Problems Related to Development of the Kaliningrad Region As an Exclave Territory of the Russian Federation Moscow 2002 Attitudes towards the geopolitical situation of the Kaliningrad Region of the Russian Federation have dramatically changed of late, both in Russia and abroad. While retaining its traditional significance in Russia’s defense doctrine, that region has come to be seen as a golden opportunity for establishment of closer mutually advantageous cooperation between Russia and the European Un- ion. There is a growing understanding of the fact that thanks to its geographic situation that region can be used as one of the Russian territories to undergo pri- ority integration into Europe’s Common Economic Area. In the present study, the possible scenarios of development of that region are examined from the point of view of such integration with advantages and disadvantages of each of those sce- narios discussed, as well as such problems as may arise in their implementation. Authors: V. Zhdanov, O. Kuznetsova, V. Mau, V. Plyukhin, S. Prikhodko, M. J. Wojciechowski and A. Hecht The present study and publication have been carried out within the framework of the CEPRA Project (a Russian-Canadian applied economic studies project) financed by the Canadian Inter- national Development Agency (CIDA). Editor: N. Glavatskaya Make-up: V. Yudichev ISBN 5-93255-078-3 Publishers’ License: ID No. 02079 of June 19, 2000 5 Gazetny Pereulok Moscow 103918 Russia Tel. (095) 229-6412, FAX (095) 203-8816 E-MAIL: [email protected], WEB site: http//222.iet.ru Contents Introduction.................................................................................................... 5 Specifics of the Kaliningrad Region ............................................................. 5 1. Specifics of the Kaliningrad Region’s Development in Modern Russia ........................................................................................... 8 1.1. History of Establishment and Specifics of the Kaliningrad Region Free/Special Economic Zone .................................... 12 1.2 Outputs of Operation of a Free/Special Economic Zone in the Kaliningrad Region ................................................................ 19 2. The Current Socioeconomic Situation ................................................... 26 2.1. Level of Socioeconomic Development .............................................. 26 2.2. Assessment of the Current Structure of Kaliningrad Region’s Economy ................................................................ 32 2.3. Development of Infrastructure Branches of the Region’s Economy ......................................................................... 36 2.4. Factors Impeding Development of the Region ................................... 57 3. Main Guidelines of Development of the Kaliningrad Region in the Period Ending in 2010 ................................... 64 3.1. The Strategy for Development of the Kaliningrad Region: a Strategy for Harmonization of Interests .................................... 64 3.2. Objective and Components of the Socioeconomic Policy .................. 66 3.3. Development of the Kaliningrad Region of Russia in the 21st Century .................................................................... 71 4. The Kaliningrad Region’s Role in Changing Europe ........................... 73 4.1. The Kaliningrad Region as a Region of Cooperation between Russia and the EU .................................................. 73 4.2. Russia’s Contact Territory in Central and Eastern Europe ................. 76 4.3. Efficient Use of the Region’s Potential in International Division of Labor ............................................................. 81 4.4. Ensuring of Russia’s Military-Strategic Interests ............................... 83 5. Principal Lines in the Kaliningrad Region’s Development .................. 88 5.1. Restructuring of the Region’s Economy in Accordance with the New Conditions of the Region’s Development ................................................................... 88 5.2. Development of Infrastructure ........................................................... 88 5.3. The Agrarian Sector ........................................................................... 94 5.4. The Industrial Sector .......................................................................... 96 5.5. Transformation of the Special Economic Zone Regime ..................... 98 5.6. The Public Sector of the Region’s Economy.................................... 105 5.7. Financial Institutions ........................................................................ 107 6. The Required Mechanisms and Institutional Reforms ....................... 109 6.1. Federal Goal-Oriented Program ....................................................... 109 6.2. Amendment of Federal Legislation on the Special Economic Zone ................................................................ 111 6.3. Perfection of the Regional Legislation ............................................. 113 6.4. International Agreements ................................................................. 114 6.5. Support by the European Union and the International Community ............................................................ 116 6.6. Public Consensus (Non-Governmental Organizations in the Region) ................................................................... 120 6.7. Strategic Planning and Indicative Plans ........................................... 120 6.8. Inter-Regional Cooperation .............................................................. 122 7. Local Economic Development Strategies for Kaliningrad Oblast: Lessons from Northern Ontario Initiatives .... 123 7.1 Introduction ....................................................................................... 123 7.2 Outline & Methodology .................................................................... 124 7.3 Canada’s Economic Development Strategies: An Evolutionary Perspective ................................................................... 125 7.4. Socio-Economic Trends: Northern Ontario vs. Kaliningrad Oblast ................................................................................. 135 7.5. Potential Lessons for Kaliningrad .................................................... 142 7.6 Final Remarks ................................................................................... 145 Appendix .................................................................................................... 146 Introduction Specifics of the Kaliningrad Region The federal authorities have been giving particular attention to the Kalinin- grad Region of late. In 2001, issues related to that region’s development were discussed at meetings of the Government of the Russian Federation on three occasions (in March, September and October). The Kaliningrad Region is the only region for which a Concept of Federal Socioeconomic Policy has been devised. While there has been a sharp reduction in the number of federal goal- oriented development programs for specific regions (in 2002, there are only six such programs, while in 2001 they numbered 41), the Kaliningrad Region program has been preserved. It is to be noted that apart from that program, the 2002 federal budget only provides for financing of development programs for Tatarstan and the Kuril Islands which belong to the Sakhalin Region. The purpose of this paper consists in studying of the reasons behind the par- ticular attention the federal authorities have been giving the Kaliningrad Region, analysis of various likely scenarios of that region’s future development, assess- ment of the advantages and faults of each of those scenarios and of such prob- lems as may arise in implementation of those scenarios. The Kaliningrad Region is the Russian Federation’s westernmost region. With an area of 15,100 square kilometers and a population of 946,800 (77 per- cent urban residents), it is a comparatively small region (by the Russian stand- ard). The Region has been included in the structure of Russia’s North-Western Administrative Area. As an administrative entity, the Region includes the City of Kaliningrad (re- gional center, population 421,700), two major (‘regional-scale’) cities, three smaller urban municipalities and 13 administrative districts. Apart from Kalinin- grad, the largest cities (with populations of 20,000 to 50,000) are Sovetsk, Chernyakhovsk, Baltiysk, Gusev and Svetly. The specifics of the Kaliningrad Region’s geopolitical and geoeconomic sit- uation are determined by the following factors: Geographic situation: The Kaliningrad Region is the Russian Fed- eration’s westernmost territory, so it is situated closer to the center of Europe and to most EU countries than any other Russian territo- ry. Kaliningrad is the Russian Federation’s only transportation junction which has unfreezing seaports on the Baltic Sea and services multi-modal transportation. Geographic separateness. The Kaliningrad Region is the only ad- ministrative-territorial entity of the Russian Federation which is separated from the rest of the Russian Federation’s territory by land borders of foreign states and international waters. The Russian terri- tory closest to the Kaliningrad Region, the Pskov Region, is 368 kilometers away from it (border to border, as a crow flies). Every batch of goods produced in the Kaliningrad Region and every batch of imported goods transited through the Kaliningrad Region into Russia has been subjected to full customs control