Estonian transit shows growth but fears Russia

Estonian transit shows growth but fears Russia

By Olya Schaefer

TALLINN - Estonia’s transit industry continues to show double-digit growth in 2011. This is a very encouraging sign for the economy, and leads analysts to speculate that the transit sector would be a lucrative investment in the future. Estonia is uniquely positioned to capture a significant share of the transit market between Russia and Scandinavia, Western Europe and the Baltics. Rail infrastructure is solidly in place, there are several convenient ports, and international airports are available as well. Tallinn’s airport is accommodating more flights and carriers, while Tartu airport was renovated in 2009 to provide regular international flights. However, it has been pointed out by Olli-Pekka Hilmola, a professor at Lappeenranta University of Technology in Finland and who has written extensively on the subject of transit that, “in transportation, everything depends on the state of economy.” So, accurate predictions of the future of the transit industry are as difficult to come by as accurate predictions of economic trends. While some analysts see a continuation of fast growth, Professor Hilmola is more cautious, predicting only modest growth.

Why are there differing opinions on the future of Estonian transit? The latest figures are impressive. Juhan Tere, reporting for The Baltic Course on Feb. 17, found that a total of 3.05 million tons of cargo was transported on Eesti Raudtee (Estonian Railways) infrastructure in January of 2011, which exceeds the result of January 2010 by 18.9 percent.

Oil and oil products were the biggest cargo group, with 2.09 million tons in January, a growth of nearly 16 percent in a year.  Oil shale followed with 560,000 tons, an annual growth of 80 percent. Fertilizer transport totaled 180,000 tons, a growth of 17 percent in a year. Local transport formed 590,000 tons, transit 2.3 million tons, export cargo 38,000 tons and import cargo 107,000 tons. Transit grew by 9 percent, local transport by 77 percent, export by 10 percent and import by 39 percent. The cargo turnover of ports managed by Tallinna Sadam (Port of Tallinn) has grown a lot in 2010. In September the turnover totaled 27.2 million tons, 16.8 percent more than last year. And growth was noted in all cargo types.

These are excellent statistics, giving rise to high hopes. Is such hope justified? Is the Estonian transit industry growing by leaps and bounds, and can it maintain such levels of intense expansion? An important question to ask is one posed by Alari Purju in his “Transit trade trough Estonia: problems and developments” article in the Baltic Rim Economies bimonthly review of 2008, and that question is how do we measure the transit trade? “The amount of transit flows of goods, services and tourists are measurably quite easy. However, to determine the size of value added created by the transit trade is a complicated task. The role of the transit trade is even harder to define, if the indirect impact of those activities is considered. The transport and storage services are accompanied by different financial, security and other services. In the framework of the transit cluster, the re-export should also be included.”

Additionally, we must look at political, economic and world market factors that can indirectly influence this sector. In the matter of Estonian transit, a sharp decrease was registered in 2007. This happened before the general economic downturn, and was due to Russian sanctions in response to the incident of the Bronze Soldier – a World War II monument which was moved from the center of Tallinn to a cemetery in a suburb. The decision to move the statue angered the Russian community in Estonia. Yet sanctions imposed by Russia did not help the local Russians, as many jobs, specifically manual labor, factory work, and skilled labor associated with the transit industry suffered massive layoffs. A disproportionate amount of people whose jobs were cut and who cannot not find alternate employment are Estonian Russians. Language remains a barrier to employment options and those factory and labor positions were often filled by Russians, as knowledge of the Estonian language was not imperative.

Perhaps rallying behind the Bronze Soldier cause was simply a shrewd business tactic. Animosity in the transit sector was brewing for some time prior to the incident, as Russia felt that Estonia was profiting unfairly from its natural resources and cutting too heavily into Russia’s export profits. Rather than use Estonia as a stopover for the import and export of goods, Russia is working hard to cut out this middleman.

There is room for competition and profits in transit for both countries, but Estonia must work hard to maintain the momentum and high growth. Urmas Koiv, head of the Estonian Logistics Cluster, which is the country’s largest business association, uniting harbors, railroads and airports, believes that “historically, Russia has always been, and will stay forever Estonia’s biggest and most important transit customer. Finland has been and most likely continues to be one of the two top export and import partners for Estonia, together with Sweden. Hopefully this relationship will become even stronger due to the growth of north-south transit traffic to and from Finland.”

Currently, Estonian railways use the same gauge that is used throughout Russia and the CIS, making Estonia an attractive European hub for bulk shipment of goods from the Far East: 80 percent of rail freight in the country is transit traffic. However, the EU’s Commissioner for Transport, Siim Kallas, speaking to World Cargo News, stated that switching over from the Russian (1,520mm) to the European (1,435mm) rail gauge would be a better option for Estonia. He added that further development of the 1,520mm broad gauge was not required in Estonia, as there would be no major east-west traffic through the Baltic States’ railways over the course of the next five years. He also emphasized the drop in Russian transit cargo traffic through Estonia, which is primarily due to Russia’s policy of ‘Russian ports for Russian cargoes.’ The European Commission, which is set to fund 50 percent of the Rail Baltica project, had been pushing for the standard gauge (1,435mm), which is the gauge that is used in the majority of EU states.

The Baltics, however, with their proximity to Russia and their historic connection to the country, share the same broad-gauge system, which means that freight to or from the Baltic States into Europe must change rail cars and gauges. The Rail Baltica project is aimed at connecting the railway networks of Poland, Lithuania, Latvia, Estonia and Finland. The first stage is to be completed by 2013, and the second by 2015. The project will further integrate transport links between Eastern and Central Europe.

The decision to change gauges is a highly charged one, politically, economically and emotionally. To change would mean a break with Russia; to maintain the current one would displease the EU and pit Estonia against Russia. A decision is still pending.

Professor Hilmola sees the possibility of growth in the transit sector coming mainly from value-added services, such as security, but agrees that the future of Estonian transit lies in shipments from Russia to Europe.  This niche “has already grown, but it will grow significantly more in the next decade. The Russian ruble is still weak, so it is still cheap to produce goods there and export. So, I would predict that this would be the case.” And the main product that Russia is exporting in the transit sector is oil. According to Professor Hilmola, Russia exported 20 million tons of oil over Estonian rail in 2004; in 2010 the amount exported was 23 million tons – a slight increase overall, but with a large dip in 2007 and a steady rise afterward. This supports the theory that the economic climate dictates the transit sector’s growth and profitability.

Estonian Railways, a state-owned company which will celebrate its 141st anniversary this month, was one of the firms hit especially hard by the severe drop in Russian oil exports through Estonia in 2007. It has since made significant strides towards recovery. Managing Director Kaido Simmermann was quoted last year by Eesti Rahvusringhaaling as stating that cargo traffic was up by 12 percent compared with 2009, and overall traffic by 16 percent. Simmermann added that investments into infrastructure development and the addition of new trains by 2015 would mean that Estonian Railways would be a 100 percent 21st century company.

The cargo turnover of Estonian ports has increased, but it is too early to rest on its laurels, since the Ust-Luga port in Russia is developing fast and snatching a part of cargo flows. According to their Web site, Ust-Luga port is expecting to handle 120.6 million tons of cargo by 2015. In 2004 it handled 36 million tons of cargo. The many-fold increase is expected to come from general growth of cargo transit in north-western Russia, as well as usage of new technologies in storage and loading, an increase in participants and investors of the project, as well as government incentives.

Russian industrialists and large companies’ association deputy president Aleksandr Murychev stated that the volume of cargo is growing and Russia must disperse risks. Spirin thinks that launching the Ust-Luga port project takes main cargo flows away from Estonia, and it is possible that Estonian ports will suffer from a shortage of work. “The volume of cargo moving between Russia and the European Union grows. This benefits all: all ports of the region develop,” said Sillamae port co-owner Tiit Vahi. “With the expansion of the Ust-Luga port, a part of the cargo goes to Russia. But there will not be a 100 percent loss for Estonia,” he said.

In order to diversify and distance itself somewhat from its neighbor and competitor to the East, Estonia is actively seeking new partnerships and relations to boost the transit industry, and its leaders are looking outside the box. Eesti Rahvusringhaaling quoted Minister of Economic Affairs and Communications Juhan Parts, speaking at an Estonia-Kazakhstan business forum in Astana on Feb. 14, 2011, emphasizing Estonia’s willingness to become the inland nation’s sea gate in the foreseeable future. Compared to alternative transport corridors, Estonia could offer Kazakh companies lower handling prices, and the Port of Tallinn is ready to seek investments for building a terminal or distribution center for Kazakh goods, said the Logistics Cluster. Perhaps the future of Estonian transit will lie in innovative ventures such as this. Currently, Estonian transit is thriving, but is doing so in Russia’s shadow.
 
 
The Baltic Times
 
 
 

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