The Northwest District is one of the seven administrative divisions that constitute the Russian Federation. Northwest Russia encompasses many northern and western regions of European Russia – the western territories include the Leningrad Region, the city of St. Petersburg, the Pskov region and the Novgorod region. Among the northern regions are the Komi and the Karelia republics, the Arkhangel’sk region (including the Nenets Autonomous District), the Murmansk region, and the Vologda region. Kaliningrad is also officially a part of the Northwest Russia Federal District, but it is geographically and economically a separate territory.

Northwest Russia stretches 2,250 km (1,400 miles) from west to northeast and 1,500 km (940 miles) from north to south. Its total area is 1,663,000 sq. km (650,000 sq. miles). The largest regions are the Arkhangel’sk oblast (35% of the total Northwest Russia area) and the Komi (24%) republic. Northwest Russia occupies 42% of the total area of European Russia and covers over 10% of Russia’s total area. By comparison, the total area of Northwest Russia is somewhat greater than the area of the State of Washington and Alaska combined. A significant part of Northwest Russia in such regions as Murmansk, Arkhangel’sk, and Komi lies beyond the polar circle. The region has a number of rivers, lakes, and forests (including tundra). Northwest Russia Ladoga and Onega lakes are among the largest lakes in Europe. Mountainous terrain characterizes only some parts of Murmansk (Apatity mountains) and eastern Komi (the Urals).

Northwest Russia is considered to be Russia’s “window to the West”, as it borders several countries, almost all of which (excluding Norway and Belarus) are EU members – Estonia, Finland, Norway, Latvia, and Belarus. Northwest Russia provides access to several international sea routes in the Barents Sea, the White Sea, the Baltic Sea, and the Kara Sea. Through an internal river transportation system, the seaports of Northwest Russia are linked with the ports on the Black Sea and the Caspian Sea in the south. Through the Transsiberian railway, St. Petersburg is connected with the Russian ports in the Far East (most importantly Nakhodka and Vladivostok).

The territory of Northwest Russia has been mentioned in ancient chronicles as early as 850 CE, under the name of the land of Russians. The recorded history of Russia began in the town of Staraya Ladoga (110 km east of St. Petersburg), which was the capital city of Northern Russia at that time. At the end of the tenth century, Staraya Ladoga was superseded by the city of Veliky Novgorod (i.e., the Great New City). Historically, the largest part of present-day Northwest Russia belonged to the Veliky Novgorod Republic, which started active colonization of the territories to the northeast in the 12-14th centuries. It was during that period that the famous northern monasteries (including Solovki, Valaam, Kola, Kirillo-Belozersky, Nilo-Stolo-bensky, etc.) were built. 

The population of Northwest Russia region is approximately 12.8 million (slightly less than 10% of Russia’s total). Population density is 7.7 people per sq. km. All regions are roughly equal in terms of population (0.7 - 1.5 million), except St. Petersburg, where 4.62 million people reside. The surrounding Leningrad Region is home to some 1.67 million people. Together, St. Petersburg and the Leningrad Region form Russia’s second largest urban area after Moscow. Urban population constitutes 82% of the Northwest Russia’s total.

The educational and scientific leader of Northwest Russia is undoubtedly the city of St. Petersburg, which hosts 49 state and 41 private higher educational institutions. St. Petersburg has inherited a great number of research organizations, universities, and laboratories for various sciences. The first professional scientific community in Russia, called the Russian Academy of Sciences, was established in St. Petersburg in early 18th century. Currently, St. Petersburg is the center of microbiology, electro technology, physics, chemistry, avionics, wood-processing technology, geology, and several other scientific fields. St. Petersburg is Russia’s center for shipbuilding technology, with 70% of the industry’s scientific potential located in the city. The city of Apatity (Murmansk Region) and Syktyvkar (Komi Republic) have strong research institutes in mining, microbiology, and related fields. A vast body of knowledge from Arctic exploration is accumulated in the Arkhangel’sk region. Severodvinsk (Arkhangel’sk Region) is Russia’s primary center of submarine construction, while Plesetsk (also in the Arkhangel’sk Region) is Russia’s only space launch site (unlike Baikonur, which is located in Kazakhstan).

 Northwest Russia is extremely rich in natural resources. It is an area with huge unspoiled territories and vast fresh water reservoirs. There are over seven hundred various minerals found in the soils of Northwest Russia. The richest areas are also coincidentally the northernmost ones - namely northeast  Komi, north Arkhangel’sk (in the Nenets District), and north Murmansk (Kola Peninsula). Vast deposits of oil & gas were found in the Timan-Pechora province (Komi) and the Nenets Autonomous District (Arkhangel’sk), as well as on the shelves of the Barents and the Kara seas.

Other natural resources of international importance are ferrous, non-ferrous, and rare metals (steel, alumina, titanium, nickel, etc. – Komi, Murmansk, Karelia), fish (Murmansk, Arkhangel’sk), timber (every region of Northwest Russia, except St. Petersburg and Murmansk), shale (Leningrad Region), phosphate, vermiculite, phlogopite (Murmansk, Komi), and diamonds (Arkhangel’sk, and potentially Karelia).

Economy

All regions in the Federal District are classified as either Western regions or Northern regions based on their economies.

Western regions (the city of St. Petersburg, Leningrad, Pskov, and Novgorod regions) have old manufacturing and agricultural traditions and developed processing industries, but relatively limited natural resources. The industrial center has traditionally been the city of St. Petersburg and the surrounding Leningrad Region. The Pskov and the Novgorod regions are famous for their satellite factories, as well as for electronics and machine-tool building plants. In the Soviet period, a significant part of the manufacturing sector was employed for the military-industrial complex. Such fields as power machine building, shipbuilding, nuclear energy, optics, microbiology, printing and publishing, food processing, transport, research & development, military high-tech and instrument-making were also well developed.

Northern regions (Komi and Karelia republics, Vologda, Murmansk and Arkhangelsk regions) were industrialized during the Soviet period, with a focus on extraction, initial processing, and transportation of raw materials to Central Russia, as well as on the support of military bases (especially in Murmansk and Arkhangel’sk). Industrialization of these regions was characterized by the implementation of huge projects, high operating costs, and ecological problems. 

Among the Northwest regions, only St. Petersburg and the Leningrad Region have a relatively diversified economic structure, while other regions have to rely on a limited number of industries and companies for employment and taxes. The following numbers change slightly from year to year, depending on price fluctuations. The percentages are a good indicator of economic specialization of respective regions.

Karelia’s main industries are logging, wood processing and pulp & paper (55% of production), as well as metallurgy (14%).

Komi relies on oil & gas (65%) and wood processing/pulp & paper (20%).

The Arkhangel’sk region has mainly logging, wood processing and pulp & paper (55%), oil/gas (15%-20%), and ship-building (15-20%) industries. The Vologda region’s main focus is metallurgy (60-70%), chemical (6-8%), and wood processing/pulp & paper (8-10%).

The Murmansk region specializes on non-ferrous metallurgy (40%), ferrous metallurgy (10%), chemical industry (10-15%), and fishing/fish processing (20%).

St. Petersburg has a rather diversified machine-tool building industry (40%) [mainly shipbuilding and power machines], and a food processing industry (30%) [beer and tobacco are large contributors]. The Leningrad Region has oil refining (25-30%), metallurgy (8-10%), machine-tool building (10%), logging, wood processing and pulp & paper (20-25%), and food processing (10%).

The Novgorod Region specializes in chemical production (34%), wood processing (15-20%), food processing (20-25%), and machine-tool building (10%).

The Pskov Region is known for machine-tool building (30%), food processing (30%), and logging & wood processing (6-10%).

Northwest Russia as a whole has its largest share of industrial output in metallurgy (20%), chemical and petrochemical production (12-15%), logging, wood processing and pulp & paper (10-13%), oil & gas (10%), machine-tool building (10%), food processing (9%), power generation (9%), and non-ferrous metallurgy (6%). 

Western regions:

The city of St. Petersburg together with the Leningrad Region, is the key trade, transport, finance, manufacturing, education, scientific, and tourism center of Northwest Russia. Transportation, trade, finance, food processing, and construction material manufacturing have expanded during the last ten years. St. Petersburg, however, cannot be considered an economic center of Northwest Russia in the sense that corporations headquartered in Moscow or abroad mainly control the economies of northern regions. Northern regions of Northwest Russia now have fewer economic links with St. Petersburg (in terms of bilateral material and equipment flows) than before, during the times of socialist labor division. An important factor for the change in trade & investment patterns of many Northwest regions is trans-border cooperation with neighboring countries – Estonia for Pskov, Finland for Karelia, and Norway for Murmansk. Nordic countries see trans-border and interregional cooperation as a way of promoting trade and investment, to support their own less-developed regions, and to ensure that their countries are included in inter-regional infrastructural projects expected to link Northwest Russia with manufacturing centers of the EU, through Northern Europe.

Since the early nineties, the manufacturing regions of Northwest Russia, such as St. Petersburg, the Leningrad Region, as well as Pskov, Vologda and Novgorod, have experienced a drastic fall in high-end manufacturing (especially in the industries linked to the military-industrial complex and machine-tool building), a decline in the volume and quality of R&D, and a serious decline in the quality of education in many important disciplines. Layoffs followed, and very qualified scientists and engineers have either migrated abroad, or found less qualified work in transport, trade, food processing, construction, building material manufacturing, or offshore programming. Companies are facing a shortage of qualified employees and engineers, as these specialists are now sought-after from across the country. The decline of manufacturing prompted a decline in the internal demand for raw materials. Re-orientation of raw material sales of northern regions of Northwest Russia (such as oil & gas, chemical products, ferrous and non-ferrous metals, and timber) from domestic sales to foreign markets has brought great profits to the exporters. Noncompetitive local consumer product manufacturers have gone bankrupt, as consumers began favoring imported products. Most of the export proceeds are being used to open retail stores, business centers, warehouses, and small non-capital-intensive processing and assembly plants on the premises of closed factories, machine-tool building plants, and research institutes. The most affected sectors in the past ten years have been machine-tool making, public transport, public health care, and R&D. One of the most thriving regional towns is Cherepovets (in the Vologda Region), because it is home to Northwest Russia’s largest steel mill Severstal, a couple of related metalworking plants, as well as two chemical enterprises.

St. Petersburg and the Leningrad Region, which is a popular place for locating production aimed at the St. Petersburg market, felt much growth in recent years. Several consumer-oriented industries have shown stable development. Foreign exporters, who gained access to the Northwest Russia market, have found it more profitable to move part of their production (often assembly/packaging operations) closer to their customers. Food processing has definitely been a beneficiary of this trend. Another quickly expanding sector has been (and continues to be) building material manufacturing, advanced by the shortage of residential housing and the resulting overpriced market. It remains an open question whether the overheated construction market in St. Petersburg (and Russia overall) will eventually come down, following the changes in the global economic situation. The telecommunications sector has been growing very strongly.

A lucrative trend is taking shape in the banking sector. Banks in Russia can be divided into two categories – Russian banks with Russian shareholders, and Russian banks with foreign banks as their shareholders. The latter have substantially squeezed the former in the retail market by way of offering very competitive products and pricing. It is expected that foreign banks will gain a much larger share of trade financing and capital investment. While Citibank (U.S.), Deltabank (U.S.), Raiffeisenbank (Austria), and Société Générale (France) are already very active in St. Petersburg’s retail market for financial services, there may be other international players that prepare to enter this growing sector. Private health care services (especially dental) have also shown great dynamics, although the quality of health services is still insufficient, especially in light of the absence of the medical liability insurance market. The emergence of large-scale retail chains (as several dozen trade supermarkets have been built), commercial real estate development (retail and warehouse space, offices, hotels), and residential construction also contributed to the economic growth in the last five years. Transportation services (based on the leasing of transportation vehicles) and warehousing have also been on the rise, supported by growing export/import volumes handled by St. Petersburg and the Leningrad Region. Software outsourcing and tourism are also important areas of activity in St. Petersburg.

 Northern regions:

Active industrialization in the North of the European part of Russia started only in the Twentieth Century, after the Bolshevik revolution. Initially, the industrialization of the northern territories relied on slave labor of Gulag prisoners and aimed at saving the political regime by building an autarkic economy. Hence, the economies of the northern territories were designed to supply the U.S.S.R.’s manufacturing areas in Central and Eastern Russia with raw materials, as well as to provide the Soviet government with hard currency earned from exports (mainly timber). Export proceeds were used to buy machinery and equipment badly needed for the economy of the country destroyed by the civil war. This process resulted in severe damage to society that lost many brilliant people in the Gulags. The second wave of industrialization in the north occurred in the fifties and the sixties. In the last 20 years, the lack of capital investments for the modernization of equipment and technology installed during the second phase of industrialization has led to higher costs of production and low efficiency.

Following the collapse of the U.S.S.R., the structure of Northwest Russia’s economy has degraded to become rather archaic. This reality is especially apparent in the northern regions, which have lost almost all manufacturing in the absence of clearly defined principles in federal industrial and regional policies (complicated by the fact that such policies have to be conducted within market conditions, whereas all the formerly developed principles were applied in a centrally-planned economy), the lack of efficiently distributed subsidies, the decrease of domestic demand, and the growing international competition. Faced with these challenges, regional enterprises had to re-orient a large part of raw material sales to external markets. Now, the northern regions of Northwest Russia are experiencing high unemployment rates, poor health and educational infrastructure, and socio-economic instability exasperated by fluctuating world commodity prices. These factors are further amplified by the stagnation of economic activity in non-export-oriented sectors and the ageing population dynamic. The only “bright spots” are old industrial raw material extraction and processing companies and a few new natural resource extraction projects by Russian and international companies (timber for all regions, oil & gas in Murmansk, oil & gas, metals and minerals in Komi, oil & gas in Arkhangel’sk). It is, however, an open question whether these new projects are providing employment to the local population, as an increasing number of companies prefer to use workers from other regions and rotate them every month. The northern regions of Northwest Russia will not be able to solve their pressing economic and social problems without increased investment and well formulated federal policies, which should be based on clear principles designed to stimulate substantial investment.

The Soviet legacy of gigantism, which resulted in the construction of huge factories in the north, and a more recent trend towards “vertical integration” of extraction, basic processing, transportation, and other related functions, has led to the creation of giant holdings. Since former Soviet autocrats, many of whom are now the owners and top managers of these companies, were not able to invent new approaches, Russian holdings have come to resemble former Soviet branch ministries. A system of central funding (planning and funding functions are concentrated in Moscow-based head offices) is applied in Russian “private” holdings, which are actually quasi-state companies due to their links to the government. Such holdings control the Russian economy almost entirely. Large corporations have not only “vertically integrated” their core businesses; they also have been putting their export earnings into “high-yielding” sectors, such as real estate, food processing, services, local banking, wood processing, retail trade, entertainment, and transport. A combination of all these factors has led to a monopolistic structure of local industries, lack of competition, as well as high and ever-rising internal production costs and prices. Development of small and medium-size private business is very limited, as even SME’s traditional domain of retail trade has been now captured by mega retail chains. Obtaining funding for a start-up or a small private business is a challenging task, as most banks will not even consider small loans (as subsidiaries of large corporations that are not interested in promoting competition).

While most U.S. companies coming to Northwest Russia choose to establish green field operations, many European competitors (from Germany, the Czech Republic, the Netherlands, Finland, Poland, Italy, etc.) prefer to partner with existing Russian companies that often have a quasi-monopolistic market position. Such a strategy may eventually lead to the replication of West European competition patterns in the Russian market (i.e., EU-based companies will be competing in Russia as they are doing in their home markets). Russia is seen as the next step needed to be taken after Eastern Europe. EU companies are quite aggressive in Russia - and in Northwest Russia in particular. Their choice of Northwest Russia as a starting point of expansion into Russia is often predicated on the ease of access to the Baltic Sea that has effectively become EU’s internal sea. Hence, a majority of joint ventures in the processing industries from Northwest Russia to the Urals have German capital participation. Newly emerging supply chains are - in essence - making Russian raw material processing plants the suppliers of EU-based manufacturers. A large portion of profits is transferred abroad, and local private business is left with no extra capital to invest at its discretion. Hence, the best way for U.S. companies to break into the market is by building new companies and working together with Russian entrepreneurs, who share the basic values of freedom, responsibility, fare competition, efficiency, sound business practices, and ethical behavior.

Key projects in Northwest Russia

Murmansk: the development of the Shtokmanovskoye gas condensate field, the construction of a gas liquefaction plant, the possible construction of an oil pipeline from West Siberia to an oil terminal near Murmansk, construction of a gas pipeline from the Shtokmanovskoye field to St. Petersburg (to be connected with the North-European pipeline). The partners for these projects have not yet been identified (Gazprom will be the Russian counterpart in all gas projects), and the decisions regarding the capacity of the gas liquefaction plant and the pipelines have not yet been made. The first alternative is that a pipeline with a capacity of 22.5 billion cubic meters will connect the platform used to develop the Shtokmanovskoye offshore field with an on-shore liquefaction plant, which would have a production capacity of 14.4 million tons. This liquefied gas would then be shipped to the U.S. Another pipeline from the field would carry gas to Volkhov (a city near St. Petersburg, where a North-European gas pipeline will pass), and its capacity will be 45 billion cubic meters. The second alternative is to build two pipelines with a total capacity of 45 billion cbm from the off-shore field to the liquefaction plant, which would produce 22.8 million tons of liquefied gas per year, and a third pipeline would deliver 22.5 billion cbm to Volkhov. A third alternative is to send all gas (67.5 billion cbm) to the liquefaction plant in Murmansk. The start-up project cost is currently estimated to be approximately $10 billion. The launch of the project is expected in 2010.

Arkhangelsk: the development of oil fields in the Nenets District, the revitalization of the Northern Sea Route (providing the shortest route from Murmansk to Vladivostok along the Russian Arctic coast), the development of Lomonosovsky diamond deposit, the exploitation of forest reserves.

 Large-scale oil extraction in the Nenets District has already begun, but it is limited so far by the lack of export infrastructure. The construction of a pipeline to a deep-water port would greatly help in further expanding oil extraction in the region. Currently, oil companies have to utilize railway transportation (very expensive and inefficient as oil thickens in the cold climate) or a small oil terminal in Varandei. The development of the Northern Sea Route, which would provide shorter delivery times by sea from Western Europe to South-East Asia through the Arctic seas, may become a big project in the future. The single, development-ready diamond deposit in Europe, named after Russian scientist Lomonosov, is located in the Arkhangelsk Region. Russian diamond company ALROSA started the extraction of diamonds in 2004. A facility for processing of 5.6 million tons of ore should be completed in 2006. The total investment in the exploration project is expected to exceed $350 million over a period of several years.

Komi: oil & gas exploration and extraction, the exploitation of forest reserves, the development of a bauxite mine, and the construction of an alumina production plant, the construction of the Belkomur railway running east-west from the Urals through the Komi Republic to Arkhangel’sk.

Among recent projects announced in the oil sector of Komi is a joint Russian-Finnish project, which is being carried out by SeverTEK, JSC, a joint venture of Lukoil (Russia) and Fortum (Finland). SeverTEK plans to invest $ 360 million in the development of the Pashorskoye oil field of the Timan-Pechora oil province. SeverTEK intends to attract $ 200 million from the European Bank for Reconstruction and Development. Full-scale oil extraction is scheduled to start in 2006. Successful implementation of this partnership will pave the way for larger projects in Komi with foreign participation, and for the construction of transportation infrastructure in the east-west direction (currently, Komi is linked only with Central regions of Russia). The project for the construction of an alumina production plant is being carried out by a consortium of two of Russia’s largest alumina production companies, SUAL and RUSAL. The plant will be capable of producing 1.4 million tons of alumina, and the required investment is $ 1.2 billion.

Striving to develop a shorter and cheaper export route, the government of Komi, together with the governments of the Perm and the Arkhangel’sk regions as well as some large regional companies, established the Belkomur company to carry out a detailed feasibility study regarding the building of a railroad to connect the Urals and the Komi region with the Arkhangel’sk port (the “Belkomur project”). The plan assumes that this railroad will go from Perm through Syktyvkar to Arkhangelsk, crossing the Komi Republic from east to west. If completed, the construction of this railroad, will stimulate development in far-away districts of Komi,  the Arkhangel’sk region, and the Perm regions and will allow easier access to some important deposits of natural resources. Belkomur is looking for private investment. Investors willing to develop mineral deposits and forests along the railroad may be particularly interested in the success of this venture.

The Leningrad Region: the construction of the North-European gas pipeline, the possible construction of a gas liquefaction plant, the development of the Ust-Luga sea port and of oil export terminals, assembly plants of foreign importers, logistics and warehousing.

One of the key projects expected to start in the Leningrad Region is the construction of the North-European gas pipeline, which will connect Gazprom’s gas extraction in West Siberia with consumers in Germany, bypassing transit countries like Poland. This is now Gazprom’s priority investment project. Over $ 50 million have already been invested in the feasibility study. A construction management company has already been established in St. Petersburg. The total cost of the NEG pipeline is estimated at $ 6 billion in current prices. BASF has been chosen as the key partner on German side, with BASF getting a 49% stake in the project, while Gazprom will retain 51 percent. A feasibility study of an LNG plant in the Leningrad Region and LNG shipments to North America (through the Ust-Luga sea port) is being prepared by Gazprom, in cooperation with PetroCanada. If constructed, the LNG plant near the Ust-Luga port may cost up to $ 1.2-1.5 billion and would be commissioned in 2009. Its capacity may be 5 bcm. Canadian press has reported that Petro-Canada may be investing $ 2.9 billion in the Ust-Luga projects.

The Leningrad Region has become an important export region for Russian oil. Several oil terminals have been built there over the past five years, and more are expected in the near future. Lukoil has already launched two phases of an oil export terminal in Vysotsk and plans to finish the final phase next year, bringing the total export capacity of its facility to 12-14 million tons of oil per year. The throughput capacity of the Baltic Pipeline System, which ends with an oil export terminal in Primorsk, will be expanded to 62 million tons by the end of 2005. TNK-BP is also working on its own oil export terminal at the Ust-Luga port, while Surgutneftegas plans to build a terminal in Batareinaya Bay. All these projects are in the Leningrad Region. Due to its proximity to St. Petersburg, the region also has good potential for the development of the transportation and the warehousing sector, as well as for the establishment of production and assembly plants.