualification profile. Otherwise enterprises that were established in the Oblast in the last 15 years will move their operations to Pskov Oblast, Novgorod Oblast or even China. St. Petersburg cherishes the hope that by delegating certain types of activities to Leningrad Oblast it gets rid of some of its problem . However, crossing of administrative border does not solve anything. If St. Petersburg fails to retain these types of activities, fails to meet the challenge, it is unlikely that these activities will remain in Leningrad Oblast.
- What industries will undergo changes?
- The key point is transformation of transport and logistics. In the sphere of complex logistics we lag behind advances nations where management of logistics outsourcing is developed 5-6 times better and containerization - 5 times better. At present we are rapidly closing the gap: the annual growth is 20%. St. Petersburg and Leningrad Oblast is an ideal location for development of logistics. Soon it will be clear whether this development would follow the logic of cooperation or the logic of confrontation
Engineering industry that provides services to fuel and energy complex; shipbuilding , oil and gas production have good prospects. Prospects for building petrochemical plants for liquefied natural gas will depend on formation of liquefied gas market in Europe.
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Author: Boris Mazo
Source: Region Rosta magazine (Delovoi Peterburg newspaper supplement)
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