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Last Updated: Monday, 16 October 2006, 14:03 GMT 15:03 UK
Kaliningrad erases stains of past
By Laura Sheeter
BBC News, Kaliningrad, Russia

Kaliningrad is sandwiched between two EU member states
It is rare to hear good things about Russia's Kaliningrad region on the Baltic Sea.

Cut off from the rest of Russia, tucked between Poland and Lithuania, during the 1990s Kaliningrad became notorious for smuggling and epidemics of heroin abuse and HIV. It was the first place in Russia to be hit by widespread HIV infection.

During Soviet times Kaliningrad was a closed military zone, and after the fall of the USSR the exclave suffered one of the worst economic collapses anywhere in Russia.

But things are quietly changing in Russia's smallest region, because Kaliningrad is experiencing an economic boom - and Moscow has declared it will turn the region into "the Russian Hong Kong".

'Car capital'

With average GDP growth of more than 10% in the last few years, Kaliningrad is growing faster than any other region in Russia, even outstripping the success of its EU neighbours.

Crane in Kaliningrad
New buildings are sprouting up everywhere in Kaliningrad

There are building sites everywhere putting up new homes and office blocks.

Designer shops line the streets of the city centre, and the region now has more cars per head than Moscow.

The reason for all this prosperity is that Moscow has designated Kaliningrad a Special Economic Zone (SEZ).

Manufacturers based here get tax and customs duty breaks on the goods they send back to Russia.

That policy means the region is now a manufacturing hub. One in three televisions in Russia is made in Kaliningrad, and it is home to car plants making Hummers and BMWs.

Stefano Vlahovic, president of Produkty Pitania, Russia's largest frozen food producer, says he started his company in Kaliningrad because of the SEZ.

"It just doesn't make sense for us to be based anywhere else in Russia. In fact it's so advantageous we're opening a new plant here too," he says.

That is despite the cost of having to send the finished goods in refrigerated trains through Lithuania and Belarus to get them back to his customers in Russia and Central Asia.

Migration plan

Wherever you go across the region, the feeling of confidence is palpable, there is a sense that growth can only get faster.

Map of the Kaliningrad region
Territory founded by Teutonic knights in 1255
Called Koenigsberg until renamed in 1946
Was capital of former German province of East Prussia
Was home to German philosopher Immanuel Kant
German population expelled after World War Two
Kaliningrad is the name of the territory and its capital city
Now surrounded by European Union member states

In fact, the regional government believes that with unemployment at almost 0%, the only problem they face is a lack of workers to do the jobs.

But they have ambitious plans to overcome the shortfall.

The current population is just under 950,000 people, and according to the regional economy minister Felix Lapin, they plan to attract 300,000 immigrants to move here in the next five years.

"We're advertising all over the former Soviet Union, among the Russian diaspora in Kazakhstan and in the Caucasus," he tells me.

"We know it's a lot of people to bring in, but we're already preparing, building new houses so that as soon as they arrive, people can find a job and a home and live comfortably."

Isolation worries

But while the red marble and gushing fountains in the renovated city centre speak of the money pouring into this region some question whether Kaliningrad can keep up the pace.

Freight trains in Kaliningrad
Most of the goods produced go east - back to Russia

Almost all the money comes from Russia and most of the goods produced go straight back there.

Local economist Georgy Dykhanov is worried that by concentrating on linking itself to the rest of Russia and ignoring its European neighbours, Kaliningrad will not be able to outgrow its dependence on Moscow's favourable economic policies.

"A lot is said by the EU and Russia about co-operating in Kaliningrad, but very little is being done," he says.

"If we look at scenarios for the future, it's one of isolation - Kaliningrad connected to the rest of the Russian economy, but within the European Union territorially, so around there is another economy and other rules and other connections. I don't know who profits from that scenario - it will cost everyone more."

'Big Russia'

But the local authorities see the region's future tied to Russia.

Pupils at School Number Seven in Kaliningrad
More of the local children have visited the EU than Moscow

They are dismayed, rather than encouraged by the fact that more of Kaliningrad's school children have visited the EU than Moscow, and they are trying to put that right.

In School Number Seven, a group of pupils is giving a presentation, telling their parents, teachers and classmates about a recent trip to what they call "big Russia".

It has been paid for by the government, part of their "We are Russians" programme.

Alexandra, 16, says it was great to see Moscow's Kremlin and the Winter Palace in St Petersburg.

But she says that "Kaliningrad is different, more European. Big Russia is something else".

Whether local people's hunger to be a part of Europe will translate into greater openness and economic connections between Kaliningrad and its EU neighbours, is still an open question.

Some believe it is the only way the region will be able to stand on its own two feet, but for now, at least, Moscow's policy is to build a purely Russian economic stronghold on the Baltic Sea.

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