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Kaliningrad Enclaves and Economic Integration Kaliningrad Enclaves and Economic Integration Evgeny Vinokurov Special Report March 2007 In writing this report, the author is most indebted to Ivan Sergeevich Korolev and Ivan Samson, who were mentors through several years of studying the Kaliningrad economy. The author is grateful to all those, both in Russia and the EU, who commented on the manuscript or on separate chapters at various stages of its progress, namely Michael Emerson, Timur Gareev, Alexey Ignatyev, David Kernohan, Vladimir Kuzin and Artur Usanov. The views expressed are attributable only to the author in a personal capacity and do not necessarily reflect those of CEPS or any other institution with which the author is associated. ISBN-13: 978-92-9079-698-5 Available for free downloading from the CEPS website (http://www.ceps.be) © Copyright 2007, Evgeny Vinokurov Kaliningrad Enclaves and Economic Integration * Evgeny Vinokurov Abstract When the Soviet Union broke up, Kaliningrad suddenly found itself separated from mainland Russia by new frontiers. Hardly any other Russian region has been hit as hard by the economic disruption as Kaliningrad. The geographical situation of the region meant that it was more highly exposed to the destabilising effects of post-communist economic transformation. Since then, a dramatic trade opening has occurred, and regional trade and production have undergone profound changes. Kaliningrad has experienced a major shift in its economic orientation towards the tertiary sector and a new industrial orientation based on its position as an intermediary in EU–Russian trade. In short, that is what this report is about: the present and future economic development of this Russian enclave during its integration into the world economy, its place in the international division of labour and in the Russian–EU economic interface. The major phenomenon relative to the economic development of the region is its enclave status. The report explores the specific features of enclave economies and specifically those of Kaliningrad. It argues that economic openness is a prerequisite for an enclave’s prosperity and the enclave should develop a multi-vectored orientation towards both the Russian market and the EU market, complementing industrial specialisation targeting the mainland with new features. Moreover, as economic integration – with the surrounding state or on a non- discriminatory basis with the rest of the world – has significant positive effects on enclaves, the future of Kaliningrad’s regional economy and its specialisation is profoundly connected to Russian–EU relations and the prospects for their economic cooperation. ∗ Evgeny Vinokurov is a Senior Analyst, Strategy and Research Department, Eurasian Development Bank, Almaty, Kazakhstan. Contents Introduction: Kaliningrad in the conditions of enclavity ........................................................1 Chapter 1. The limitations and opportunities for an enclave’s economy...............................7 1.1 The conceptual framework for a theory of enclaves: Definitions, typology and the mainland–enclave–surrounding state triangle...............................................................7 1.2 Economic features of enclaves......................................................................................9 1.3 Openness as a condition of an enclave’s economic development...............................14 1.4 East Prussia as a German exclave (1920-39) and as a predecessor of Kaliningrad....22 1.5 The theory of enclaves and Kaliningrad .....................................................................25 1.6 Kaliningrad’s society today ........................................................................................29 Chapter 2. Structural characteristics of economic transition ...............................................31 2.1 Structural shifts in the distribution of GRP.................................................................31 2.2 Shifts in employment ..................................................................................................33 2.3 Transformation of industry .........................................................................................34 2.4 Common misunderstandings about investment dynamics ..........................................37 2.5 The 1998 monetary crisis and Kaliningrad’s dependence on Russian economic trends...........................................................................................................................41 2.6 The high share of the shadow economy......................................................................44 2.7 Kaliningrad in comparison..........................................................................................47 Chapter 3. Foreign trade and trade with mainland Russia: An intermediate position between Russia and the EU...................................................................................50 3.1 Commodities and the geographical structure of foreign trade....................................50 3.2 Strong ties to the Russian mainland............................................................................56 3.3 An undeveloped trade in services ...............................................................................58 3.4 Trade forecasts............................................................................................................59 3.5 A high degree of trade openness as a consequence of trade intermediation...............61 Chapter 4. Factors of regional competitiveness......................................................................64 4.1 Introduction.................................................................................................................64 4.2 Measurement of comparative advantages, international specialisation and intra- industry trade ..............................................................................................................65 4.3 Kaliningrad’s factors of production............................................................................72 4.4 Domestic policy: The SEZ of Kaliningrad as a springboard to the Russian market...79 4.5 Exclave costs...............................................................................................................83 4.6 Cargo transit, passenger transit and border trading.....................................................85 4.7 A typology of the competitive factors of regions: From generic resources to specific assets ...........................................................................................................................87 4.8 Conclusions.................................................................................................................92 Chapter 5. Regional specialisation, optimal development trajectory and distribution of GRP: A synthesis ...................................................................................................95 5.1 A review of development strategies............................................................................95 5.2 An optimal development strategy ...............................................................................98 5.3 Selected branches of the regional economy: What is their place in regional specialisation in the long run?...................................................................................108 Chapter 6. Main findings and policy consequences .............................................................122 6.1 Main findings............................................................................................................122 6.2 Policy issues: A liberal and positive approach..........................................................125 Glossary of Abbreviations ......................................................................................................131 Bibliography ............................................................................................................................132 Appendix I. Statistics ..............................................................................................................142 Appendix II. Principal typology of enclaves and exclaves..................................................148 List of Figures Figure 1.1 The MES triangle......................................................................................................... 9 Figure 1.2 East Prussia and the Polish Corridor, 1920–39.......................................................... 23 Figure 1.3 Main actors and mechanisms in Kaliningrad’s foreign trade regime ........................ 28 Figure 2.1 Russia’s GDP and Kaliningrad’s GRP in 1995–2006, annual changes (in %).......... 31 Figure 2.2 Share of industries in the total industrial output, 1990–2003 .................................... 34 Figure 2.3 Industrial production: The 1990s crisis and post-1999 rebound (in % to the 1990s, i.e. 1990=100%)................................................................................................................... 35 Figure 2.4 Consumption figures in Russia and the volume of goods delivered from Kaliningrad to mainland Russia, growth (in %)................................................................... 43 Figure 2.5 Correlation of Kaliningrad’s outflows to mainland Russia and total Russian imports, 2000–04 ................................................................................................................. 43 Figure 3.1 Kaliningrad oblast foreign trade flows, 1992–2005 (KRCS methodology) ($ mn)..
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