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Sara Dutch

Why Kaliningrad Hasn’t Transformed into the “Singapore” of Russia

After the collapse of the Soviet Union, the hopes were great for Kaliningrad to become the „Singapore“ of Russia. As for today, investors are still rare, the trade volumes are very low, unemployment is above Russian average and prices lie way over Russian standards.1991 : great hopes for the future

"Panorama of Kaliningrad, author: Dima Bushkov, source: Flickr

“Panorama of Kaliningrad, author: Dima Bushkov, source: Flickr

High hopes for great deceptions… or why Kaliningrad hasn’t transformed into the “Singapore” of Russia

Flag of Kaliningrad, source: Wikimedia Commons Until 1991, Kaliningrad was a “closed” area, impossible to enter for foreigners because of its strategic importance for the Soviet defense. After the Baltic countries regained independence and the Soviet Union finally collapsed in 1991, Kaliningrad became an exclave of the no longer socialist Russian Federation, cut off from its motherland by a 35 kilometer strap of Lithuanian land, or 70 kilometers of Polish territory. This special geographical location however had the potential of transforming Kaliningrad into “the new window to the West”.

The new neighbors Lithuania and Poland were however also eager to take advantage of the new geopolitical setting and started to levy tariffs on goods trade between Kaliningrad and the Motherland.  To offset this economic disadvantage, Kaliningrad was granted the status of a “free economic zone” within the Russian Federation in 1991. This status was however terminated in 1995, and Kaliningrad was turned into a “Special Economic Zone” the following year.Special Economic Zones, or SEZ’s, are areas to which the Russian government granted special conditions in order to foster their economic growth.

This practice started in the eighties already and boomed under Yeltsin, before being banned by the first Putin government, according to the motto “everyone should be treated the same”. Most of them have been however re-legalized in 2004. As for now, there are several types of SEZs, such as: innovative zones; manufacturing zones; tourism zones;  port zones;  “old zones” of the 1990’s; and gambling zones. Kaliningrad stacks the hats, being at the same time an “old zone”, focused on tax-free imports-based assembly and large investments, as well as a gambling (since 2009) and tourism zone (since 2007).

The Special Economic Zone of Kaliningrad

The main feature of the SEZ in Kaliningrad is to offer duty free imports to foreign companies if they add 30% of added value to their goods inside the Oblast, thus changing the category of the goods. In other terms: if you import a car in parts and assemble it in Kaliningrad, you will be able to import it duty-free to the rest of Russia. This SEZ will however “close” in 2016 because of Russia’s joining of the WTO and the incompatibility of some of its provisions with WTO rules.

The reasons of a failure

The 4 million Euro threshold turns down most of the small and middle-sized entrepreneurs of the region to come and invest in Kaliningrad. Although Kaliningrad belongs to a SEZ, the advantages offered to the enterprises cannot overcome the costs of transit (energy, time, transport, storage) through the neighborin

g countries. As a consequence, most of big businesses who want to implant in Russia go to other SEZs “inside” Russia. Added to this, the general problems of trying to do business in Russia – corruption, changing laws, lack of transparency, inefficient courts, complicated and extensive administrative requirements – make most of the enthusiasts give up along the way.

As for tourism, the focus has been put on high-standard luxury leisure, which doesn’t attract the middle class who makes out most of the visitors of the region. Furthermore, the service, infrastructure and prices are better in Poland and Lithuania, and European citizens do not need a Visa to go there, which is the case for Kaliningrad. The German “homeland” tourism, which had been making out most of the foreign visitors, is dying out. As for the Russians, it is cheaper for them to go to the Black Sea or outside of Russia for holiday – were the infrastructure is better and the sea warmer.

The consequences of this difficult economic situation are harsh on the local population: although the prices are higher than in the rest of Russia due to the Oblast’s great dependency on Mother Russia and the neighboring countries, the salaries in the region belong to the ten lowest in Russia, and the unemployment rate- around 10%, is higher than the Russian average.

For the Oblast itself, the financing of the SEZ has been a high burden on the budget, combined to high tax losses. And the region is still highly dependent on the outside, although Kaliningrad’s economy was to become production and export-orientated thanks to the SEZ.

The political reasons behind

Map of the Kaliningrad economic region of Russia, source: Wikimedia Commons

Map of the Kaliningrad economic region of Russia, source: Wikimedia Commons

The real reasons of this lack of economic development are mainly political. Traumatized by the crumbling apart of its once great empire, Moscow is afraid of giving too many advantages to Kaliningrad and thereby to foster independence aspirations.

This is why, for example, the ports of the exclave, although being the only Russian seaport  free of ice year-round, are still mainly used for the Baltic Sea fleet. Probably also why Kaliningrad is quite invisible on the main tourist maps of Europe and Russia, why there are no cheap flights to and from Kaliningrad to the outside world, as well as no trains.

Why the central government doesn’t suppress the “security zone”, a 7 kilometer-wide stripe of territory along the border which is closed to tourists without a special authorization – which is, like any document in Russia, quite a hassle to be granted.

Also probably why there is virtually no boat connection to other ports, and why the most beautiful beach of the Oblast, Baltiisk, lies in a closed area, so as Jantarni, the most popular and best developed  beach resort.

Why the government has been constantly legally trying to reduce or take back the advantages once granted to the region. Why local small and middle-sized entrepreneurship doesn’t enjoy any support, while Moscow-based business is being actively promoted.

Why the dependence of the Oblast on state-redistribution funds has been steadily increasing in the last years.

And, last but not least, why the grip of the central government is tighter on Kaliningrad than on any other Russian region.

Hey. My name is Sara. I like travelling and writing and stuff. check out my blog http://saratamsaratyt.wordpress.com/

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  1. William Grant says:

    With two Atomic Power Stations proposed in the near future, and just about self sufficient generating electric power at the moment, perhaps the surplus power will be value added , re powering a desalination plant, or some industry requiring massive amounts of power.
    Also the re-skilling of the labour force by foreign investors, assembly plants etc, makes up in some way the failings in the infrastructure.

    There are some remarkable successful businesses, animal feed additives for one. A massive plant which supplies part of Europe and Russia and sources raw produce from South America, does show that economy of scale is not a problem to them. And as the business has grown re genuine demand and a good product, unlike power through monopoly as some of the more established suppliers have retained their market share, the future looks good for them.
    Storage facilities for Natural Gas will be developed in the near future, which will also make the area a more desirable place for future development.
    At the moment , a small workforce is not a problem, as modern industries are not labour intensive as such, and skilled staff can be brought in, and in time integrate and train up local labour.
    Fixing problems such as various pollutions: ground , water, air re modern standards/codes, can be used as good hands on training of the labour force,
    and soak up the unemployed at the lower end of the workforce, getting workers in work that they find useful, the worker regains dignity etc. and lessens social problems.
    Some way must be found to make “Tourism” a viable industry. The difficult balance of commerce being seen as good value, and not just robbing the tourist as happens in other places.
    The “Oblast” for me, has all the conditions needed for a dramatic change in fortunes.
    Location , History, the ability to value add and cash generate, small population which can have expectations raised relatively quickly, social problems tackled and problems isolated.
    I hope in time “The Oblast” will be used as a good example of how to rejuvenate end of an era industrial areas, and make them viable again.