Exclave's future hangs in air

KALININGRAD

A pristine BMW plant tucked in the corner of a Soviet-era naval base is proof to a few optimists that Russia's struggling Baltic exclave of Kaliningrad can shed its shady reputation and become Moscow's bridge to Europe.

"This factory runs like a Swiss watch - tick-tock, tick-tock - every day. It just takes training," boasted Rolf Bottner, the German luxury car maker's local representative.

But as sleek and shiny as the production line is, only 10 cars roll off the lines daily, all of which are sent to Moscow for sale.

Amid the post-Soviet chaos that reigns in the exclave, the plant is a model of reliability the regional administration has seized upon ahead of May 1, 2004, when Poland and Lithuania - Kaliningrad's neighbors - are to join the European Union.

The administration is eager to counter recent European fears that the region's crime and corruption problems could spill into the enlarged EU.

"Everything here was oriented toward the military, but now Kaliningrad can be a bridge for the integration of Europe and Russia," said Alexander Koretsky, the administration's spokesman.

The depth of the exclave's difficulties is evident from Kaliningrad city's run-down housing and dilapidated infrastructure, which have effaced the grandeur of what was the splendid Prussian capital of Konigsberg until World War II, when Germany lost the region to the Soviet Union.

Salaries average less than $100 per month, while per capita productivity lags behind the rest of northwestern Russia and the EU candidates, a study by Denmark's Foreign Ministry showed recently.

Particularly worrying is that foreign investment in the enclave stagnated in 2002 at a little under the 2001 level of $24 million.

The administration attributes this to uncertainty.

over future border-crossing arrangements once Lithuania and Poland end visa-free travel for Russians.

Despite its problems the exclave has many well-run small- and medium-sized enterprises, says Susanne Decker, chief operating officer at KMB, a bank owned mainly by Western governments that aims to foster small businesses in Russia.

KMB has leant an average of $5,000 each to 225 small businesses since opening its Kaliningrad office last spring.

"We have to watch out, but (Kaliningraders) are very open minded, you see a higher level of education in business terms," Decker said.

The region's bread-winner, however, is oil.

Observers are divided as to the role played by LUKoil, for whom Kaliningrad is the major tax payer. Its newest plans to extract oil from a platform in the Baltic Sea close to the unique Curonian Spit, a UNESCO World Heritage site, have drawn condemnation from Lithuania and are opposed by a majority in the region's legislature, Vladimir Yozhikov, a lawmaker, said.

"Independent environmental experts have not been asked to give an opinion, and we think there's a big risk. Tourism has great prospects here. It would be a disaster if something went wrong," Yozhikov said.

With all sides expressing a will to solve the ever-present transit issue, a greater problem may be that investors are unimpressed by the exclave's status as Russia's low-tax "special economic zone."

"It is extremely important for the administration to change. There is a lack of fiscal accountability and transparency and virtually no demand for good practices — good practices are often punished," says Jesper Pedersen, an EU-appointed adviser to the administration.

Part of the problem is a fear in Moscow that economic success could breed separatist sentiment in the exclave, said Igor Rostov, general director of the privately owned broadcast company Kaskad.

He accused Moscow of dragging its feet over a new law intended to govern special economic zones on which much of the region's success hinges.

As a result, potential investors cannot be sure of receiving the kind of treatment enjoyed by Avtotor, the Moscow-based company which owns the BMW assembly plant and also builds vehicles for South Korea's KIA.

"Moscow does not have a policy — foreign businesses need stability and predictability, not just low taxes," Rostov said. "The region's status is up in the air."

In the 1990s the coastal town of Zelenogradsk was popular among nostalgic Germans eager to revisit what was an elegant resort (known as Crantz) renowned for its elaborate Jugendstil architecture and health spas. But the buildings are now collapsing, the streets are potholed, and most work is in the gray economy.

The lesson is clear for Yelena Pozdnjakova, director of the town's recently opened museum.

The exclave will only recover if its inhabitants start to understand and take pride in the region which most of them arrived in during the Soviet Union's postwar expansion, she says.

"For Kaliningraders history begins in 1945. That's why they graffiti the buildings and everything is broken. People only know about buying and selling," Pozdnjakova said. "We have to explain history honestly, we have to change things, our laws and politics, for ourselves."