Global Economics

Russia Siphons Shipping from the Baltics


Through port modernization and hardball politics, Russia is handling a greater volume of cargo, at the expense of the Baltic states

For a decade and more after their independence from the Soviet Union, the three Baltic republics punched far above their weight in the business of handling cargo bound to and from Russia.

With a combined population of hardly more than a 20th of Russia's, Lithuania, Latvia and Estonia handled a much greater share of Russia's Baltic shipping, thanks to Soviet planners who invested heavily in the development of their ports to service the USSR's external trade.

The Baltic republics' gain, though, was the Russian Republic's loss, a deficit inherited by the Russian Federation.

In the 1990s, says Konstantin Fedotov, a member of the dockers union at the port of St. Petersburg, "Our port, the largest in the country, was a very unattractive asset. The volume of cargo handled was too small because business was poor."

MONOPOLY BUSTING

By the end of the decade, however, Russia's economic recovery coupled with surging commodity prices boosted cross-border trade in both directions. Stability gave Russia an opportunity to pay attention to the political and security aspects of economic growth and trade with the three Baltic republics, which have been thorns in Moscow's side for 15 years over their treatment of the Russian minorities and their aspirations to join NATO and the European Union.

Launching a major Baltic port modernization plan, Russia built its largest oil port at Primorsk in 2001, restarted the frozen Ust-Luga port scheme in 2002, and began work on the Vysotsk oil terminal in 2003 -- all direct competitors with ports in Latvia, Lithuania and Estonia.

Modest Kolerov, a foreign-relations specialist at the Kremlin, recently noted, "The serious intentions of officials to diversify shipping are beyond doubt. This is a necessity because of the need to increase national security and reduce dependence on any monopoly held by neighbors."

Kolerov was sacked from his post as head of the Russian presidential administration's foreign relations office in October, but his assessment still holds. The Kremlin demonstrated its willingness to play hardball with the Baltics on land as well, twice in the past two years unexpectedly closing down important rail connections for "urgent repairs."

The Baltic states are vulnerable to such tactics because only a small fraction of the cargo that passes through their ports stays in-country. The rest is shipped onward, mainly to Russia. In 2006, the Russian Transport Ministry reported, the three countries' ports handled 138 million metric tons of cargo, of which just under half was Russia-related.

In a typical year Baltic stevedoring companies do up to $350 million worth of business, much of it paid by Russian firms for export and import of manufactured steel, automobiles, timber and coal. However, more and more of that money is remaining in Russian hands as the Kremlin's port modernization program goes from one major project to another. From 170 million tons in 2000 Russian ports boosted the volume of cargo handled to 397 million tons in 2006, with 150 million tons moving through Russia's Baltic ports alone.

The Latvian port of Ventspils has lost much of its oil trade to Primorsk, while Ust-Luga with its future 100-million ton annual capacity promises to leave dockers in Sillamae, Estonia, empty-handed, believes Russian Railways president Vladimir Yakunin, the former chairman of the Ust-Luga company who supervised the port project at the personal request of Russia's President Vladimir Putin.

In 2001, the Russian government began offering rail transport discounts to freight owners who delivered their cargoes to domestic terminals. Other port modernization projects set for the coming two to five years include increasing the capacity of the Kaliningrad port, new terminals in St. Petersburg and a new, large port zone at Vistino, west of St. Petersburg.

"By developing ports on our Baltic shores we'll reduce our need for services of ports belonging to other countries. That way we can exploit our facilities and pay salaries to our citizens, not foreigners," First Deputy Prime Minister Sergey Ivanov -- a possible successor to Putin in 2008 -- said recently.

Behind statements of this kind lie "purely political reasons," according to Nadezhda Malysheva of the PortNews shipping information service.

"In Russia, the question of export and import flows has never been treated as a transport issue. Because it has huge natural resources, above all, oil and gas, the country paid very little attention to what was going on in shipping, ports, or the automotive, logistics and railway sectors," Malysheva says.

'URGENT REPAIRS'

Russia's confrontation with Estonia over a Soviet war memorial last spring brought home to Tallinn the consequences of seeming disloyalty to Moscow.

Just two weeks after violent demonstrations in April by Estonia's numerous Russian minority over the relocation of the Bronze Soldier memorial, Putin instructed his government to work out a set of measures to enhance the competitiveness of Russian ports, sending a signal that for Moscow Baltic sea and land transport has become a political issue no less than an economic one, just as control over natural gas has become a major component of its foreign policy in recent years.

The effects were soon felt at the port of Tallinn, the largest in Estonia, which handled 17.5 percent less freight in June compared to the previous year -- a drop that cannot be attributed to "pure" business fluctuations alone. Some types of Russia-bound cargo have almost disappeared from Tallinn, transiting instead through the port of St. Petersburg, says Alexey Bezborodov, head of the InfraNews research agency.

"Business feels and reacts very sensitively to political tensions" between Russia and Estonia, Russian Transport Minister Igor Levitin commented in July.

The competition is heating up on chilly Baltic waters.

The sting is even worse for Estonian railways. In September, Estonian railways said the volume of goods from Russia had dropped 30 percent since the Bronze Soldier affair in Tallinn and 200 rail workers had lost their jobs as a result, RIA Novosti reported.

Moscow had an explanation for the drastic curtailing of rail traffic, one it has employed before -- urgent repairs on the line. Repair work began in early May, days after the rioting in Tallinn.

"The same method of repairs to infrastructure was used in the relationship with Lithuania. [In July 2006] the Druzhba oil pipeline was shut down due to breaks that appeared suddenly.' And it's still under reconstruction," Malysheva says.

MOSCOW'S MONEY TALKS

Baltic officials acknowledge the effect of the Russian transport tourniquet but have not appeared overly concerned.

Estonian Economic Minister Juhan Parts estimated that the country saw a 30 -- 35 percent drop in the volume of rail and ship-borne freight since the Bronze Soldier incident, but insists the situation will recover by the end of the year. Tallinn's port still has advantages over Russian competitors, says the chairman of the port management board, Ain Kaljurand.

"We have enough terminal capacity to double the volume of Russia-related cargoes," Kaljurand says. "Besides that, we have very stable port tariffs. This is our advantage in comparison to Russian ports."

Andris Maldups of the Latvian Transport Ministry rests his country's case on long-term cost savings. "Any importer can save money by reducing customs taxes when transporting goods through Latvian ports. Due to the unification of Latvian and EU laws, our ports require minimum formalities from a freight owner," he says.

Russia's basic position in external affairs has been stated, or demonstrated, time and again: Without proven loyalty or cooperation, no economic benefits. This is the case with Georgia, whose Borjomi mineral water can be purchased in many countries but not in Russia, ostensibly for health reasons, or with Polish meat, banned on the same grounds.

The dispute with Poland interrupted regular dialogue EU-Russia dialogue at a high level, but in spite of the EU's vaunted single market, "We can see that when it comes to their own interests individual countries prefer not to see themselves as EU-oriented" in their economic dealings with Russia, believes Bezborodov of InfraNews.

"Germany preferred to conclude a contract with Russia for reliable gas supplies from the Nord Stream gas pipeline instead of showing solidarity with the Baltic states and Poland. No sanctions were taken in response to Russia's ban on Polish meat. Also there were only verbal reactions from the European Union leaders to Russia's reduction of transit through Estonia," he says.


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