The Baltic ports prepare for increasing business

Contemporary Review, Nov, 2002 by Thomas Land

THE great, formerly Soviet-controlled, ports along the Baltic coastline will bear enormous strain as they gear up to handle substantially increased cargo traffic. The European Union (EU) has just given the Russian economy an unprecedented boost by designating it a 'free market'.

The move has been announced by Romano Prodi, President of the European Commission, the administrative headquarters of the EU, on a visit to Moscow. It follows another unprecedented accord between Moscow and Washington that has finally buried the Cold War and opened the way to Western dependence on Russian hydrocarbon supplies regardless of what might be happening in the notoriously unstable markets of the Middle East. This should stimulate lucrative trans-shipment trade for all the Baltic ports.

The stakes are very high. According to its own estimates, Russia now spends some $1.5bn a year on trans-shipment charges through the foreign ports of the Baltic. It would like to keep that money. But in the short and medium term, it must spend a lot more on the construction of new shipping infrastructure and the acquisition of cargo handling equipment in order to achieve that.

On the other hand, the strategically placed ports of the now independent republics of Estonia, Latvia and Lithuania must also go on investing in modern infrastructure and equipment in order to retain their position a jump ahead of Russia, and to compete in the provision of speedy, reliable and economic trans-shipment services. This makes the region an enormous market for port infrastructure and equipment. And the crunch is coming.

These three small Baltic neighbours are the only former republics of the Soviet Union that have declined membership of the Commonwealth of Independent States (CIS). They may well join the EU fairly soon.

Their ports are fighting -- sometimes even against each other -- to retain a healthy slice of the Russian trans-shipment business. Thus the Lithuanian port of Klaipeda is to counter a significant current decline in its cargo trade, a direct result of Moscow's tough new freight transport policies, through collaboration with the nearby Russian port of Kaliningrad to the likely detriment of other rivals in the Baltic. Liepaja, a former Soviet naval base in Latvia, is cleaning up the polluted Karosta Canal to build a thriving cargo hub for East-West traffic. Paldiski South harbour, another former Soviet naval base within Estonia's Tallinn port complex, has emerged as a major new cargo centre.

Competition for the lion's part of the lucrative trans-shipment trade generated by the largely landlocked former Soviet empire has thus kept the cranes busy over the Baltic seaports during the recent world economic slowdown. Expectations of increased cargo flows may well lead to a new construction boom. But trade patterns are changing.

Trans-shipments from Russia via Estonia thus increased in the first four months of 2002. The volume of transit cargo moving through the port of Tallinn grew by as much as 25 per cent year-on-year in the period January-April. Oil and grain shipments via Estonia rose substantially. Transit volumes are now so high that constraints on capacity can be seen in the Russian railways.

Correspondingly, freight movements through Latvia have declined. Oil shipped through the Ventspils terminal fell by 8 per cent from the level reached a year earlier. Cargo volumes handled by the Lithuanian harbours are also down. Freight transport specialists take this as a sign that Russia wants to move more shipments through its own ports in the Gulf of Finland.

All the Baltic ports (with the exception of those in Finland) had been developed in Soviet times to facilitate Soviet trade. At the end of the 1990s, Russian trans-shipments represented 7-9 per cent of the gross domestic product (GDP) in Estonia, 8-10 per cent in Latvia and 4-6 per cent in Lithuania.

The non-Russian ports last year handled 44 per cent of the 95.2 m tons of North-West Russia's total export, import and transit cargoes, according to official statistics. Some 73 per cent of Russia's oil and liquid chemicals were shipped through the ports of the Baltic countries. These ports have managed to attract substantial investment in their struggle to retain their trans-shipment income.

But they are facing an enormous challenge. The Russian government has just approved a $127bn long-term transport-development master-plan placing top priority on the creation of modern domestic seaport infrastructure. Sergei Frank, the Russian Transport Minister, has told a specialist conference in Moscow that the investment would be raised from many sources during the next decade - including the projected savings on trans-shipment charges now paid to the foreign Baltic ports.

His scheme projects a 150 per cent increase in traffic volumes by 2010, placing huge pressure on the ports. Investment of such magnitude would have to be raised from a mixture of private and public sources, including the big Western financial institutions, and be backed by Russian government guarantees.