Nataliya Smorodinskaya Kaliningrad: Baseline Tendencies of Social and Economic Development in the 2000-s

1
Nataliya SmorodinskayaKaliningrad Baseline
Tendencies of Social and Economic Development in
the 2000-s
Institute of Economy, Russian Academy of Sciences

• International Workshop
• Water Resources Management and Development
• for Economic Growth and Environmental
  Sustainability in Kaliningrad Oblast.
• Org. by SIWI, Warsaw, 15-17 March, 2010

2
Kaliningrad general facts

• Federal district North-Western. Border with
  Lithuania and Poland
• Size 75th out of 83 regions in Russia in terms
  of area (15 100 km)
• Distances to some European capitals (km)
• Vilnius (350 ) Riga (390), Warsaw (400 ), Berlin
  (600 ), Stockholm (650 ), Helsinki (660 ),
  Copenhagen (680), Oslo (850) and Moscow (1200 )
• Inhabitants 937 400
• Largest towns Kaliningrad 422 400, Sovetsk
  42 700, Chernyahovsk 41 100, Baltiysk 33 300.
  Share of urban population 77
• Main industries food (fishing), fuel (oil),
  machine building, metallurgy
• Natural resources 90 of worlds amber reserves,
  oil, brown coal, peat, rock salt, mineral water
  services

• Key economic peculiarities
• since 1991, special SEZ status (free trade and
  other exclusive federal favours)
• since 2004, unique enclave position within the EU

3
Kaliningrad as of the Russian Total

• Area 0.1
• Population 0.7
• GDP 0.5
• Enterprises 1.0
• Industrial production 0.6
• Retail trade 0.5
• Exports 0.5
• Imports 3.9
• FDI 0.6

4
KD is much more than a regional case...
It is the best magnifying glass to observe
all-Russian realities

• As free-customs enclave KD is the most open
  economy in Russia. As enclave inside the EU it
  is the most exposed locality to global
  competition
• This unique combination makes KD an amplifier
  of
• all-Russian economic trends
• all-Russian structural disbalances
• all-Russian social illnesses

5
Federal Underlying Policy Priorities towards
Kaliningrad

• Not to loose the levers of control over the
  territory in the enlarged Europe
• 1. To bound KDs life-support systems
  centripetally to mainland Russia (infrastructure,
  power supply, communication)
• - to provide free flow of traffic to local
  ports and military facilities
• - to ensure easy terms of cargo, gas and
  energy transit deliveries to KD
• To hold any extension of the Western economic
  presence in KD
• - to narrow down the EU-Russian
  cooperation on KD to the
• issues of its immediate life-support
  (transit-points), while avoiding
• discussion of its fundamental modernization
  priorities
• 3. To avoid both the growing social contrast and
  the too rapid convergence of KD with the EU
  neighbours
• for the sake of preventing a rise in local
  separatism

6
Kaliningrads specialization as the SEZ not
an exporter to EU but just an intermediary for
pushing duty-free consumer imports to Russia
Imports were sky-rocketing far above GRP and all
trade flows Sales to RF in RUR just followed
imports Exports proper were almost flat
7

• KDs import-led pattern of growth in the
• booming 2000-s Imports reached unrivalled
  levels of
• 30-50 above GRP. Exports kept 60-65 below
  GRP (and started to grow only after 2004, due to
  Russian oil transit flows)

Exports proper (cleared from transit oil) max
30 Manufacturing exports (excl. local oil)
max 11 This was incomparable with 130-150 for
imports, also mostly manufacturing
GRP, rate of growth,
8
Kaliningrad GRP growth rates as compared to
Russia and Baltic states
9
For many years KD has been operating under a
hidden state of default, with the growing trade
and fiscal deficits covered from the federal
budget. The higher were the GRP growth rates, the
larger were the shortages
By 2006, KDs actual deficit (as cleared from
transit flows) amounted to US 4bn, or 92 of
GRP. If not growing oil exports, it would have
exceeded GRP by a quarter
10

Kaliningrads import-led industrial growth is
purely statistical

• Deliveries from SEZ to Russia (cars, TV, etc.)
  are formed for 70-85 by
• imported components, but statistically registered
  in value as KD industrial
• output
• KD macro-pathologies may enter the Guinness Book
  of Records
• To be competitive at remote Russian markets,
  import-processing firms (... of industrial
  output) regularly avoid or evade taxes
• KD runs a second economy in the shadow (95 of
  GRP)
• Official economy grows under decreasing level of
  private investment and tax collection
• budget rests on oil industry as the largest
  taxpayer (it makes only 9-11 of industrial
  output, but 70-80 of net KDs revenue)
• KD faces a dope dependence of business on state
  money, and of public sector, on external aid
• Vicious Circle of Economic Growth
• Shortages - federal subsidies higher growth
  more shortages
• - more federal assistance

11
To make an economic advance, KD should rely on
three basic assets

• Rich natural landscape, advantageous
  geographical location in the centre of Europe,
  and unique cultural and historical heritage
• Dynamic neighbourhood of rapidly growing Baltic
  states, geographical proximity to Scandinavian
  countries (technological leaders of the EU), and
  a natural chance to get linked to numerous
  infrastructural and communication networks in the
  BSR
• High market adaptability of the local population
  due to its wide-range engagement in the
  small-business and individual entrepreneurial
  activities under years of the SEZ regime. Today,
  this experience could be renewed and
  substantiated through developing flexible and
  innovative forms of economic activity
• Currently these assets have either a negative
  value or no value at all.
• But they will get their natural
  investment attractiveness once KDs economy
  starts moving towards integration into Europe

12
Amending federal incentives for Kaliningrad
ideology of the 2006 Law on SEZ

• Three main federal motives to revise the old Law
  on SEZ
• to stop shadow leakage of federal money into
  local private pockets and reorient KD to European
  export markets
• to prevent KD from rapid lagging behind its
  neighbours as new EU-members
• to bring the SEZ in compliance with
  international standards applied in WTO
• In late 2005, Boos was appointed the
  governor just to clear out KD. But the new Law
  appeared to be a compromise between rational
  economic reasons and alarmist security concerns.
• The Law prioritized
• Russian investment inflow to KD instead of
  foreign
• Big Russian newcomers to KD (to become
  locomotives of new industrial clusters) instead
  of local SME
• Building large industrial plants instead of
  stimulating new economy

13
The 2006 Law on SEZ in Kaliningrad benefits for
Old SEZ Residents

• Old SEZ residents based on customs favours
  granted by the 1996 Law on SEZ
• firms registered in KD before April 2006, may use
  their customs benefits
• imported foreign goods are exempted from customs
  duties and taxes
• goods delivered to other RF regions are exempted
  from customs duties if
• - commodity classification code has changed
  at the level of first
• four digits
• - share of the added value has reached at
  least 30
• Favours for old residents will be in force
  till the end of March 2016 (for 10 years)

14
The 2006 Law on SEZ in Kaliningrad benefits for
New SEZ Residents

• New SEZ residents based on tax favours introduced
  by the 2006 Law on SEZ
• New firms conducting a capital investment at
  least 150 mn RUR (USD 5.3 mn) in the regions
  industrial sector over 3 years may use the tax
  benefits
• Tax benefits offered for an investor
• corporate income tax and property tax are 0 for
  the first 6 years and reduced by 50 for the
  7-12 years after the investment
• The 2006 Law will be in force till the end of
  March 2031
• (for 25 years)

15
The new Law on SEZ hasnt changed KDs pattern of
growth but rather enhanced its ability to
generate negative value added

• no large capital came to KD, rather local
  firms re-registered as new SEZ residents (56 as
  by 2009)
• a bulk of small firms were deprived of any
  SEZ favours and had ruined
• no new export facilities, rather assembling
  firms established daughters to make double use of
  both customs and tax favours
• KD economic achievements by 2007-2008
• Imports rise by 1bn a year, to reach 6.6 bn
  in 2008. KD has the largest in RF imports per
  capita and per unit of GDP, with China as the
  largest supplier.
• VA of imported goods is more than twice as high
  as VA of exported. In 2008,
• trade deficit ( 5.8 bn) was 30 above GRP
  (4.4 bn)
• skyrocketing growth in import-processing (food,
  cars, TV sets) and, therefore, in
• manufacturing output (a 2.6 fold increase
  y-o-y) under miserable investment of
• assembling firms (0.7 of the total)

16
Now the crisis (globalization) has started to
wash away Kaliningrads pattern of growth

• In the booming 2000-s
• 2000 16 (RF -10)
• 2002 10 (RF 5)
• 2005 - 13 (RF 6)
• During crisis years
• 2008 - 9.1 (finalized)
• 2009 - 13.9
• (RF - 7.9 )

GDP growth rates in KD and Russia
17
KDs industrial production as compared to
St-Petersburg and Russia as a whole

• Until the start of the crisis assembly industries
  were making KD the leader but in 2008 KD sharply
  slowed (2.5) and in 2009, went down (- 11.8,
  and -- 18 for manufacturing) due to a fall in
  consumer demand in mainland Russia.

18
Kaliningrad inflation rate ()
2000 2002 2004 2006 2007 2008
Producer prices in KD 27.7 23.8 8.8 0.5 -2.0 -2.0
Consumer prices in KD 17.5 9.8 11.7 7.9 11.2 15.2
Consumer prices in RF 20.2 15.1 11.7 9.7 9.0 14.0
For reference , 2008 Lithuania 10.9,
Poland 4.2, Estonia 10.4 In 2009,
CPI in KD reached 16.3 by official local
estimation
19
Kaliningrad calamities as of 2009

• - 14.8 for index of industrial production , -
  13.9 for rate of GRP
• Construction has fallen by 64
• Like in Russia as a whole, a sharp rise of
  tariffs in HC services
• (production and distribution of electricity,
  gas and water)
• Small business swept away by major firms
• Unemployment rate 11.6 (RF- 8.2). Each
  third-forth is dismissed or under the risk of
  dismission
• Good news the import-processing firms have
  started to look out for export markets beyond
  Russia But they have too littlel to offer.

20
General Tendencies accompanying the economic
crisis in Russia (since autumn 2008)

• 1. The crisis has so far reinforced
  existing tendencies
• state control over the economy
• oil-oriented structure of the economy,
• the ruling elite's economic expansion at the
  expense of private businesses,
• the preservation of political power and
  status-quo
• 2. In 2010, social protests in Russia are
  becoming increasingly political
• Protests staged in Kaliningrad
  (10,000-12,000 people) were followed in February
  2010 by similar demonstrations in Angarsk,
  Irkutsk (4000) and Samara (4000).
• 3. Further monopolization of the Russian economy
• A new wave of accelerated redistribution of
  assets in key sectors. A section of the political
  elite which using the crisis to take over
  selected strategic assets in their private
  interests.
• 4. Macroeconomic trap how to secure social
  stability under falling federal finance

21
Key concerns of Mr. Boos as a governor show that
Kaliningrad is a mirror of Russia

• 1. Economic concerns
• How to ensure the local major businesses (Avtotor
  the first) a sufficient volume of federal favours
  for the future, to successfully get round the
  crisis challenges (the growing unemployment is
  not the last problem )?
• How to save the budget? Under the existing set
  of federal guidelines and incentives for KD, the
  local community is objectively unable to improve
  KDs economic structure and social situation.
  Just like his predecessors, Boos is doomed to go
  on seeking additional rents, money and benefits
  from the federal centre
• 2. Political concerns
• to strictly follow Moscow guidelines and to
  preserve the existing level of administrative
  power
• to keep KD under control through authoritarian
  style of ruling and toughening verticals of
  power even more than on the federal level.
• By 2009, local Duma has become completely
  subordinated to Boos. MPs have lost any
• independent say on Governors activities and the
  question of state-property redistribution.

22
Risks and limitations of the Project for
reforming KD water system management

• 1. Full dependence of the regional authorities
  upon Moscow
• 2. Communities of remote regions are just a tool
  in Moscows strategic games and commercially
  beneficial foreign contracts
• 3. For Moscow, ecology issues are a third-rate
  priority as compared to good bargains or social
  stability at separate enterprises
• 4. General moods of political and business
  elites, both federal and regional, to preserve
  the status-quo as long as possible (instead of
  speeding modernization)
• 5. Macroeconomic trap in Russia and its regions,
  growing fiscal deficits
• However, this discouraging situation
  looks encouraging for searching a
  non-traditional, creative approaches to the
  Project in a post-modern style

23
To be continued

• Thank you for attention!

24
(No Transcript)
25
(No Transcript)
26
(No Transcript)
27
(No Transcript)
28
(No Transcript)
29
(No Transcript)
30
(No Transcript)
31
(No Transcript)
32
(No Transcript)
33
(No Transcript)
34
(No Transcript)
35
(No Transcript)