Kaliningrad: Trade & Investment Gateway by Gordon Feller Excerpts from A New Trade and Investment Gateway into the former USSR for the West?: The Unusual Post-Cold War Status of the Baltic Port of Kaliningrad copyright by Gordon Feller, President, Integrated Strategies of San Rafael, California, a trading and investment advisor to Western firms working in Kaliningrad; publisher of "Russian Business News" 870 Estancia; San Rafael, CA 94903-USA; tel: 4154914233; fax: 4154921414 email: 3698877@MCImail.com. Reprinted with permission. Kaliningrad is best known as the port of the heavily militarized Russian Oblast (Region) which, after the breakup of the former USSR, found itself an enclave nestled between Poland and Lithuania. Since the end of the Cold War much has changed, including Kaliningrad's relations with the West. Consider just one particular: In the past year a strong sealane relationship has developed between the St. Lawrence Seaway Corporation and Kaliningrad. A high level delegation from Kaliningrad visited Seaway executives in June 1994 as part of the on-going progression of the relationship. Many thousands of tons of commercial cargo have moved between Kaliningrad and the Seaway in the last year, and not only from East to West. Likewise, discussions are underway between Kaliningrad Seaport Authority (responsible for the management and operations of all five ports in Kaliningrad Oblast) and the South Carolina State Ports Authority about a major new container port project in the region. The population of one million is divided equally between the city of Kaliningrad and the oblast. Its approximately 15,000 square kilometers (5,600 Square miles) is larger than the U.S. state of Connecticut. The recent sudden and dramatic changes in the former Soviet Union have offered Kaliningrad an unprecedented opportunity to shape its own economic destiny. Two significant events in late 1991 have contributed to this opportunity: ·Helmut Kohl publicly declared to Boris Yeltsin in Bonn that Russia's "ownership" rights over the former German area are not in question, resolving any potential issue of international sovereignty; and · In September, the Russian Council of Ministers enacted a special legal framework to designate Kaliningrad as the largest Free Economic Zone in the world. Kaliningrad is well equipped to serve as the Gateway to the Russian heartland. With a well established structure of roads, rail lines, ports, airports and other municipal services, Kaliningrad has the potential to produce some of the most attractive foreign investments available in Russia. The memory of Konigsberg as a world trading center is still fresh i the minds of many Europeans, and it is not difficult to envision the city's return to a viable and strategic economic marketplace. Kaliningrad's economic infrastructure is a real asset. It includes: · Three coastal ports, including an active river port, a deep water naval seaport now being converted for commercialization, and a merchant seaport; · The only European-gauge railway system in all of Russia; · An existing light railway system operating throughout the city for public transportation; · A PTT with a basic telecommunications infrastructure ready and eager for conversion; · A group of reform-oriented leaders working closely with the region's military commanders; · An educated workforce offering the comparative advantage of wage rates lower than Poland; · An ethnically cohesive group of one million Russians separated from the rest of the Russian Federation.   The Yantar Free Economic Zone In September of 1991, Boris Yeltsin and the Russian Council of Ministers enacted legislation to create the Yantar Free Economic Zone in Kaliningrad. Yantar means amber in Russian, and the name was chosen because Kaliningrad is the world's amber capital. The legislation grants an unusually high degree of economic autonomy to the region. Kaliningrad is one of a number of free economic zones planned in Russia. At least two are already in operation and at least twelve more will be activated in the near future. What distinguishes Kaliningrad from all others is its location. It has the opportunity to become the most lucrative trading zone in all of Russia. Kaliningrad will be the only FEZ in the country with complete control of its borders, which makes possible special customs and tax policies advantageous to foreign investors. No other zone will stand as a Russian enclave surrounded by other countries. Kaliningrad is a progressive region of Russia actively creating foreign economic ties with the West. The FEZ is the result of a two year study based on careful analysis of other free trade zone programs around the world. Its authors are recognized for their contributions to the concept of free zones in Russia. They now play highly responsible roles in the government, providing continuity between the conception of the free trade zone and its implementation. The Zone legislation provides many key benefits for non Russian investors, traders and producers, including: · A five year tax holiday for firms with a minimum 30% foreign investment; · A subsequent five year negotiated tax rate with a` 16% maximum; · Full rights to reparation of foreign capital; · Customs duty exemptions for goods with at least 30% local value; and · Liberal rules regarding labour contracts, retail trade in hard currency and banking rights. Kaliningrad is implementing a system allowing businesses to register for the program with a single permit, rather than a long series of local, oblast and Russian certifications. Further local control is granted to approve all investments of less than US$50MM in foreign capital. An example of the planning for the Yantar FEZ is in customs. The former 12 person customs office that served the entire oblast has evolved into a Customs Service of over 400 employees being trained for international trade. When the FEZ is fully implemented, over 600 employees will operate in ten Customs Posts, three on the border with Poland and two with Lithuania. Indications are strong that the Kaliningrad Regional Customs Office will have a high degree of independence from Russia's central customs bureaucracy. The Yantar FEZ program is a relatively simple and straightforward tax incentive program that is positioned to provide benefits competitive with all other major free zones. The commercial opportunities of the Zone are similar to that of Hong Kong. Qualifying firms can negotiate their advantages. For example the Kaliningrad maximum income tax rate is 16%, compared to Hong Kong's 17%, and all rates and time frames can be negotiated. Kaliningrad has three indigenous and growing commercial banks, three commodity exchanges with shareholders from the West, and an aggressive privatization program adopted by the local government. The recent independence of Lithuania, Latvia and Estonia has left Russia with only two Baltic ports: St. Petersburg and Kaliningrad. Because of its numerous advantages and its ideal location, Kaliningrad has the unique opportunity to move toward a free market economy methodically, effectively and profitably. The economic direction Kaliningrad is now taking is helping to shape the next phase of the region's involvement in the rebuilding of the Russian Federation and the Baltic Region. Unfortunately, the special legal, tax and duty framework of Kaliningrad's FEZ is still little understood in the West. Since first re-opening in September of 1991 to the world after 45 years of "closed status", Kaliningrad has seen extraordinary changes sweep through. The Russian-American Chamber of Commerce® is a nonprofit, nonpartisan organization acting to promote American business interests in the Russian marketplace. The Russian-American Chamber of Commerce® Last Updated: November 27, 2001. Copyright the Russian-American Chamber of Commerce® 1995-2003. All rights reserved.