KALININGRAD AGRIBUSINESS FORUM: GERMAN FARMERS TO

UNCLAS SECTION 01 OF 03 MOSCOW 005513

SIPDIS

SENSITIVE
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ST PETERSBURG FOR CG KRUGER
USDA FAS FOR ICD/FOSTER, PASS ERS/LIEFERT
COMMERCE FOR 4231/IEP/JACK BROUGHER

E.O. 12958: N/A
TAGS: EAGR ECON PGOV PINR PREL GM RS
SUBJECT: KALININGRAD AGRIBUSINESS FORUM: GERMAN FARMERS TO
RETAKE KOENIGSBERG?

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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
SUMMARY.


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.

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AGRICULTURAL CONDITIONS IN KALININGRAD
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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,

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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.

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TAXES AND BORDER CROSSINGS
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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.

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AUDIENCE
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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.

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BRINGING THE GERMANS BACK?
--------------


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

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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.

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COMMENT
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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.
BURNS