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Reference ID Created Released Classification Origin
06MOSCOW5513 2006-05-25 06:26 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Moscow

DE RUEHMO #5513/01 1450626
R 250626Z MAY 06

E.O. 12958: N/A 
MOSCOW 00005513  001.2 OF 003 
1. (SBU) SUMMARY: Kaliningrad Oblast's first international 
agribusiness forum intended to stimulate foreign investment 
drew a respectable, German-dominated audience of foreign 
farmers and processors.  The oblast minister of agriculture 
conceded that openly inviting German farmers to come to the 
oblast 60 years after their compatriots were driven out could 
draw criticism from other Russian politicians, but with over 
40 percent of Kaliningrad Oblast's agricultural land idle and 
investment languishing, it is a risk worth taking.  END 
2. (U) Kaliningrad Oblast's government hosted its first 
international forum to attract foreign investors in 
production agriculture and agribusiness May 17.  The forum 
was opened by Governor Georgiy Boos, followed by Vice 
Governor Yuriy Shalimov, Minister of Economy Feliks Lapin, 
and Minister of Agriculture Andrey Romanov, each of whom 
opened his remarks with the words, "Kaliningrad Oblast is an 
integral part of the Russian Federation."  Each extolled the 
virtues of investing in Kaliningrad based on its location and 
tax breaks, paving the way for topical presentations by two 
bankers (local heads of Sberbank and Rosselkhozbank), the 
head of the oblast tax directorate, local chamber of 
commerce, and testimonials from successful local and foreign 
investors in food processing, including Croatian-owned 
Produkty Pitaniya and Lithuanian-owned Vicunai-Rus.  An added 
attraction was presence all day of Lithuanian Minister of 
Agriculture and former Prime Minister Kasimiera Prunskiene. 
3. (SBU) Two highlights were presentations by German 
academics, Prof. Gerd Graef, a private consultant, and Prof. 
Holger Klink of the University of Kiel, whom the oblast had 
commissioned to spend six months studying Kaliningrad Oblast 
agriculture and then to report on its potential for revival 
in the event German farmers could be enticed to invest both 
capital and know-how.  The professors noted that climatic and 
soil conditions of Kaliningrad are not dissimilar to those of 
northern Germany, though with a somewhat shorter growing 
season.  These excellent lectures were offset somewhat by a 
lengthy diatribe by German Ministry of Agriculture specialist 
Martin Struck, who opened with complaints about radar-toting 
Russian traffic police and undisciplined pedestrians, to the 
amusement of the audience, then concluded with a sales pitch 
for German technical assistance.  Another low was the 
boastful, in-your-face presentation by Konstantin Khaypov of 
Inteko Agro, agricultural subsidiary of the construction firm 
owned by Moscow Mayor Yuriy Luzhkov's wife, Yelena Baturina. 
Khaypov openly challenged Prunskiene, saying within a few 
years Inteko's investment in Kaliningrad Oblast would result 
in Inteko alone exporting more to Lithuania than Lithuania 
currently exports to all of Russia.  He offered naught but 
high expectations, though, as Inteko has yet actually to 
accomplish much in Kaliningrad. 
4. (U) Oblast Agriculture Minister Romanov reported that out 
of a total of 723,000 hectares of agricultural land, over 40 
percent is unused and has been essentially abandoned.  In 
another ten years, he said, it will be overgrown to the point 
that reclamation will be prohibitively expensive, so now is 
the time for investors to come in and start farming.  He 
noted that rapeseed production (for export to Germany to be 
processed) is on the rise, and that while beef and pork 
production continues to contract, production of poultry meat 
is growing as rapidly in Kaliningrad Oblast as in Russia at 
large.  One major issue is deterioration of polders.  Much of 
the oblast, like the Netherlands, is below sea level, 
protected by dikes, and drained by a system of tiles, canals, 
and pumps.  Some of this infrastructure dates to the 16th 
century and none of it has been upgraded or overhauled since 
the fall of the Soviet Union.  Putting some of the unused 
land back into production will require investment of up to 
USD 1,000 per hectare, though the Oblast government is 
willing to help with financing some of this work. 
5. (U) Minister of Economy Lapin described infrastructure 
projects underway, particularly upgrades of east-west and 
north-south roads to handle better transit cargo from the 
Kaliningrad seaport.  The oblast has identified five 
priorities for economic development: producing agricultural 
raw material for the food processing industry, tourism, 
MOSCOW 00005513  002.2 OF 003 
logistics and transport (the warm-water port coupled with 

roads), export-oriented manufacturing, and innovation 
development.  Lapin dwelt at length on the six-year holiday 
on corporate profits (following by a 50 PCT cut in profit 
taxes in years 7 through 12), and Kaliningrad's Special 
Economic Zone status that will exist through 2031.  Oblast 
Tax Inspector Aleksandr Fedorov extolled the virtues of the 
single agricultural tax of 6 PCT (a national, not local, 
policy) plus relief from VAT and corporate income tax 
available to investors in the Oblast. 
6. (SBU) Following Governor Boos's presentation, the floor 
was opened for questions and answers.  The first questioner, 
a local farmer, asked why individual farmers had been 
excluded from the list of enterprises eligible to import 
inputs free of customs duty.  Joint-stock companies, she 
pointed out, can import grain combines and tractors 
duty-free, but individual farmers cannot, and thus get stuck 
with 18 PCT VAT plus 5 PCT import duty.  Boos promised to 
look into it and see what could be done. 
7. (SBU) Another questioner, the local representative of a 
German investor already engaged in local agriculture, 
complained that border crossings for foreigners are a major 
obstacle.  "It creates tension," she said, "what can we do to 
fix the problem globally?"  Boos tried to dodge the question, 
answering that getting goods and products across the border 
is an enormous problem, but the questioner interrupted.  "I'm 
not talking about products, but about people," she said. 
"Yesterday it took seven and a half hours for one of my 
investors to cross the border."  Boos again tried to dodge 
the question, lamely saying it is a problem of lack of 
"synchronization" with the Polish border guard service, but 
is being discussed at the federal level between Russia and 
the European Union.  "We should be better integrated with the 
European market," he said, "but for now we are temporarily 
excluded.  We are working with the President to propose to 
the EU making Kaliningrad an open zone," he concluded. 
Later, another oblast official told AgMinCouns the border 
crossing issue is Kaliningrad's single biggest headache, and 
one that the governor simply cannot deal with since it is in 
the hands of federal authorities, not his. 
8. (SBU) A German farmer already vested in an operation in 
Kaliningrad mumbled to AgMinCouns that the entire dialogue 
was nonsense, that border crossings are getting more and more 
difficult -- and not because of the Poles.  Damir Imamovic, 
vice president of Produkty Pitaniya (which has invested USD 
112 million in Kaliningrad so far, and intends to invest 
another 200 million in 2006), stated in his presentation that 
border crossings remain hard, and since his firm ships 15,000 
metric tons of product monthly, all by truck, the time wasted 
crossing the border is a significant cost. 
9. (U) The standing-room only forum exceeded the expectations 
of its organizers in terms of turnout.  Over 150 invitees 
actually came.  Of them, 64 were from Germany, mainly 
Mecklenburg-Vorpommern, Brandenburg, Saxon-Anhalt, and 
Schleswig-Holstein, and 21 from Belarus.  They and a 
sprinkling of Scandanavians, Poles, and Lithuanians 
represented both agricultural producers and processors, plus 
a few input suppliers. 
10. (SBU) The following day Minister Romanov led much of the 
group in two large buses around a series of farms, including 
the impressive Georgiyev Horse Farm, to show what Kaliningrad 
agriculture is capable of producing.  He invited AgMinCouns 
and German AgAtt Judith Kons to ride with him, and during the 
course of the day Kons asked him bluntly if inviting Germans 
to come back to Kaliningrad would not create political 
problems for him.  Romanov admitted that it will, as the idea 
of letting German farmers come back to "Koenigsberg" after 
MOSCOW 00005513  003.2 OF 003 
over a million Soviet soldiers died to capture it will rub 
many nationalists the wrong way.  Kaliningrad has no other 
choice, he said.  We need the foreign investment, we need the 
know-how, he had discussed it with the governor, and they had 
concluded it was worth the political heat from Russian 
nationalists to invite the Germans back.  Otherwise, he said, 
in another ten years the land currently idle will be so far 
gone it will never be brought back into production.  He added 
that this new, positive attitude toward foreign investors is 
a change from the previous governor's policies, and expressed 
the hope that the agribusiness forum would be only the first 
of a series of such activities intended to attract foreign 
attention to the oblast. 
11. (SBU) Agronomically there is no reason Kaliningrad 
Oblast's agriculture could not be put back into production. 
The critical issues will be market access in the EU for the 
crops the oblast can produce (mainly rapeseed, some small 
forage grains like barley, and perhaps some specialty crops) 
coupled with willingness of foreign investors to pick 
Kaliningrad over other candidates for investment, such as 
Poland.  Other obstacles are common to Russia as a whole, and 
include the continued muddle of who owns the farmland, the 
fact that foreigners are only permitted to lease land and not 
to own it outright, shortages of competent local staff to 
manage and operate farms and companies to Western standards, 
and shortages of credit for farming operations.  The 
Kaliningrad Oblast administration appears acutely aware of 
these headaches and to its credit is actively looking for 
ways to deal with them. 
12. (SBU) The border-crossing problem cannot be minimized. 
As an "exclave" cut off from the mainland and now surrounded 
by the European Union, Kaliningrad Oblast will have 
difficulty developing tourism as well as attracting foreign 
investors if visitors truly have to spend an entire working 
day in line each time they cross the land border.  This 
problem is acknowledged, at least tacitly, by the highest 
levels of the oblast administration.  At the conclusion of 
the VIP dinner following the forum, AgMinCouns overheard Vice 
Governor Shalimov assure Prunskiene that he had spoken to 
appropriate border guard authorities and ensured that her 
overland crossing back to Lithuania the next morning would 
not cause her any delays. 


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