Russian Enclave at Crossroads Before EU Expansion

KALININGRAD, Russia - Fear is spreading through the Russian enclave of Kaliningrad that the European Union's eastern expansion will isolate Moscow's westernmost outpost from the motherland, casting it deeper into poverty.

When Poland and Lithuania join the western bloc in coming years, the million inhabitants of this Baltic region sandwiched between those two countries may no longer be able to travel to the rest of Russia except by sea.

Local officials say that without a top-level deal between Moscow and Brussels on the future on this former Soviet military bastion, its already shaky economy may collapse due to a severing of transport and energy links with Russia's mainland.

"Our geographical location may be a curse or a blessing. We are afraid that our natural advantages may be forsaken," says Yuri Matuchkin, Kaliningrad's governor in the early 1990s, now chief of the regional assembly's economic committee.

EU countries, especially Sweden and Finland, are calling for action on Kaliningrad, which was part of Germany before World War Two, fearing it will become an island of crime and corruption inside the bloc, exporting pollution and disease.

The strategic importance of Kaliningrad, half the size of Belgium, was highlighted in early January, when U.S. media reports that Moscow had moved short-range nuclear weapons into the region prompted serious concerns in Poland and the rest of NATO.



EU EXPANSION MAY BENEFIT KALININGRAD

Kaliningrad's local authorities know EU enlargement would give them a unique opportunity to turn the impoverished region into a thriving area of liberalised trade, a testing ground for improved cooperation between Russia and the EU.

This is the goal of Kaliningrad's new governor, Vladimir Yegorov.

But the key to the region's prosperity is in the hands of Moscow, which local officials say lacks any clear vision for the enclave, once a closed military area, whose rundown roads and decaying housing show it is markedly poorer than its neighbours.

"We want Kaliningrad to become a bridge of cooperation between Russia and the European Union," says Yegorov, an admiral who won a November election on pledges to root out corruption that plagued the region under his predecessor Leonid Gorbenko.

Kaliningrad has already missed an opportunity to become what local reformers hoped would be a Hong Kong of the Baltic in the mid-1990s with the failure of attempts to create a credible free economic zone in the region.

The zone offered only half-hearted trade liberalisation and investors were scared away by rampant corruption, fluid regulations and a law which forbids foreigners to own land.

Sweden, which holds the EU's rotating presidency in the first half of 2001, hopes to start talks with Russia on the practicalities of everyday life in Kaliningrad once the enclave becomes a little Russia marooned within the EU.

"It is heavily polluted, it has diseases like HIV and tuberculosis, and there is nuclear waste. Almost every problem you can find you have there," Swedish Prime Minister Goran Persson said in a recent interview.

Sweden estimates that Kaliningrad needs up to $3 billion in investment over the next four years for a preliminary clean up of its environment, soiled by industrial pollution and untreated sewage from cities.

Governor Yegorov told foreign journalists that AIDS had become a serious problem in the region and he lacked funds to fight it.

"Tuberculosis is a social disease. We live poor lives, so people fall ill. AIDS is linked mostly to narcotics," he said.

Kaliningrad, blessed with 90 percent of the world's amber, has some industry with paper, food processing, fishing, shipbuilding and oil production. Its annual foreign trade turnover is $1.5 billion.

But thousands of Kaliningrad citizens make their living by smuggling vodka, cigarettes and petrol into Poland, where they are two to three times more expensive.

"This smuggling is worth about $200 million annually," said Polish consul Andrzej Janicki-Rola, adding that the practice should stop in October, 2001, when Poland plans to impose strict, EU-style travel restrictions on Russians.

Lithuania, expected to join the EU one or two years after Poland, which is likely to be a member by 2004 or 2005, will also be forced to impose similar travel rules, unless Moscow and the EU work out a special travel agreement.



ECONOMIC ZONE A MISSED OPPORTUNITY

Kaliningrad's special economic zone has attracted $160 million in foreign investment over the last four years. The German auto maker BMW has built a small assembly plant to produce tax-break cars for Russia's business executives.

But the attractions of tariff breaks do not outweigh the disadvantages perceived by many potential investors.

"Kaliningrad has failed to become a thriving economic zone because of two main factors: no right to buy land and corruption," said Janicki-Rola.

The new governor vows to put the region's murky past behind it and give foreign firms stable conditions for investment, but he is thin on details.

"We will amend our regulations so people are not afraid for their investment. We will take steps to put economic life under control," Yegorov said, referring to the large unofficial sector of the economy which is often linked to organised crime.

Yegorov blames most of Kaliningrad's woes on its Soviet past. Until 1989, the nuclear port of Kaliningrad was closed for foreigners and Soviet citizens needed permits to get in.

Kaliningrad's road and rail infrastructure is poor and hundreds of million of dollars in investment will be needed to make its port, Russia's only major Western warm water port, into a transport hub in the Baltic region.

"We were closed to the outside world for 50 years. It is difficult to make up for this in 10 years," said Yegorov.



SHADOW OF SOVIET PAST

Foreigners are still required to get permission to enter Baltiisk, the site of Russia's Baltic Fleet. In Baltiisk, like in the capital of Kaliningrad, the main street is still named after Lenin, the father of the Soviet revolution in 1917.

Kaliningrad used to be Koenigsberg before the Soviet Union took it from Nazi Germany during World War Two. In the 18th century the city was home to Immanuel Kant, one of the world's most eminent philosophers.

Soviet dictator Josef Stalin ordered the expulsion of Germans after the war and brought in people from across the Soviet Union to populate what became a heavily militarised outpost threatening Europe with nuclear weapons throughout the Cold War.

German houses are now being restored and wealthy businessmen are building houses imitating the pre-war German style.

"Kaliningrad is a place where two visions still clash -- keeping the region as a military bastion with geo-strategic importance or turning it into a zone of robust trade," said one local politician. "It is up to Moscow.