Communication from the Commission to the Council -  The EU and Kaliningrad
Date: 2001-01-18
Institutions: European Commission
Subjects: USSR, economic development, enlargement of the Union, environmental protection, health care, prevention of delinquency

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 17.1.2001
COM(2001) 26 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL

The EU and Kaliningrad

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL

The EU and Kaliningrad

INTRODUCTION

Kaliningrad is a unique part of Russia, separated geographically from the rest of the country
and destined after enlargement to be surrounded by the EU. As enlargement draws nearer,
increasing attention is being focused on the region. In keeping with the Commission’s
Enlargement Strategy Paper of November 2000, the purpose of this Communication is to
contribute to a debate which the EU should launch with Russia (including Kaliningrad), and
with the two neighbouring future Member States, Poland and Lithuania, on issues which will
affect our common future.

The Communication looks at the impact of EU enlargement and distinguishes between issues
which will arise for all Russian regions1 and those which are specific to Kaliningrad.
Enlargement of the EU will be a positive development for its neighbours, contributing to
stability and prosperity. Russia stands to benefit substantially from enlargement and regions
such as Kaliningrad are well placed to take advantage of the new opportunities which will be
created.

The adoption of the acquis by Poland and Lithuania will inevitably imply changes in some
existing rules and practices between Russia, the EU and the new Member States. Some of
these changes will have an equal impact on all Russian regions while others will have specific
implications for Kaliningrad, mainly on the movement of goods, people, and the supply of
energy. This paper also looks at ways in which the EU and Russia can work together to their
mutual benefit to reduce the impact of existing problems confronting Kaliningrad, which are
not directly related to enlargement, in areas such as environment, the fight against crime,
health care and economic development.

This paper does not set out formal Commission proposals for decision, but rather outlines
ideas and options for discussion between the parties. Responsibility for Kaliningrad lies with
Russia and the region itself. However, the EU and its future Member States have an interest in
helping to ensure that the changes required by accession are made smoothly and in fostering
co-operation with Kaliningrad on a number of regional issues. A number of suggestions are
made to provide ideas for tackling the issues which are highlighted in the paper. If they prove
worthwhile,
they can subsequently become the basis for decisions by the appropriate
authorities.

Background information on the current situation in Kaliningrad and on its relations with its
neighbours and international organisations is set out in the annexes to the paper.

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And all neighbouring third countries

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ISSUES ARISING FROM THE ENLARGEMENT PROCESS

Movement of goods

At present EU-Russia trade relations are governed by the Partnership and Co-operation
Agreement (PCA) signed in 1994. Upon accession Poland and Lithuania will take over the
PCA as part of the acquis and the common external tariff will apply in trade between Russia
and the enlarged EU. Since the EU already has very low MFN tariff levels for trade with
Russia in industrial goods, 4,1%, while Poland’s MFN tariff level is 15,8% and Lithuania’s
5,3%, Russian goods will benefit from significantly lower tariffs after enlargement. These
lower tariff levels will apply to goods originating in Kaliningrad on the same basis as the rest
of Russia. Given its proximity to EU markets this prospect of easier access represents an
important opportunity for Kaliningrad. Since Kaliningrad relies strongly on trade with
neighbouring areas, it should have an interest in adopting EU technical norms and standards
to enable it to take full benefit from this improved market access. However, until a more
detailed assessment is done, it cannot be excluded that the changes in the trade regime which
will take place on accession might have an impact on particular products.

is suggested that

It
the EU and Russia examine the trade impact of enlargement on
Kaliningrad, in the trade and industry sub committee of the PCA. If particular problems are
identified, the sub committee can be asked to recommend ways of dealing with them. This
assessment should be carried out in the first half of 2001.

At present goods originating in Kaliningrad which are destined for Russia, and vice versa,
transit through Lithuania and Latvia/Belarus. After enlargement, the PCA will provide for
free transit through Lithuania and/or Latvia, without customs duties or any other transit duties
(other than charges for transport and administration). The PCA will also benefit trade in
goods between Russia and the EU, since it grants Russia MFN treatment. When Russia joins
the WTO, its rules will apply to EU-Russia trade.

From time to time, proposals have been made for a special trade regime for Kaliningrad.
Since Kaliningrad is an integral part of Russia, it would be difficult to grant any special status,
such as free trade or a customs union. This would raise a number of political and legal issues
apart from the fact that Russia is unlikely to grant the necessary degree of autonomy to
Kaliningrad. Given the generally favourable situation described above it is not clear that any
special treatment would be needed.

One aspect of movement of goods which will require attention is border crossings. At present,
there are 23 crossing points between Kaliningrad, Poland and Lithuania. In order to ensure the
efficient flow of goods across the EU’s external border, improvement could be made both in
physical infrastructure and in processing, including through upgraded information systems.
Experience of the last enlargement has demonstrated that the introduction of the acquis on the
border between Finland and Russia can speed up border crossing formalities. Considerable
investments have been made in infrastructure and in procedures in Lithuania which should
lead to similar positive results. It should be possible to build on this positive experience and to
use some of the funds available through the Phare and Tacis programmes to finance
improvements in border crossing facilities and procedures, in close co-operation with the
Russian authorities.

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The EU, Russia, Poland and Lithuania should discuss the functional management of border
crossings, starting with the main road and rail crossings, particularly those linking the region
to the Pan-European Transport Corridors I (via/rail Hanseatica) and IX (middle section).
Discussions should include customs, border guard, phytosanitary, veterinary and health
aspects. They could be held in working groups, with Russia under the relevant PCA Sub-
committees and with Lithuania and Poland within the framework of the Europe Agreement.
Discussions should encourage ratification of pending agreements on border demarcation and
on crossing points, and should aim at agreeing a multi-annual approach to upgrading facilities
to be implemented by the relevant national authorities. They should include advice on the
optimal use of funding from all sources.

Future transit activities will also be facilitated by improved transport links and Kaliningrad is
being integrated into the pan European transport corridor network, in particular Corridors I
and IX. The Tacis programme has already funded a multi-modal transport strategy for
Kaliningrad. Significant investment would be necessary in order to upgrade road corridors I
and IX to European standards.

It is suggested that the output of this study be discussed with the IFIs and the Russian and
neighbouring authorities, with a view to securing funding for priority projects.

At present military goods and personnel are transported through Lithuania under a special
agreement with Russia. These arrangements need to be examined in the context of
enlargement.

Energy supplies

At present most of Kaliningrad’s electricity needs are met through imports from the rest of
Russia which pass through Lithuania via a common grid. Lithuania envisages a link to the
central Europe electricity grid by establishing a connection with Poland. Depending on the
technical solution to be adopted for such connection (electrical line with or without a
conversion station) and on the related costs, Kaliningrad could either maintain its link with
the Russian electricity grid or switch to the Central European grid, which is connected to the
main EU electricity grid, UCTE.

Without pre-empting the future choices to be made, it is suggested that a Tacis study on
energy needs, energy potential and possible scenarios should be undertaken, to assess, inter
alia, the feasibility of electricity generation in Kaliningrad, alternative electricity supply and
electricity exchange solutions. The question of new gas pipeline projects in the Baltic region,
as well as related transit issues should also be included in the study, which will require close
co-operation between the EU, Lithuania, Russia, (including Kaliningrad) and the IFIs.

Movement of people

The introduction of the acquis by new Member States will have an impact on third countries
in terms of visa requirements and border controls. While the requirement of the acquis will be
no different for Kaliningrad than for any other part of Russia or other neighbouring third
countries, it is possible that the impact on the population may be greater there than in other
parts of Russia, given the geographic situation of Kaliningrad.

Poland intends to introduce the Community acquis in 2001 and Lithuania at the latest upon
accession. This will have implications for transit and travel of persons. Travel, for whatever

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purpose, to or through EU Member States will require possession of a visa. Visa-free transit
(currently available to Kaliningrad and certain categories of Russian citizens transiting
Lithuania) will no longer be possible. In addition, Kaliningrad citizens will be obliged to
travel in possession of a valid passport (as opposed to the internal identity documents which
are currently accepted).

These new requirements will not necessarily impede the movement of people between
Kaliningrad and the rest of Russia and to and from future Member States (nor will all
requirements necessarily apply as of the date of accession, as parts of the acquis will not have
to be implemented until the moment internal border controls in the enlarged EU are lifted for
new Member States). The acquis provides for the issuance of transit visas, short-term visas
and long-term national visas allowing for smooth border crossing and the possibility of
multiple entries.

In the wider context of Community policies on visas and on external borders, there may be a
need to examine a number of areas from the point of view of ensuring smooth movement of
people: the possible development of further rules on small border traffic (traffic within areas
adjacent to the external border) in order to avoid disrupting local socio-economic ties; the
effect of existing rules on transit in view of the specific situation of Kaliningrad; the cost of
passports (the responsibility of Russia) and visas (responsibility of current and future EU
Member States); the presence of consular offices in Kaliningrad to facilitate visa issuance
(responsibility of EU Member States) and the possibility to take advantage of any special
arrangements permitted by the acquis. In this latter context, the examples offered by other
candidate countries should be examined.

However, most important will be the efficient operation of border crossings, through the
upgrading of facilities and procedures and exchange of best practice. This would speed up
slow and arbitrary border crossings procedures. The EU is already contributing to the
development of infrastructure at border crossing points, modernisation of procedures and
training to facilitate the movement of persons and goods across the future external border.
Such practical measures facilitate border crossings, while combating organised crime and
other illegal activities.

Without pre-empting the accession negotiations with Poland or Lithuania, it is suggested that
practical measures to conduct proper and efficient border control be continued, facilitating the
movement of persons and goods across the future external border. The use of liaison officers
could be considered.

EU technical and financial assistance can contribute to the creation of a functioning border
control system, including appropriate sufficiently fake-proof travel documents.

In the wider context of Community policies on visas and on external borders, the suitability of
Community rules on small border traffic and transit for the specific situation of Kaliningrad
could be assessed. The possibility to take advantage of any special arrangements permitted by
the acquis should be looked into, using examples offered by existing arrangements, including
in candidate countries.

The cost of passports (the responsibility of Russia) could also be examined, as well as the cost
of visas (responsibility of current and future EU Member States), in the wider context of the
Community policies. Both new and current Member States could consider opening consulates
(or sharing facilities to reduce costs) in Kaliningrad, to facilitate visa issuance and manage
migration flows efficiently.

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Such moves to ensure smooth movement of people across borders would imply some co-
ordination between Russia and the EU on visa policy, which would also be of broader mutual
benefit. They would need to be accompanied by appropriate controls and action against
inadequately documented travellers and passengers. The early conclusion of a readmission
agreement between Russia and EU would help to build confidence.

An information initiative should be conducted to dispel misconceptions about
the
consequences of EU enlargement for the movement of both people and goods across the
future external border of the EU.

It is suggested that the EU and Russia conclude a readmission agreement as soon as possible.

It is suggested that the EU should provide the administration and population of Kaliningrad
and bordering regions with information on the way in which the future external border of the
EU will function taking into account the need for fast and efficient border crossing for goods
and people whilst preventing illegal activities.

Fisheries

Following enlargement, the Baltic Sea will almost become an exclusive EU fisheries zone,
except for smaller areas around Kaliningrad and St Petersburg.

It is suggested to review the EU-Kaliningrad fisheries relations in the light of the consequences
of enlargement on fishing access and of future fisheries agreement between the EU and Russia.

ISSUES OF MUTUAL
ENLARGEMENT

Economic Development

INTEREST NOT DIRECTLY RELATED TO

Unemployment and poverty have increased dramatically in Kaliningrad since 1991 and the
main welfare indicators suggest that the standard of living is below the Russian average (see
annex 1 for more details on the economic situation). Responsibility for the economic
development of Kaliningrad lies with the central authorities in Moscow and the local
authorities in the region. Kaliningrad is dependent on budgetary allocations from Moscow and
on its trade and economic links with the rest of the country. As yet, Russian regional policy is
less developed than that of the EU, in terms of financial transfers and investment incentives
and current Russian policy is oriented towards greater centralisation. Nonetheless, there is
much that the central and local authorities can do to stimulate economic development. As
elsewhere in Russia there is a need for a stable and secure legal and institutional environment.
Good corporate governance, fair and efficient enforcement of legislation (e.g. to guarantee the
protection of shareholder and investor rights, bankruptcy, auditing and accounting), enterprise
restructuring an the further development of SMEs. Market institutions should be strengthened,
e.g. in the financial sector and the tax system.

There are various ways by which the EU can contribute to the economic development of
Kaliningrad. Already now, the EU can help by providing advice, sharing experience and by
providing funding through the Tacis programme and bilateral Member States programmes.

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It is sometimes suggested that a special fund should be established for the development of
Kaliningrad. However, the Commission rather believes that the first priority is to work with
the Russian and local authorities to identify priority areas for support and then to help them
find appropriate grant and/or loan funding for these activities. Tacis funding for Russia can be
implemented regionally, and in its discussions with the Russian authorities on future
priorities, the Commission can take account of priority activities in Kaliningrad.

More specifically officials and companies based in Kaliningrad can participate in Tacis
funded training programmes to help develop market institutions such as banks, insurance and
local tax services. Local managers could participate in training programmes in EU companies.
With a view to developing Kaliningrad’s export potential and markets in neighbouring
countries, the EU could also provide assistance in areas such as harmonisation of standards
and conformity assessment procedures. Tacis is supporting a Regional Development Agency
in Kaliningrad, which could play an important role in promoting trade and investment in
Kaliningrad.

The Special Economic Zone (SEZ) has been created mainly in order to offer companies based
in Kaliningrad advantages through tariff and tax exemptions for their imports and for locally
produced goods, exported to other countries and to the Russian mainland. The idea of
promoting economic activity and investment through a Special Economic Zone is interesting,
even if in its present form, the SEZ may have trade distorting effects through subsidies
incompatible with the PCA and WTO rules. In practice, the SEZ has never been fully in
operation and has had only limited backing from the authorities. Nevertheless, the possible
if
benefits and the status of SEZ should be clarified with the federal authorities and,
necessary, adapted to bring it into line with Russia’s international obligations.

Information society is a key enabler for prosperity and sustainable development. A favourable
environment for uptake and the use of the Internet is of crucial importance for developing the
economy, business, government
Information Society
and democratic participation.
development
should be encouraged and efficient ways of supporting Kaliningrad’s
participation in regional co-operation actions on Information Society need to be identified.

Governance, democracy and the rule of law

Kaliningrad’s own development and its involvement in the wider region depends on the
strengthening of the rule of law, and the broad implementation of good governance principles,
particularly through promoting institution building and civil society development. The EU
could contribute to this process by encouraging Kaliningrad’s participation in EU projects for
public administration and judicial reform, and participation of local civil servants in training
programmes. Regional and local budget management and management of municipal services
could be supported.

Through the Tacis Local Support Office, established in Kaliningrad in December 2000, the
participation of local actors in partnership programmes with EU organisations and people-to-
people activities will be promoted, including training institutions, NGOs, trade unions, media,
professional organisations, enterprises, municipalities and courts.

As elsewhere in Russia there is a need for action to combat illegal activities, which are likely
to affect neighbouring EU member states. Strong action is needed by the federal authorities,
for example to enact and enforce legislation and international conventions. The Task Force on
Organised Crime in the Baltic Sea Region can make a valuable contribution to tackling these
problems. On the local level co-operation should be developed to deal with problems such as

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car crime and then be extended to other areas. Co-operation could also be directed at
improving the independence of the local judiciary, in particular via training and twinning
programmes targeting magistrates. Efforts to develop effective border/customs control
measures should also be linked to the wider anti-crime agenda.

Environment

As part of wider efforts to improve the quality of life in Kaliningrad there is a need to focus
on the environment, and in particular on reducing water pollution. A cleaner Baltic Sea would
benefit all Baltic Sea regions and should be a priority objective for regional co-operation.
More could also be done to reduce pollution originating in smaller towns in the region.
Kaliningrad should be actively involved in federal efforts to monitor the environment,
harmonise standards, etc.

In view of the past military presence in Kaliningrad, there may be problems relating to the
disposal of nuclear waste. There are also problems arising from stockpiles of chemical
weapons left over since the second World War.

The environment has been a focal point for EU assistance. Current activities include a Tacis
CBC project dealing with water quality on the borders with Lithuania and Poland and a Tacis
waste management project in Kaliningrad’s coastal zone. There is an EBRD/NEFCO/NIB
loan for a sewerage treatment plant in Kaliningrad City, and several bilateral projects to
improve the water network in the region (see Annexes II & III).

Health

The spread of communicable diseases is a serious problem in Russia and particularly in
Kaliningrad. These problems must be tackled at the federal level but preventive action can
also be taken in Kaliningrad itself. Tacis is supporting several initiatives at local level and in
the non-governmental sector to help reform health care delivery systems and to help deal with
HIV. In the future, the recommendation of the Task Force on Communicable Diseases
Control in the Baltic Sea area will help address the issue of TB and HIV at the regional level.

NEXT STEPS

involving different partners. It will be important

The aim of this paper is to contribute to a discussion. As outlined in the paper there are many
issues to be considered,
to take this
discussion forward in the right framework, fully respecting the responsibilities of each of the
partners. In the PCA, the EU and Russia already have the mechanisms which will allow for
discussion of these issues at the highest political level, as well as for thorough technical
preparation of the debate. In the enlargement process, the EU can discuss all of these issues
with the candidate countries. Where it is necessary for all the partners (EU, Russia, Lithuania
and Poland) to discuss together meetings can be arranged.

In keeping with the Commission Enlargement Strategy Paper of November 2000, issues
concerning Kaliningrad should be addressed in co-operation with Russia, Poland and
Lithuania. It is suggested, once this paper has been discussed internally by the EU, that the
EU-Russia Co-operation Council include Kaliningrad on its agenda and discuss how to take
the various issues forward. This co-operation should be prepared with Russia by the
Presidency and the Commission. Based on the outcome of these political and technical
discussions, problems and possible solutions can be identified for consideration in the PCA
bodies. It is also suggested that Kaliningrad be discussed at the EU–Russia Summit in May

8

2001. In parallel, the EU will continue to discuss the same issues with Lithuania and Poland
within the fora established under the Europe Agreements. If necessary, meetings between all
the parties can be arranged. In addition, to facilitate cross border co-operation, specific
meetings may be called between interested partners so as to, inter alia, establish practical
arrangements.

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SUMMARY OF MAIN SUGGESTIONS

It is suggested that:

• the EU and Russia examine the trade impact of enlargement on Kaliningrad, in the trade

and industry sub committee of the PCA, during the first half of 2001.

• the EU, Russia, Poland and Lithuania discuss the functional management of border
crossings, starting with the main road and rail crossings, particularly those linking the
region to the Pan-European Transport Corridors I and IX. Discussions should include
customs, border guard, phytosanitary, veterinary and health aspects. Discussions could be
held in working groups, with Russia under the relevant PCA sub committees and with
Lithuania and Poland within the framework of the Europe Agreement.

• the output of the Tacis study on a multi-modal transport strategy be discussed with the IFIs
and the Russian and neighbouring countries authorities, with a view to securing funding for
priority projects.

• a Tacis study on energy needs, energy potential and possible scenarios should be

undertaken.

• the practical measures to conduct proper and efficient border control be continued,
facilitating the movement of persons and goods across the future external border, . The use
of liaison officers could be considered.

• without pre-empting accession negotiations with Poland and Lithuania, EU technical and
financial assistance can contribute to the creation of a functioning border control system,
including appropriate sufficiently fake-proof travel documents.

• the suitability of Community rules on small border traffic and transit for the specific
situation of Kaliningrad be assessed. The possibility to take advantage of any special
arrangements permitted by the acquis should be looked into, using examples offered by
existing arrangements, including in candidate countries.

• in the wider context of Community policies on visas and on external borders, the cost of
passports (the responsibility of Russia) could also be examined, as well as the cost of visas
(responsibility of current and future EU Member States). Both new and current Member
in
States could consider opening consulates (or sharing facilities to reduce costs)
Kaliningrad, to facilitate visa issuance and manage migration flows efficiently.

• the EU and Russia quickly conclude a readmission agreement.

• the EU should provide the administration and population of Kaliningrad and bordering
regions information on the way in which the future external border of the EU will function
taking into account the need for fast and efficient border crossing for goods and people
whilst preventing illegal activities.

• the EU-Kaliningrad fisheries relations be reviewed in the light of the consequences of
enlargement on fishing access and of future fisheries agreement between the EU and
Russia.

• the EU and Russia discuss key issues of environmental concern in Kaliningrad.

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• issues concerning Kaliningrad be addressed in co-operation with Russian in the relevant
PCA bodies and, in parallel, that the EU continue to discuss the same issues with Lithuania
and Poland in the Europe Agreement for a. In addition, to facilitate cross border co-
operation, specific meetings may be called between interested partners so as to, inter alia,
establish practical arrangements.

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ANNEX I

Background information on Kaliningrad

1.1.

Economic situation

The Kaliningrad region is a Russian enclave bordered by Poland, Lithuania and the Baltic
Sea. It has a land surface of 15,100 square km and a population of almost one million
inhabitants, of whom about 430,000 are concentrated in the capital, Kaliningrad.

In the Soviet Union Kaliningrad was a closed military centre and the headquarters of the
Soviet Baltic Fleet. The strategic importance of Kaliningrad has decreased in the 1990s. Since
1991, the number of military personnel in the region has fallen from 200,000 to 18,000 and
the armed forces are unlikely to regain the political and economic significance they had in the
past.

Kaliningrad has suffered from marked economic decline, along with the rest of Russia.
Production has fallen by more than half since 1990. Kaliningrad was particularly strongly
affected by the Russian financial crisis of August 1998 because of its dependence on foreign
trade and particularly imports.

Overall economic decline has been accompanied by drastic changes in the structure of the
regional economy. Military-related industries have shrunk dramatically. The fishing industry,
which used to be a major economic activity, experienced a similar decline. Today, the main
industries in the region are oil and amber extraction. Oil is extracted offshore (about 1 million
tons a year) and sent to Lithuania for refining. Kaliningrad has some 90% of the world
reserves of amber, virtually all of which is smuggled out of the region in raw form. Other
important economic activities are food processing, pulp and paper production, furniture
manufacturing, machine-building, and computer software development. Agriculture carries
little economic weight, although the land in Kaliningrad is fertile and there is potential for
growth.

Kaliningrad households have come to rely increasingly on unregistered economic activities.
As a border province, Kaliningrad offers much scope for informal activity, estimated to
account for more than 50% of GDP. About 10,000 people are believed to be involved in
regular cross-border shuttle trading.

There are some 14,000 SMEs in the region. As such, Kaliningrad ranks third in Russia in
terms of the number of SMEs per capita. The strong presence of Moscow banks in
Kaliningrad also suggests that the region is economically attractive. This is not, however,
reflected in inward investment which is on a par with the average in Russia. The business
environment, like that of the rest of Russia, lacks predictability, stability and incentives. There
is insufficient investor and property protection, legislation is often not enforced (the tax
environment remains complex and is not supportive of business).

A Special Economic Zone (SEZ) provides, under certain conditions, for tariff and tax
advantages for goods produced in Kaliningrad for export, for imported goods, and for goods
"exported" to the Russian mainland and to third countries. The SEZ was intended to promote
economic activity and foreign investment but its operation has, in practice, been fraught with
uncertainty. With no clear backing from the authorities and indications of possible
incompatibility with WTO rules, the relevance of the Kaliningrad SEZ has been limited.

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As elsewhere in Russia, unemployment and poverty have increased dramatically since 1991.
Thirty percent of the population in now estimated to live below subsistence level. The main
welfare indicators suggest that the standard of living in Kaliningrad is lower than the Russian
average, although a relatively high level of apparent consumption is visible in the region, for
example in western-style supermarkets and restaurants.

1.2.

Transport links

Kaliningrad's road network is relatively dense, but requires upgrading. Stretches of the Pan-
European Transport Network passing through the territory are under-developed. Branch B of
Corridor IX, connecting Kaliningrad to Kiev, via Vilnius and Minsk,
is of particular
importance for Kaliningrad.

Rail connections with neighbouring countries and Russia are under-utilised compared to the
1980s and early 1990s. The main railway line, Kaliningrad-Kaunas-Minsk-Moscow, serves
freight traffic with Lithuania and Russia. The line Kaliningrad-Riga-St Petersburg is less used
for international freight transport, as is also the case for lines to Poland (largely because of
different rail gauges).

Traffic to and from the EU can use several routes and is not obliged to pass through
Kaliningrad. When travelling to Western and Central Europe, Finns, Estonians, Latvians and
Lithuanians typically use the Via Baltica branch of Corridor I, Helsinki-Tallinn-Riga-Kaunas-
Warsaw, by-passing Kaliningrad to the east, avoiding the Via Hansaetica branch, Riga-
Kaliningrad-Gdansk.

Kaliningrad's ports are less used by foreign cargoes than ports in Lithuania, Latvia and
Estonia. They are also insufficiently competitive to handle Russia's internal trade; a rail
journey from Moscow takes 25-28 hours and is more expensive than sending cargoes to
alternative ports, such as Klaipeda. Kaliningrad does have the potential, however, to handle a
share of cargo traffic from Belarus and northern Ukraine.

There is only one regular international flight from Kaliningrad, to Copenhagen.

Kaliningrad's contacts with neighbouring countries are hampered by slow border crossing
formalities and infrastructure bottlenecks at the 23 international road, rail, air and sea border
crossing points of the region.

1.3.

Trade and transit

Due to its small size and enclave status, Kaliningrad is dependent on imports, the value of
which is three times that of its exports, with heavy reliance on trade and economic interaction
with mainland Russia. Every year more than 6 million tons of goods transit, mainly by rail,
through Lithuania to and from Russia. 55% of this traffic is oil, coke and coal. Kaliningrad
also imports many goods (including most of its food) from its immediate neighbours, Poland
and Lithuania, which, with Germany, are Kaliningrad's most important foreign trade partners.
Although Kaliningrad has relatively more trade links with its non-Russian neighbours than
other Russian border regions, it is still relatively poorly integrated into the regional economy.

1.4.

Energy

Kaliningrad is almost totally dependent on imported energy from the Russian mainland and
produces only 20% of its own needs (mainly at small fuel oil and coal-fired plants). The
delivery of fuel oil and coal is costly and complicated, dependent upon the transit regime

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agreed with neighbouring countries. Gas is received from Russia through a pipeline which
transits Belarus and Lithuania. The Kaliningrad authorities want to increase the share of gas
for electricity production. A new gas-fired power station is under construction.

1.5.

Education, health, environment

Kaliningrad has a good level of basic education. Kaliningrad State University and five other
higher education institutions in the region maintain high standards. Their faculties and courses
such as microelectronics, biotechnology, new
do not cater
manufacturing processes and business administration.

sufficiently for

sectors

Public health care services in Kaliningrad are close to the Russian average. Diseases such as,
tuberculosis, diphtheria, measles and epidemic paratyphoid are widespread. TB is becoming
multi-resistant and its prevalence is growing, especially among the inmates of Kaliningrad
prisons. Drug use and prostitution have led to the alarming spread of other communicable
diseases. For instance, Kaliningrad is among the worst regions in Russia for registered cases
of HIV, and is by far the most affected area in the Baltic Sea region.

Kaliningrad is the second worst source of pollution in the Baltic Sea region after St.
Petersburg, generating more than 400,000 tons annually of domestic and industrial waste.
Sanitary conditions in urban areas are deteriorating, and the sewage system dates back to pre-
WWII. Russia has committed itself to decrease marine pollution. As a result, the discharge of
pollutants has diminished somewhat since 1991.

1.6.

Regional governance, democracy and the rule of law

In the past, Kaliningrad's regional administration has generally not been perceived as either
skilful or competent. Its style of management has been considered autocratic and lacking in
transparency. The quality of the Kaliningrad City administration has generally been perceived
in more positive terms compared with that of the Oblast.

Freedom of speech has not always been respected. Journalists have been harassed, and there
are only two independent newspapers in the region. The judiciary and law enforcement
agencies have not been sufficiently independent for the regional government. As a result of
the recent election of a new Governor there is now opportunity for improvements in the
efficiency and transparency of the regional administration, a new momentum to enhance the
image of the region and to tackle its problems in a spirit of co-operation with Kaliningrad's
neighbours.

Kaliningrad's relations with Moscow have to be seen in the context of ongoing federal
reforms, which point to greater centralisation. Kaliningrad is part of the North West federal
district with its centre in St. Petersburg. Moscow's policy emphasises the creation of a "single
economic space" in Russia, and its control over Kaliningrad will probably strengthen.

1.7.

Crime

As in many other parts of Russia, crime is widespread in Kaliningrad, thriving on weak
institutions. Organised crime, trafficking in human beings, drugs and stolen vehicles and
illegal migration are all present. Smuggling - notably of amber, alcohol and cigarettes - and
prostitution are also prevalent. According to official statistics, the level of crime is 20%
higher than the Russian average, in particular for organised crime, as well as crime by minors
and by people acting under the influence of alcohol. Organised crime has, as elsewhere in
Russia, a pervasive negative effect on the business and investment climate. Criminality,

14

linked to corruption, poses a threat to economic development and the development of a
democratic system governed by the rule of law.

Through its Operative Committee (OPC), the Task Force on Organised Crime in the Baltic
region has been conducting joint, multi-disciplinary law enforcement operations. A
communications system allowing for intensive exchange of information (BALTCOM) is
operating 24 hours a day. From the start, Russia has been one of the most active members of
the Task Force. In 1998-2000 Kaliningrad participated in a series of operations against stolen
vehicles (“The Kaliningrad project, 1998”), drugs (“Channel, 1999”) and illegal migration
(“Baltic Guard 1997-98” and “VIVAN, 1999”). The fact that Russia has organised joint
operations including the Kaliningrad region, has been highly appreciated by all other Baltic
participants. These joint operations have contributed to confidence building and improvement
of soft security in the Baltic Sea area. Thanks to this, the perception of Kaliningrad is today
much better in the region than it was in 1996 when the Task Force started work.

1.8.

Enclave related constraints on the mobility of persons

During the Soviet period people from Kaliningrad travelled freely within the USSR. Since the
break-up of the USSR, they have to travel some 500 kilometres through Lithuania and either
Latvia or Belarus in order to get to the rest of Russia. The same applies for other Russians
who want to visit their relatives, friends and business partners in Kaliningrad.

1.9.

Neighbouring States, regional organisations, regions, IFIs

• Lithuania

Lithuania is one of Kaliningrad's main trade partners and an important investor, located on the
transit route between the region and the Russian mainland. It has the largest share of visitors
and transit traffic from Kaliningrad and wants to maintain good relations with Russia, to
ensure that Kaliningrad is not isolated and does not become a source of economic or political
instability.

Lithuania and Russia have established an institutional basis for co-operation through bilateral
agreements on Kaliningrad (1991,1999). In February 2000, Russia and Lithuania issued a
joint statement on regional co-operation, known as the "Nida Initiative", and agreed on a set
of common project proposals in the framework of the Northern Dimension,
including
transport, gas pipeline, water management and border crossing issues.

• Poland

Co-operation agreements exist between certain Polish regions and Kaliningrad. Activities
mainly consist of partnerships and exchanges at the local level (SMEs, academic institutions,
administrations), but also cover preparation of investment projects, e.g. in transport, energy
and the environment. Poland is an important investor in Kaliningrad and the leading partner in
terms of joint ventures with local enterprises.

15

• CBSS, Euroregions and International Financial Institutions2

The CBSS maintains close links with regional authorities and has recently opened a
EuroFaculty at the Kaliningrad State University.

Kaliningrad is part of several Euroregions, established to promote cross-border co-operation.
The Euroregion "Baltic" includes Denmark, Latvia, Lithuania, Poland and Sweden while the
Euroregion "Saule" has been established between eighteen regional and local authorities
from Lithuania, Latvia, Sweden and Russia (2 districts and 1 town in the northern part of
Kaliningrad Oblast). Furthermore, a Euroregion "Neman" should link communities in
Lithuania, Kaliningrad and Belarus.

For the IFIs, such as the EBRD the World Bank, the NIB and NEFCO, Kaliningrad is seen in
an overall Russian and Baltic context, and it has so far not been given any special treatment.

2

The Council of the Baltic Sea States (CBSS) consists of 11 littoral countries , and aims to secure
democratic and economic development in the Baltic Sea region.

16

ANNEX II

Tacis and other EC activities in Kaliningrad in 1991-2000

Since 1991, the European Union has financed a variety of projects in Kaliningrad, mostly
through Tacis, including large projects in the sectors of institution building, energy, transport,
enterprise restructuring, management
If smaller partnership
projects are added, Kaliningrad has been the recipient of more than EUR 30 million of Tacis
assistance. In addition, some assistance has been provided under other EU programmes, in the
fields of environment, transport and training.

training and environment.

1.

1991-1999

Tacis activities in Kaliningrad started in 1991 with a Food & Agriculture project, which
promoted private farming. The Oblast also participated in two 1993 Tacis Russia projects
aiming at establishing a network of SME Development Agencies in Russia. Tacis activities
notably increased in 1994, when Kaliningrad was selected as a priority region, with a specific
Action Programme. Projects identified in 1994 were implemented during the following years,
and completed by the end of 1999/ beginning of 2000. Under this programme, Tacis actions
mainly focused on:

– institution building, with support given to the development of the Free Economic Zone/
Special Economic Zone (FEZ/SEZ). In the same context, assistance was also provided to
the transport and energy sectors;

– enterprise restructuring, with the creation of an Enterprise Support Centre and the
strengthening of the local SME Development Agency. Special attention was given to the
fish industry;

– human resources development, with the establishment of a Business Management

department at the Economics Faculty of the Kaliningrad State University (KSU).

After 1994, Kaliningrad has also been involved, as a pilot region, in several Tacis Russia
projects, particularly in the field of energy. It has also significantly benefited from other Tacis
facilities, such as:

– City Twinning (with Copenhagen, Aalborg, Southampton and Bremerhaven);

– PIP (Productivity Initiative Programme), which has created internship opportunities for

local managers in EU companies;

– ESSN (European Senior Service Network), which has assisted wood-processing SMEs;

– LIEN (Link Inter European NGOs), which has focused on social and health issues,

especially the social re-integration of former military staff and their families;

– TEMPUS, which has encouraged collaboration of the KSU with Swedish and Danish

universities;

– BISTRO, which has implemented 9 projects in Kaliningrad, covering issues such as

business and export promotion, pollution control and health issues;

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– CBC (Cross Border Co-operation), which has mainly focused on improving cross-border
infrastructure as well as on environmental issues (water quality management). Kaliningrad
has been eligible to the CBC Small Project Facility since 1996, but interest in exploiting
this opportunity has only emerged recently in the region, with the City being more active
than the Region.

In addition to Tacis, other EU programmes have been active in Kaliningrad:

– DG ENV’s LIFE fund has initiated two projects in Kaliningrad, in the areas of urban
traffic and ecotourism. DG ENV has also financed the establishment of an Environmental
Centre for Administration and Technology (ECAT) in Kaliningrad, which was, in 1997,
transferred to the local authorities;

– DG REGIO’s ECOS/Ouverture programme has

in
Kaliningrad, TROS (Training of Retired Officers), RUSSTI (Russian Short Sea Transport
Investigation) and AMBER;

implemented three projects

– Two INTERREG II C projects have been implemented in the Baltic region, which also
in efficient air transport development (SEABIRD) and urban

benefited Kaliningrad,
environmental management.

2.

1999-2000

Considering the geographic location of Kaliningrad and the specific issues which, as a result,
need to be addressed, the EU again identified, in1999 and 2000, a significant package of new
projects targeting the region and to be implemented in 2001.

First of all, in light of EU enlargement, within the 1999 and 2000 Tacis CBC Programmes,
two border crossings in Kaliningrad received priority: Chernyshevskoe /Kybartai-Nesterov
(road/rail) and Bagrationovsk/Bezledy (road), on the borders, respectively, with Lithuania and
Poland. These crossings, identified after a detailed feasibility study, are the major ones
located on the Pan European Transport Network. Trade and movement of goods and persons
will be facilitated through the development of infrastructure, modernisation of border
procedures, and training of enforcement agencies staff to detect unlawful activities and
increase their capacity to collect tax revenue.

In addition, under the Special Action for the Baltic Region 1999 and 2000, several projects
have been selected for the region. Kaliningrad Port Development aims to stimulate trade
and transit via the region, by strengthening the competitiveness of its port facilities and their
management. Ultimately, the port modernisation will contribute to a sustainable economic
development of the area and its integration into the Baltic region. Waste management in the
Kaliningrad Oblast will contribute to the establishment of an efficient and safe waste
management system in the region in order to alleviate the impact of waste generation on both
public health and environment.

Kaliningrad will also take part, as a pilot region, among others, to the North West Health
Replication Project aiming at reducing health and social disparities across the borders by
supporting the reform of the health system in the region, currently facing deteriorating living
conditions and acute public health problems. As well as to the Promotion of innovative
SMEs in the Baltic region, which will develop the existing infrastructure supporting
innovative SMEs (the so-called technological parks or "technoparks"), by strengthening their

18

capacity to provide training, marketing services and general business advice. Possibility of
twinning experiences with similar EU organisations will be explored.

the important Technical Assistance Contract

Finally,
for Promoting Trade and
Investment in Kaliningrad Oblast will put the emphasis on the socio-economic stabilisation
of the region. Its main objective is to strengthen the Regional Development Agency and thus
to develop the economic potential of the region and to promote trade and investment.

Kaliningrad will also be eligible for participation in future Tacis partnership and investment
promotion programmes, as well as in the CBC Small Project Facility. To allow Kaliningrad
to participate appropriately in regional co-operation activities, when INTERREG funding is
made available on the Community side of the border, may require matching Tacis funding.

19

ANNEX III

Main bilateral and regional activities in Kaliningrad in 1991-1999

Several EU Member States, as well as other States and donors, have been active in
Kaliningrad during the past decade. Especially the near-by countries have demonstrated an
interest in Kaliningrad and have provided considerable amounts of technical assistance, at the
governmental and local levels. It has not been possible, at this stage, to include an overview
table of all the bilateral and other projects conducted in Kaliningrad, as such data are not
available yet, but a recent update of the list produced by the CBSS Secretariat shows the main
trends.

Of all countries, Denmark appears to be the most active in providing technical assistance to
Kaliningrad. It has implemented approximately fifty projects in the region since 1991, mainly
in the areas of energy and environment (particularly water and waste water management), but
also in human resources development and in the social sector. Its total assistance to
Kaliningrad exceeds EUR 10 million.

Sweden, which has a common sea border with Kaliningrad, has also demonstrated notable
amount of activity. Its projects have covered various sectors, with a focus on business
development, administrative reform and support to local governments,
land reform and
prevention of transmissible diseases. Sweden’s total amount of assistance to Kaliningrad is
close to EUR 4,0 million. In addition, Southern Swedish local authorities are taking part to
people-to-people and networking programmes with Kaliningrad.

Germany has implemented approximately ten projects in the region, with a total of over EUR
1 million. The projects have been realised in the spheres of education, agriculture and
economic development. Significant exchange programmes are also taking place at the level of
German Länder and cities.

Finland has provided assistance and resources for the prevention of HIV epidemic in
Kaliningrad, and has also been involved, together with NIB/NEFCO/EBRD/Sweden and
Denmark, in the Water and Environmental Services project for the City of Kaliningrad.

Lithuania’s projects cover HIV prevention, civil society development, education and
exchange initiatives in the academic sector. Poland’s activities in the area concern mainly the
regional level and cross-border co-operation.

An important initiative was the establishment, by the CBSS, in September 2000 of an
EuroFaculty at the Kaliningrad State University. After Tartu, Riga and Vilnius, foreign
language courses are being organised, lectures will be delivered by professors from European
Universities to students, and new curricula developed in law and economics.

Other technical assistance providers include Norway (mainly energy saving projects) and the
USA (in the field of civil society promotion).

20

ANNEX IV

List of abbreviations

CBSS Council of the Baltic Sea States

EBRD European Bank for Reconstruction and Development

ECAT Environmental Centre for Administration and Technology

EU

European Union

FDI

Foreign Direct Investment

FEZ

Free Economic Zone

FTA Free Trade Agreement

GATT General Agreement on Trade and Tariffs

GDP Gross Domestic Product

HIV Human Immunodeficiency Virus

IFI

International Financial Institution

JHA Justice and Home Affairs

LIEN Linking Inter-European NGOs

MFN Most Favoured Nation –treatment

NGO Non Governmental Organisation

NIB Nordic Investment Bank

NEFCO

Nordic Environment Finance Corporation

PCA Partnership and Co-operation Agreement

SEZ Special Economic Zone

SME Small and Medium Sized Enterprise

TB

Tuberculosis

TEN Trans-European Transport Network

UCTE Union for the Co-ordination of Transmission of Electricity

USSR Union of Soviet Socialist Republics

WTO World Trade Organisation

21

ANNEX V

22