The economy
of million-plus cities:
The right to develop
Russian cities with populations of over one million make significant contributions to the country's economy, in spite of crises and other unfavorable conditions. However, they could achieve more: according to a study conducted by Strelka KB's Center for Urban Economy, this would require investments, sensible distribution of existing resources, and a high-quality urban environment. In their work, the researchers analyzed the economies of 16 Russian cities with populations of 1 million people or more by 1 January 2019. The study covers the period from 2010 to 2017.


Drivers of the Russian economy
1 Hereinafter GDP is used for the whole country, GRP - for Moscow and
Saint Petersburg (as they are regions, not minicipalities). GMP is used for another 14 cities (mentioned in the text as regional million-plus cities). Also GMP is used for 16 cities in general and for group of Saint Petersburg and 14 regional cities (mention in the text as 15 cities)
16 Russian million-plus cities provided 32% of the country's GDP in 2017.1 At the same time, the general notion of a "million-plus city" covers vastly different cities, each with their own unique qualities, interests, and paths for development. The largest city, Moscow, covers 54% of the million-plus cities' contribution to the national economy; Saint Petersburg contributes 15%, and the other regional million-plus cities make up the remaining 31%. The gross regional product per capita of Moscow exceeds the same indicator for regional cities by more than two times (1.3 million rubles versus 0.5 million rubles in 2017, in nominal prices).
15% of Russia's GDP

is produced by million-plus cities (excluding Moscow),but the quality of their urban environments is significantly worse than in Moscow and the nationwide average.
The study showed that there is an imbalance among million-plus cities in terms of GMP, their budgets, urban environment quality, and the level of investments. For example, public revenue per capita in Russia's two largest cities was significantly higher than in other Russian million-plus cities: 169,000 rubles per capita in Moscow and 97,000 rubles per capita in Saint Petersburg versus 23,000 rubles per capita in other million-plus cities, according to data from 2017.
A marked difference between million-plus cities was observed on the level of investments as well. The volume of investments per one Muscovite was 162,000 rubles in 2017; per one resident of Saint Petersburg, 127,000 rubles; and in other million-plus cities, 94,000 rubles. From this, we see that the level of investment in regional cities is only 58% of the investment level in Moscow. In absolute terms, the overall situation is as follows: Moscow attracted about 2 trillion rubles in 2017, Saint Petersburg brought in 0.67 trillion, and other million-plus cities received a total of 1.6 trillion.
Million-plus cities vary significantly among themselves, not only in economic terms, but in terms of environmental quality. In regional million-plus cities, the urban environment ranked significantly worse than in Moscow — and even worse than the Russian average. A study of the urban environment quality in 1,112 Russian cities conducted in 2017 by Strelka KB in collaboration with an integrated housing development institution DOM.RF found Moscow's quality of life to be good (214 points out of a possible 300), while other million-plus cities earned an average score of 135 (the average score for the entire country is 137 out of 300). This is a poor showing. Even Saint Petersburg only boasts a "satisfactory" rating, at 181 out of 300.

Such a considerable difference between the contribution of million-plus cities (apart from Moscow) to the country's economy and the resources available for their development show that these population centers do not employ the full scope of resources that they produce. As a result, they simply do not have any internal stimulus for development. If this tendency persists, it could lead to a reduction in the potential of million-plus cities over the long term and, as a result, to the reduction of their role in the country's economy.
4,000 ruble

increase, on average, in gross output per capita
in cities per 1-point increase in the urban
environment quality index

DENIS LEONTYEV,
CEO, Strelka KB
Today, million-plus cities provide a third of Russia's GDP, more than half (54%) of which is created in Moscow. In order to increase the contribution of million-plus cities in the country's economy, we must support the growth of small and medium businesses, especially in those cities where the basis for development still comes from industrial behemoths. We should also stimulate a steady flow of investments into the most promising fields, and give cities the opportunity to make full use of the value that they create, thereby fulfilling their right to development. We need to start looking at cities as a platform for systemic, comprehensive investments. These measures will allow us to speed up the growth of our cities' economy.
Developing million-plus cities
With a GMP per capita comparable to second-tier cities in China and major cities in Turkey and Poland, million-plus cities in Russia grow significantly more slowly — comparable to wealthy cities in Western Europe. A comparison of growth rates between Russian million-plus cities and poorer cities that have only just begun their path toward dynamic growth (such as Indian, Vietnamese, and Indonesian cities) is even less favorable. One of the reasons is that the growth factors for these cities simply do not apply to Russia as it left the stage of active urban growth when rural residents began resettling in cities and the contemporary consumer economy was first introduced. In this way, Russian million-plus cities, with the exception of Moscow, are in some sort of middle-income trap. Having used up the initial resources needed for economic growth and having achieved a particular level of well-being, they still cannot develop approaches for further sustainable growth.
25%

is the minimal ratio of investment to GMP
for sustainable growth of million-plus cities.

It is noteworthy that over the last 7 years, the economies of 15 million-plus cities grew slightly faster on average than Moscow did, although slower than the rest of the country. The entire country grew 1.4% per year on average (per capita). Saint Petersburg grew 1.85% per year, and regional million-plus cities grew 0.8% per year. Meanwhile, Moscow's GRP per capita did not change in real terms. Overall, million-plus cities grew an average of 0.5% per year.
If you look at the trends in the GMP of million-plus cities over the past 7 years in more detail, then it becomes clear that 2014 was a breaking point for the economies of regional million-plus cities. Strelka KB's study showed that the 2014 economic crisis affected them most of all, while Moscow and Saint Petersburg weathered the storm more easily. After a period of stable growth from 2010–2014, the gross product per capita of regional million-plus cities fell much further (5.1%) than the GDP of Russia as a whole (0.4%). In Moscow, the drop was insignificant (1.8%), while Saint Petersburg was able to maintain a small but sustainable (2.4%) level of economic growth.
On the way to prosperity
If the development trends of Russian cities seen between 2010–2017 continue into the future, then the average regional million-plus city will need about 100 years to catch up to Moscow's 2017 level in terms of gross product per capita.
In order to shorten this timeframe, cities must radically speed up the growth of their own economies. The specific timeframe and increase in growth rate depend on the starting positions of a given city.

At present, the million-plus cities (except Moscow) can be divided into progressive (average growth rate in 2010-2017 of 1.4%) and lagging (average growth rate in 2010-2017 of 0.2%) in terms of gross metropolitan product. Among the progressive cities (Ekaterinburg, Saint Petersburg, Kazan, Ufa, Samara, and Krasnodar), 10 years of 5.9% growth per year would be necessary to reach Moscow's 2017 level, while lagging cities (Voronezh, Omsk, Chelyabinsk, Novosibirsk, Volgograd, Rostov-on-Don, Perm, Krasnoyarsk, and Nizhny Novgorod) would need an average of 20 years at 5.4% growth per year.
2x

The gross output per Muscovite is 2x higher than per
resident of regional million-plus cities.

If these cities can speed up and hit Moscow's level, they will increase the growth in the country's overall GDP and be important actors in the national economy. Based on the current forecast from the Ministry of Economic Development, in 2018-2030 the average annual growth of Russia's GDP will reach 2.9%. Based on a forecast formulated as part of the study, this rate can be extrapolated to a growth rate in regional million-plus cities of 3.2%. In this way, if Russian million-plus cities are able to achieve 5.4-5.9% growth (the necessary level to reach Moscow's 2017 level of economic development), this will only increase the likelihood of achieving the projected level of GDP growth.
One of the defining factors of economic growth is fixed asset investments. For this reason, the volume and structure of investments are key characteristics that define the trends of gross product change. In order for the gross product to grow, investments must grow as well.

This won't be an easy task for Russian cities for at least one reason: a negative trend over the past three years which has been noted above. Since 2014, the proportion of investments compared to the gross metropolitan product in regional million-plus cities fell by 30% — from 23.1% in 2010–2014 to 17.6% in 2015–2017, while in Saint Petersburg, the relationship between investment and GRP fell from 17.6% on average in 2010–2014 to 15.5% in 2015–2017.
32% of Russian's GDP


came from Russian million-plus cities in 2017,
and more than half of this came from Moscow.

We should note that since 2014, million-plus cities lag behind the majority of European cities with similar or much higher gross metropolitan product per capita in terms of the relationship between investment and gross metropolitan product. However, the low levels of investment are not as critical for European cities as they are for Russian ones. In the wealthy cities of Western Europe (like Madrid, Hamburg, and Stuttgart), investments exceed 20% of GMP, while in the sustainably growing cities of Eastern and Central Europe (like Krakow, Bratislava, and Prague), this indicator regularly exceeds 25%. The comparison with dynamically growing cities in developing countries is even more depressing: for example, investments make up 30% of GMP in Delhi, while in certain cities in China with available statistics (Chengdu), they make up 57%.
Looking at comparable cities in Eastern and Central Europe, we can conclude that investments must make up a minimum of 25% GMP to maintain stable development. Looking on the Russian national goal of bringing investments up to 25% of GDP, then the level of investment in regional million-plus cities must reach 26.5–27%, based on the established proportion between national and local investment activities from the pre-crisis period (2010−2014).

Another factor that could speed up the growth of urban economies is the creation of motivations for local authorities. At the present moment, there are not many such stimuli, as according to our research, the level of growth in municipal budgets lags behind the speed of gross metropolitan product by a factor of two. Over 7 years, Russian million-plus cities (excluding Moscow and Saint Petersburg) grew their GMP by an average of two times (97% in nominal prices), while city budget revenues grew by just 49% in nominal prices.

If we compare Russian regional million-plus cities with German ones such as Munich and Cologne, then we see that the difference between the rate of gross metropolitan product change and urban budget change is considerably lower. Recalculating the budget revenues of Russian cities according to the German method gives the sum of 479 billion rubles over 7 years (about 5.2 billion rubles per year per city, making up 22% of annual revenues). This is the amount of revenues that regional million-plus cities could have received if the difference between the rate of gross metropolitan product change and the urban budget had been aligned to the German practice in the 2010-2017 period.
Unlike what we see in Europe, the development of urban economies in Russian cities does not yet translate into budget revenues, and municipal authorities do not have enough motivation to stimulate the growth of their cities' economies.
ELENA KOROTKOVA,
Director of the Center for Urban Economy, Strelka KB
This is one of the few studies dedicated to the gross metropolitan product of Russian cities. Such assessments of urban economies — over several years, in large aspects, and on a large scale — are a rarity in our country. This study is yet another step towards an understanding of what makes up urban economies, what they depend on, and what tools can stimulate their growth.
Unique characteristics of million-plus cities
Investments that can be converted into stable economic growth are not a pro forma achievement of the official KPIs, but a process that takes into consideration the specific characteristics of urban economies.

It's important to remember the specifics of the economies in each of million-plus cities, and consider these nuances when investing.

Russian million-plus cities differ significantly in terms of the structure of their economies, the number of people employed in various fields, and in their productivity.

Eight Russian million-plus cities have their own specializations: fields where the majority of people work at a high level of productivity compared to other million-plus cities. For example, among cities with a high percentage of people engaged in trade are Krasnodar and Ekaterinburg, while manufacturing employ the majority in Omsk, Ufa, and Kazan. Krasnodar is distinguished by a high rate of employment and productivity in the construction sector, while the real estate sector is particularly strong in Krasnodar, Samara, Kazan, Nizhny Novgorod, Ekaterinburg, and Novosibirsk.
Cities also differ widely in terms of the main drivers of their economies. In some places, small businesses are developing rapidly, while in others life continues to revolve around industrial titans. In Ufa, Novosibirsk, Krasnodar, Chelyabinsk, Voronezh, and Rostov-on-Don, the small business sector is outpacing the average growth rates of the cities' economies. Meanwhile, large businesses grow faster than smaller ones in Omsk, Samara, Kazan, Nizhny Novgorod, and Volgograd.
The balance between the structure of the economy, the relative proportions of various sized businesses, and the relationship between productivity levels in different fields can serve as the basis for cities'investment policies. Fields with high levels of employment and productivity can serve as a base for forming industry-centric clusters capable of operating on a national or worldwide scale. Fields with high employment and low productivity can become focal points for transformations, and the remaining labor resources and physical assets (including real estate) can be redirected to more perspective uses.

This study clearly shows that the investment strategies of Russian cities must be created. The cities' positions in the regional and worldwide economy need to be found, considering their unique specializations and favorable growth factors.

By doing that, million-plus cities can become drivers of GDP growth, although they should also create conditions for internal development and provide a flow of investments to the most promising fields. On one hand, this would allow to set changes in the cities and provide conditions for human development; on the other hand, it would help them provide the GMP growth that the entire country needs. In order for this to happen, cities must have access to the value that they create and use their rights to develop further.