Racketeers spoil the party at St Petersburg

It is being advertised as the event of the year, a lavish post-Soviet coming-out party for Russia's historic "second capital" of St Petersburg.

But when 45 world leaders, including Tony Blair, arrive in late May to celebrate the city's 300th anniversary, they may find St Petersburg's celebrated centre still shrouded in scaffolding and construction hoardings, because much of the £380m budgeted for reconstruction appears to have been wasted, misspent or simply "lost" through corruption.

According to a report issued by the State Accounting Chamber, which answers to Russia's parliament, a massive "dissipation of budget resources" has left at least 59 major renovation projects in central St Petersburg far behind schedule. Many have no chance of being ready for the jubilee.

The investigation is unlikely to be concluded before the celebrations are over, but the accounting body's chief, Sergei Stepashin, recently highlighted a number of scams he had already uncovered, including the disappearance of £20m earmarked for road building, which he said was "simply hidden in the bushes".

Auditors are also looking into a payment of more than £60,000 to a private security company to guard non-existent building sites and the transfer of £25,000 earmarked for traffic improvements to a mysterious "gardening" fund. They also want to know why the city hired a bankrupt firm to rebuild its flood defences.

"Corruption flourishes in rushed construction projects like this, because Russia has no system of tenders and no proper oversight," said Dmitry Orlov, deputy director of the Centre for Political Technologies, an independent think tank. "There is evidence that huge amounts have been misappropriated in St Petersburg and we are so far seeing only the tip of the iceberg."

The 300th birthday party is important to Vladimir Putin, a native St Petersburger, who plans to host the week-long celebration. The Kremlin has spent up to £125m to transform Konstantinovsky Palace, a former Tsarist pleasure dome on the city's outskirts, into an ultra-modern presidential residence with its own helipad, yacht harbour and 20 ornate guest houses where Mr Blair and other partygoers will stay.

During a visit last year, Mr Putin displayed angry impatience over the slow pace of reconstruction and the hazy use of funds. "What is this? Money is allocated -- millions. But it is not used effectively," the President snapped in a televised meeting with Governor Vladimir Yakovlev.

Founded by Peter the Great in 1703, St Petersburg was Russia's capital for more than 200 years until the Bolsheviks restored that status to Moscow. Renamed Leningrad in 1924, the city suffered hugely in the "900-day siege" by the Nazis. After the war, the Soviets painstakingly rebuilt the most important landmarks and the city centre, but post-Soviet economic depression and social collapse hit the city hard.

Peter the Great intended his new city on the Baltic to be Russia's "window on the West", a model for modernising and reforming the whole country. But since the fall of Communism – when the city changed its name back – it has earned a reputation as Russia's crime and corruption capital. According to a survey of 40 Russian regions conducted last year by the Berlin-based Transparency International and Moscow's InDem Foundation, St Petersburg has one of the highest rates of "endemic corruption" in a country regularly listed among the world's top 10 most corrupt.

Some say the accusations over the anniversary celebrations may be part of a Kremlin campaign to remove Mr Yakovlev, an old Putin foe, and replace him with a presidential loyalist after the foreign leaders have gone home.

"Corruption is everywhere in Russia, but corruption charges are usually quite selective," said Georgy Satarov, head of the InDem Foundation. "In another country, such accusations usually herald a battle against crime. Here it means a political struggle is afoot."