When Russia's Kaliningrad Oblast opened its doors to the world more than a decade ago, hopes were high that the territory's proximity to Europe would lead to a trade boom. Kaliningrad would become Russia's Hong Kong. Those hopes never materialized. Far from leading the pack, Kaliningrad's economy now ranks below that of several other Russian regions. The introduction of visa restrictions by neighboring Poland and Lithuania, planned for next year, will mark a further blow for the territory. But local business leaders say there are also other, more pressing issues to be addressed if the economy is to be revived.
Kaliningrad, 4 October 2002 (RFE/RL) -- It's 10 a.m. at the Mamonovo crossing, on the Russian-Polish border.
As she does several times a week, Irina has hitchhiked her way down from the city of Kaliningrad, 50 kilometers away. She is carrying two cartons of cigarettes and a liter of vodka -- the legal "norm," as it's known to the initiated -- that she hopes to sell on the Polish side. Maybe she's carrying a little more than the norm, Irina suggests with a conspiratorial smile. She explains how it works. "You cross, you bring over a little more than the norm -- whatever you can manage. You make $10, not more. A maximum of $10 a day, if you're lucky, but it takes a lot of work," Irina says.
It takes a lot of work because the border cannot be crossed on foot. So Irina and her fellow shuttle traders have to find a driver willing to take them across -- a German or other Westerner, preferably.
Germans usually don't balk at paying off the Russian customs officers, and they get better treatment. It's simple: Pay 50 euros ($49) and your car goes right through; pay 20 euros and the wait is likely to be two to three hours; pay nothing and you go to the back of the line, which stretches for more than a kilometer to the border and isn't moving. Capitalism, Russian-style.
The drivers are mostly unemployed Poles who load up on cheap Russian gasoline and cigarettes. They can afford to wait, with whole families packed into one small car. There are periodic cries of outrage, but no one is in a hurry. They are used to the routine.
A Polish woman says: "We've been standing here, on this spot, since yesterday. On this same spot, since yesterday!" Her traveling companion, a man, adds, "Twelve hours!"
"It looks like the Polish side isn't letting anyone through," she says. "We haven't budged."
"And on this side, the gate is closed," he says.
Asked if they are doing this just for the gas, she answers: "Yeah, so we can drive to work! We've got a big tank. And there are four of us, so we're taking cigarette cartons, which we're allowed, and a liter [of vodka] -- the norm."
Irina says that at this rate, she'll be lucky to return to Kaliningrad by 10 p.m. Still, the money beats unemployment. She's found her German: a single tourist returning to Berlin in his car. But he doesn't want to pay the customs officers. "This is supposed to be Europe!" he gasps in frustration. Police officers direct him to the back of the line. Irina rolls her eyes. "An idealist," she says. They're rare, thank God. I've got to find another ride."
Irina and her Polish counterparts are the human face behind one facet of Kaliningrad's shadow economy. Thousands of people are engaged in the cigarette, gasoline. and vodka border trade -- thousands who used to work on collective farms that have been disbanded or in the region's defense enterprises that have gone bankrupt. Average salaries for manual workers in Kaliningrad are 2,000 rubles, or $65 a month, making it more attractive to trade for a profit of even $10 a day.
The introduction of visas, starting next year, will likely kill off much of this trade. The impact, especially for those in rural areas on both sides of the border, will be significant. But the border trade, say local analysts, is not the linchpin of Kaliningrad's economy. It is a symptom of deeper problems and an indication of the Russian government's failure to address more serious issues.
With the collapse of the Soviet Union in 1991, Kaliningrad -- until that point a closed region heavily dependent on the military -- faced a whole new set of opportunities and a whole new set of worries.
In 1996, the State Duma in Moscow approved legislation making Kaliningrad a "free economic zone." The law means foreign goods imported into the region as raw materials or for assembly purposes and subsequent shipment to other regions of Russia, so-called "import substitution goods," are exempt from certain tariffs. The German luxury-car manufacturer BMW, among others, has taken advantage of this regime to set up an assembly plant in the region that puts together cars for the greater Russian market.
But local businessman Aleksei Shuvalov tells RFE/RL that aside from creating a partial free-trade zone, the Russian authorities have failed to address a host of other economic issues and have invested next to nothing in Kaliningrad. "Russia is applying political pressure now to facilitate the movement of its citizens, but the region's other problems are not being taken into consideration. This region at one time was being promoted as one of Russia's leading regions, as Russia's visiting card, if you will. But the federal government does not finance any programs to develop the region. Russia invests practically nothing here," Shuvalov says.
Shuvalov, whose company imports computers and other electronic goods, says Kaliningrad's geographical isolation from the rest of Russia, with which it conducts most of its trade, puts it at a great disadvantage. Shuvalov does most of his business with a Moscow supplier, but shipping costs from the Russian capital to Kaliningrad, -- with Lithuanian customs tariffs factored in -- are prohibitively high. "It's a very serious problem. For instance, let's talk about rail transport -- both passenger and freight. The cost of a ticket from Moscow to Kaliningrad is almost identical to the cost of a ticket from Moscow to Vladivostok, a distance five to seven times greater," Shuvalov says.
Aleksei Ignatiev, of the East/West Institute, an international nongovernmental organization devoted to building democracy and free enterprise across Eastern Europe, says one solution would be for the Russian authorities to offer transport subsidies. "One of the ways to resolve this problem would be to lower transportation fees for goods going out of Kaliningrad as well as in the other direction, if they transit through Russian territory. This would be an internal matter of the Russian Federation and it should be done. It would be a hidden subsidy, in any case. So the Transportation Ministry would lose money and it would have to be compensated from the federal budget or some other source," Ignatiev says.
Several countries in the European Union currently apply a similar subsidy model to ensure their island territories or other outlying regions are not disadvantaged when it comes to transportation. So far, however, the proposal has not found enough backing in Moscow.
Of even greater concern, says Ignatiev, is the possibility that Kaliningrad could lose its special-economic-zone status, as a consequence of Russia's attempt to join the World Trade Organization (WTO). "Since the WTO is only prepared to negotiate with Russia if Russia applies a unified legal and economic regime throughout its territory, with no exceptions, the easiest step would be to close the special economic zone. This would have devastating consequences, because practically the entire economy of the district is built on this special free-trade status," Ignatiev says.
On several fronts, Kaliningrad is facing impending change and experts agree that it is going to have to adjust to new realities if it is not to become still poorer and more isolated.
Ignatiev says: "I think that the economic regime currently in place in Kaliningrad has to change significantly. If today, Kaliningrad's economy is oriented primarily toward Russia -- I'm talking about the production of 'import-substitution goods' -- then, thinking about the future, the local economy is going to have to become an export economy."
But a lot will depend on the compromise worked out by politicians in Brussels and Moscow. Ignatiev points out that next year's much-talked-about introduction of visas by Poland and Lithuania will harm everyone's interests, and is in fact, for now, unnecessary. "Lithuania's joining of the European Union does not mean that at the same time, it will become party to the Schengen agreement. Border controls between Lithuania and Latvia and Poland will remain, and Lithuania will not be empowered to issue Schengen visas. It will be able to issue only Lithuanian visas. So, objectively speaking, there will be a certain transition period. Our proposal is, during this transition period, to leave everything as it is, especially since the European Union's security will not be compromised in any way," Ignatiev says. Instead of using Kaliningrad as a pawn, Ignatiev says European and Russian politicians should look to resolve jointly a series of pressing regional issues, among them, the signing of readmission agreements on illegal refugees and the ratification of border agreements between Russia and all three Baltic states.
In time, he notes, especially if Kaliningrad's economy finally lives up to its promise, Russia and the EU may find that the visa issue will take care of itself. By that point -- this is the optimistic scenario -- gas lines at the border will have disappeared, "the norm" will be a distant memory, and those who would like to see Kaliningrad as a part of Europe will no longer be dismissed as idealists.
Kaliningrad, 4 October 2002 (RFE/RL) -- It's 10 a.m. at the Mamonovo crossing, on the Russian-Polish border.
As she does several times a week, Irina has hitchhiked her way down from the city of Kaliningrad, 50 kilometers away. She is carrying two cartons of cigarettes and a liter of vodka -- the legal "norm," as it's known to the initiated -- that she hopes to sell on the Polish side. Maybe she's carrying a little more than the norm, Irina suggests with a conspiratorial smile. She explains how it works. "You cross, you bring over a little more than the norm -- whatever you can manage. You make $10, not more. A maximum of $10 a day, if you're lucky, but it takes a lot of work," Irina says.
It takes a lot of work because the border cannot be crossed on foot. So Irina and her fellow shuttle traders have to find a driver willing to take them across -- a German or other Westerner, preferably.
Germans usually don't balk at paying off the Russian customs officers, and they get better treatment. It's simple: Pay 50 euros ($49) and your car goes right through; pay 20 euros and the wait is likely to be two to three hours; pay nothing and you go to the back of the line, which stretches for more than a kilometer to the border and isn't moving. Capitalism, Russian-style.
The drivers are mostly unemployed Poles who load up on cheap Russian gasoline and cigarettes. They can afford to wait, with whole families packed into one small car. There are periodic cries of outrage, but no one is in a hurry. They are used to the routine.
A Polish woman says: "We've been standing here, on this spot, since yesterday. On this same spot, since yesterday!" Her traveling companion, a man, adds, "Twelve hours!"
"It looks like the Polish side isn't letting anyone through," she says. "We haven't budged."
"And on this side, the gate is closed," he says.
Asked if they are doing this just for the gas, she answers: "Yeah, so we can drive to work! We've got a big tank. And there are four of us, so we're taking cigarette cartons, which we're allowed, and a liter [of vodka] -- the norm."
Irina says that at this rate, she'll be lucky to return to Kaliningrad by 10 p.m. Still, the money beats unemployment. She's found her German: a single tourist returning to Berlin in his car. But he doesn't want to pay the customs officers. "This is supposed to be Europe!" he gasps in frustration. Police officers direct him to the back of the line. Irina rolls her eyes. "An idealist," she says. They're rare, thank God. I've got to find another ride."
Irina and her Polish counterparts are the human face behind one facet of Kaliningrad's shadow economy. Thousands of people are engaged in the cigarette, gasoline. and vodka border trade -- thousands who used to work on collective farms that have been disbanded or in the region's defense enterprises that have gone bankrupt. Average salaries for manual workers in Kaliningrad are 2,000 rubles, or $65 a month, making it more attractive to trade for a profit of even $10 a day.
The introduction of visas, starting next year, will likely kill off much of this trade. The impact, especially for those in rural areas on both sides of the border, will be significant. But the border trade, say local analysts, is not the linchpin of Kaliningrad's economy. It is a symptom of deeper problems and an indication of the Russian government's failure to address more serious issues.
With the collapse of the Soviet Union in 1991, Kaliningrad -- until that point a closed region heavily dependent on the military -- faced a whole new set of opportunities and a whole new set of worries.
In 1996, the State Duma in Moscow approved legislation making Kaliningrad a "free economic zone." The law means foreign goods imported into the region as raw materials or for assembly purposes and subsequent shipment to other regions of Russia, so-called "import substitution goods," are exempt from certain tariffs. The German luxury-car manufacturer BMW, among others, has taken advantage of this regime to set up an assembly plant in the region that puts together cars for the greater Russian market.
But local businessman Aleksei Shuvalov tells RFE/RL that aside from creating a partial free-trade zone, the Russian authorities have failed to address a host of other economic issues and have invested next to nothing in Kaliningrad. "Russia is applying political pressure now to facilitate the movement of its citizens, but the region's other problems are not being taken into consideration. This region at one time was being promoted as one of Russia's leading regions, as Russia's visiting card, if you will. But the federal government does not finance any programs to develop the region. Russia invests practically nothing here," Shuvalov says.
Shuvalov, whose company imports computers and other electronic goods, says Kaliningrad's geographical isolation from the rest of Russia, with which it conducts most of its trade, puts it at a great disadvantage. Shuvalov does most of his business with a Moscow supplier, but shipping costs from the Russian capital to Kaliningrad, -- with Lithuanian customs tariffs factored in -- are prohibitively high. "It's a very serious problem. For instance, let's talk about rail transport -- both passenger and freight. The cost of a ticket from Moscow to Kaliningrad is almost identical to the cost of a ticket from Moscow to Vladivostok, a distance five to seven times greater," Shuvalov says.
Aleksei Ignatiev, of the East/West Institute, an international nongovernmental organization devoted to building democracy and free enterprise across Eastern Europe, says one solution would be for the Russian authorities to offer transport subsidies. "One of the ways to resolve this problem would be to lower transportation fees for goods going out of Kaliningrad as well as in the other direction, if they transit through Russian territory. This would be an internal matter of the Russian Federation and it should be done. It would be a hidden subsidy, in any case. So the Transportation Ministry would lose money and it would have to be compensated from the federal budget or some other source," Ignatiev says.
Several countries in the European Union currently apply a similar subsidy model to ensure their island territories or other outlying regions are not disadvantaged when it comes to transportation. So far, however, the proposal has not found enough backing in Moscow.
Of even greater concern, says Ignatiev, is the possibility that Kaliningrad could lose its special-economic-zone status, as a consequence of Russia's attempt to join the World Trade Organization (WTO). "Since the WTO is only prepared to negotiate with Russia if Russia applies a unified legal and economic regime throughout its territory, with no exceptions, the easiest step would be to close the special economic zone. This would have devastating consequences, because practically the entire economy of the district is built on this special free-trade status," Ignatiev says.
On several fronts, Kaliningrad is facing impending change and experts agree that it is going to have to adjust to new realities if it is not to become still poorer and more isolated.
Ignatiev says: "I think that the economic regime currently in place in Kaliningrad has to change significantly. If today, Kaliningrad's economy is oriented primarily toward Russia -- I'm talking about the production of 'import-substitution goods' -- then, thinking about the future, the local economy is going to have to become an export economy."
But a lot will depend on the compromise worked out by politicians in Brussels and Moscow. Ignatiev points out that next year's much-talked-about introduction of visas by Poland and Lithuania will harm everyone's interests, and is in fact, for now, unnecessary. "Lithuania's joining of the European Union does not mean that at the same time, it will become party to the Schengen agreement. Border controls between Lithuania and Latvia and Poland will remain, and Lithuania will not be empowered to issue Schengen visas. It will be able to issue only Lithuanian visas. So, objectively speaking, there will be a certain transition period. Our proposal is, during this transition period, to leave everything as it is, especially since the European Union's security will not be compromised in any way," Ignatiev says. Instead of using Kaliningrad as a pawn, Ignatiev says European and Russian politicians should look to resolve jointly a series of pressing regional issues, among them, the signing of readmission agreements on illegal refugees and the ratification of border agreements between Russia and all three Baltic states.
In time, he notes, especially if Kaliningrad's economy finally lives up to its promise, Russia and the EU may find that the visa issue will take care of itself. By that point -- this is the optimistic scenario -- gas lines at the border will have disappeared, "the norm" will be a distant memory, and those who would like to see Kaliningrad as a part of Europe will no longer be dismissed as idealists.
