Russian City Aims to Become A Haven for Free Enterprise

AN open letter published in a recent issue of a St. Petersburg daily newspaper provides a revealing glimpse of the problems that beset this city's dreams of becoming a bastion of free enterprise.Addressed to members of the small-business community, it is a spirited protest against the city's decision to entrust economic planning to St. Petersburg's economic old guard. "We protected democracy during the coup," say the writers, who are also small entrepreneurs. Will power really "return to the hands of people whose time has already passed?" they ask. Their demand for economic empowerment is the latest indication that significant tactical disagreements lurk behind the strong consensus here for rapid economic liberalization. It has left many worried that free-market reforms - and the prosperity they are expected to bring - may not happen rapidly enough. (See story, Page 5.) "What is going on in St. Petersburg is a quiet fight between newcomers and the former Communists, who are still the most active and experienced part of the society," says Mari Tarlova, an agent for foreign films seeking to do business here. "Nothing can be resolved until this is settled." Since taking office a year ago, Mayor Anatoly Sobchak has been in the forefront of efforts to turn St. Petersburg into a haven of free enterprise and a magnet for foreign trade, investment, and tourism. "Peter the Great wanted to open a window on Europe," says city council member Alexander Sungurov, referring to the Russian czar who founded the city. "We want to open a door." With 75 percent of the Russian Republic's industrial base, 10 percent of its scientists, and most of its high-tech and electronics firms, St. Petersburg has the plant capacity, infrastructure, and skilled labor force to provide the raw material for economic growth. With the Baltic states independent, St. Petersburg is also Russia's only port with well-established links to European markets. But these advantages may not be enough to offset 75 years of communism. Economists here divide the city's business community into three categories: managers of formerly state-owned enterprises; black marketeers with strong entrepreneurial skills but, in Ms. Tarlova's words, "no business culture and a criminal mentality;" and small entrepreneurs operating within the law. There are potentially thousands of others who lack the resources to get started, they note. So far, Mr. Sobchak has relied almost entirely on the first group, including such figures as electronics magnate Georgi Khiya, who was recently chosen to head the city's economic planning commission. Until recently members of the Communist establishment, these figures have long been the dominant economic force here. The mayor's top-down plan for economic reform has the virtue of drawing on the most senior business talent, supporters say. But critics worry that the mayor's allies are people of limited vision who are more interested in preserving their positions of influence than in launching sweeping free-market reforms. If the mayor is serious about reform, his critics say, he will find ways to harness the energies of the aggressive small entrepreneurs who, because they are more responsible to the market, will be the most effective agents of economic change. "They're right on the border between the producers and the consumers," says city council staff member Tatyana Bogachova. "They understand better than anybody else what the free market is and what the real needs of the people are." This includes the business-wise black marketeers, who are economically "today's ugly ducklings but tomorrow's golden swans," Ms. Bogachova says. "The democratic way is to give property to new ventures and put everything on equal terms," says Pyotr Filippov, a member of the city council who is one of the city's leading advocates of economic reform. "You've got to take [small entrepreneurs] into account and unshackle them." Which is just what the city coun-cil, where the small business community's views are represented, plans to do. Two weeks ago, the council authorized a 5.5 million ruble loan fund to help small entrepreneurs get started. It also recommended that the mayor include small business on the city's economic planning boards. The centerpiece of the city's reform plans is a "free enterprise zone" designated by the Russian parliament last July. Thanks mostly to Russia's decision to extend long-term leases, various tax advantages, and rights for full ownership of subsidiaries, outside investment has increased somewhat, especially in the tourism and service sectors. But beyond aggressively promoting itself, the city has done little to restructure the business environment. "They can announce the zone, but they are changing the rules slowly," acknowledges Mikhail Gorney, a member of the city council's executive committee. Here, as elsewhere in the Soviet Union, there is still no real concept of private ownership that includes legal entitlement and the right to dispose of property. Potential investors have also been scared off by the absence of a functioning banking system or a convertible currency that would make it possible to sell for a reasonable profit. Just as problematic is a city bureaucracy that has often frustrated the most interested suitors. With no central clearinghouse, potential investors are left to their own devices to track down the officials needed to grant operating authority. Once they do, they are frequently asked to pay bribes before permits are granted. "It's a matter of stripping away the layers [of bureaucracy]," says Matthew Murray, a New York-based consultant on East-West trade and investment. "Each sector of the economy has its own rules and its own people. The key is finding people who combine decisionmaking authority with operational authority." Under the circumstances, says Mr. Murray, the only reasonable strategy for potential investors is work for long-term market share, not short-term profits.