Crisis Management Challenges in Kaliningrad

Eugene Krasnov, Anna Karpenko

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317157656
• Edition: 1
• Topic: Politik & Internationale Beziehungen
• Subtopic: Kommunismus, Postkommunismus & Sozialismus

Crisis Management Challenges in Kaliningrad captures the evolving nature of the types of crises faced by a society as it transforms and evolves. Once the westernmost bastion of the Soviet Union and now the westernmost part of the Russian Federation, the Kaliningrad Oblast remains cut off from direct land communication with mainland Russia and provides a condensed, real-life laboratory in which to observe changing political, technological and economic priorities in Post-Soviet society. Expert contributors from the region chart the tensions, problems and opportunities created by the collapse of the Soviet Union in December 1991 and examine the change in status and situation of the Kaliningrad Oblast. By looking at a selection of economic, environmental and social crises a historical link between the Soviet and Post-Soviet eras is formed and rigorously examined.

Chapter 1
The Early Evolution of the Special Economic Zone in Kaliningrad Oblast

Timur Gareev

Introduction

This chapter aims to study the case concerning one of the most important economic aspects of the Kaliningrad Oblast during the decade 1991–2001 – the Free Economic Zone (FEZ) and the Special Economic Zone (SEZ) evolution. It would not be too much to say that no serious modern study on the Kaliningrad region (economic, politic or social) can be conducted without analysing the instability of the SEZ that was affected by multiple socio-economic factors, both internal and external. Being a major precondition for modern development of the Kaliningrad region, the SEZ regime in fact prevented Kaliningrad Oblast (subject of Russian Federation) from experiencing a full-scale socio-economic crisis and helped the region became an integral and competitive part of many regional economic agents (Gareev et al. 2005a). Thus, preservation and development of the SEZ itself became one of the main challenges for regional authorities during the period under consideration.

This case study investigates the crisis that occurred in connection with the SEZ instability when a set of external shocks (disruptions) severely reduced the benefits of the SEZ and almost led to the full cancellation of the SEZ. In order to avoid misinterpretation, the notion of crisis in this case study is defined as a decision-making phenomenon, characterized by urgency, uncertainty and threats (or expectations of threats) to certain values critical for society (Stern 2000). Therefore, I prefer to use the term socio-economic problem, at the same time staying within the framework of the cognitive–institutional approach substantiated by Bengt Sundelius and Eric Stern (Stern 2000). The elaborated chronology of the SEZ instability reveals the disruption points and, in my view, proves the possibility to use the method proposed by Stern and Sundelius.

Since the assumption is that the reader is not familiar with the Russian legislative system in the post-Soviet period, this chapter has been extended in order to give a holistic view of the uniqueness of the Kaliningrad situation, in particular how the special economic regime was granted to the region via the Federal Statute ‘The special economic zone in the Kaliningrad region’.

In the analytical part of the chapter, a somewhat original research scheme is applied by examining the different disruptions and aspects of the FEZ/SEZ¹ instability within the framework of different analytical themes. Thus, the case centres on the struggle for the SEZ between the regional and federal level. ‘Promising growth’ versus ‘need for compensation’ dichotomy is perceived as the most interesting topic in this respect.

The preparedness of regional bodies to address and mitigate the dramatic deterioration of the SEZ legal framework is examined during the most profound disruption in 2000–2001. It is interesting to trace the chronology and the instruments of pressure and arguments used by the different levels of power. The bureaucratic procedures are emphasized as the main tool for mitigating problems of a legal nature. Local institutional conflicts displayed during two of the crisis outbreaks in 1998 and 1999 are also discussed as another analytical theme in order to demonstrate the complexity of problems of this kind. The chapter concludes by summarizing the major observations and findings of the research.

Crisis Definition: Instability Evolving through a Series of Disruptions

There are many definitions of crisis and many stress the importance of subjectively perceived uncertainty, time pressure, iteration nature of escalation, intersection of ‘information noise’ overload with lack of reliable data, threats to significant values and the need for taking additional risks for decision makers. Some only identify a crisis as those events that have a capacity to develop into a full-scale military conflict or have far-reaching negative consequences.

The conceptual problems with these definitions appear when it comes to crises with a ‘creeping’ nature. Urgency is not so obvious (months, years), the values at stake are more complex (go beyond health, life and material security such as ‘human rights’, ‘identity’, ‘self-determination of community’, ‘independence’ and so on) and the negative impacts are probabilistic or indirect in nature. The crisis management issues in such crises are not always so clear-cut and are sometimes quite ambiguous. Within the neo-institutional framework, a broader perspective considers the systems of legal norms and informal rules (‘game rules’). Developing as an inductive theoretical system, the institutional thought shares some elements of deductive methodology. Instead of elaborating ‘universal recipes’ (as rational choice theory prescribes), neo-institutionalism suggests to apply some ‘uniform approaches’ to the analysis of problematic situations, that is crises.

Therefore, I prefer using the notion of instability to describe the problematic situation of the SEZ in the Kaliningrad region. Instability problems may be perceived as ‘creeping’ crises. In other words, the problem can be defined as a state or/and the dynamics of socio-economic environment that is/are perceived by society as unsatisfactory (insufficient) regarding such values as development, sustainability and economic security (based on comparisons, expectations, experiences and so on).

The SEZ instability was a problem that, while not immediately urgent, caused a great deal of negative public opinion and had a negative impact on business activities and politicians’ behaviour. There is a distinction between an ‘instability problem’ and the notion of a ‘creeping’ crisis in the sense that the latter deals with some pathogens within a social or political system that take a long time to develop into a full-scale crisis. The problem itself does not necessarily have to be a ‘pathogenic’ in nature. In other words, a problem can be linked with the poor functioning of a positive institution (like preferential regime). Instability is a dynamic aspect of a system which evolves through several disruptions. In turn, a disruption is understood as a rapid change that has the potential to trigger an escalation and drive the system into a crisis.

For the purpose of this chapter, it is more important to show what values were threatened and how serious the danger was. The SEZ crisis of 1991–2001 is defined as the instability of institutional and legal norms that were embedded in the social system and had evolved through a series of regular disruptions. Decision makers felt time pressure even in the periods between the disruptions because they felt they had to demonstrate the positive aspects of the SEZ operation.

Another important aspect is to discuss the analytical themes that deserve attention but which are not so apparent in terms of decision making and policy reaction. Stern stresses a central role of framing in policy discourse that is defined as ‘… interactions of individuals, interest groups, social movements, and institutions through which problematic situations are converted into policy problems, agendas are set, decisions are made and actions are taken’ (Stern 2000, 41). In this respect interpretation and problem framing are important as far as the SEZ is a result of many interpretations of policy makers of different levels of power.

This refers to the fact that the ‘values’ of certain regions may not be so important to the federal decision makers, whereas one of the prime tasks for regional institutions is to protect ‘regional values’. The only way to mitigate real disruption, or to prevent one, is to persuade federal policy makers that ‘regional values’ are part and parcel of those values that higher level politicians are likely to maintain. The change in problem framing and political bargaining are aspects that stress a cognitive nature and subjectivism of SEZ policy making.

Concluding the definition discussion, not only should the question ‘Why is the method used for “creeping” crisis applicable?’ be answered but also the question ‘Who felt that the problems with SEZ was a crisis?’ According to the current definition of the crisis used in this chapter, the list of those who perceived the SEZ problems as a crisis was rather extensive. It was a crisis for the public administration – because they had to make critical decisions and maintain a good public image; for the entrepreneurs – because they were dependent on the SEZ and incurred higher risks in the unstable financial environment; for investors – because any business plan or long-term strategy always has to be allied with the ‘rules of the game’; and for society – because they felt their welfare was greatly dependent on the destiny of the SEZ.

Indeed, the detachment of Kaliningrad Oblast from the Russian mainland makes economic development rather limited. The SEZ enabled the establishment of a few new industries (namely electronics, furniture making, car assembling and canning meat) that constitute at least half of the region’s industrial production and growth. At the same time there has been great uncertainty concerning the issue of the tax-free status of these products. Considering the fact that the Baltic region is a highly competitive environment and Kaliningrad’s geographical detachment from the rest of Russia, the issue of a stable SEZ is extremely significant at least until a new sustainable and functional economic mechanism can be implemented. Until this is done, there will be a great sense of uncertainty in Kaliningrad with any attempts to modernize or eliminate the SEZ. This uncertainty is in part associated with the SEZ as a manifest (or symbol) of the Russian Federation’s concern for its western exclave and its inhabitants.

Unfortunately, the regional and federal politicians have significantly different plans for the SEZ. On the one hand, the federal politicians accept the fact that the SEZ should be modernized but they do not have a clear vision of what should be done instead. On the other hand, the local politicians (heavily influenced by the regional business elite) reject any suggestions on reforming the SEZ and want to protect the SEZ as long as possible. It seems that discussions about modernizing and reforming SEZ have their intrinsic value for decision makers on both sides, but they, of course, irritate the public.

Institutional Context

Historical background

The FEZ in the Kaliningrad region was established in 1991 as the institutional response to a crisis that hit the Oblast in the very beginning of 1990s. As a result of the collapse of the USSR and the emergence of the new Baltic States, industrial ties and transport routes became fragmented and this rapidly triggered a dramatic economic downturn which affected the Oblast economy until 1995 when new market mechanisms were institutionalized.

The most apparent features of this economic downturn were 1) the market lacked goods and services; 2) some of the larger local industries shut down and contributed to the rising unemployment rate; 3) demilitarization and reduction of military staff in Kaliningrad; 4) a dramatic decline of the aggregate turnover and Gross Regional Product (GRP); and 5) enlargement of a shadow economy sector confirmed by expert judgments and indirect indicators.

Moreover, at a deeper level, the crisis acted as a manifestation of a more serious disease connected with structural problems of the economy as a whole rather than just reduction in productivity. The crisis revealed that government institutions and private enterprises were unable to adapt to the evolving environment in the transition to a market economy. Even the traditional strategy of outsourcing production to the interregional subcontractors and suppliers was unable to address the new exclave’s reality.

The crisis of the early 1990s proved that Kaliningrad was largely unable to control the key determinants of soft security issues. The capacity for restructuring the economy had been significantly reduced because of hyper-inflation, rapidly increasing input costs (including the cost of energy and imported raw materials), and escalating unemployment in traditional sectors not yet substituted by small business and self-employment schemes.

The crisis also highlighted the inability of the end-producers to hook up with their final consumers, which was a clear weakness in comparison with the foreign suppliers of imported goods. This can, in part, be explained by the Oblast’s over-reliance on the fishing sector (which had been traditionally subsidized within the Soviet planned economy) and on the old-fashioned machinery sector as well. Faced with a crisis that simultaneously affected all of the regional industrial sectors, the Kaliningrad administration displayed a clear propensity to help those industries organized around large-scale enterprises where the labour force was more heavily unionized and therefore politically more influential (as in the fishing, shipbuilding, pulp-and-paper and machinery sectors).

Since the Russian Federation reduced its financial support to Kaliningrad and requested restructuring of the Oblast’s production sector, the governing bodies lacked the financial means and competencies to manage the economic situation efficiently. Thousands of people, who had been displaced from their traditional occupations, had to initiate self-employment types of activities,² many of which evolved into Small and Medium-sized Enterprises (SMEs) by the late 1990s.

Professor Urij Matochkin – the head of the Regional Administration and the Governor of Kaliningrad Oblast in 1991–1996 – accompanied by some researchers and practitioners in 1989 suggested the FEZ concept for regional development (Matochkin 1999). The concept had first been mentioned during Matochkin’s election campaign for the Supreme Soviet of the RSFSR (Ivchenko and Samoilova 1999).³ In 1991 the Regulation of the Council of Ministers of the RSFSR No. 497 ‘Priority measures for the development of free economic zones in Kaliningrad and Chitinskaya Oblasts’ was approved. Thereafter the history of FEZ ‘Yantar’ made headway.

The idea of FEZ had to squeeze through a political struggle between two schools of thought, namely Moscow and Sankt-Petersburg. The bias of the argument lay in the field of spatial economics. The former insisted on the adoption of FEZ in the entire Oblast area (that is, implementation of FEZ within the boundaries of the Oblast); the latter insisted on local FEZ establishments based on priority districts or enterprises. Finally the Moscow vision was adopted as a framework for a few President’s Edicts in 1992–1993 concerning the development of the Kaliningrad region in general and the FEZ in particular (see the Chronology section).

The Russia-wide economic reform policy in 1992 (sometimes referred to ‘shock-therapy’) also adversely affected the new FEZ status that had recently emerged in the Kaliningrad region. In response to the dynamic and extremely destructive environment, the Regional Administration had to change the slogans from ‘development’ to ‘survival’. Therefore, after a promising start in 1992, the FEZ concept failed to demonstrate outstanding ‘FDI-attracting capacities’⁴ designed to turn Kaliningrad into new growth pole, but it did help to fill the local markets with imported goods.

Many researchers (Khlopetsky and Fedorov 2000; Matochkin 1999) have asserted that the FEZ indeed served as an instrument for survival rather than an instrument for a fast economic transition with superior modernization results. Nevertheless, regional interests very often seemed to contradict with federal interests and this resulted in many political speculations. As a result, the first variant of special customs treatment regime (formed by the FEZ norms) proved unable to attract sufficiently large, if any, amount of foreign investments to compensate for the reduction in tax collection on the federal level. Consequently, the FEZ was abandoned after only four years of operation. It was obvious that only a Federal Statute could...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures and Tables
• List of Contributors
• Acknowledgements
• List of Abbreviations and Translations
• Maps of the Baltic Sea Region and Kaliningrad Oblast
• Introduction – Kaliningrad: Managing Evolving Crisis Challenges
• 1 The Early Evolution of the Special Economic Zone in Kaliningrad Oblast
• 2 The Cepruss Pulp and Paper Mill: Complex Crisis Management
• 3 Child Welfare in the Kaliningrad Region: Production of a Creeping Crisis
• 4 Building a Mosque in Kaliningrad
• 5 The Curonian Spit: Systemic Crisis of a National Park
• Conclusion
• Annex
• Index