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China wants to have a compliant middle class

China wants to have a compliant middle class


From time to time, especially in the public domains of Russia and China, calls are made to create a so-called de-Americanised world. In one of the most recent comments discussing this inexorable expectation, an editorial in The Wall Street Journal weekly on October 21st wrote that the frontrunners to the leaders of a de-Americanised planet get their allies, if any, mainly through the use of coercion.

For instance, in trying to keep pro-Russian Edgar Savisaar in the post of the mayor of Tallinn (it is unclear, however, how much de facto pro-Kremlin he is), Moscow even announced an international search of his main competitor. Kremlin efforts to restore the Soviet empire by any means caused concern in the official Riga in late October.

On the other hand, Western negligence sometimes leads to the aggression of other countries, and especially Russia. For example, the suspension of the U.S. government because of rather futile ambitions and a lack of responsibility among Washington politicians, and reoccurring rumours of a potential bankruptcy of the United States, evoked a variety of opinions in the world. Lone China in the Southeast Asia might think: “...Why not me?” It is a circumstance that speaks for itself – when U.S. President Barack Obama refused to take part in the Asia-Pacific Economic Cooperation summit in Bali in early October because of the crisis, the current Chinese leader, Xi Jinping, became the main celebrity of the summit. So this time, a Chinese breakthrough did occur, at least symbolically.

Towards a liberal economy...

Moreover, Beijing was forced to follow the crisis in America with anxiety. After all, China is a major creditor of the United States; its central bank holds U.S. government securities worth more than 1 trillion U.S. dollars. This means that, despite the tensions, Beijing still trusts (or simply has no other choice) the U.S. financial and political system. However, in the editorial article of The Washington Post of October 9 “Does the U.S. deserve its world-class credit rating?”  they point out with sarcasm that at the time, Washington’s crazies can be actually be dangerous to political stability not only in the United States, and not only theoretically. However, these and similar reflections in the American and the global media had no significant effect on Chinese actions, because in the modern world, the big players are too dependent on each other to afford any ambitious movements, and focus on instantaneous problems, rather than the long-term balance of power.

In any case, the fact that China is buying U.S. securities, rather than vice versa, suggests that the economic model based on the needs of the U.S. is currently still operating in the world. And the day when Beijing, declaring from time to time that the communist system is better than American "capitalism", will disengage from the U.S. economy, has yet to come.

But it would be wrong to say that China is not satisfied with this situation. Being pragmatic, the Chinese are very well aware that the principle according to which the global economy functions today provides highly favourable conditions for China to earn U.S. dollars and thus transform its economy and increase its potential. After all, now the Chinese can quietly but surely build themselves a bridgehead, and victoriously take over the control of the global financial pyramid. But, as usual, China is only ready for change with the condition that everything remain under control, and without risk to the Communist Party’s hegemony.

This approach also dominated in the ruling Chinese Communist Party’s plenum on November 9-12 – it outlined the country's economic development guidelines for the next decade. As announced by the Western media with a certain satisfaction, although the wording is traditionally vague, it is clear that the free market will play a key role in the future. According to the Financial Times, the state is planning to gradually abandon price regulation in a number of economic sectors, as well as to eradicate the disparity between the status of urban and rural land. It is believed that this will facilitate more rapid urban development. The plenum also set the stage for the liberalization of the exchange and interest rates.

Plus, there are also signs of abolishing the compulsory registration which keeps rural residents attached to their place of residence. The Chinese communists have already realised that the registration hampers the country's development, as it prevents villagers from settling in cities with their families – currently, in coming to the big city illegally, family members lose their right to education and medical care. Beijing also promises to change the rights of ownership so that non-urban residents have the same rights to land as the urban population. This could mean that Chinese peasants moving to large cities might be allowed to sell their land in the future.

But again – strictly under the guidance of the Communist Party…

However, the summarizing plenum document (communiqué) points out with obvious authority that the state-owned companies will maintain their power and monopoly in economic sectors such as banking, energy, telecommunications and transport. Although the communiqué states that the free market will play a key role in the country’s economy, the decisive impact of the Communist Party has not been omitted. This is reflected in the actions of Xi Jinping – he promotes the old-fashioned rhetoric of supporting the Communist Party as the main ideological power, while at the same time suppressing the political free mind, in particular among online commentators (some have already been arrested and are awaiting trial).

Interestingly, the Chinese Communist Party is planning to set up a State Security Committee, which is likely to reinforce the powers of the country's president to control the military. Western press sources predict that this committee will act in the same way as the U.S. National Security Council. So, this is another, although formal, copycatting of the U.S., but of course, adapted to the realm of a huge country still liberating itself from totalitarianism.

Paradoxically, in many areas of the economy and even in social infrastructure, the Chinese attempt to copy the West, but at the same time have a paranoid fear of not only changing the economic, but also the political system. This paranoia can be explained by the fear characteristic to all autocratic leaders of the state that as soon as you release the reins, multinational corporations will exploit your vulnerabilities and impoverish your country in the blink of an eye. That explains why the current Communist Party elite is driving the Chinese economy towards a liberal free market (by the way, the main economic adviser of the ruling class is a liberal, Liu Sheng), while adhering to conservative communist ideological traditions.

Integration with international structures such as the World Confederation of Labour, the World Trade Organization, and the International Monetary Fund also forces adherence to the rules of the world. This can also be seen in competition all throughout the world. Globalization habits and in particular, the rules of global capitalism as "tested" by the U.S., penetrate China, sometimes in unseen forms. For instance, among 820,000 foreign students in U.S. universities during the academic year of 2012-2013, a total of 235,000 Chinese students were leading without competition.

The Forbes magazine issue of July 30 cited Ruchir Sharma, an economist of the Morgan Stanley financial services company and author of the book Breakout Nations, who stated in an interview with the officious China Daily, that China will be the only country of the four major developing countries (the other three are Brazil, Russia and India) to achieve a high living standard, as defined by the World Bank (more than 12,000 U.S. dollars per year). If the country's economy grows by 5-6 percent over the next few years, the average income per capita in China will double to about 20,000 U.S. dollars per year. But the most important question is not whether they will achieve it and when it will happen, because the process is beneficial for the global economy in the first place, but what will happen to China when it has a large middle class.

The young capitalism is being exploited by everyone who can…

After numerous scandals of the Taiwanese Foxconn company related to the tragic deaths of its young workers who could not bear the stress of working there (the company has earned the nickname, “the Suicide Factory”), at the end of July, the focus shifted to a U.S. corporation, Apple Inc. In order to diversify its production, it cooperates with another Taiwanese company, Pegatron. A New York based NGO, China Labour Watch, raised the question of how Pegatron succeeds in reducing the cost of its production. This turned out to be, by using methods that were prevalent in America during the first half of the last century.

China Labour Watch's report refers to 80 violations of the labour, production and environmental codes that were found to exist at Pegatron, ranging from failure to comply with environmental laws, taking away the passports of workers (preventing them from fleeing to another company), to unbearable conditions in the factories, exploitation and child labour. Moreover, low wages force the company’s staff to work overtime. It turned out that 700,000 workers employed in the three Pegatron factories are forced to work an average of 66-69 hours per week.

Of course, Apple received a serious blow to its reputation – after all, the Pegatron companies make​​ components for its new iPhone model. However, only hypocritical representatives of China were surprised by these reports. It was as if they had forgotten that China's success story began with a cheap labour force. So, it will take some time before what has become a normal practice to become an intolerable thing of the past (and, if China's non-governmental organizations actually begin to fight for the rights of working people, rather than simply run propaganda against Chinese manufacturers, Huawei's competitors).

In any case, it is clear that the era of uncontrolled cheap labour in the world is about to end. Multinational corporations will have to seek a new location for their manufacturing operations or have to adapt, which usually means paying more. That would be one of the changes benefiting China's economy, and raising the per capita income level. However, when we talk about the actions of China Labour Watch defending the rights of the working people, which may be useful for the Chinese economy and certain Chinese companies, we should not overlook other phenomena that could symbolize much deeper tectonic fractures in society.

On November 13th, the Japanese newspaper Asahi Shimbun announced a publication with a revealing title, Explosion in Shanxi: What is wrong with China?, telling the story of several bombings in a provincial capital in the western part of China near a Communist Party headquarters.

Accurate identification of what the cause of the explosions was is not easy. However, it should be noted that Shanxi produces most of the Chinese coal that fires the majority of the country's power plants, which in turn, supply cheap electricity to maintain the economic competitiveness and growth. Public corporations and many small and medium-sized enterprises operate within the province, and a number of businessmen were able to capitalize on the government-controlled economic promotion policies of the backward western regions, ignoring work safety in the mines or slave labour, where kidnapped individuals and even people with mental disabilities were forced to work. In addition, many people had to flee their homes because of the development of the coal fields (in this case, it should be noted that aggravating environmental problems cause public discontent in China).

The Chinese people have become increasingly intolerant to such injustices – especially to social exclusion, which is particularly rampant in China as compared to the rest of the world. A Japanese newspaper has presented statistics that allegedly show that the number of demonstrations and acts of resistance in the country is growing fast – from 60,000 in 2003 to 180,000 in 2011. Accordingly, the cost for Beijing to maintain public order (in China it is called the cost of public safety) has increased from 330 billion yuan in 2007 to 700 billion yuan in 2012, surpassing the defence budget.

The growing protests indicate that the Chinese are following what's going on in the world, and learning to fight for their rights. The only difference is that they convey their protests in Chinese forms and use Chinese phraseology. For instance, peasants, deprived of their land by corrupt officials in the course of the current reform, write in their appeals to a higher authority that their goal is not to turn over the Communist Party, but that the government should not violate the so-called “heaven mandate” granted to it (in China, the rule of law has been based on it for centuries).

While the Chinese Communist Party leaders see each new issue as an opportunity to promote economic growth by investing the U.S. dollars earned from foreign trade, simple Chinese people have to live with these problems.

Is it possible to control the middle class?

According to the Sinology lecturer of the Centre for Oriental Studies at Vilnius University, Vytis Silius, China's economic model is approaching the Western model. Undoubtedly, it has specific Chinese features. So far, it is only in the level of testing and social experiment. For example, some provincial towns have attempted to install a democracy, where a local community solves its problems by voting and elects the local government. It is argued that the Chinese are satisfied with this, because traditionally, democracy for them is most important at the grassroots level – local communities – and they do not really care about electing the highest powers in the country. However, monarchs that once had power in many countries of the world, failed to preserve it. So nothing is eternal. Everything changes. Traditions are also not forever, no matter how strong they are. Therefore, while watching the solutions currently being implemented by China, both China and the Western countries will have to answer a lot of questions – which will determine what the world will look like in the 3rd decade of this century.

First of all, the question is whether China, in seeking to free itself from economic dependence on the exports of cheap labour and to create a strong middle class, which might boost and stabilize consumption within the country, will be able to perform this transformation without the democratisation of its political system. This question is very interesting – after all, a democratic environment is more favourable to creativity and innovation, so during the migration from textiles to high-tech industry, and in order to be a leader in a transparent competition, the dominance of an infallible party can become a nuisance. On the other hand, the current system makes it possible for China to consolidate its business stronghold in the global market, making use of the state apparatus and control, together with structural and financial support, to achieve positive results. However, in this case, the U.S. and the EU will have to answer the question of how long they will tolerate the competitive distortions where private Western corporations have to compete with Chinese state-owned companies involved in banking, energy, telecommunications and transport.

However, a key question that the future will inevitably answer is this – Will the emerging middle class of China want to live in the shadow of an ideological and unerring political regime? It may be all very well for Russia to control the situation, when individuals serving oligarchs account for a greater part of Russia's middle-class. Therefore, by controlling oligarchs you control the middle class. How China will control their own middle class and how much the latter will allow itself to be controlled is still a mystery, as tales about the dangers of democracy because the Communist Party could lose power and then everything would come under the control of a mid-level clerk of a U.S. company, can be only told to the exploited and poor part of the population, while it is much more difficult to deceive the middle-class. Its representatives understand what the leaders fear most, and who is responsible for the assets of certain players to grow by billions every year, while they end up living in a polluted environment.


NASDAQ OMX Baltic - Three Countries, One Market

NASDAQ OMX Baltic - Three Countries, One Market

Ott Raidla

NASDAQ OMX Baltic operates three stock exchanges and three central securities depositories in Estonia, Latvia and Lithuania under one Baltic roof, providing the capital market infrastructure across the whole value chain – from listing, trading, and market data to clearing and settlement and safe-keeping of securities.

NASDAQ OMX Baltic exchanges are a part of the world’s largest exchange company NASDAQ OMX, thus ensuring great confidence in Baltic securities market for international investors, offering a market infrastructure in accordance to the international industry standards, world’s fastest trading platform and high listing standards.

The Baltic Market offers a comprehensive, efficient and secure marketplace, regulated to global standards for companies to raise capital and for investors to transact and settle financial products seamlessly between the three countries.

In the recent years, NASDAQ OMX Baltic exchanges have focused on removing frictions to cross-border investments and leveraging on the regional integration. The essential elements of a single Baltic marketplace like shared global technology, one market model, joint membership, common information distribution and other have been put in place, making the region easier accessible and more attractive to local and international investors, as well as companies seeking to list their shares on the stock exchange.

By introducing a single trading and settlement currency as Latvia joins the euro area in January 2014, NASDAQ OMX Baltic will take another step to become a truly integrated market. The single currency across the Baltics will greatly improve the efficiency of the Baltic market and facilitate capturing larger flows of portfolio investments to the region. For foreign investors the common currency will reduce transaction costs through savings in conversion expense, allow for smoother management of cross-border portfolios, as well as diminish trading-related risk.

Baltic tiger is roaring

The Baltic region has demonstrated remarkable agility by quick recovery from the recent economic crisis. Estonia, Latvia and Lithuania have been the fastest growing economies among the 27-member states of the European Union for the last three years. Latvia's GDP in 2012 as compared to 2011 increased by 5.6%, while Estonia's GDP grew by 3.2% and Lithuania's by 3.7%.

During the past 3 years NASDAQ OMX Baltic Benchmark index which is composed of the largest Baltic companies covering different sectors advanced by more than 40%, since the beginning of 2013 the index has grown by 12%.

More opportunities to raise capital

As Baltic economies are steadily growing, so is the capital market. Expanding list of corporate bonds proves that there is a great alternative to bank loans. And this alternative is likely to become more attractive for companies, as the regulations and requirements imposed on bank lending are becoming stricter. There are more and more opportunities for companies to diversify their capital base and attract growth capital using stock exchange instruments.

IPO as a source of attracting capital could be as beneficial for large companies, seeking funding for expansion, as for small and medium size enterprises (SMEs) who cannot access bank loans for various reasons.

As SMEs constitute approximately 99% of all companies in the Baltics, their valuable role in the economies cannot be overestimated. The importance of SMEs has been accurately characterized in a program, which aims to boost the IPO market in Sweden (“IPO White Paper”). The significance of SMEs in Swedish economy has been growing constantly over the recent years. For example, in the last decade about 80% of the new jobs in Sweden were created by the companies with fewer than 50 employees. It seems reasonable to assume that the situation is similar in the Baltics. Taking this into account, it is important to ensure that SMEs and start-ups have the opportunity to get an easy access to capital if they need to.

In addition to the regulated market,  NASDAQ OMX Baltic has an alternative market called First North Baltic. First North is designed specifically for SMEs and start-ups and has much looser regulatory requirements compared to the Main and Secondary lists. Two companies – Baltic Telekom and Telescan – joined NASDAQ OMX Baltic Alternative Market First North in 2013.

The main purpose of the alternative market is to serve as an entrance point to stock exchange for SMEs. Usually, these ambitious companies grow and seek to become the main list companies in the future. The alternative market can boost a company’s visibility and create better conditions for finding investors for further financing.

As a matter of fact, the Swedish IPO White Paper also reveals that the job growth in the companies which went public increased by 36.5% annually during the years following the IPO (by comparison, the average job growth rate in private sector companies in Sweden is 1,5%). This proves a positive link between access to capital by SMEs and job creation.

We believe that what determines success is not how large or small the market is, but instead whether the market is growing or shrinking. As Baltic countries are standing firmly on the path of sustainable economic growth, we believe the IPO and listing trends which we witness all over the world will gain momentum also in the Baltics.

Baltic Market Quick Facts (in a separate box)

79 listed companies
33 members
29 corporate bonds
45 government bonds & bills
5.7 billion euros - market cap
3,265 euros - average transaction
23.92% - increase in the Baltic Benchmark Index y-o-y

OMX Baltic Benchmark GI index (26.11.10-26.11.13) (in a separate box)


10 largest companies by market capitalization

Tallink Grupp (TAL1T) – 643 MEUR
Olympic Entertainment Group (OEG1T) – 283 MEUR
Lietuvos energijos gamyba, AB (LNR1L) – 241 MEUR
Tallinna Vesi (TVEAT) – 226 MEUR
Tallinna Kaubamaja (TKM1T) – 223 MEUR
Lietuvos dujos (LDJ1L) – 185 MEUR
Ventspils nafta (VNF1R) – 145 MEUR
Apranga (APG1L) – 139 MEUR

NASDAQ OMX Baltic Market Awards – honoring excellence in investor relations (in a separate box)

Each year NASDAQ OMX Baltic exchanges identify the best companies in the Baltic market in terms of investor relations and award them during the Baltic Market Awards ceremony.

The Baltic Market Awards project, alongside with evaluating investor relations, identifies the best financial intermediary – a bank or a brokerage company trading in the Baltic company shares – and awards it as Member of the Year.

The Baltic stock exchanges have been carrying on the Baltic Market Awards project since 2006.

Best investor relations in the Baltic countries in 2012 – TEO LT
Best annual report in 2012 – TEO LT
Best investor relations online in 2012 – TEO LT
Most visible improvement in investor relations in 2012 - Latvijas kuģniecība
Member of the year in 2012 – LHV Pank
Overall in the Baltic market, the quality of investor relations of the listed companies has improved by 46% since the first Baltic Market Awards in 2006.



What do Baltic NT promoters dream about?

What do Baltic NT promoters dream about?


In 2007, when the future of the Baltic countries didn’t look resplendent in gold, but it was at least pink, I met a 22 year old Swede on a plane to Vilnius. The fourth-year student was flying to Lithuania, hoping to become a millionaire in a few years – an investment in the Lithuanian economy, then growing at an incredible pace, and in real estate in the Baltic countries, seemed like a gold mine to him, where you do not even need to dig. And he was not the only one to think this way. Hopefully, this young man did not buy the real estate that was supposed to turn into mountains of gold ...

Today, now that we know how the Baltic Tigers’ history ended, we can see his flight across the Baltic Sea from prosperous Sweden to Lithuania as a folly. However, were those who as recently as in the crisis of 2008, seeing the terrific fast growth of profitability of investments, thought it was the result of a new model of the world economy, rather than an investment bubble, equally foolish? And what to think about those who were too lazy to even look deeper into the fluctuations of the gold price during this century, and believed that even though the price was reaching record highs, it would continue to grow? The gold rush fever got its name specifically because it is based on hope rather than logic; the belief that if others succeeded in easily making their fortune, I will succeed, too.

Therefore, when a bubble is emerging in the market, an increasing number of people begin to believe that this is a real and safe opportunity to earn. It is for these reasons that we should have responsible financial and tax policies that would reduce the potential for bubble formation. Without a doubt, you can’t control all bubbles, because some of them are global, but the most negative influence is usually caused by bubbles formed at home. Therefore, when today's Baltic economies are growing very rapidly in the European Union (EU) and their real estate companies constantly share information in the media about the recovering real estate market, it is a good time to decide whether to take interest of the opportunities of investing in the real estate of the Baltic real estate market, and to check if it is more secure today. Maybe you should wait again for a new bubble?

The Swedish BANG and the Baltic bang-bang-bang

During the last crisis, the burst of the real estate bubble did not come to Sweden for a good reason – the country had already learned its lesson in the most painful way. In the middle of the ninth decade of the last century, construction in Sweden intensified because about 4 per cent of the country's gross domestic product (GDP) was spent for subsidising it. At the same time, loans were becoming cheaper because of inflation, until the experts of Uppsala University finally estimated that the interest had actually become negative because of tax preferences! The last ingredient in the cocktail was aggressive lending, which reached 150 percent of the national GDP because of the loan portfolio.

A great BANG awaited Sweden in the 1990s. In 1990-1995, residential property prices fell by about 25 per cent, commercial properties – by an average of 42 percent, while bad loans rose by 5 percent. Sweden was expected to devaluate the kronor, so the currency market was flooded by a wave of speculation. The Swedish central bank hoped to put them off by increasing the interest rate by 500 percent. But this did not help either: it ended with the nationalization of two banks – Nordbanken and Gotabanken. It cost the country's budget 4 per cent of GDP, or 64 billion Swedish kronor (today, this would amount to about 18.3 billion U.S. dollars). By the way, the Swedish government only sold the last 7 percent stake of former Nordbanken in September this year.

However, the strict actions of the Swedish central bank and politicians have yielded results – the consequences of the bubble burst were eliminated in about seven years. To achieve this, Sweden has adopted many other amendments: nationalised banks could only get government assistance if they agreed to write off bad assets as losses; additional supervisory authority (Bank Support Authority) was established; the regulation of banks was tightened and the kronor was devalued. Then, tax reform was introduced: tax rates for employees were reduced, but the tax base was increased, and capital and dividends were taxed at higher rates. In analyzing the solutions of the crisis, economists note that one of the essential elements of success is the political elite's ability to achieve consensus and structural changes. After the crisis, Sweden could boast of having the most stringent regulation of banks in Europe, and the economist Paul Krugman suggested they should apply the experience in the United States in 2008.

However, in addressing the situation at home with extreme caution, Swedish banks have turned a blind eye to their activities in the Baltic countries, or maybe the emerging economies seemed so attractive that no one wanted to spoil the party with discussions on the lessons learned in Sweden, necessary restrictions and tighter regulation? The truth is, though the small bang-bang-bang of the Baltic States reminded me of the Swedish case, there were many more assumptions made that allowed real estate bubble to form here. According to the analysts, when Scandinavian banks came to the Baltic countries, confidence in these markets increased, so the cost of loans was falling, and foreign investment was growing. Invitation to access the EU contributed to even greater investor confidence. Wages rose, expectations were skyrocketing – the Baltic Tigers seemed unsurpassable. For example, in the decade before the recession, Estonian real estate went up 352 percent! Let’s compare: during the same period, the prices of properties in Germany experienced the slowest growth – just 1 percent.

While real estate prices were rising at a dizzying rate, Lithuania was considering a discussion on the introduction of a real estate tax to reduce the bubble formation rate and prevent it from exploding. It may be hard to believe today, but representatives of the largest real estate companies, in the light of such proposals, recommended looking at the real estate prices in London or Paris. They believed that they had to prove to the public that the real estate prices in Vilnius and Riga still had a great potential to rise. By the way, in trying to understand why politicians and the central banks of the Baltic countries did not take any serious action to stop the formation of the real estate bubble, it is not only necessary to pay attention to the influence of the promoters and intermediaries of real estate projects and the desire to profiteer from the bubble blowing, but also the political investments in real estate, and the influence of the real estate bubble on the economy. The rapid growth of real estate prices has a positive impact on the construction sector and the overall economy growth, so for politicians, it is often much easier to relax and enjoy a fast-growing economy, rather than making unpopular decisions restricting the availability of credit or the attractiveness of real estate investment by increasing the share of tax in the sector. So, the lack of social responsibility among politicians and business, and ignoring the Swedish lessons were the main reasons why the real estate market downturn was so huge.

The explosion took place throughout all the Baltic States: the housing price index in the Baltic countries fell by almost half, according to Ober-Haus Valuation and Market Research Department manager, Saulius Vagonis, from the highest price level reached during 2006-2007, to the bottom reached during 2009-2010. In Vilnius, apartment prices fell by about 40 percent, in Tallinn – 50 percent, and in Riga – by as much as 60 percent.

However, to combat the consequences of the downturn, the example of Sweden was used and, according to the manager of the Consultation and Analysis Department at Inreal, Arnoldas Antanavičius, the same errors were not duplicated. "A number of similarities can be seen between the explosions in the Baltic countries and Sweden, but with companies going bankrupt in Sweden, banks rushed to sell the seized property. Under these circumstances, the real estate prices fell further, so not only did the bubble burst, but all the air escaped through the holes. Banks in the Baltic countries created subsidiaries and took over the seized property, but did not rush out to throw it on the market – it is being sold more actively now, when it is obvious that the prices are recovering,” says A. Antanavičius. “In an attempt to get out of the recession, the Baltic countries took a different strategy, and we are already seeing a rise in all the major cities. For example, in Vilnius we already saw the first signs of it last year. So far, regions and smaller towns are still lagging behind, so you can guess that the recovery will be delayed for a year or two there." According to Ober-Haus, since October 2010, apartment prices in Vilnius have risen by 2 percent, in Riga – 11 percent, and in Tallinn – by as much as 35 percent. "It seems that prices are recovering the slowest in Vilnius, but do not forget that it was hit the least", said S. Vagonis.

Both prices and the construction cranes are rising in the Baltic countries

During the downturn, there were almost no new projects, so the Baltic countries are not only now facing the growing expectations of consumers, but also the rapidly growing demand for real estate.

This intensifies the construction sector. The board chairman of the Estonian Merko Ehitus construction company implementing projects in the Baltic countries, Andres Trink, says that the construction sector has been growing over the past two years: "Much of this growth was due to public sector orders. However, bearing in mind that the year 2013 is the last year of the EU funding period, I think that the share of the public sector projects will decline in 2014. However, about half of the Merko Ehitus contracts launched in the Baltics were private orders in 2013. The situation with housing projects in 2013 is probably the best since 2008; the number of projects is growing, but the prices are still about 30 percent lower than the record high in 2007. Thus, rapid growth poses no threat. I would be more critical about office projects – very few new projects have been started recently.” According to A. Trink, the main reason is quite low rental prices, making office projects less attractive.

However, Vilnius is distinguished in the office segment: now, about 13,000 square metres of construction is being completed, over 40,000 square metres of construction is currently pending and another 30,000 square metres of office space has been planned. In 2013, the office space for rent, according to Ober-Haus, amounted to 467,000 square metres, so the supply will increase in the very near future. However, according to real estate experts, the growth should not become a concern: vacant office space in Vilnius is only 8 percent, in Riga, where the total office space area is 679,000 square metres, it is 14 percent, and in Tallinn, where the total area is 579,000 square metres, they have about 9 percent of vacant office space. Thus, the activation of new projects in Vilnius should not come as a surprise. "I would say that the current projects were launched on time, but I think that the future demand will be satisfied for a while", said A. Antanavičius.

Particularly noteworthy is the exclusive real estate market. According to the co-owner of Baltic Sotheby’s International Realty, Paulius Gebrauskas, the market is especially active in Latvia, where in 2010 they passed a law allowing free residence in Latvia and free travel in the Schengen area for everyone who acquired real estate for more than 142,000 euro, and their family: "80 percent of the market buyers in Latvia are foreigners, but they have currently launched a debate on the amendment or withdrawal of this law, or maybe the introduction of quotas. These changes may also affect the real estate situation." According to P. Gebrauskas, exclusive luxury properties are less sensitive to volatility and less dependent on the credit markets: "During downturns, luxury real estate prices dropped by 20-30 percent, but they were the last to fall, and today we can talk about a price level comparable to that before the crisis. However, there were no new projects during the recession, so the market demand currently exceeds the supply."

The last chance to earn or another opportunity to lose?

All of these trends suggest that the real estate market recovery in the Baltic countries is no longer a question, but at the same time it is clear that confidence in the longevity of this process is not high. According to A. Trink, the bubble explosion forced the abandonment of long-term plans – earlier, projects were planned for three to five years, and now it comes to plans for only 6-12 months. This cautious approach is well understandable and is linked not so much with the processes in the Baltic economy, but with external factors of which the real estate project promoters are afraid and which may scare away buyers. This includes the slowing Russia's economic growth, the new wave of problems of the southern EU countries or the Chinese real estate crisis, which is predictable, but has not become a reality.

By the way, when it comes to the effects of free-market factors on real estate prices, with economic growth, and the responsibility of public authorities in mitigating the negative effects, China could be one of the best examples. We should only remember the warnings of prominent economists before the crisis of 2008, that one of the biggest risks to the global economy stems from the Chinese real estate sector. However, no matter how ironic it would be, China's real estate market not only failed to detonate before the recession, but also withstood the crisis. It perfectly supports the assumption that the responsible and prudent policies of the central bank and government decisions may manage the boom in real estate prices, making it similar to the real potential of the purchasing power of the economy and society, and not posing a danger.

Many economists and free market apologists are very critical of all decisions that reduce the value and attractiveness of properties believing it is an unreasonable interference in free market relations and an attempt to regulate prices artificially. These statements have some truth, therefore, when it comes to wise policy, raising prices (the real estate promoters are engaged in it, deliberately encouraging overly positive expectations) or price reduction should not be the goal. Decisions must be made in pursuit of the long-term goals.

For example, if the state is concerned about families and wants to prevent emigration, wants families to live in the country and raise children, with the growing real estate prices, it has to deal with the issue of housing affordability in one way or another. No less important is the choice of the elite in the country, of where to direct the public: towards creativity, or towards the accumulation of capital. It is very easy to identify this by looking at how labour and real estate is taxed. If society is oriented to creativity and increasing personal capacity, income generated from labour and business should be taxed less, and properties should be taxed more. Thus, the focus on the long-term interests of the state is often very clearly a background for certain decisions that do not allow real estate prices to rise above the real purchasing power of the public.

In this context, we have to recognize that, although after the crisis the Baltic countries realised that responsible policy is needed, so far, we can only talk about isolated decisions addressing the most significant problems, but there are no outlines of long-term policy, demonstrating the long-term perspective of real estate prices.

There is no doubt that in the next few years, the real estate market in the Baltic countries will rise and prices will increase, but whether it will be a long-term process that will continue with minimal downs for decades, or a phenomenon reminiscent of American roller coasters, will be shown by the objectives that dominate the agendas of the governments of the Baltic countries and the ways of achieving them. The fact that these objectives had to be set long ago is best demonstrated by the fact that in having a lot of negative influence on long-term real estate values, the demographic situation in the Baltic countries is deteriorating much faster than the purchasing power of the public is growing. So, if there is no wise policy, Parisian real estate prices in the Baltic countries will mean yet another bubble.

Excerpts from the article

There is no doubt that in the next few years, the real estate market in the Baltic countries will rise and prices will increase, but whether it will be a long-term process that will continue with minimal downs for decades, or a phenomenon reminiscent of American roller coasters, will be shown by the objectives that dominate the agendas of the governments of the Baltic countries and the ways of achieving them.

The explosion took place throughout all the Baltic states: the housing price index in the Baltic countries fell by almost half, from the highest price level during 2006-2007, to the bottom reached during 2009-2010. In Vilnius, apartment prices fell by about 40 percent, in Tallinn – 50 percent, and in Riga – by as much as 60 percent.

The rapid growth of real estate prices has a positive impact on the construction sector and the overall economy growth, so for politicians, it is often much easier to relax and enjoy a fast-growing economy, rather than making unpopular decisions restricting the availability of credit or the attractiveness of real estate investment by increasing the share of tax in the sector. So, the lack of social responsibility among politicians and business and ignoring the lessons learned by the Swedish were the main reasons why the real estate market downturn was so huge.



While real estate prices in the Baltic countries are stabilising and rising, Scandinavia is swelling up again – the International Monetary Fund (IMF) in its report released in August, highlights the precarious situation in the real estate market of Scandinavia, especially in Sweden and Norway. It states that Swedish real estate has been overrated by about 25 percent, and the Norwegian by as much as 40 percent. The truth is that they have talked about the potential burst of this bubble for several years, but up to IMF’s report, the banking stress tests have shown that they are capable of absorbing the potential problems of the real estate sector.

The fact that the tension in the Scandinavian real estate sector is seen seriously, and responsible preparations are being made to handle the potential risks, are obviously demonstrated by the decisions being made. Essentially after the end of the crisis of 2008, in particular, in March 2015 they made decisions further increasing the reliability of the bank. Moreover, Swedish Finance Minister, Anders Borg, predicts even greater regulatory tightening. Similar precautions were discussed in Norway. Such attention of responsible institutions on the real estate sector suggests that talking of a possible explosion of the bubble will remain nothing more but talking in the near future.







Full-scale increase compared to the previous year

Source – Merko Ehitus


The Lithuanian Economy: Lessons Learned From the Crisis

The Lithuanian Economy: Lessons Learned From the Crisis

The global financial crisis that hit the Lithuanian economy in 2008 that was not particularly prepared. A price bubble formed in the real estate market from 2004-2007, which led to the overheating of the construction sector. The credit policies of banks was oriented at encouraging this part of the sector, which led to the particularly quick rates of GDP growth, however after the crisis started, many households and businesses could not carry out their financial obligations.

The market cycle only deepened the procyclicality of economic policy – right before the 2008 parliamentary elections, a populist decision was adopted to increase retirement pensions, which a few months later had to be retracted and cut social benefits. Not only was precious time lost in implementing reforms but also the trust of investors and the people in the social security system.

Already on the eve of the crisis, the government was taking steps to cool the real estate market, for example by getting rid of tax incentives for buying a home. However the main decisions to stabilize the economy were to be taken in 2009-2010. Taxes were raised and public expenditure was slashed. Though this policy is subject to debate today, it helped to lessen the state’s dependence on loans and created a form macroeconomic foundation for developing the country’s business.

After the end of the crisis, the export sector was the one that best guaranteed a rise in GDP. A fair amount of hope to get the construction and real estate business back up on its feet was put in the mass renovation of multi-story residential buildings, however due to a lack of conceptual ideas, it did not play its role and ultimately the implementation of this programme had to be put off for a few years. The high unemployment rate impacted the drop in real wages, which limited the consumer power in the internal market.

With the internal market recovery hampered, the firms focused on exports demonstrated extraordinary ability and the true power of the country’s business. Many of them were able to increase their share of the market in Western European countries that are going through stagnation, while exports to the growing Russian market over the last few years have had double-digit growth each year. That would not have been possible without the reforms in production and how work is organized, which guaranteed the competition of business in the international market.

During the first half of 2013, a comparative balance of the export and internal market was achieved, which makes up the country’s GDP. On one hand, the Eurozone recession and Russia’s economic problems impacted the natural slowdown of Lithuania’s export growth. However, there has been a rise in employment and average salary in the country. Looking at Lithuania’s economic prospects in the near future, the question of the breakthrough of investments is becoming a decisive factor. In 2012 and the beginning of 2013, business investments were almost at a standstill, while companies awaited new, optimistic signals from the market. It’s clear that there isn’t any sense in continuing this policy of wait-and-see. First of all, production capacity is almost at the same level as before the crisis. Secondly, the need is ripening for investments in technological revamping. Companies guaranteed their competitiveness by minimizing production costs over the last few years, however looking toward the future, this business development model is no longer viable. It is necessary to invest in new equipment and technologies, and thereby cutting the level of costs per production unit. In this context, it is noteworthy that Lithuanian business will not get by without foreign investment, which provides not only financial incentives, but also most often brings with it priceless know-how.

The government’s duty in this situation is to guarantee business conditions that don’t attract investment “hands”, i.e. companies investing a symbolic amount of capital that are looking to use privileges given especially to them, but rather local and foreign companies that have long-term development plans. In this context, potential investors should observe the actions of policies in the job and tax sectors (first of all the changes to direct taxes like income taxes and corporate taxes).

The introduction of the euro in 2015 is not only a tool to increase the attractiveness of investing in Lithuania even more, but also a chance to check how consistent it is able to implement the goals it has set for itself. In addition, keeping to the Maastricht criteria is a value in and of itself, which reflects the robust macroeconomic health of the country. It’s important that carrying out the criteria won’t become a store-window display, i.e. that once the euro is introduced, that the criteria would be swept aside as an unnecessary constraint.

Real GDP Index






Source: Eurostat


Business trips to the Baltic countries: Two birds with one stone

Business trips to the Baltic countries: Two birds with one stone

Riga, which is going to become a European Capital of Culture in 2014, promises to offer about fifty events aimed at attracting art and entertainment lovers. Meanwhile, every year, Vilnius and Tallinn bring crowds of tourists from abroad to their annual music, theatre, film events and festivals reviving the Baltic tradition. A growing number of foreigners who visit the Baltic countries for business are eager to come back here again with their families. The following year, you should plan your business trips and conferences in the capital cities of the Baltic States to make them both useful and fun.

“When planning a business trip, it's worth looking into the events happening in the country,” said Rasa Martens, a famous Lithuanian entrepreneur and tourism business expert. “I think it is necessary and useful, as you can combine work, leisure, broaden your horizons and get to know the cultures of other countries. I admit that one must get to know the city, rather than sitting in a hotel room and waiting for the next day. Of course, not everyone loves art, but I have never met a person indifferent to music, excluding those who are not interested in anything at all, and who, upon arrival to a foreign country, head straight to the hotel.”

R. Martens believes that foreigners coming to the Baltic countries are mostly fascinated by their people, the comfort and by our old towns. “All the world knows about the Soviet legacy of the Baltic countries, but I’m pleased that entrepreneurs who came here expecting to see the sorry state of affairs, leave the country satisfied, and then come back again. The organization of conferences and inclusion of cultural programs is a new opportunity for businesses to get to know the countries, and a good method for promotion for the country.”

To the library, after opera       

In 2014, after a five-year preparation and 24 million euro investment, Riga will become a European Capital of Culture. The Force Majeure cultural program prepared for residents and tourists includes 127 large projects, and will not only attract art lovers, but also entrepreneurs coming to the Latvian capital city for business, the organizers said. Next year, Riga will host 500-600 events: the cultural virus will spread throughout the city, which will be converted into a fun leisure venue with the help of artists.

You will certainly have many things to do upon arrival in Riga during January 17-18. The opening of the European Capital of Culture will solemnly start with Richard Wagner's contemporary opera Rienzi at the Latvian National Opera on January 17th.

The “Book lovers’ chain” on January 18th should be of interest not only to the fans of culture, but also to random passers-by – people are going to link the old National Library to the new library building. Books will travel from hand to hand, and thus reach the new, modern library, named the “Light Castle”.

This impressive building was designed by an American-Latvian born architect, Gunnar Birkerts, well known on the other side of the Atlantic as the designer of the Corning Glass Museum and the Law Library in Michigan. A huge building, reminiscent of the Himalayan peaks, attracts the eyes of curious tourists. The shape of this modern architectural monument embodies the mystical Glass Mountain and the Light Castle – symbols of Latvian folklore. A legend says that the Light Castle sunk in an ancient lake, and will only emerge from the depths when the Latvians are again the masters of their land. The “Book lovers’ chain” will intersect the Daugava River and symbolically repeat the Baltic Way of 1989 significant for the Lithuanian, Latvian and Estonian history.

1914 Exhibition – history of the First World War in new colours

All the upcoming events in Riga in 2014 are divided into six thematic lines by their type. One of them is called the Liberty Street, with the most interesting event – the 1914 Exhibition to be opened in the Latvian National Museum of Art in January. It is dedicated to the centenary anniversary of the First World War. It will display non-traditional historical and personal reflections of European artists on the First World War theme, and look at it from a different angle.

French poet Paul Valery wrote that “history is the most dangerous chemical product invented by the mind: it gives birth to dreams, false memories, intoxicated people, rubs salt on the wounds, disturbs sleep and makes the nation arrogant and intolerable”.

Memories and experiences of certain historical events are commemorated in artworks. The programme of the European Capital of Culture in 2014 is unthinkable without the topics of war, power and freedom” said Diāna Čivle, Riga 2014 project manager. She reassured that the exhibition, like a good, engaging film aided by visual media and installations, will help to move the spectator back into the past and learn the true history of the war and to see its consequences.

Baltic tradition on the night of bonfires on Riga beach

No matter what, opera, contemporary art and modern architecture impress everyone. You can have a different yet thoughtful and interesting way to spend some time in Riga: the traditional bonfire night will invite you to give a farewell the summer on August 25th, 2014. In ancient times, bonfires were lit on the Baltic Sea coast to warn ships of potential dangers. Now, the festival has been revived to new life, and its main objective is to save the Baltic Sea. People gather together on bonfire night and not only relax, but also discuss the pollution and ways to reduce it and save the sea.

Every year, its mystique not only charms the locals, but also foreigners: with wild dances, concerts and games replicating ancient traditions in the light of bonfires. Hydrobiologists install aquariums, displaying the sea creatures for residents and even offering to listen to a snail’s heartbeat. This night has already been celebrated for twenty years in Finland and Estonia, and is becoming increasingly interesting and impressive in the Baltic Sea countries, especially in Latvia.

Tallinn Music Week, for the fans of various music styles

If you are going to visit Tallinn in April next year, squeeze in some time at the Tallin Music Week – one of the largest music festivals in the Baltic and Nordic countries, to start on April 27th. This event will bring together more than 200 musicians from all over Europe, making it a great opportunity for coming to the Estonian capital city in early spring and watching performances in the most unexpected places, while having a good time in Tallinn's top clubs and concert halls for three days.

The Music Festival menu includes a full range of different styles – from folk and indie to jazz and punk, from classical music to metal. It will not only present everyone’s favourite performers, but also new talents. In addition to the abundance of concerts, there will be a lot of famous musician debates and food tastings in cosy Tallinn restaurants. The Guardian wrote about this festival: “Tallinn Music Week suggested the Baltic States will be the next region to burst on to the European music scene. This is no ordinary music festival, and Estonia is not an ordinary country”.

The famous Tallinn Jazzkaar – for the most demanding jazz lovers

Jazz aficionados visiting Tallinn on April 18-27, 2014, will have the opportunity to attend the largest Baltic jazz festival – Jazzkaar. Every year, the festival team creates an interesting and unique program of events, making it the most famous jazz festival in the Nordic countries. Ten-day-long Jazzkaar in Estonia attracts the most well-known jazz artists from around the world and all of Tallinn is filled with miraculous jazz sounds.

Jazzkaar has already been visited by stars such as Bobby McFerrin, Angie Stone, Chick Corea, Dianne Reeves, Jan Garbarek, Richard Bona, John Scofield, Charles Lloyd and many other jazz musicians. For those who cannot come to Jazzkaar, the festival team also organizes seasonal jazz festivals: Winter Jazz, Autumn Jazz and Christmas Jazz. The latter lasts two weeks and is famous for its cosy, festive and intimate atmosphere.

“I would love to have some business affairs in Tallinn”, said R. Martens. “Events like the Jazz Festival, Tallinn Music Week, are very tempting to me. If I could combine my business trips, I would definitely go there. In terms of culture, Tallinn seems very strong to me.”

Kaziukas Fair – a key to the Lithuanian tradition

Visitors to Lithuania in 2014 will also have plenty of opportunities to combine business affairs with the cultural program.

The exclusive festival embodying the Lithuanian culture and old traditions is Kaziukas Fair, taking place every year on Casimir's Day, March 4th, in Vilnius. For a few days, people sell their arts and crafts, which are not only eagerly purchased by locals, but also by foreigners visiting the capital city.

Kaziukas Fair dates back to the seventeenth century, and “Palm” bouquets (called “verbos”) made of dried flower blossoms and herbs are one of its main specialties (it is a must buy for everyone) along with earthenware pots, wicker baskets, cracker necklaces and many other items crafted by talented folk artists. And, you will not go hungry while choosing your souvenirs. You can savour traditional Lithuanian meals, and be sure to taste the heart-shaped honey cookies called the “Heart of Kaziukas”, not to mention the Lithuanian culinary masterpiece – a tree cake (“šakotis”).

“I believe Kaziukas Fair is a good atmosphere to feel the spirit of the country. It does not matter that it has already become a popular phenomenon, and that it does not have so much art. Most people arrive without going deep into our culture, while this fair helps to understand our spirit and transmit good energy”, said R. Martens about Kaziukas Fair.

Singers from around the world will unite in the Vilnius Song Festival

Another no less important event cherishing the Lithuanian tradition and culture for many decades is the Lithuanian Song Festival, which will be called “Here Is My Home” in 2014. The festival takes place every four years, and this time it will bring together more than 35,000 participants from Lithuania and foreign countries. The event attracts a variety of artists – singers, dancers, composers, actors, writers, folk artists, painters and choreographers. The opening concert will be held in the Cathedral Square on June 28th. It will then be followed by a presentation of the Baltic tribal costume collection in the Rulers Palace, kanklės (traditional Lithuanian musical instrument) afternoon in St. Johns’ Church, Copper Brass Concert in Kalnų Park and in Žalgiris Stadium, and a host of other exciting events that are really worth a visit.

It should be noted that the Lithuanian Song Festival is a national cultural phenomenon with a spirit comparable to the ancient Greek Olympic Games. In 2003, the Estonian, Latvian and Lithuanian Song and Dance Celebration tradition was recognized as an Oral and Intangible Cultural Heritage of Humanity by UNESCO.

Klaipeda Sea Festival – 80 years

On July 25-27, the Lithuanian port city – Klaipėda – will host the 55th Sea Festival, celebrating its 80th anniversary this year. During this anniversary, the organizers promise to carefully explore the history of the celebration and bring to life the most successful projects of the last eight decades.

The festival will buzz for three days and three nights, and will not disappoint people with different tastes: the programme is abundant with events and generally everything your heart cares for – from exclusive sea ceremonies, entertaining concerts and street theatre performances, to venturesome sports and a large fair. Dalia Grikšaitė, the PI Klaipėdos Šventė creative director, says that creating a good impression about the only Lithuanian port city and maritime cultural centre is a matter of honour for Klaipeda residents. “The success of the festival has been around for eight decades, and every year it attracts thousands of visitors to the sea, indicating that Klaipeda has correctly chosen the heading of the feast. It is always a delight or even pride to be the nationals of a maritime country – both during the interwar period, and today”, she said.


What else is there to do?


Comedian Russell Brand show in Riga Congress Hall. 22 February 2014

Amber During The Ages exhibition in the Latvian Museum of Natural History. 15 January 2014

Opening of the former KGB building. 30 April 2014

Creative event, Potato Opera. 1 May 2014

Arturs Maskats opera, Valentina. 5 December 2014


Tallinn Christmas Fair. 21 November 2014 – 8 January 2015

Tallinn Maritime Days. 18-20 July 2014

Tallinn's Old Town days. 31 May – 7 June 2014

The 26th Estonian Song Festival and the 19th dance festival “Touched By Time. Time To Touch”. 4-6 July 2014

BMX and skateboarding competitions week in Tallinn. 27-29 March 2014


Cinema Spring film festival. 20 March – 3 April 2014

Street Music Day. 3 May 2014

Scanorama film festival. November 2014.

World 1st division ice hockey championship. 20-26 April 2014

French film festival, Winter Screens. 23-30 January 2014


6 Points interview: Global economy

6 Points interview: Global economy

1.       What are your predictions on global economic development in 2014? What kind of trends should investors pay attention to?

At Evli we think that global growth will pick up in 2014, although the recovery is not believed to be strong. We see the most interesting opportunities in Europe, which is recovering from the recession. In the euro-zone, equity valuation is still not expensive. Also, as growth numbers are getting better, especially in the US. We may see the Fed start to taper at the beginning of next year. This will put some pressure on long rates that are at a very low level.

At the same time 2014 will be a very difficult year for fixed income investors, as expected return is almost close to zero in fixed income assets. The best asset class in fixed income will be euro-area high-yield bonds, which we expect to earn a return of around 5 – 7 % next year.

2.       A few years ago it was clear that the BRIC countries of Russia and China are doing great, while the USA and EU were drowning in debts.  How could you define the current situation and how long is this situation going to last?

As global growth is normalising, and investors' sentiment is improving, their focus on weak countries with high debt levels is getting less intense. At the moment, the biggest concern in the emerging markets (EM) is the commodity market, where the trend of rising prices experienced a downturn in 2010. Currently there is an oversupply in many commodities, and the outlook is weak.  Usually it takes many years to normalise the oversupply that we see in the EM countries commodity market right now. At the moment, we at Evli are cautious regarding EM equities.

3.       Which countries’ or regions’ economic situation raises the biggest concerns and which of them seem to be the best ones?

We are overweight in euro-zone equities, as the situation in this area is still improving from the recession.  At the moment, our biggest concerns are regarding countries like Brazil, China and Russia, which are all highly dependent on the commodity cycle.

4.      Where do the Scandinavian countries stand in the European investment map? What issues can have an impact on investors’ perceptions of the Scandinavian countries?

The situation is very different depending on which Scandinavian country we are talking about. The economic situation is probably the weakest in Finland, where consumers have a lot of head wind from high debt levels and low economic growth. One of the biggest problems Finland is facing is the loss of competitiveness. Looking at the other Scandinavian countries, the outlook for growth is much stronger and more optimistic.

5.       Are there any positive news from the Baltic countries that could have a positive impact on the investors' perception of these relatively small markets?

The Baltic countries are recovering quite fast and are also getting support from the fact that global growth is rising. At the moment, investors are quite cautious in emerging markets and hence their interest in the Baltic countries is very low. Eastern Europe in particular is not a place, where we see a lot of clients' interest. Nevertheless, we hope that the latest economic performance and ease of doing business  in Baltic countries will attract more investors.

6.       When do you foresee the next global economic crisis?

It has never been a good strategy for an investor to wait for the next crisis. But we think that before 2020 we might have the next major crisis which will probably be related to the financial crisis of 2008 and the massive liquidity injection that central banks have done all over.


The Mutating Vision of Kaliningrad: From Casinos to Iskander

The Mutating Vision of Kaliningrad: From Casinos to Iskander

Vadim Volovoj

The Russian exclave of Kaliningrad is an important part of the Baltic region that has substantial economic potential. In a 2013 the Russian edition of Forbes singled out Kaliningrad as the best place for business in a list of Russian cities. The region’s inhabitants and government want to use their economic opportunities and have more cooperation with their European neighbours, however the problem is that Kaliningrad (as almost all regions in Russia) is a political hostage of Russia. What exacerbates the problem even more is that the Kremlin doesn’t know itself what it wants to make of its exclave, whether it should be a successfully developing special economic zone, an area full of giant casinos, a regional centre for nuclear energy, a region that is a testing grounds for relations with Europe, or a military outpost that could be a threat to NATO and the European Union. The experiments Moscow has carried out on the Kaliningrad region is essentially a reflection of the unclear vision it has for Russia as a whole: Putin can’t make a decision whether it should be an economically vibrant and open country, or just one huge military base, which is the desire of supporters of a great Russian power. Kaliningrad is simply an unfortunate testing ground in all of this. .

Economic Successes and Hardships

In 1996, the Kaliningrad region was declared a Special Economic Zone. In 2006, the law was changed with a new one that is in effect until 2016. According to this legal act, a resident of the SEZ does not pay any income or property tax for the first six years, and for the next six years after this period pays only half of these taxes, depending on what their amount is in Russia. According to statistics from the Kaliningrad region’s government, eleven thousand new jobs were created, and investments were made in the range of 40.5 billion rubles. Until 2008 the economic development of the Kaliningrad region was quite successful – this is shown by the constantly rising direct foreign investment in the region’s economy (2005-2009 it amounted to $943 million, while in the future it should be further encouraged by Russian’s membership in the WTO, though its long-term effect on Kaliningrad’s economic development is unclear).

All of this confirms that Kaliningrad truly does have great economic potential, and that the 2008 slump should be looked at only as a temporary phenomenon (the gross regional domestic product grew 7.3 % in 2011, and another 3.6 % in 2012). However not all that glitters is gold: for example, a total of 164 companies went bankrupt in 2009, which is 12.3 % more than in 2008, with one of the more resonant cases of bankruptcy being the liquidation of regional airline company KD Avia. In order for the growth of the Kaliningrad region to stabilize and gain speed, its government has to work at it. This task, as experts says, is complicated by the new conditions (both before and after the crisis) of a clear economic strategy and lack if independence in the sphere of Moscow’s economic policy, not to mention the weakness of the transport ties with Russia proper. As Stanislav Voskresensky, who is Deputy Presidential Plenipotentiary Envoy to the Russian Northwestern Federal District, said in speaking about the Kaliningrad region, “according to unused potential, this territory perhaps occupies first place in the country. Europe is nearby, there’s access to the sea, the exclave’s location (there’s minuses, but also pluses). There is a regime of a special economic zone for business. At the same time local companies are living in conditions of fierce competition from the Baltic countries and Poland. Today the food products and health as well as educational services are cheaper and of higher quality there. And that is being with a transport system that is separated from Russia. This is why economic development must be supported by the creation of a better environment for business, investments and the creation of the quality appearance of new jobs so that the conditions foreseen for the special zone would start operating at full capacity.” At the same time, Voskresensky emphasize that “Kaliningrad is unique, and policy should be unique in its case, I am certain of that.”

Casinos, A Nuclear Power Plant and Corvettes for the Baltic Fleet

The economic expression of such a unique view became the decision of the Russian government to award Kaliningrad the status of a special gambling zone. However as Valery Ivanov, who is the council chairman of the Russian Association for Gaming Business Development, stated in 2010 that “up to this point there has been no shift in the Kaliningrad region. Serious – huge – investments are needed there. Which means long money. Investors are not ready and it’s doubtful whether they will decide to invest.” Experts from companies like Dress & Sommer, MCB and BRT believe that the American format of project implementation, which calls for building on a large plot of land “out in the open air”, as they are currently planning to do in the Kaliningrad region, is highly unlikely. According to them, in the case of Kaliningrad, they need to discuss the possibility of a “European” option, where the casinos work on the basis of an existing tourist infrastructure (first of all in luxurious hotels). However that is only in theory. In reality, the Kaliningrad region’s government was still looking for a plot of land for their gambling heaven in 2013 (the auctions that were organized did not provide any results), while in 2016-2018 they planned to invest 14 billion rubles into this idea according to a specific federal programme.

An example of the politically unique view toward Kaliningrad is embodied in the idea from Moscow that was born at the beginning of this century of the area as a testing region for relations with Europe. Putin developed the idea of having closer ties with the European Union, hoping for greater help from the EU in modernizing the region, which is why he attempted to build “bridges of friendship.”  However the Kremlin was soon afraid of its own plans, as the inhabitants of the Kaliningrad area met this news with great enthusiasm and began to actively europeanize in both a social and economic sense. And though there were no clear traits that Kaliningrad smelled of separatism, Moscow decided not to risk anything. In this way, the pilot project finished without even being able to get off the ground. For example, today the Russian government is looking for a free visa regime with the entire European Union all once, instead of starting with the Kaliningrad area, which is harder to achieve, thus Vladimir Putin is more at ease.

Let’s go back to its strategic view toward Kaliningrad. One can say that after the rather unsuccessful experiments with the SEZ zone along with the gambling zone, the head of the Kremlin decided to take up what is dearest to him, which is energy. The concept of Russia as an energy superpower was born in his mind, which did not hope in friendly relations with its neighbours, but be able to demand it. At one point it seemed that Moscow wanted to turn Kaliningrad into a regional centre for nuclear energy. There were efforts to build a powerful Baltic nuclear power plant (with an overall strength of 2300 MW) in Kaliningrad, which would have produced too much electricity for the district itself. A greater part of local and foreign experts were unanimous in saying that it was more of a geopolitical project than an economic one, the goal of which was to export Russian electricity to neighbouring countries that in this way solidify the influence of Russian energy (and along with it, its politics) in the Baltic region. In this context, there was a desire to lay an electricity bridge to Poland and through it to the Western Europe market (first and foremost that of Germany), and perhaps lay a direct electric cable to Germany and turn Lithuania into the junction for the distribution of electricity made in the Baltic’s nuclear power plant (the Visaginas nuclear power plant that the Baltic countries planned in this case would be then rendered moot). However Warsaw, Berlin, Vilnius and various international investors that were actively encouraged by Russia to take part in the building of the nuclear power plant viewed Moscow’s intentions rather sceptically, which forced Russia to re-look at their initial plans. It is likely that there will be further attempts to implement the Baltic nuclear power plant project in 2014 (as Russia is able to financially support their own nuclear power industry with such projects): first of all efforts will be made to convince the neighbours of the Kaliningrad region of its pluses and necessity for the expansion of electricity connection (after all, the Baltic’s nuclear power plant needs back-up capacity and a market) to neighbouring countries. However whether or not this power plant will be built first of all depends on how neighbouring countries and the EU will succeed in carrying out their energy strategy, the goal of which is the integration of the European energy market and the lessening of its dependence on Russia.

In other words, Putin’s nuclear strategy in Kaliningrad essentially was unsuccessful, and now it seems that he decided to return to an old but trusted method – to turn Kaliningrad into a Russian military outpost that could be a threat to NATO and the EU, which gets the hearts of the brainwashed neo-imperialists longing for old Soviet times to beat ever faster and support their president.  The argument is that it’s necessary to have an answer to the West’s plans to have an anti-missile defence system in the area. To show that this is not empty talk is proved by the facts that confirm that recently Moscow has strengthened the military might of its exclave: the Baltic Fleet has received modern war ships, strengthened their air force, while the region now has the S-400, one of the best anti-aircraft and anti-missile defence systems in the world, the range of which (up to 400 km) allows them to control a large part of the air space of the Baltic region. It also possesses a powerful Voronezh radar system, the range of which is from 4000 km to 6000 km, plus there is still talk about the deployment of the mobile theatre ballistic missile system Iskander, which can be armed with nuclear warheads. What’s more, as was shown by the Zapad-2013 joint military exercises of Russia and Belarus, Kaliningrad together with Belarus hold a special place in Moscow’s defence (or perhaps attack) strategy in the Baltic.

In short, one can say that the militarization of the Kaliningrad region as a priority option in its development is rather short-sighted, because the growth of its economic potential seems to have much better prospects, and more effective by implementing things like the Special Economic Zones. In the latter case, the Kaliningrad region could become not only attractive for Russian investment, but also foreign investment (especially from the countries of the Baltic region), but as a political hostage of an undecided Moscow in the broader sense, it can only hope for a more sober view by Putin at this Russian exclave that has great economic prospects.


Recently Moscow has strengthened the military might of its exclave: the Baltic Fleet has received modern war ships, strengthened their air force, while the region now has the S-400, one of the best anti-aircraft and anti-missile defence systems in the world, the range of which (up to 400 km) allows them to control a large part of the air space of the Baltic region. It also possesses a powerful Voronezh radar system, the range of which is from 4000 km to 6000 km, plus there is still talk about the deployment of the mobile theatre ballistic missile system Iskander, which can be armed with nuclear warheads.

An example of the politically unique view toward Kaliningrad is embodied in the idea from Moscow that was born at the beginning of this century of the area as a testing region for relations with Europe. However the Kremlin was soon afraid of its own plans, as the inhabitants of the Kaliningrad area met this news with great enthusiasm and began to actively europeanize in both a social and economic sense.


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