KALININGRAD REGION: Economic Performance and Business Climate An overview for potential investors by Dmitry Gavrilin, EBRD, London For Swiss Ambassdor trip to Kaliningrad 1,2,3, March 2005 FOR LIMITED USE 9 December, 2004

Kaliningrad is Part of the Baltic Region _______________________________________________

Kaliningrad Region: Basic Facts ______________________________________________ The 750th anniversary of Königsberg in 2005 Exclave of Russia / semi-enclave of the EU Part of North West Federal District (total 11 regions) Territory - 15,100 sq. km (0,1% of the Russian Federation) Population - 946,800 (0,6% of the Russian Federation) Nominal GRP in appr. USD 1,100 mln. Special Economic Zone (SEZ) regime 95% of the world’s amber reserves is concentrated here The second largest Russian port on the Baltic Sea Kaliningrad is home for the Russian Federation Baltic Navy

Rapid Economic Growth After the 1998 Crisis _______________________________________________ The drop in the ruble’s exchange rate following the August, 17, 1998 crisis had a mostly favorable effect on the growth of output in the Kaliningrad Region, which outperforms many other Russian regions. Economic developments of the last three or four years are rather encouraging. Gross regional product grew 6.8% in 1999, 14.4% in 2000, 6.4% in 2001, and 10.1% in It is worth mentioning that, whereas until 1998 the Kaliningrad GRP tended to fall faster, it grew considerably faster than the country average since 1999 For the first half of 2004 the figures are even more impressive: industrial production index is 124 % to the same period of the last year, fixed capital investments has grown by 2,6 % and foreign trade turnover increased by 43 % !

Changes in Russian GDP and Kaliningrad’s GRP _______________________________________________ Changes in industrial production, % y-o-y Sources: Goskomstat (2004), Kaliningrad oblkomstat (2004)

Kaliningrad Foreign Trade in (USD, mln) _______________________________________________ Source: Kaliningrad Oblkomstat (2004)

Major Sectors and Companies _______________________________________________ Source: Kaliningrad City Hall, Economic Department The strongest sectors of the regional economy are: Fishing industry Machinery building Pulp & paper industry Food production Energy and fuel Two thirds of the industrial output of the city is produced by 7- 8 companies: OAO "Atlantrybflot", fishing & transport OAO "Baltkran", port equipment OAO "Cepruss", pulp and paper OAO "Zapryba", "SPI-RVVK", "Yantarenergo", energy provider, "Lukoil", oil company

Business Climate: Where Do we Stand ? _______________________________________________ Geopolitical situation and relatively cheap labor force have been promising Kaliningrad the future of the Hong Kong on the Baltic Sea. However, Kaliningrad’s administrative and technical infrastructure remains underdeveloped. Business environment improved considerably during the last 5 years due to –restructuring of the regional economy and effect of Special Economic Zone regime –general stabilization of the socioeconomic situation in the Russian Federation Despite obvious problems of regulatory environment, the region retains an enormous potential for growth in investments. Some of the large foreign investors have already been successful!

Corporate Kaliningrad is getting dynamic _______________________________________________ Ca. 1,400 of the enterprises were registered in the region in % of them are concentrated in Kaliningrad city. The industrial production of the Region is still determined to the great extent by a dozen of large enterprises The small businesses (About 46,000 entrepreneurs) have been successfully going on in Kaliningrad, it influences significantly the formation of the city budget The businessmen from 37 countries took part in organisation of joint ventures. The leading position on the enterprises with foreign investment held Poland- 416, Lithuania - 305, Germany, The share of foreign partners in the foundation capital of the enterprises was about 37%. Changes in federal legislation aimed at reduction of tax burden and streamlining the procedure of business establishment, economic growth in Russia since 1999 for five consequent years as well as establishing of the Special Economic Zone in Kaliningrad have led to increase in business activities including foreign investments in the region:

Foreign Direct Investment in Kaliningrad _______________________________________________ Sources: Goskomstat (2004), Kaliningrad oblkomstat (2004)

Foreign investment in Kaliningrad in USD millions _______________________________________________ Foreign investment by investing countries in 2003 Foreign investment in 2003 by type Sources: Goskomstat (2004), Kaliningrad oblkomstat (2004)

International companies in Kaliningrad _______________________________________________ The international presence in the Region is represented by small and medium businesses and covers a wide range of sectors. Most intensively foreign investments were made into trade (export of food stuffs and import of raw materials), public catering, and industry. Some examples: Source: Regional Administration ( The most significant Kaliningrad firms with the German participation: "Baltkran", a manufacturer of portal cranes and oil- producing equipment "Baltik GmbH", a construction company "Prigge Trans", road hauls "Palve", an engineering company, "Schnieder Reisen Kaliningrad", travel. Production of cars and car parts becomes a priority area of the Kaliningrad Region’s industry: On 22 Oktober 1999 “BMW AG” opened a car production line at “Avtotor” plant. KIA Motors assembles various models in Kaliningrad since 2000 General Motors’ Joint Venture is manufacturing "Hummer“ since the beginning of 2004

Future of Kaliningrad: challenges for policymakers _______________________________________________ Current policy choices are driven by the following developments: Policy making on federal level, including diversification, competitiveness debate, security Enlargement of the European Union to the East and consequent changes in the neighboring Poland and Lithuania Russia’s upcoming accession to the WTO that will lead to comply with WTO regulations dealing with free economic zones The need of clear strategy for Kaliningrad due to its special location Kaliningrad policy InternalExternal Principal - agent problem (example: national security considerations vs. openness of the region, etc) Negotiations can take long time to complete