Kaliningrad Free Zone Revives Even as Russia Proper Stumbles

THE piers of the port here are packed with freighters, spider-like cranes working over them. Canadian grain is being unloaded from a barge onto railroad cars, while Russian-built tractors, aluminum, and timber are all arrayed on the quay, ready for export.

Business is booming, as Arkady Mikhailov, the port's chief director, tells it. Last year, the port handled 4.1 million tons of goods and capacity is projected to rise by a million tons a year over the next few years, he says.

It is all quite a turnaround from the late 1980s, when port activity plummeted as the Soviet economy started collapsing. At the time, Mr. Mikhailov says, chances for revival seemed bleak, especially because the port was closed to foreign ships for military security reasons.

A Russian parliament resolution in July 1990 was the turning point for the port. The legislative decision established the Kaliningrad Region as one of 13 Free Economic Zones (FEZ) in Russia. This lifted the veil of military secrecy from the area and opened it to the Baltic Sea market and beyond.

People here have high hopes that FEZ status will lead to economic prosperity. But so far concrete action has not come near to meeting expectations. Part of the reason is the failure of Moscow and Kaliningrad to work out a well-defined, coordinated development plan.

"Our activity over the last year-and-a-half could have been better spent," says Oleg Mikhailov, deputy chairman of Kaliningrad's FEZ Development Committee. "With every change in the government, we have to convince them about our plans all over again."

He adds that the Kaliningrad FEZ's operating guidelines are still being worked out. "As we understand it, it should be a place with beneficial customs tariffs and tax laws, as well as having simplified entry and exit procedures," he says. "The main goal is to raise the standard of living here."

To date, even broad FEZ targets have only been partially hit. Taxes and customs duties, for example, are not as favorable as they could be, Oleg Mikhailov says.

The FEZ's difficulties are rooted in the political chaos in Moscow, local officials say. The power struggle between President Boris Yeltsin and his parliamentary foes is preventing the government from dealing with pressing issues, leaving many Russian regions to fend for themselves.

In Kaliningrad's case, local officials want Moscow to pass legislation they say is needed for the FEZ to function properly.

Under existing legislation, 13 FEZs are functioning in Russia, mostly in the Russian Far East and the Baltic. That is about 10 too many in the opinion of many here.

In the Baltic area, St. Petersburg and Vyborg also enjoy FEZ status. The heavy concentration of FEZs makes it tough for any one port to attract the levels of foreign investment needed to thrive.

Officials in Kaliningrad naturally argue that their region, given its unique geographical position, should become the only Russian FEZ in the Baltic. For example, the region is a natural magnet for German investment. It is also Russia's only year-round ice-free Baltic port.

"Our region is ideally suited for such activity - more so than others," Oleg Mikhailov says. "All the more so because we are separated from Russia proper."

Vladimir Toropov, the deputy head of the Kaliningrad administration, adds that Kaliningrad Russians are more receptive to Western ideas than the average Russian. "There is a very special type of Russian here," he says, explaining that virtually the entire population is comprised of immigrants, who have lost the ingrained conservatism found in Russia proper.

Western companies, despite the risks, are recognizing Kaliningrad's potential. Foreign firms, including US-based Xerox and Hewlett-Packard, have already opened authorized dealerships. In addition, there are ongoing talks about establishing air links with Nordic nations via Scandinavian Airlines.

"The companies that provide infrastructure are moving in, even though today no one is sure what it will be like tomorrow," says Andrei Rudomestky, director of BOSS West, a joint venture representing Xerox.

If the bureaucratic barriers are removed and foreign capital found, plans for Kaliningrad's economic expansion seem boundless. As for the port, director Arkady Mikhailov says a project to build deep-water docks at Baltiisk, near Kaliningrad, are on the drawing board.

"Our plans are unlimited. We just have to see what the possibilities are," he says.

If the FEZ does not get up and running soon, the port and the local economy could hit a productivity ceiling before the end of the century. That is because access to the port is through a narrow canal. Without deep-water facilities, larger ships will be unable to call, limiting capacity potential, says Viktor Forostesky, the port's chief technologist.

To a great degree, Kaliningrad's fate also hinges on Lithuania and Latvia. For Kaliningrad's cargo to reach Russia proper, reliable transit links need to be secured with its Baltic neighbors. But Lithuania and Latvia are also vying to become Russia's bridge to the West.