Doing Business in Northwest Russia

Economic Overview: Northwest Federal District (NWFD)

Quick Reference

  • NWFD accounts for 10% of Russia’s GDP (11% of industrial output, 6% of agricultural production); St. Petersburg accounts for 43% of the district’s GDP.
  • Population of NWFD is 13.6 million, 83% live in cities.
  • St. Petersburg has the highest concentration of SMEs in Russia.
  • Foreign trade turnover in 2011 rose by 42%.
  • Trade between the NWFD and the U.S. amounted to about $4 billion from January – September 2011, or 5% of the total foreign trade turnover of the District.
  • U.S. firms have invested $3 billion+ in NWFD, $640 million in St. Petersburg.
  • Key U.S. investors: International Paper, Ford, GM, Conoco-Phillips, Caterpillar, Phillip-Morris, Kraft Foods.
  • U.S. is NWFD’s fourth-largest trading partner, after China, Germany, Netherlands.
  • Unemployment in district: 5% average (nationwide, 6.2%).
  • Taxes: Individual rate: 13% (fixed).  Corporate: 20% (variable).
  • Average Wage in District: 25,000 rubles (nationwide, 22,600 rubles).

Overview

The Northwest Federal District (NWFD) is one of the most economically-developed of the Russian Federation’s eight federal districts, producing10 percent of Russia’s national GDP.  It also is responsible for 11 percent of the country’s overall industrial output and for 6 percent of its agricultural production.  The District has a population of nearly 13.6 million, 83 percent of whom live in cities (the highest rate of urbanization among the country’s federal districts).

Key Role of Natural Resources

The District is rich in natural resources, including non-ferrous metals and apatite (Murmansk oblast); iron (Karelia); oil and gas (Murmansk and Arkhangelsk oblasts, and the Republic of Komi).  Vologda, Pskov, Arkhangelsk and the Republic of Karelia also have extensive forest resources.

St. Petersburg Dominant Producer in NWFD

St. Petersburg dominates the regional economy, producing 43 percent of the district’s GDP.  The city also has the highest concentration of small and medium businesses in all of Russia.  Leningrad oblast’s strong economic performance is fueled in part by active international investment from such U.S. market leaders as International Paper and Ford Motors.

Vologda oblast is the home of Russia’s second-largest ferrous metal producer, Severstal, while the oil-rich Nenets Autonomous District hosts the Polar Lights Joint Venture between Conoco-Phillips (with $400 million invested) and Rosneft, producing some 5 million barrels of crude oil per year.  Economic development in several other parts of the NWFD has been less robust, with Murmansk, Arkhangelsk, Pskov, and the Republic of Karelia showing lower-than-average growth even during the economic boom years.

Industrial Production – 1/3 of Region’s GDP 

Industrial production plays a leading role in the economy of NWFD, comprising more than 1/3 of its GDP.  The most important branches of industry in the district are: machine-building, metallurgy, the chemical industry, and wood-processing.  Other important branches of the district’s economy are wholesale and retail trade (15 percent of regional GDP), transport and communications (11 percent) and construction (8 percent). The NWFD’s industrial output in 2011 increased by 5.3 percent, slightly higher than the national average growth rate of 4.7 percent. The highest industrial growth rate was registered in Kaliningrad oblast, where it reached 18 percent.

Foreign Trade & Investment

Foreign trade turnover in the NWFD from January – September 2011increased by 42 percent, totaling $79.2 billion.  Exports from the district amounted to $40.4 billion, while imports totaled $38.8 billion.

In the first six months of 2011, investors poured more than one billion dollars of Foreign Direct Investment into the NWFD.  The leading recipients of the FDI were St. Petersburg and Arkhangelsk oblast, with $377.9 million and $292.1 million, respectively. U.S. companies have invested more than $3 billion in the region since the early 1990s.

Trade and Economic Relations between the U.S. and NWFD

The U.S. plays a significant role in the economy and trade of the NWFD.  In Lenoblast, U.S. firms are the top foreign investors, with Ford, Caterpillar, Philip-Morris, Kraft Foods, and International Paper having opened production facilities over the past decade.  St. Petersburg also hosts a large number of leading U.S. investors, including: Coca-Cola, PepsiCo, Phillip Morris, Procter & Gamble, Wrigley, GM, OTIS, Oracle, HP, Baker & McKenzie, and Citibank

Cumulative U.S. investment in St. Petersburg totaled $639 million as of the beginning of 2011.  Another major American investment in NW Russia is the Polar Lights Company, a joint-venture between Conoco-Phillips(50%) and Rosneft (50%), which has operated in Nenets Autonomous Region since 1992.  The Polar Lights project was the first Russian-American joint-venture to develop an oilfield in Russia.

Smaller American investors are active in the oblasts of:

  • Vologda (Greif Bros. Corporation, a producer of steel barrels and plastic bottles); Pskov (Alliance-PMF, a JV between Alliance Windings Equipment and a local electromechanical plant); and
  • Novgorod (Kraft Foods;  DS Controls, a JV with Dresser Industries;and Solenoid Valve, a JV with Curtiss Wright Flow Control).

Trade between the NWFD and the U.S. amounted to about $4 billion from January – September 2011, or 5% of the total foreign trade turnover of the District.  The U.S. was the district’s fourth-largest trading partner, after China, Germany, and the Netherlands.  The main goods exported to the U.S. are fuel, metals and fertilizers. Key imports from the U.S. include motor vehicles, machine-tools, meat & poultry, and tobacco.

Wages and Unemployment 

The average salary in the NWFD amounted to 25,096 rubles ($835) in 2011, slightly higher than the nationwide average of 22,622 rubles ($755).  The residents of Nenets Autonomous District have the highest average salary in NW Russia – 48,145 rubles ($1,605), followed by Murmansk oblast with 30,800 rubles ($1,025).  The lowest average salary was registered in Pskov oblast, where it amounted to only 15,500 rubles ($515).

The average unemployment rate in the NWFD in the 3rd quarter of 2011 was approximately 5 percent, compared to a national average of 6.2 percent.  St. Petersburg and Leningrad oblast had the lowest unemployment rates, at 1.6 percent and 3.0 percent, respectively.  The highest unemployment rates were registered in Murmansk oblast (10 percent) and in Nenets Autonomous District (9.7 percent).

Taxation Rates

The individual income tax rate in Russia is uniform, at 13%.

The corporate tax rate is 20%, of which 2% is earmarked for the federal budget and 18% flows to the regional budget of the region concerned. The federal portion (2%) is fixed.  Under federal law, regional legislative assemblies are allowed to reduce the remaining balance of the 20% rate for certain groups of taxpayers, but not below a floor of 13.5%. In St. Petersburg, for example, so-called “strategic investors” (who invest more than 3 billion rubles and who meet several other requirements) are eligible for this privilege and pay a profit tax of 15.5% (13.5% regional + 2% federal).