The growth of influence of external economic and international activities on the social and economic life of Karelia has become an attribute of the economic reform in Karelia from the very beginning of the Russian economy reformation (1992). The Republic’s export went up from 5% (1993) to 42.3% (1997) of the overall volume of industrial production. In the 1st half-year 1999 export was 55.2%. Therefore the Republic of Karelia may be regarded an export orientated region of the Russian Federation.

The EU states’ share of the Republic’s foreign trade turnover went up from 25% (1993) to 62.4% (1998). All-in-all the European countries take 78% of the Republic’s foreign trade turnover (1998). The CIS states’ share of the Republic’s foreign trade turnover continues going down and in 1998 was 2.4%. This shows that the Karelian enterprises orientate its external economic activity towards European markets.

The external economic and international activities development during the last years has revived cargo and passenger flows at the Karelian sector of the Russian-Finnish Frontier and has guided development of the customs and other technical infrastructure (international cross-border stations in Vartsila, Lytta, Vartsila-Sortavala Highway). It has also helped to create new working places.

Over 895,000 people and 776,000 vehicles crossed the border in 1998. The foreign freight turnover was over 9.4 million tons (in1994 it was accordingly 329,000 people, 570,000 vehicles and 7.2 million tons of cargo). Geographic and geopolitical factors have an important impact on development of the Republic of Karelia. After Finland joined the European Union in 1995, the role of the geopolitical factor and therefore the importance of Karelia as a territory directly bordering on two biggest European formations: European Union and Russian Federation, were strengthened. It established preconditions for economic and social development of the Republic of Karelia under a new course.

Firstly, it became possible to integrate the Republic of Karelia within the Russian Federation further into the European economic environment. The cross-border co-operation may and should come to a new stage of its development.

Secondly, it creates preconditions to increase the role of Karelia and Finland as transit territories and may connect the European north of Russia to Northern Europe and through several Finnish ports to Central Europe, provided that the appropriate transport infrastructure, particularly in Karelia, is build up. Today up to a half of the EU and Russia’s trade turnover goes through Finland, a EU member. This trade turnover is served by 24 well-equipped all-the-year-round Finnish ports. The same rail gauge in Russia and Finland also facilitates the increase of freight turnover from the Finnish ports to North-European part of Russia. Besides, the north-west region of Russia plays and will play a key role in electric power, natural resources and raw materials production. It gives preconditions for further growth of exchange of commodities between the markets of the European Union and European North of Russia.

Now we are laying down the base to fulfil the above trends. EU countries and Russia named the north-west region of Russia as a priority region for TACIS Programme in 1995. One Technical Office TACIS out of 6 all over Russia was opened in Petrozavodsk in 1997.

In its turn Finland has offered the Northern Dimension Concept In EU Policy wherein the Republic of Karelia has been assigned an important position for the further development of the European Union and Russia. Today, the initiative proposed by the Republic of Karelia regarding formation of Karelia Euregion, comprising the Republic of Karelia and Eastern Finland, has been thoroughly thrashed out within the framework of rapprochement and integration process between the countries.

Another difficult to realise but still practical is the idea to form a free economic zone of export production in Kostomuksha. The importance of this idea grows up due to a deep financial and economic crisis that has disturbed foreign investors’ confidence in Russia. The Concept of Kostomuksha Free Economic Zone, approved by the Government, is an important move to attract foreign investment. Formation of the free economic zone will definitely increase the investment potential of Karelia.

Karelia has been an active member of the Barents Euroarctic Region Co-operation since 1994 and joined the Baltic States Council Co-operation in 1995.

In 1994 Karelia was declared a priority region to be financed by the Nordic Council of Ministers’ Programmes; in 1995 - by EU TACIS and TACIS/Transborder Co-operation Programmes; in 1996 - by Interreg Karelia.

TACIS Projects of total 25 million ECU has been initiated under the named Programmes since 1997. Among Projects already completed, being financed or planned for financing are as follows: Purification Systems in Lakhdenpokhja, Sortavala and other 9 towns and villages of Karelia; agricultural projects, including Agriculture Machines Rent & Service Centres in Vidlitsa, Novaya Vilga, Sortavala, Kalevala and Vegetables Planting Project in the Prionezhsky District; Forest Management; Health Care and Social Welfare Reform; Energy Supply and Energy Savings; Border-line National Parks Development.

Finland is a strategic partner of the Republic of Karelia. Finland within its own interests constantly assists Karelia in promoting and realising projects. There are 250 joint Karelian- Finnish projects of cross-border co-operation, realised and being realised in Karelia and financed from Finland’s state budget in amount of 80 million FIM from 1994 up to now. Among the most important are: Vegetable Stores in Olonets and Medvezhjegorsk Districts; Diary Plant in Essoila; Farmer Training and Assistance Programmes; Sortavala-Vartsila Highway Construction; Module Boiler-Houses, supplied by Onninen; etc.

The co-operation between Karelia, Finland, Sweden and Norway resulted in two big transnational projects, prepared and proposed for approval for EU financing: ? Atlantic-Karelia Development Corridor, covering the southern part of Karelia; ? Arkhangelsk Development Corridor, covering the northern parts of Karelia and based on the Ledmozero-Kochkoma Commercial Road which is being under constructions now.

In total there are 348 projects with regions of the European countries and under European programmes of total 38 million USD realised and implemented in Karelia in 1994-1998.

Sister relation relations have become an important development factor for many cities and districts of Karelia. Karelia has concluded effective Co-operation & Friendship Agreements with over 60 cities and communes in Finland, 5 towns and communes in Sweden and 3 towns and communes in Norway.

The Republic of Karelia has opened up friendly relations with 4 Finnish Provinces (Northern Karelia, 1992; Oulu, 1993; Mikkeli, 1992; Middle Finland, 1994) two Finnish Commune Unions (Northern Savo, 1993; Keski-Suomi, 1995), Provinces of Sweden and Norway (Vesterbotten, 1994 and Tromse, 1994), State of Vermont, USA, 1998; Republic of Adzharia, Georgia, 1995.

External Economic and International activities in many ways govern the present economic potential of the Republic. Following the logic of the world economy development and globalization it should be forecasted that Russia, including Karelia, will continue penetrating further into the world economy system. The interpenetration of countries’ economies will increase. The competition among business entities will become stronger.

It is inevitable that the competition between the Russian regions to attract investment, including foreign investment, and to gain transport flows will intensify.

External economic activities will be developed under the circumstances when the domestic and world prices and export costs equalise. This will require new approaches to increase the competitiveness and efficiency. State and institutional (customs, bank, etc.) and regional statistics has been accumulated during the years of the state reform. The statistics gives an opportunity to make more accurate estimations of the ongoing processes, to plan activities and work out objectives. During the same period the Republic has become a member of several international organizations and takes part in realisation of many international programmes. The Republic has gained a great experience in international activities. Therefore it becomes possible to attract material, financial and other resources to stabilise the situation and to lay down a background for the future development.

Good preconditions for further cross-border co-operation in all fields are provided for in the Partnership and Co-operation Agreement Between the European Union and the Russian Federation of June 24th, 1994 which took effect on December 1st, 1997 and Nordic Dimension Concept in EU Policy. It is anticipated that Russia will not join the World’s Trade Organization within the scheduled period because of several problems need to be settled by compromise.

Therefore, the Russian protection barriers which protect Russian manufacturers as well as foreign states’ restrictions relating to import of several raw materials and goods from Russia will basically remain in force.

The Government of the Republic of Karelia will have to pay special attention to Northern Europe, in the first place Finland, where the Republic of Karelia has all objective preconditions for rational integration and co-operation development in all spheres.

Domestic situation will influence the external economic activities side by side with external factors. The financial crisis in August 1998 lead to Rouble devaluation and inflation growth. It is expected that this tendency will continue but in a “softer” way. The purchasing power of the popular majority has severely decreased. Therefore, the further external economic activity will be governed by rather favourable domestic situation for export growth on the one hand, on the other hand by factors suppressing import supplies. Besides, it is expected that there will be some drops in prices for raw materials and timber products until 2001 that may affect Karelia’s export value index. Investment risks will not become less for foreign investors. A very severe negative impact on development of external economic and international activities may be caused by introduction of Article 11-1 Law RF “State Frontier” into actual effect because of additional frontier charges. This will lead to foreign partners’ retaliatory measures and increase expenditures of all parties.

In point of economic safety of external economic activity, Karelia has and will have particularities that deepen All-Russian factors.

The Republic has forest resources of export value close to the border. Therefore, there is a danger of massive export of unprocessed timber at low prices that causes damages to Karelian economy.

Historical differences in prices for unprocessed timber in two countries boost sales of round timber to Finnish loggers and its export to Finland. The Finnish loggers have nominally determined an approximate 200-kilometer zone in Karelia within which it is obviously profitable to log and export unprocessed timber, using their own transport for further export operations.

The named reasons have created a danger of raw material deficiency for wood-processing and pulp and paper industry of Karelia. They do not stimulate the exporters’ interest to carry out deep processing of wood. The liberalisation of external economic activity and the named particularities of Karelia have led to an unreasonable growth of number of the so-called unorganised timber and pulp & paper exporters (over 350) and caused a decrease of timber export efficiency.

Thus, the Republic of Karelia has certain good historical, geographical, geopolitical and natural background to be involved into the international division of labour and may have a claim on the role of a transit region (like St-Petersburg and Leningrad Region) in the North-European part of Russia . A combination of technological and financial resources of Western Europe with labour forces and resources of the North-European part of Russia may create additional background and preconditions for social and economic development of the Republic of Karelia.