tutkimuia

Eastern European Markets

(May 30th 2010)

Kaliningrad Province: Biannual Economic Review
University of Eastern Finland – Karelian Science Centre, CEMAT 2010

Economic development: economy starts
to recover by the end of 2009

The global recession hit Kaliningrad’s economy very hard. Rapid expansion of bank lending to businesses and households gave way to severe tightening of lending standards, increased interest rates and a jump in defaults. A gradual appreciation of the rouble over the last few years resulted in its rapid devaluation at the beginning of 2009. A strong inflow of foreign investment essentially stopped, and investors began moving their funds to safer assets.

These factors affected other regions in Russia as well, but the Kaliningrad province turned out to be more sensitive to their impacts than most other regions. Sectors of the economy such as manufacturing (especially import processing manufacturing) and construction, which were major drivers of the economic growth in recent years, have experienced the largest contraction in output. Fixed capital investment collapsed by 30%. According to preliminary estimates by the regional government, Kaliningrad’s GRP fell by 13.4% in 2009 vs. a fall of 7.9% in Russia’s GDP.

Kaliningrad´s gross regional product

Such dynamics should not be unexpected. Changes in Kaliningrad’s GRP in the post-Soviet years have been closely correlated with changes in Russia’s GDP, but generally have had a higher magnitude. Regression analysis shows that a change in Russia’s GDP by 1 percentage point leads, on average, to a change in Kaliningrad province’s GRP by 1.9 percentage points (for 1995-2009, R2 = 0.87).

Russia´s GDP and Kaliningrad´s GRP, %-change

The economy seemed to hit rock bottom in the second half of the year, and then showed signs of recovery. In particular, manufacturing and retail trade began to grow again in the last months of 2009. The unemployment rate started to fall, and real household income began to grow. Furthermore, banks began to increase lending
again.

Yet the recovery remains fragile and feeble. The financial position of many companies is still weak, and business confidence is relatively low. Global financial problems (such as a higher risk of sovereign defaults) might once again severely limit access to credit.

Contraction in the extraction industries were mainly related to a fall in oil production, which reflects a natural decline in production from mature (post-peak) oil fields in Kaliningrad.

In production and distribution of electricity, gas and water, the main factor behind lower output was lower demand for electricity and heat (due to depressed economic activity in the region). Electricity production in the province fell by 7.1% in 2009.

Manufacturing, and especially sectors producing final goods for the Russian market from imported components/raw materials (automotive, consumer electronics, furniture) were the most affected by the crisis. In addition to a slump in consumer demand, they were hit by a sharp devaluation of the rouble in the beginning of 2009. The cost of imported components accounts for more than half of the final product cost in these sectors. As a consequence, the devaluation led to a sharp increase in their production costs measured in roubles.

In the first months of 2009, manufacturing production was falling at a rate close to 50%. Later, the situation somewhat stabilized, and began to change for the better in the 4th quarter. In November, industrial production increased y-o-y for the first time in 13 months. A deep slump in production in early 2009 almost guarantees that the growth in manufacturing will continue in the first half of 2010 due to a low base effect.

The consumer electronics sector in Kaliningrad has suffered more than any other sector during the recession. Output in this sector fell by almost 70% last year. In the second half of the year several large plants, including Baltmixt, Radioimport-R, Tekhprominvest (a subsidiary of Snaige) either suspended their activities or were shut down permanently. Their owners are considering either options for changing their plants’ specialization, moving equipment to other regions or the outright sale their assets.

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Economic Monitoring of North-West Russia (http://www.hse.fi/ecomon)
The project “Economic Monitoring of Northwest Russia” was launched in 2000 with the aim to provide regular, comprehensive and systematic reporting on the socio-economic development in the region. The monitoring covers today six Northwest Russian regions: The City of St Petersburg, Leningrad, Kaliningrad, Murmansk and Novgorod provinces, and the Republic of Karelia.

More Information
Professor Riitta Kosonen
Director, Center for Markets in Transition (CEMAT)
riitta.kosonen@aalto.fi
cemat@aalto.fi


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