St Petersburg accelerates drive to be Russian Detroit

Russia's second city, St Petersburg, has persuaded the Japanese car manufacturer Nissan to build a factory there as part of an over-arching strategy to turn itself into a Russian Detroit.

Nissan is following in the footsteps of Ford and Toyota, which have already chosen the St Petersburg region as a manufacturing base due to its low labour costs, generous tax breaks and proximity to Europe's markets.

St Petersburg's feisty female governor, Valentina Matvienko, a confidante of President Vladimir Putin, says she is also in talks with another foreign manufacturer, thought to be General Motors, to bring a fourth car plant to the city.

As car factories in Western Europe are wound down or shut because of high labour costs, production is moving east, and Russia, particularly St Petersburg, is hoping that Europe's loss will be its gain.

Construction of the $200m (£110m) Nissan plant will be completed in 2009. It will initially produce 50,000 cars a year, creating 750 new jobs; Nissan has yet to decide which model the factory will build.

Ms Matvienko said she was delighted that Nissan had chosen her city. "This is a huge triumph for St Petersburg," she said. "Our city is going to turn into Detroit! There was a tough battle with certain regions until the very last day, with them proposing ridiculous conditions that bordered on being illegal."

She is thought to have persuaded Nissan to come to St Petersburg by offering tax breaks for up to five years, worth $16m, and by pledging a further $16m investment in the factory's infrastructure.

The St Petersburg region is already home to a Ford assembly plant which turns out 36,000 Focus models a year, which is likely to rise to 100,000 once the factory is working at full capacity.

Meanwhile Toyota's St Petersburg plant is due to start producing its first Camrys next year. Initially it will produce just 20,000 cars a year, but the company says that number will gradually rise to 200,000.

St Petersburg, Mr Putin's home city, is tired of languishing in the foreign investment shadow of Moscow, and sees attracting foreign car makers as its best chance of catching up. And the signs are that the city is well placed to tap into a growing demand for foreign cars. Increasingly well-off, Russians are eager to trade their old Ladas for socially prestigious inomarki (foreign cars), and Russia's domestic car manufacturing industry has so far miserably failed to even begin to meet consumers' heightened expectations of quality and comfort. That is one reason why last year sales of foreign cars outstripped Russian brands for the first time.

According to industry analysts, Russians' appetite for new cars is nowhere near being satisfied. With 167 cars per 1,000 people, Russia lags far behind neighbouring eastern Europe, which has 323 vehicles per 1,000 people, and car sales here are set to explode from 1.8 million a year now to 2.8 million annually by 2010.

Even then demand will outstrip supply, and it is estimated that only 50 per cent of foreign cars bought in Russia in 2010 will be made in Russia, with the rest being imported.

The Kremlin currently protects its enfeebled domestic industry by levying high tariffs on imported cars, but has slashed tariffs on imported auto parts in an attempt to get foreign manufacturers to relocate here.

The strategy has been reasonably successful. Renault has opened a factory in Moscow, Fiat is due to start assembling cars here with a local partner next year, and General Motors has a joint venture with Russia's AvtoVaz (albeit a troubled one) to build sport utility vehicles.

Germany's Volkswagen is also poised to build a $400m plant in the Moscow region to assemble 115,000 Skoda Octavias and VW Pointers a year.

Meanwhile the enclave of Kaliningrad has emerged as an important hub for assembling upscale foreign cars, popular with Russia's burgeoning new elite, such as BMWs and Hummers.

With oil prices at a record high, Russians' spending power looks set to increase, something that can only benefit car makers.

German Gref, the Economic Minister, is predicting that the prospect of gaining a foothold in such a lucrative market will see foreign car manufacturers invest $2bn in Russia by 2008.