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After Yeltsin, who?

During the short-lived coup in 1991, St. Petersburg Mayor Anatoly Sobchak almost single-handedly prevented Soviet troops from occupying the city. But with Russia in chaos and Boris Yeltsin in a fight for his political future, Sobchak has joined centrists in criticizing Gaidar's shock therapy--perhaps positioning himself for a national role.

By now, the story is legendary among citizens and observers of the Russian republic. In front of a national television audience in 1990, Anatoly Sobchak, now the mayor of St. Petersburg, was excoriating then-Prime Minister Nikolai I. Ryzhkov for his role in an $8 million defense profiteering scandal. "I do not understand you, Mikhail Sergeyevich," Ryzhkov complained to former Soviet President Mikhail Gorbachev. "Why do you always let Sobchak speak?"

The answer is obvious: As Gorbachev likely had long-since deduced, it is impossible to silence Sobchak, who was elected to the Soviet parliament in 1989 and soon after propelled himself into the global spotlight with his radical free market positions and fiery oratory skills. Sobchak cemented his reputation in the heat of the August 1991 coup when he faced down Leningrad's military commander and prevented Soviet troops from occupying the city. As mayor, he has deftly circumvented Communist Party officials, remaking St. Petersburg into a free economic zone with sovereignty over its banking and trade policies. Without a shred of self-consciousness, Sobchak rubs elbows with descendents of Peter the Great, the Romanov emperor who founded St. Petersburg on Baltic marshland in 1712 as Russia's imperial capital and "window on the West." Along with Boris Yeltsin, the mayor ranks as perhaps the only Russian official of true international standing.

Anatoly Aleksandrovich Sobchak, 55, might be forgiven his crusade to shake up the status quo. His grandfather, who supported the Bolshevik revolution of 1917, was among the tens of millions imprisoned by Joseph Stalin in the 1930s. After working as a lawyer in Stavropol, Russia, where a young Gorbachev was already making a name for himself, Sobchak returned to Leningrad to teach law, completing his doctoral thesis in 1973. He joined the Communist Party in 1988--still viewing it as a vehicle for change, he says--and was elected to the newly formed Congress of People's Deputies in April 1989. Two months later, he was named to the smaller, more powerful Supreme Soviet; Sobchak soon joined fellow parliamentarians Yeltsin and Andrei Sakharov in founding an ad hoc committee of the legislative body in opposition to the Communist Party. A day after Yeltsin's resignation from the Party in July 1990, Sobchak and former Moscow Mayor Gavriil Popov followed suit.

Elected mayor of St. Petersburg in May 1990, Sobchak encountered crisis a year later. Roused in Moscow shortly after dawn on August 19, 1991, with news of the coup, Sobchak scrambled to confer with Yeltsin, then flew under guard to Leningrad, where he crashed a meeting of the KGB, the police, and the military. "I didn't let them open their mouths," the mayor later told The Washington Post. "I told them if they moved one finger, they would be tried the way the Nazis were tried in Nuremburg."

"We thought Sobchak was God," says a St. Petersburg tour guide. "At one time we would do anything for him. But he has failed us. Now his popularity is not so great."

One reason: Sobchak, a handsome man with a taste for Brooks Brothers suits, has posted an uneven record as mayor. He won free-zone status for the city, gaining the right to set and collect taxes, engage in foreign trade, and determine import duties. But his grander schemes have gone largely unrealized, including those to convert military shipbuilding into a commercial enterprise and to place St. Petersburg, a city of 4.5 million people, on a par with other maritime hubs, including Singapore and Hong Kong. Sobchak complains that he's been stonewalled by a City Council packed with unreconstructed hardliners. But his critics respond that the mayor has failed to master the complexities of urban government and prefers to roam the globe, mingling with foreign dignitaries. Sobchak's recent decision to relocate his office from City Hall to a building once lived in by Russian royalty and the fact that he hosts a weekly call-in show on Russian television that attracts an estimated 70 million viewers have done little to dispel popular impressions.

Another problem: Hunger strikes St. Petersburg particularly hard. While other municipalities can barter industrial goods for food, some 70 percent of the city's industrial base is devoted to military hardware, no longer in strong demand. Sobchak has polished such local landmarks as the Hermitage and the Winter Palace, and hotels remodeled in tandem with foreign partners complete the window dressing. But the rest of the city continues to crumble, and the dark back alleys described by Dostoyevski are more sinister than ever--except now they reek of alcohol and vomit.

"This is a dangerous, dirty city," says a St. Petersburg doctor, picking her way down Nevsky Prospect on a bitter-cold winter evening. How dangerous? The woman pulls a 9mm pistol from her shoulder purse.

On the plus side, Sobchak has proved an effective goodwill ambassador to the international business community. Among the American companies active here are Procter & Gamble, Philip Morris, Gillette, and Otis Elevator, a subsidiary of United Technologies. The National Patent Development Corp. recently formed a joint venture to market technologies developed by the Engineering Academy of St. Petersburg for potential use in medicine and environmental cleanup.

"Despite the difficulties, you have to take a shot at a virgin market with some 300 million consumers," says the CEO of a large consumer products organization posted in St. Petersburg. "And if you do, this is the most desirable port of entry."

"It is the American Wild West; there are some cowboys and wildcatters here," says Jack Gosnell, the city's American consulate representative. "I'm not predicting St. Petersburg will succeed," he adds. "But if it doesn't, Russia won't."

Though an architect of the original reform agenda, Sobchak has joined moderates in backing away from economic shock therapy. In line with this position, he has criticized the World Bank and the IMF for demanding that Russia balance its budget to remain eligible for Western credits.

Sobchak has taken Yeltsin's side in the president's clash with Parliament but has been much less vocal in his support for the embattled leader than in the wake of the 1991 coup--perhaps mending fences with moderates and positioning himself for a run at the top job should Yeltsin fall. Indirectly, Sobchak has even criticized his "friend and ally." At the World Economic Forum in Davos, Switzerland, in January, Sobchak quipped that St. Petersburg was the only major Russian city not "crawling" with Harvard-trained advisers--a pointed reference to Yeltsin's ties to economist Jeffrey Sachs. Nonetheless, Sobchak wins praise from many American conservatives for his rock-solid position on the relative ineffectiveness of humanitarian aid to Russia and the other CIS republics. Calling for direct investment by Western companies in conjunction with government guarantees, he observes: "If our leaders have proven anything, it is their ability to waste billions on impressive plans."

In a back room of St. Petersburg's Grand Hotel Europe, Sobchak spoke with CE managing editor Joseph L. McCarthy about the business climate in St. Petersburg, the prospects for reform, and the dangers facing the Russian republic. "We are running out of time," he warns. "We must begin to show more of a payoff." Later, Sobchak joined a group of Russian and American chief executives (see sidebar) for dinner followed by a question-and-answer session that served as a coda to CE's Russian expedition.


It appears the leaders of the Russian republic may be running out of time. Specifically, some Western observers fear that if reformers do not begin to register more tangible success soon, the Russian people might tire of the idea of democracy, and the reform process might be in jeopardy. Do you agree?

Of course, we are running out of time. Every elected politician--here or anywhere else--is running out of time.

Let me qualify that by saying it would be impossible to pursue our present course in the development of a new society without some major difficulties. Let's remember the American experience, for example. It was several years after your independence was secured from England that your leaders finally abandoned the idea of a loose confederation and adopted a constitution.

Another condition in early America was a lack of new political parties. Similarly, there are more than 100 movements and factions in Russia at the moment, but none of them is a party in the Western sense of the word, and none of them really has a national base. Thus, parties here remain an ineffective vehicle for national change.

If these are the similarities between Russia and post-Revolutionary America, what are the differences?

One difficulty is that our legislation can't keep up with the problems or with the pace of change at the grass roots level.

Another is that there are a lot of former Communist leaders who cannot find their place in this new society--and thus have become a disruptive force. Russia needs to develop new political and economic institutions. But the old structures still exist, and this is a handicap.


What is Moscow's responsibility for the lagging pace of progress?

Those who are quick to criticize our national leaders must remember the monopoly of the Communist Party was removed just two years ago. Two years is too short a period to develop a completely new political system.

What can the West do to help Russia and the other CIS republics?

I have spoken to President Yeltsin and former President Bush, and I plan to speak to President Clinton on this matter. What is needed is a comprehensive plan. Ideally under such an initiative, the U.S. would get back much of the money it invests through increased trade with Russia and the other independent CIS republics.

Political guarantees of Western investments would help. But Russia and the other former socialist countries don't need humanitarian aid. They need direct investment, investment in concrete projects. Of course, this involves real cooperation--a cooperation some Western countries don't appear to be prepared to give. The leaders of these countries--and many businessmen, as well--talk a lot about how dangerous it is to work in Russia and the CIS. But I'll tell you this: The people who are able to put aside their fears and actually work here today--people with the pioneering spirit of the American West--are enjoying tremendous success.

Take Procter & Gamble. This company came to St. Petersburg a year and a half ago and it started to cooperate with St. Petersburg University. You can see its advertisements now on local television.

During this time, the company has increased its production severalfold--in fact, it recently expanded sales of its products to the Moscow area. In addition, we have just agreed with Procter & Gamble to start construction on a new factory for soap and detergents, and it wants to buy several shops here to sell its products.

Any other joint ventures of note?

Perhaps the best example of U.S.-Russian cooperation is Otis Elevator. In February 1991, an agreement was signed between the company and two St. Petersburg partners to manufacture, sell, install, maintain, and modernize elevators in our city. The joint venture, Otis St. Petersburg, followed the establishment of Otis' first joint venture here, Shcherbinka Otis Lift, near Moscow.

The local partnership employs 700 people and manages about 5,500 units in our central district. A new 20,000-square-meter factory |222,000 square feet~ already produces Western-caliber machine tools and is expected to produce 3,700 Otis-designed elevators annually for use primarily in apartment buildings beginning in July of this year.

This factory was built within 11 months, and it is much more modern than a similar plant in the U.S. It was built in conjunction with Russian engineers and technicians--which should be a good indication of the talent and training of our labor force. In another expression of confidence, the company also plans to open a service operation in St. Petersburg, just as it has in France, Germany, and other Western countries.

When I saw how smoothly the cooperation between Otis and our city proceeded, I understood fully the possibilities of cooperation between our two countries.


That may be so, but do you truly mean what you say about Russia not needing Western humanitarian aid?

I say this to make a point. Aid given to the government is aid that may not be put to the best use. If our leaders have proven anything, it is their ability to waste billions on impressive plans. I have told U.S. leaders many times about my experience as an economist of a major research institute. We bought equipment worth many millions that lay unused. So I repeat, a focus on individual, concrete projects and joint ventures is the way to go.

Some Russian officials maintain there are no significant obstacles to Western investment--that the biggest problem involves the Western press, which unfairly exaggerates the difficulties here. Do you agree?

The investment conditions are much better here than is commonly reported. In many cases, the press refuses to see the truth. Even so, there is much work to do.

What types of activity will take priority?

We must develop an infrastructure that is truly world-class. Toward that end, we have launched a program to construct a high-speed railway between St. Petersburg and Moscow. Along this railway line, there also will be a new highway--this will facilitate travel and create increased opportunities for employment.

At the same time, we are constructing a highway from St. Petersburg to the Finnish border. This is an important channel of commerce for the city and for the entire republic.

Some other infrastructure projects involve the reconstruction of the agricultural system, partly through radical land reform. In the St. Petersburg area, for example, we are now creating 25 new farming ventures in cooperation with American concerns.


One of the most vocal complaints American CEOs have about the business environment here is the apparent lack of coordination between local, regional, and federal legislation and officials. In combination with economic volatility, this makes some businessmen even more reluctant to invest. Is there a solution?

To be sure, there is a conflict between the executive and legislative powers in Russia. Under our constitution, laws defining the powers of these two branches of government are extremely unclear.

To offset this negative, in St. Petersburg we've worked hard to secure a degree of economic autonomy. For example, we've created a free economic zone to attract foreign investment and are looking at a number of ways to increase our income from tourism.

Perhaps I am a hopeless optimist, but in the end, I have faith that all of these problems and conflicts will be settled. However, this may take some time.

Sobchak On The Stump: Come to Russia

Like most business leaders in Russia these days, Anatoly Sobchak is anxious both to extol the virtues of his native land and to cultivate contacts with Western businessmen. Thus, be accepted Chief Executive's invitation to address a panel of Russian and American CEOs at a dinner at St. Petersburg's Grand Hotel Europe. The gathering marked the end of CE's five-day excursion.

In a wide-ranging address, Sobchak touched on the changing of the political guard, the perceived lack of information about potential business partners in the city, and local privatization initiatives. Below are excerpts from a question-and-answer session that followed the dinner.

Marvin E. Miller (PrimeSource): Despite my best efforts, I find it difficult to locate manufacturers of certain products in St. Petersburg. Have you any intention of creating a commercial directory, or are there any other efforts afoot to aid Westerners such as myself who are interested in doing business in your city but who can't find the necessary information?

We have already published a Russian Yellow Pages, a telephone and address directory with all the information you might need. However, we are already planning new editions, because changes are taking place rapidly.

Meanwhile, if any one of you cannot find the information you are looking for, please feel free to contact my office. My deputies have compiled an additional file with information on enterprises in St. Petersburg that have not yet appeared in the directory. This file includes a full rundown on the capabilities and specialties of these companies.

Dianne Barnes (wife of J. Mark Barnes, Western International Media): I understand that some private property in St. Petersburg is periodically placed on the auction block. If I wanted to buy a palace in the countryside, could I simply go to one of these auctions, purchase the property with American dollars, and move into the mansion right away?

Property auctions generally take place every two weeks. At these sessions, enterprises and real estate can be bought by both Russians and foreigner. That includes foreign companies and individual investors. There is no limit on the ownership stake.

Despite the rumors that circulate among residents of the city, however, thus far only municipal, commercial, and some private properties are up for sale. No palaces are on the market yet, I regret to say. Some historic buildings are for sale, but the best a foreigner can do right now is to become a co-owner through a joint venture.

We are negotiating with Citibank, which has expressed significant interest in moving here. These negotiations are making progress, although for now I can say no more. We are very serious about bringing Citibank to St. Petersburg--in fact, to offer it a prime, picturesque location right on the Palace Square.

As you probably know, some foreign banks are active here already, but many of them tend to focus their activity on project finance in the fuel and raw materials sphere. In general, the Russian republic recognizes that banks operating with 100 percent foreign capital are an important part of integrating the Russian financial system into world markets. Toward that end, The republic recently licensed Credit Lyonnais of France to engage in banking activity.

I cannot help but observe that in the banking arena here--as in other sectors of the Russian economy--the activity of European banks exceeds that of their American counterparts. This is unfortunate, and we hope the situation will change in the near future.

Cowboys & Capitalists In St. Petersburg

One American banker described U.S. Consul General Jack Gosnell, based in St. Petersburg, as "the only person related to State |Department~ who is a true expert in what is going on, and who is really trying to promote U.S. business." A fluent Russian speaker and knowledgeable about the Russian economy, he has close personal ties to St. Petersburg Mayor Anatoly Sobchak (their daughters attend the same school).

Gosnell and consular associate Karen L. Zens told CE's roundtable participants that there are three simultaneous revolutions in Russia today: First is the political one we see played out in the confrontation between Yeltsin and Ruslan Khasbulatov, the speaker of the Congress, and the struggle between centralizers and decentralizers, nationalists and old Communists. Second is the creation of a market economy and something resembling a modern banking system to facilitate it. Third is the transformation of the infrastructure, including the education system, which "makes people very sharp but very narrow." Changing any one of the three would be difficult enough for any society. Changing all at once, Gosnell says, is like "getting out on the wing of a biplane to fix the struts while the plane is in flight."

Gosnell intends to start a business center to collect information and resources for U.S. executives wishing to invest in the St. Petersburg region, which he regards as the most congenial in terms of government flexibility, size and sophistication of market, and proximity to the West. Among local developments he reckons ought to be of interest to business leaders: Citibank intends to open a branch office; Duke University's Fuqua School of Business plans a pilot business school there; Otis Elevator, which predicts that 20 percent of future elevator demand will be in Russia, located there; Procter & Gamble, which is selling 30 different household products in Russia, right now operates out of six rooms at the Grand Hotel Europe; Sara Lee and Gillette each have set up operations locally and plan to produce for the domestic market in approximately two years.

Gosnell's advice to the interested: "There are cowboys on both sides who ride into town with dubious claims. You should always work with reputable people."
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Title Annotation:includes related articles; interview with St. Petersburg Mayor Anatoly Sobchak
Author:McCarthy, Joseph L.
Publication:Chief Executive (U.S.)
Article Type:Cover Story
Date:May 1, 1993
Previous Article:Down & out: a new strategy for success.
Next Article:Turning swords into market shares.

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