Main findings

The conclusions are limited to a concise bullet-point summary of the main findings.

1) 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 relations. The economic crisis of the 1990s was characterised on the one hand by a sharp decline in the relative share of commodities production (manufacturing and mining, agriculture, construction and forestry) and on the other hand by continuous growth in the relative share of services in the GRP. As a result, Kaliningrad’s GRP structure transformed within a decade and began to resemble the typical structures of more developed states. Yet this resemblance should not mislead observers because it was reached by a sharp fall in industrial production. The economic transition of the local economy can be split into two clearly distinguishable periods, 1991–98 and 1999 onwards. After the first period, when industry and agriculture collapsed far below average Russian levels, the second period of rapid industrial growth began. The growth was based on the SEZ regime, combined with a strong overall rise in consumption in Russia. Despite robust industrial growth being an engine for regional growth, it did not result in a relative re-industrialisation. The shares held by various sectors in Kaliningrad’s GRP have generally remained stable. Industrial growth triggered subsequent growth in transportation, trade, construction and services.

2) The current state of Kaliningrad’s industry is characterised by a clear division into two groups, firms that are export-oriented and those that focus on import substitution. The first group is represented by the extraction of oil and by the wood, pulp and paper sector (with some reservations, as some of the latter sector’s production is aimed at the Russian market, too). The second group comprises the food-processing, machine-building and furniture industries, which sell their output mainly on the Russian market. Import-substitution industries are experiencing dynamic growth, whereas export-oriented ones are growing slowly or stagnating. Traditional exports possess little potential for growth.

An analysis of the industrial structure leads to the conclusion that the region has managed to develop industries in which it was already specialised during the Soviet era. At the same time, traditional sectors are undergoing profound qualitative changes and switching to new products.

The SEZ regime has played a crucial role in the recent industrial development of the Kaliningrad region. Regional industry reorganised itself over the last decade to take full advantage of the SEZ preferences. To a great extent the leading industries are based on these preferences, such that they might not be able to survive if the preferences were taken away.

3) An analysis of Kaliningrad’s trade flows with mainland Russia and the region’s foreign trade leads to the following conclusions:

• The degree of trade openness is extremely high, with total trade volumes exceeding GRP by a factor of 2.7.

• Trade with Russia plays a significant role in the trade balance of the Kaliningrad oblast, making up more than 40% of overall trade flows. Another 40% of trade is carried out with the enlarged EU.

• The oblast is the more developed trade partner in its trade with mainland Russia, buying fuels and raw materials, and selling processed goods. Yet the growth of trade primarily stems from the SEZ and the development of import-substitution industries oriented towards the Russian market.

4) Total trade reveals high IIT values. Although comparative advantages based on basic factor endowments may still be relevant to explain Kaliningrad’s orientation, their explanatory power is limited. We need to move away from basic factors to consider other factors, resources and assets, notably the legal framework in which Kaliningrad’s trade takes place. At the same time, most of the sectors that feature prominently in the region’s foreign trade have low IIT values. Here, the explanatory power of comparative advantage is rather strong and still highly relevant for Kaliningrad’s specialisation.

5) Overall, Kaliningrad possesses a comparative advantage in labour-intensive products in relation to the EU-15 and the CEECs, but not with regard to Russia. The region is comparatively disadvantaged in capital-intensive goods. It benefits from low energy costs as a factor of production compared with the EU, but it is disadvantaged compared with mainland Russia. Use of low-cost and efficient labour, along with external factors, has played an important role in shaping the current specialisation of the regional economy.

6) Our exploration of enclave economies provides a comprehensive set of pivotal benchmarks on the issue of Kaliningrad’s specialisation:

• Enclaves are usually economically disadvantaged in comparison with other regions of the same state.

• Enclaves have a high degree of economic vulnerability. Their vulnerability comes from not only their small size and insularity (enclavity), but also their detachment (exclavity) from the mainland.

• Since enclaves are small in territory and population, their economic potential consequently tends to be limited. Although Kaliningrad is one of the largest enclaves in the world, its local market and production base are small.

• Exclavity impedes both exports to foreign countries and outflows to the mainland.

From the point of view of economic geography, the surrounding state could form a convenient proximity market. Yet, numerous tariff and non-tariff barriers make the enclave’s products uncompetitive against the surrounding state’s own producers and protect this market. Furthermore, the sheer distance and cost of transit complicate access to the potential market of the mainland state.

• Double peripherality is a natural consequence of an enclave’s geographical location relative to the economic geography of the mainland and the surrounding state.

• Economic openness is a prerequisite for an enclave’s prosperity. There is a straightforward correlation between the relative incomes per capita in the MES triangle and the presence or absence of a regime of economic openness. All enclaves with incomes either higher than or equal to the mainland’s average enjoy a regime of economic openness towards the outside world. Conversely, the majority of enclaves with incomes inferior to the mainland’s average are closed to the outside world.

• Inherent economic disadvantages combined with increased vulnerability explain why various kinds of special economic regimes are so often established in enclaves.

A special economic regime can make an enclave economically viable in the situation wherein its natural assets are not sufficient for its survival. Two approaches can be employed, the compensatory approach (compensation for the

detachment from the mainland) and the liberal approach (liberalisation towards the surrounding state and the rest of the world).

• Successful enclaves tend to develop a multi-vectored orientation, avoiding a concentration of trade and economic connection exclusively with the mainland.

7) A successful economic strategy should be able to achieve two results simultaneously.

First, it should allow exclave costs to be minimised. Second, a successful strategy should take advantage of available resources. In other words, it should make Kaliningrad’s enclavity a resource in itself (given its proximity to the EU market). The best strategies induce an economic orientation that is well adapted to the specific conditions of the enclave, simultaneously minimising costs and valorising resources. The issues of international and interregional economic orientation in the specific case of Kaliningrad should be viewed as inseparable.

8) An optimal orientation would be situated within a high development trajectory supplemented by the building-up of new competitive advantages in selected economic sectors. It would combine both the Russian market and the export market (primarily to the EU). Furthermore, it should minimise exclave costs and valorise resources so that enclave-specific opportunities outweigh enclave-specific costs.

This should be achieved through

• a regime of economic openness to enable multi-vector specialisation and an optimal place in the EU–Russian trade interface;

• a valorisation of the geographical location as a way to promote close interaction with the EU economy;

• a concentration on high added-value activities to counteract enclave-specific transaction costs;

• the decreasing transferability of assets by moving towards specific assets, anchored in the territory; and

• a reduction in the total transport-intensity of production.

9) An optimal distribution of Kaliningrad’s GRP could be outlined as below.

• The share of agriculture in the GRP is already relatively low and is unlikely to increase in the future. Overall, with a few exceptions a specialisation in agricultural products is unjustified for the Kaliningrad region.

• Industrial manufacturing is able to remain a stronghold of the regional economy and an engine for economic development. It has to move towards higher added-value activities and sectors with a greater degree of territoriality.

• Despite the rise in the share of services in the GRP, their potential is underused.

Services, ranging from transport to tourism, should take a larger share in the GRP.

Transport, tourism and ‘clean gate’-types of advanced services in the field of trade intermediation are fully compatible with a high development trajectory. They also fit perfectly into an ideal ‘enclave’ specialisation.

10) The issue of Kaliningrad’s specialisation necessarily has to be seen within the framework of Russian–EU economic interaction, as there is no viable economic alternative for Kaliningrad. More specifically,

a) The future of Kaliningrad’s regional economy and its specialisation are profoundly connected to Russian–EU relations and the prospects for their economic integration.

b) Kaliningrad’s specialisation is dependent on the contents and dynamics of trade flows between Russia and the EU.

The current state of Russian–EU relations is not favourable to the economic development of the Kaliningrad region. The lack of economic openness, high barriers to the EU market and high transaction costs in trade with the Russian regions (partly because of EU enlargement) impede the transition to an advanced and less vulnerable economy. More comprehensive economic integration would unlock the potential of the region. Regulatory convergence, the lowering of TBTs and the facilitation of the movement of people are, in this respect, of no less importance than more traditional trade integration. These conditions have to be supplemented by political stability and good neighbourly relations based on trust and understanding. Economic integration between the partners would entail a major positive change for the Kaliningrad enclave. It would allow Kaliningrad to achieve a multi-vectored orientation, producing for both the Russian and the EU markets and thus prevent a heavy and unhealthy dependence on the Russian market alone. It would effectively counteract the drawbacks of the enclave’s small size. The most important consequence of the prospective EU–Russian economic integration is that it would help valorise the advantage of the Kaliningrad region, which consists in its proximity to the EU market. Strained EU–Russian relations would seriously obstruct economic development and make Kaliningrad more dependent on Russian federal subsidies.

6.2 Policy issues: A liberal and positive approach