The special economic zone in the Kaliningrad region: development tool or institutional trap?

In this paper we examine the special case of the "degenerated" Special Economic Zone (SEZ) in the Russian exclave on the Baltic Sea - the Kaliningrad region. The 'compensation Vs. development' policy dilemma associated with the SEZ in the exclave is elaborated using modified ERP and ETR techniques. Factual results and consequences of more than 20 years of ongoing SEZ institutional instability (a transitional shift from customs tariff to profit taxation preferences) are examined. We show how transfer pricing and formation of hybrid structures reinforce the import-substitution bias of exclave economics. Some concerns about the trade-off between stimulation policies and economic efficiency in the context of the SEZ are discussed.