Kaliningrad Oblast and the ‘Sanctions War’: Genuine Progress or Avoidable Stagnation? (Part One)

In August 2014, in retaliation against the West’s economic sanctions adopted to punish Russian aggression in southeastern Ukraine, Moscow introduced its own package of countersanctions. Kaliningrad Oblast (KO), traditionally heavily dependent on federal subsidies (Rambler.ru, November 9, 2018), was initially hit particularly hard by the resulting economic upheaval. And this year, the outbreak of COVID-19 further exacerbated local economic hardships, forcing KO’s regional authorities to divert considerable oblast funds to deal with the crisis (TASS, September 7). The local economy obtained massive support from the state-owned Sberbank and the Ministry of Finances (Kgd.ru, September 10). This, however, did not fully reverse the years of serious economic slowdown in almost all sectors of strategic importance to the exclave (TASS, September 11; Newkaliningrad.ru, September 7). Of particular note, in the post-2014 period, Kaliningrad underwent important socio-economic transformations in three key areas: food security (a chronic problem since 1991), tourism (a sector Moscow had most hoped to improve for the region), and local offshoring (presented as a means for Russia to circumvent Western sanctions). An overview of the developments in these three sectors provides important insight as to how Kaliningrad fits into Russia’s regional Baltic policy.

Kaliningrad Oblast was hit particularly hard in 2014 when it comes to food security. Most locals consider the food commodities sector a crucial “strategic branch of the local economy” (Newkaliningrad.ru, September 20, 2019). Throughout its post-1991 history, KO was never able to fully cover its basic needs when it comes to essential food products. And while the government has taken some important strides in boosting self-sufficiency (Gurievsk.gov39.ru, August 7), the efforts since 2014 have resulted in skyrocketing prices for local residents. In effect, Moscow’s policy of “import substitution” has by and large failed: imports from non-Western countries, such as Belarus, Serbia, Chile, Macedonia, and Morocco have grown exponentially, generally resulting in significantly higher transportation costs compared to previous imports from neighboring Lithuania and Poland (Newkaliningrad.ru, August 26). At the same time, despite the implementation of rigorous anti-smuggling policies, food/staples smuggling from the EU is thriving (Newkaliningrad.ru, September 21). On top of that, massive Russian investments into local agriculture (production of cereals and grains) appear to have been unproductive due to insufficient local transportation infrastructure, lack of local grain elevators for storage, etc. (Newkaliningrad.ru, October 14, 2019). And the situation is further aggravated by Lithuania’s high transit tariffs on products coming out of Kaliningrad, which has made grain and cereals cultivation an unprofitable business in the westernmost Russian oblast (Newkaliningrad.ru, August 29, 2019).

In the realm of tourism, Kaliningrad has indeed achieved a notable milestone, though longer-term prospects remain dubious. In 2019, the number of tourists visiting Kaliningrad reached 1.74 million (Interfax, August 25); and by the end of 2020 (even despite the COVID-19 pandemic), it is expected to hit an impressive 1.3 million (Atorus.ru, August 25). According to one report, based on the projected number of tourists, KO will be this fall’s second-highest destination for Russian visitors, ceding first place to Krasnodar (Kgd.ru, August 27). Moreover, Kaliningrad City was named “one of the most popular destinations for the upcoming winter holidays” among Russian urban areas (RIA Novosti, August 15). This undisputable success rests on three factors. First was the “2018 Soccer World Cup effect,” which increased Kaliningrad’s visibility domestically and abroad, as reflected by National Geographic mentioning Kaliningrad as one of Russia’s best excursions (Kbp-travel.ru, February 17). Second has been the “COVID-19 effect,” which has barred many Russians from traveling abroad, thus making Kaliningrad a suitable and budget-friendly vacation substitute. Third is the effect of the confrontation with the West—namely, individual travel sanctions—which prevented large numbers of employees of the Russian interior ministry and other security services from taking trips abroad. Local authorities are planning to increase the overall number of incoming tourists to three million by 2025. This is to be achieved thanks to large infrastructural projects, including the construction of a sea cruise terminal (Pionersky), which could accept up to 250,000 additional visitors annually (TASS, April 18, 2019). On the other hand, the oblast authorities hope to attract tourists from China, which is hindered, for now, by the lack of direct flights (Kbp-travel.ru, January 23, 2020).

The third strategic area of the Kaliningrad economy is the “offshore” taxation zone for imports and exports, which was seen by Moscow as a remedy against Western sanctions (see EDM, June 5, 2018). It needs to be noted that between 2018 and 2020, the overall volume of investments that went through the offshore zone reached 32 billion rubles ($415 million), but KO’s profits from this initiative, received in the form of dividends, amounted to a meager 130 million rubles ($1.6 million) (Newkaliningrad.ru, September 10). Similarly, the offshore zone has not been able to attract many multi/international corporate residents (just 11 in all) (Newkaliningrad.ru, July 24) nor Russian companies. Many of the latter—especially in the IT industry—have preferred to make use of Skolkovo (outside Moscow) or other Russian business-friendly venues (Newkaliningrad.ru, June 23).

The above survey suggests two broad conclusions. First, Kaliningrad Oblast was able to somewhat weather years of economic hardships only thanks to massive economic support from the federal center. Local entrepreneurial spirit—undermined by Moscow after 2000 (via its subsidies policy)—has now been suppressed even further. Moscow has made it abundantly clear that KO, which is so geo-strategically important to Russia, must not develop close socio-economic and political ties with neighboring Poland and Lithuania since such links could have a deep transformative effect on the exclave’s residents. Irrespective of costs and economic losses, Russia will thus artificially seek to maintain relatively high standards of living to avoid public discontent and preserve popular loyalty. This policy leads to the further isolation of the oblast and the de facto reversion to its pre-1991 status: as an isolated and heavily militarized “island.” Second, despite huge expectations, the import-substitution strategy for the oblast has failed to achieve food autarky—a critical component from a military-political standpoint—leaving KO still dependent on external players. In the socio-economic domain, the Kremlin’ stance vis-à-vis Kaliningrad reflects the Leonid Brezhnev era’s “Period of Stagnation,” and any real progress registered today is being sacrificed for illusory ideological causes.

*To read Part Two, please click here.