Fast money, even if there's no fast food

ST PETERSBURG - Before the First World War my grandfather had an office here. It was nothing grand, just a wooden shed on the docks. He was a London timber merchant and much of Europe's supply of timber came from Russia and through the St Petersburg docks. Foreign companies came to St Petersburg not just because it was then capital of Russia, nor because it was the country's main intellectual and cultural centre. They came to make money.

They are starting to come back for the same reason. St Petersburg has been in the news this week because it has been host to the annual meeting of the European Bank for Reconstruction and Development. But far more important than the visitors - the 4,000 bankers, the world's main finance ministers and so on - is the way the city is beginning to recover its economic function as Russia's window on the West. The signs are small. But it is almost as though this great city, the fourth largest in Europe, after London, Paris and Moscow, retains a folk memory of its old role - enough of a memory to be able again to become an economic asset to the newly capitalist Russia.

It is deeply unfashionable to argue that anything to do with the Russian economy is starting to come right. The figures are dreadful. Industrial production is about 60 per cent of its 1991 levels; inflation is running at about 8 per cent a month; the dollar, now worth 1,700 roubles, is expected to be worth about 3,500 roubles by the end of the year; hyperinflation remains a real possibility. And St Petersburg has some economic disadvantages of its own: an unsafe water supply, one of the oldest populations in Russia; a drug problem, with an estimated quarter of a million addicts; and serious street crime.

The city is, to Western eyes, dreadfully dilapidated. There seems to have been almost no new building for 70 years (though it was substantially rebuilt behind the same facades after the devastation of the 900-day siege in 1941-44) and precious little maintenance of the existing buildings. Physically, it is as if the city is frozen in the form it was when it ceased to be the Russian capital in 1917: a place where time seems to have stopped.

But if you go behind the crumbling 18th- and 19th-century blocks that run for mile upon mile across the Neva estuary, it is possible to see signs of economic revival. There are a few boutiques and small restaurants. There are English-language newspapers. There are new foreign bank offices. There are dealerships for foreign cars.

People who live here feel the progress in even the last 18 months. 'It's where Warsaw was in 1979,' explained an acquaintance who is helping reorganise wholesale food distribution, 'and the same progress will happen here.' Poland, incidentally, is now the fastest-growing economy in Europe with 4 per cent growth last year and probably another 4 per cent this year. There is even - and regular visitors say this is new - evidence of a culture of service. People in service jobs have become polite and helpful, not qualities for which they were renowned under the old Soviet regime.

Of course, this is not enough. The days are long past when St Petersburg could exist as a centre of conspicuous consumption and it is no longer a great nation's administrative centre. It has to earn its keep and cannot do so by industry alone - a tractor factory currently on very short time is its largest single employer.

There are two obvious ways, over and above its mercantile function, in which St Petersburg has a comparative advantage, two areas that give it 'cash crops' which can be used to generate foreign earnings and help rebuild its economy: tourism and financial services.

Tourism is already an important industry, bringing more than one million visitors a year to the city. Potentially, it has enormous appeal: St Petersburg offers a cultural depth that few other world cities can. As well as the Hermitage Museum, the Kirov Ballet and the grand buildings of imperial Russia, it contains a wealth of architecture which is remarkably intact given the deprivations the city has suffered. The advantage of not having enough money to do buildings up is that you do not have enough money to pull them down. It is important to remember that Russia was, between 1900 and 1910, the fastest-growing economy in the world. St Petersburg out-glittered even Paris.

To attract tourists, a vast amount needs to be done. New, medium-sized and reasonably priced hotels have to be established in the smart area of Nevsky Prospekt. St Petersburg needs the equivalent of the West End. At the moment many of the small services sought by tourists do not exist. You can't buy fast foods on the street - not necessarily one of the more attractive aspects of Western civilisation, but something the punters want.

Some 'hotels' are cruise ships anchored in the docks, a quick way of providing quality accommodation but unsatisfying to anyone wanting to be at the hub of city life. But the fundamental assets are there. All that's needed is the development and packaging of those assets.

The other great cash crop could be financial services. Financial centres are often not capital cities and are frequently located on the fringe of a continent: New York and Hong Kong are classic examples. St Petersburg already has two foreign banks able to accept deposits from Russian customers. There is a stock exchange, albeit with only 15 listed companies and a daily turnover of a mere dollars 1m.

There are plans to establish an offshore banking centre with special tax incentives, rather like those used by Dublin to attract offshore financial business. It is perfectly possible that in another five or maybe 15 years we will see St Petersburg become the effective financial capital of Russia. And even if it never takes off in that role, it is still going to be an important Baltic trading and financial centre - a city helping Russia look west.

For cities can have a life that goes beyond the country in which they are located. It is not just New York and Hong Kong that have made an economic virtue out of not being capital cities. Barcelona, Milan, Hamburg and Lyon are all commercial success stories despite (maybe because of) having no national political importance. A strong civic tradition may be a more valuable economic asset than a strong national one.

On paper, St Petersburg ought, within a generation, to be the cultural and financial capital of the entire western side of Russia. The prize, if it achieves that, will extend beyond the city, for the whole region will be pulled up by its success. We in Western Europe will go there to make money as well as gaze at past glories - just as we did before the First World War. And we will make money not only by selling Western goodies to the local population, but also by helping to bring Russian raw materials to Western markets.