Special no more: Kaliningrad on life support

If it is to ever to flourish, Russia’s westernmost outpost needs more freedom, not tighter control, from Moscow.

Kaliningrad caught the world’s attention last month when Russia deployed nuclear-capable Iskander missile systems to the exclave[1]. The entity’s strategic location, sandwiched between Lithuania and Poland, makes it prime real-estate for Russia. But six months ago Moscow removed the status of special economic zone (SEZ) which it had bestowed on Kaliningrad ten years earlier and which gave it the right to duty-free trade.

How will Kaliningrad cope without the special privileges that the SEZ provided? Half a year into the new reality, is the previously established model really undergoing a profound transformation, as some hoped it would, or is it merely adjusting to the new circumstances while preserving its long-standing features? Has Kaliningrad in fact regressed to the pre-1991 situation and simply squandered 25 years of development? And what will Moscow do about its outlying territory?

Life after SEZ

SEZ status gave Kaliningrad a variety of privileges. Primarily it enjoyed the ability to present goods produced in the European Union as “made in Kaliningrad” and ship them to the Russian mainland. Local companies also enjoyed tax-free status for the first six years of the SEZ regime. Nearly 800 local companies benefited from it and it had a direct impact on the lives of one-third of Kaliningrad’s population. There was therefore great concern in Kaliningrad when the Russian government announced the end of the SEZ regime. Formally, Moscow argued that by bringing the SEZ to an end it is demonstrating compliance with World Trade Organization rules, especially those that pertain to competitiveness: after all, goods sold to the EU from the region enjoyed protection from all sorts of competition.

Before the SEZ was revoked, local and federal media launched an unprecedented campaign, supported by local politicians, the business elite and intellectuals, to retain SEZ status. They painted apocalyptic pictures of immediate economic breakdown, with a full collapse of the local labour market and up to 120,000 workers losing their jobs.

To what extent have the predictions come true? Kaliningrad’s economy has suffered, but the situation is far from apocalyptic. There are indicators that industrial output has fallen in recent months, but such a decline merely underscores trends that have been evident for years – or even decades. There are three main reasons why Kaliningrad’s economy continues to deteriorate.

Firstly, the region remains highly unattractive to both foreign and domestic investors, with the level of investments having decreased by 13 percent on the previous year[2]. One may be tempted to link this “unattractiveness” to the fact that foreign investors frequently encounter bureaucratic hindrances, such as visa-related issues. Unfortunately, this is merely the tip of the iceberg. The alleged “uniqueness” of Kaliningrad is simply not outlined as a competitive advantage when seeking investment – either from geographical neighbours or other Russian regions. That is why not even Russian entrepreneurs are not rushing to undertake investment activities in Kaliningrad. In the early 2000s there was an uptick in interest in the local real estate market by affluent Russians, but this was only because there were hopes of Kaliningrad being granted a visa-free regime with the EU. Large operations such as the Yantar shipyard and Khrabrovo airport are also in a precarious economic position lacking investment and failing to be profitable. 

Moscow’s reaction to the deteriorating situation has been harsh – just this year it has replaced Kaliningrad’s governor on two occasions. 

Secondly, one of the most well-known scourges and distinctive features of the exclave is its notorious “shadow economy”, now on the rise again.

Finally, Kaliningrad preserves its long-lasting status as the “chief acceptor” of federal financial support among the regions constituting the north-western district of the Russian Federation. According to the most recent estimates, one-third of the local budget is made up of financial injections from Moscow[3].

These trends demonstrate continuity with the situation before 1 April this year rather than any real change since the loss of special status.

In the meantime, despite the prevailing picture, local officials are maintaining that the difficulties experienced by Kaliningrad are “temporary” and are primarily related to “sanctions and geopolitical location”[4] – repeating arguments that, in one form or another, have accompanied local historical narratives since 1946. Still, at the end of May 2015, Kaliningrad’s then governor, Nikolai Tsukanov, firmly stated that his region had succeeded in catching up with Lithuania in terms of quality of life and wages, and that the next goal was to do so with Poland[5]

Ensuring Kaliningrad’s dependence

Moscow’s reaction to the deteriorating situation has been harsh – just this year it has replaced Kaliningrad’s governor on two occasions. Meanwhile, the Russian Security Council, headed by Nikolai Patrushev and which met in Kaliningrad, publicly concluded in June that quality of life there is rising at an unacceptably slow pace[6], and that the high level of imports has led the local economy to experience severe difficulties[7]. He also condemned the level of corruption, smuggling and illicit amber extraction[8].

During his visit, Patrushev further claimed that the Russian Security Council had taken Kaliningrad under its “wing”. The proposed solution is quite simple: an additional 217 billion rubles to be provided to the region until 2020. But such a system of compensation for Kaliningrad – owing to the long-held notion of an allegedly unfavourable geopolitics and challenging historical past – fails to address the crux of the matter. It puts Kaliningrad on life support, perpetuates its dependence on Moscow and ultimately prevents it from developing.

Patrushev also unveiled a plan to provide “information security” to the exclave, in order to “protect” its population from highly undesirable information from abroad which may reveal to the local population the extent to which it is falling behind its immediate neighbours. This openly aggressive stance on the part of the Kremlin has translated into yet another round of militarisation in the region. In response, Warsaw temporarily suspended the Small Border Traffic Regime with Kaliningrad[9]. Despite the severe predictions by the Russian side, Poland appears to be little hurt by this action: on the contrary, the level of petty crime and smuggling on the border has decreased dramatically and Warsaw looks to be in no rush to reinstate the former arrangements.

Freedom or control?

Moscow has two choices. It could opt to support Kaliningrad on a path towards sustainable development by allowing greater freedom in foreign contacts, increasing cooperation and growing competitiveness. Or it could strengthen its control over Kaliningrad. It seems to have chosen the latter option. It now appears that the SEZ was just a transitory period of development which was little more than a mirage. The end of the SEZ is not the cause of current problems, nor is Kaliningrad’s geopolitical situation the root of its troubles. If anything, these are red herrings that allow authorities to ignore the heart of its economic problems. For Kaliningrad, the answer is real reform, and real support towards that reform, over a sustained period of time. There is little to suggest that Moscow will respond.
 

Sergey Sukhankin is a native of Kaliningrad currently working on his PhD at the Autonomous University of Barcelona (UAB) and is an Associate Expert at the International Centre for Policy Studies in Kyiv. His areas of research include Russian Foreign and Security Policy, Russia-EU relations and Kaliningrad.

 


The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.

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