3. EXCEPT FOR THE GRAVE OF GERMAN
PHILOSOPHER IMMANUEL KANT AND SCATTERED POCKETS OF PRE-WAR ARCHITECTURE, KALININGRAD
SHOWS FEW SIGNS OF ITS FORMER INCARNATION AS THE GERMAN CITY OF KOENIGSBERG.
THE CITY CENTER'S VAST OPEN SPACES TESTIFY TO THE POUNDING IT TOOK DURING
WORLD WAR II. THE ENTIRE OBLAST -- FORMERLY A PART OF THE GERMAN PROVINCE
OF EAST PRUSSIA -- BECAME A SOVIET MILITARY COLONY IN 1946. IT REMAINED A
CLOSED AREA UNTIL 1991 AND IS NOW THE RUSSIAN FEDERATION'S ONLY NON-CONTIGUOUS
SUBJECT. KALININGRAD'S CURRENT LEADERS SEEM DETERMINED TO OVERCOME THIS HISTORICAL
LEGACY AND TAKE ADVANTAGE OF THE OBLAST'S PECULIAR GEOGRAPHY.
GOVERNOR TOUTS SPECIAL ECONOMIC ZONE
------------------------------------
4. MEETING WITH KALININGRAD OBLAST GOVERNOR YURIY MATOCHKIN, AMBASSADOR PICKERING REMARKED THAT KALININGRAD OBLAST FACED A FUNDAMENTAL CHOICE: IT COULD BECOME EITHER AN ISLAND -- GEOGRAPHICALLY AND ECONOMICALLY SEPARATED FROM RUSSIA BY LITHUANIA -- OR A BRIDGE LINKING POLISH AND OTHER WESTERN INVESTORS TO THE REST OF RUSSIA. GOVERNOR MATOCHKIN STRONGLY AGREED, UNDERSCORING HIS VISION OF KALININGRAD AS AN INVESTMENT BRIDGE. HE ANTICIPATED INCREASED FOREIGN INVESTMENT IN THE REGION THANKS TO PRESIDENT YELTSIN'S REELECTION AND THE OBLAST'S DESIGNATION AS A "SPECIAL ECONOMIC ZONE".
5. MATOCHKIN NOTED WITH PRIDE THAT THE
KALININGRAD SPECIAL ECONOMIC ZONE IS A UNIQUE LEGAL ENTITY IN RUSSIA, DEFINED
BY A BILL SIGNED INTO LAW BY PRESIDENT YELTSIN IN JANUARY 1996. THIS LEGAL
STATUS ALLOWS FOR SIGNIFICANT TAX AND CUSTOMS BENEFITS, INCLUDING THE DUTY
FREE SHIPMENT THROUGH KALININGRAD TO THE REST OF RUSSIA OF ALL PRODUCTS FOR
WHICH AT LEAST 30 PERCENT OF VALUE IS ADDED IN THE OBLAST. IN OTHER WORDS,
A FOREIGN INVESTOR COULD IMPORT UP TO 70 PERCENT OF THE VALUE OF A PRODUCT
DUTY- FREE, ADD 30 PERCENT OF THE VALUE IN KALININGRAD (PRESUMABLY THROUGH
LOCAL LABOR), AND SHIP THE FINISHED PRODUCT ON TO CONSUMERS ELSEWHERE IN RUSSIA.
---> Trevor Gunn note: we have many reports from companies active in the region that this is true. If you require any more concrete details, we will work to supply. Based upon exhaustive research,we have determined (with near-absolute certainty) that Kaliningrad is the only so-called Free Economic Zone in Russia today, which can boast of such aggressive 'bottom-line' privileges for potentially interested U.S. companies (tariff lightenings, most importantly).
6. MATOCHKIN FURTHER NOTED THAT THE OBLAST WAS WILLING TO PROVIDE ADDITIONAL TAX INCENTIVES TO FOREIGN INVEST0RS PR0PORTIONAL TO THE VALUE OF THEIR INVESTMENT. HE CITED SOUTH K0REAN AUTO MANUFACTURER KIA AS AN EXAMPLE. KIA WAS ABOUT TO COMMIT TO INVEST USD 0NE BILLION OVER THREE YEARS TO CONVERT A KALININGRAD DEFENSE ENTERPRISE INTO AN AUTOMOBILE FACTORY. "GIVEN THAT LEVEL 0F INVESTMENT," MATOCHKIN EXPLAINED, "WE ARE WILLING TO REDUCE ALL TAXES LEVIED AGAINST KIA TO ZERO."
7. RESPONDING TO THE AMBASSADOR'S QUESTION, MATOCHKIN CAUTIONED THAT FEDERAL LAW REMAINED CLOUDY WITH REGARD TO LAND USE BY FOREIGN INVESTORS. 0BLAST LEGISLATION, HOWEVER, ALLOWED FOREIGN INVEST0RS T0 LEASE LAND FOR UP TO 49 YEARS.
BUT TRANSIT PROBLEMS HAMPER ECONOMIC GROWTH -------------------------------------------
9. MATOCHKIN ADDED THAT KALININGRAD PORT'S ABILITY T0 HANDLE SHIPS WITH A DISPLACEMENT OF ONLY 10,000 TONS FURTHER LIMITED THE 0BLAST'S ECONOMIC POTENTIAL. DEEPENING KALININGRAD'S CHANNEL WAS NOT ECONOMICALLY VIABLE. MATOCHKIN WAS THEREFORE LOOKING FOR INVESTMENT PARTNERS TO DEVELOP THE MILITARY PORT OF BALTYSK -- 40 KM FROM KALININGRAD -- INTO A CARGO PORT CAPABLE OF HANDLING SHIPS OF UP TO 40,000 TONS.
AMBASSADOR SUGGESTS AREAS OF COOPERATION ----------------------------------------
10. AMBASSADOR PICKERING PLEDGED TO INFORM POTENTIAL U.S. INVESTORS ABOUT
THE ADVANTAGES OFFERED BY KALININGRAD OBLAST'S SPECIAL ECONOMIC ZONE. HE ALSO
OFFERED TO WORK WITH USIA TO EXPAND THE "BUSINESS FOR RUSSIA" PROGRAM TO KALININGRAD
OBLAST. THE AMBASSADOR SAID HE WOULD DIRECT TRADE EXPERTS AT THE EMBASSY TO
STUDY MATERIALS PROVIDED BY GOVERNOR MATOCHKIN, FOCUSING IN PARTICULAR ON
TAX BENEFITS OFFERED BY THE OBLAST. REPRESENTATIVES OF THE FOREIGN COMMERCIAL
SERVICE COULD THEN VISIT KALININGRAD AT A LATER DATE TO EXPLORE INVESTMENT
OPPORTUNITIES IN GREATER DEPTH. AMBASSADOR PICKERING FURTHER SUGGESTED THAT
EMBASSY AND OBLAST AUTHORITIES EXAMINE SEVERAL USG PROGRAMS THAT MAY BE APPLICABLE
FOR KALININGRAD SUCH AS:
-- THE TRADE DEVELOPMENT AGENCY'S GRANTS OF UP
TO USD 250,000 FOR FEASIBILITY STUDIES;
-- OPIC'S USD 500 MILLION FUND TO PROMOTE
DEFENSE CONVERSION; AND
-- EXIM BANK'S FUNDS TO DEVELOP RUSSIA'S
OIL/GAS AND FORESTRY INDUSTRIES THROUGH
PURCHASES OF U.S. TECHNOLOGY.
12. GOVERNOR MATOCHKIN RESPONDED
ENTHUSIASTICALLY TO THE AMBASSADOR'S SUGGESTIONS AND PLEDGED TO PURSUE THEM
AFTER RUSSIA'S AUGUST VACATION SEASON.
BUSINESS LEADERS RAPIDLY EXPAND TIES WITH WEST ----------------------------------------------
14. SEVERAL PROMINENT BUSINESS LEADERS
DISCUSSED THEIR EFFORTS TO EXPAND TIES WITH WESTERN INVESTORS DURING A SEPARATE
MEETING WITH THE AMBASSADOR. THEY SAID THAT APPROXIMATELY 1000 JOINT VENTURES
WERE OPERATING IN KALININGRAD 0BLAST, MOSTLY IN PARTNERSHIP WITH POLISH INVESTORS.
ANNUAL TRADE WITH POLAND WAS AR0UND USD 20 MILLION WHICH, ACCORDING TO THE
PRESIDENT OF A L0CAL TRADING COMPANY, "WAS N0T ALL THAT BAD, C0NSIDERING WE
STARTED FROM ZERO IN 1991 WHEN KALININGRAD WAS STILL A CLOSED AREA." THE BUSINESS
LEADERS HAD ESTABLISHED A FORUM TO DEVELOP CREATIVE WAYS T0 IMPROVE THE 0BLAST'S
INVESTMENT CLIMATE, INCLUDING THE POSSIBLE SALE OF OBLAST BONDS TO FINANCE
INFRASTRUCTURE IMPROVEMENT. THEY RESPONDED POSITIVELY TO THE AMBASSADOR'S
SUGGESTIONS TO EXPLORE THE EXIM BANK AND OPIC PROGRAMS MENTIONED ABOVE.
MAYOR ECHOES GOVERNOR'S ENTHUSIASM FOR INVESTMENT -------------------------------------------------
15. DURING A SEPARATE MEETING, KALININGRAD MAYOR SHIPOV REITERATED THE POTENTIAL BENEFITS AWAITING INVESTORS IN KALININGRAD'S SPECIAL ECONOMIC ZONE. SHIPOV SAID HE AND HIS STAFF WERE WORKING HARD TO ENSURE THAT THE LEGISLATI0N CREATING THE ZONE WAS FULLY IMPLEMENTED. SHIP0V NOTED WITH PRIDE THAT KALININGRAD ENJ0YED ONE OF THE HIGHEST LEVELS OF BUSINESS ACTIVITY IN RUSSIA, AFTER MOSCOW AND ST. PETERSBURG.
16. MAYOR SHIP0V EXPRESSED HIS GRATITUDE THAT AMBASSADOR PICKERING HAD CH0SEN
TO MAKE THE FIRST VISIT BY ANY U.S. AMBASSADOR T0
KALININGRAD. THE AMBASSADOR BRIEFED SHIPOV ON USG INVESTMENT PROMOTION PROGRAMS.
SHIP0V THANKED THE AMBASSADOR, ADDING, "WE ARE READY TO WORK SERIOUSLY WITH
YOU TO MAKE THIS COOPERATION HAPPEN."