This paper discusses the progress of economic reform in St Petersburg. It first discusses several difficulties, legacies of the previous system and problems of the transition, which are having to be overcome. Despite these, and with the aid of an advantageous tax system, significant foreign investment is being attracted. The development of an effective banking system supports these investments, although there was a large scale banking crisis in 1995. There has also been a radical liberalization of the restrictions which particularly affected small business growth. However, an inadequate city budget provided an obstacle to further economic development. A reform of the city’s tax system was implemented in 1994–5. This did not increase the aggregate tax burden but increased tax on property and decreased taxes on profits and incomes. Nevertheless, because of high inflation the city is having to meet increasing proportions of the costs of housing and transport. Further changes are now occurring following the election of a new city government in 1996.