VILNIUS - Numerous reports have surfaced in recent weeks that the investment climate in the Kaliningrad Oblast, Russia's isolated exclave, is about to take a turn for the worse. Moscow is apparently in the process of amending its law on free economic zones, which regulates special tax regimes such as Kaliningrad, and according to specialists, the result might not be pretty.
Raimundas Lopata, director of Vilnius University's Institute of International Relations and Political Sciences, said last week that Russia was effectively trying to push Lithuanian investors out of the exclave.
"Lithuanian capital in the Kaliningrad region accounts for 21 percent of foreign investment in the area. Currently, Russia is revising its law on the special free economic zone in the Kaliningrad region, and there are several disturbing tendencies there. Apparently, they will try to simply kick Lithuanian business out of the region," he told a round-table conference on Feb. 18.
In his opinion, the draft law would change the "rules of the game" for foreign investors and allow Moscow and St. Petersburg capital to step in instead. "The funny thing is that investors are given a 10-year transitional period to adapt to the new rules of the game, when in fact the terms are more or less set up so that they actually disregard existing investors in the Kaliningrad region," he explained. According to the proposed amendments, the free economic zone and customs privileges that are part of the current law will only be available to those that invest some 150 million rubles ($5.5 million), he said.
The political scientist said President Vladimir Putin ordered that a debate over the draft law be commenced at Russia's State Duma in early March.
In short, if this draft law is passed, Lithuanian investors might withdraw from the region entirely or move their business to other parts of Russia, Lopata said.
More than 600 Lithuanian-owned companies currently operate on the free economic zone, but only a few of them have made such large investments. Those due are lured by the low value-added tax and cheap labor that can be an attractive springboard for "exporting" to the lucrative Russian market. Several Lithuanian clothing, furniture and confectionery firms have moved part of their production to Kaliningrad, the most renowned of which is Snaige, the Alytus-based refrigerator producer which opened a $25 million plant in the exclave. Other investors include the Viciunai fish processor, confectioner Naujoji Ruta and grain processor Kretingos Grudai, which owns two poultry firms.
In the first half of 2004 Lithuanian businesses invested a total of $4.7 million into the region.
But the lack of clarity in the tax regimen has stunted the growth of many other companies.
"Lithuanian businesspeople who are working here are worried as no one can say today whether the tax privileges will remain in place tomorrow. You need to know this to plan your company's activities," Donatas Butkus, economic attache at the Consulate General in Kaliningrad, was recently quoted as saying.
The law on Kaliningrad's free economic zone came into force in 1996 as a way of compensating local business for the "surplus charge" they face in delivering their goods to the rest of Russia through Lithuanian territory. But the law was both abused and disregarded by the regional administration at the time, leading many Moscow lawmakers to call for changes. Instead of stimulating value-added services and production, the region of 1 million residents became a haven of used-car sales and cigarette smuggling.
When Putin came to power in 2000, he promised to pay particularly close attention to the region, but the law has largely remained in limbo over the past five years. Many in Moscow believe the law needs to be amended to prevent the spread of pocket Lithuanian firms that in reality invest very little money 's if any at all 's into the local economy.
