27 April 2008

A Baltic boom

By Eric Jansson
Published by Financial Times, 26 April 2008

For real estate developers who think big, central Tallinn has become a claustrophobic place. The property boom that energised Estonia after it joined the European Union in 2004 also made the centre of this city of 400,000 a more cramped place for developers to work.

Space was already scarce
before the boom. Now it is scarcer. In a market where most developers prefer to start from scratch rather than renovating old buildings, strong demand for plots has sent the Baltic country's capital sprawling into the surrounding carrot and potato fields, where fledging suburbs now rise from the soil.

And still there is Kopli, an expansive district situated on a peninsula that points away from the Old Town into the chilly, choppy waters of the Gulf of Finland.

The area arguably represents the last great chance for real estate development near the city centre. Though it is blessed with open space like almost no other part of the capital, the district has seen little in the way of development, yet it lies minutes away from the heart of Tallinn by car, bus or tram.

“In 10 years, this will probably be one of the most valuable areas of Tallinn,” says Endel Siff, a businessman living in the city who has made much of his wealth in Russian oil transit.

To understand why a growing number of Estonian real estate experts think he is right after steering clear of Kopli for years, consider the district’s peculiar history of isolation. It spent a half century as a restricted zone during Estonia’s occupation by the Soviet Union, when the military deemed the peninsula’s port a top-secret asset.

When the country regained independence in 1991, Russian sailors quartered there stayed on for many more years. When they finally left, they stripped many of the war boats in the harbour of copper pipes to sell as scrap, causing them to capsize. They left behind an almighty mess in the water and on the land.

Yet much of what was built here under Soviet rule, residential and commercial property, remains usable and inhabited. Many of the buildings that predate 1940 have been preserved, perversely, because underinvestment has been so severe that, until recently, people somehow kept them in working shape even as they sagged and sank.

Driving around Kopli, Siff offers an impromptu tour of a district that, by accident, has become a living museum of Estonian history and architecture.

On one street, century-old clapboard tenement houses still lacking indoor plumbing stand opposite a block of 1960s-builtKhrushchevki, apartment blocks nicknamed after the Soviet leader Nikita Khrushchev, during whose rule they were erected. Turn down an alley toward the shore, lined with interwar mansion houses, and one sees weather-warped wooden villas – built during Tsarist times – begging for restoration. Turn back inland and one enters a crumbling neighbourhood of grandiose, pillared Stalin-era apartment blocks.

In one such courtyard, where some front doors are falling out of their frames, vodka bottles lie strewn in the yards and old men slump on broken benches. The scene reeks of post-totalitarian deprivation. If the future is bright, it might be distant.

“We are probably talking about five to 10 years. You cannot build an oasis of prosperity if it is surrounded by poor areas but you can see that prosperity is finally reaching this area, too,” Siff says.

Siff, who does not like to think of himself as a developer, has nonetheless been dreaming up some of the biggest ideas about property development anywhere in Tallinn. His most ambitious dreams focus on Kopli, where one of his business interests, Bekkeri Sadam, a commercial port, is located.

His plans have, so far, encountered resistance from city officials. They are understandably cautious, knowing that the choices they make in Kopli are likely to define the peninsula’s role in new ways, affecting the city for many years to come.

So strong is public officials’ sense of need for a brainstorm that they presented a section of Kopli for the consideration of participants in last year’s Europan, a competition for young architects and urban planners across the continent. Contestants from Germany, Spain and Italy posted back competing visions of hypermodern residential tower blocks in a mixed-use harbour.

If such visions feel a long way off, that is only because real estate investment has not yet swept into Kopli on the massive scale seen in other Tallinn districts.

Marek Antoniak, one of the city’s leading developers with his company Artig Kinnisvara, agrees with Siff that such investment undoubtedly will arrive. “Kopli is a good area, near the city, near the sea, with good transport links. Sure, it lacks a good image, but it is the most undervalued place in Tallinn,” he says.

Small-scale investments are already evident, many of them vastly more impressive than a fresh lick of paint on an old Khrushchevka, though such basic renovations are extremely common where owners and tenants have found ways to co-operate, often after years of haggling. As this happens, the area’s peculiar history – including its sad legacy of isolation – is being converted into an asset and wealthy owners who like the heady atmosphere are moving in.

“Kopli has a very fresh vibe. It seems that everyone is looking forward to inevitable change, and change can only be good,” says Toomas Prangli, a young lawyer who last July moved there from the Old Town.

Prangli’s old neighbourhood of Toompea, an ancient hilltop area, is home to some of the country’s most coveted residential properties but he was happy to move out. Toompea, for those who live there, has been badly damaged by the real estate boom that recently petered out.

“So many foreigners bought Old Town properties as investments and rarely stayed there themselves that eventually I felt I was living in a ghost town,” Prangli says. His new loft apartment at Marati 4 in Kopli, in a Tsarist-era administrative building, boasts five-metre high-ceilings. Prangli says his purchase, lavishly renovated and managed by Uus Maa, a Tallinn estate agency, cost 30 per cent less than property in the Old Town.

Prices in similarly renovated Kopli properties range from €1,600 to €2,100 per sq metre, with Marati 4 near the top of the scale. Because apartments such as Prangli’s are commonly sold off-plan, mid-renovation, he managed to persuade four friends to buy in the same building, establishing a social base in the previously unfamiliar district.

Like many new residents in the area, Prangli says he was worried about crime but he now feels “more safe in Kopli than in Toompea”, contradicting the district’s stereotype as a stamping ground for homeless drunks and petty criminals. In Tallinn slang, when a man hits the bottle he is said to be elavad Kopli liinide – “living on Kopli rails”.

Another pleasant surprise awaiting newcomers is that, although many Estonians still regard Kopli as a place “for Russians” – a legacy of its time as a Soviet restricted zone – in fact the non-Slavic Estonian language is frequently heard in streets and shops, alongside Russian.

As more developers start working in the district, it seems almost certain to follow the trajectories of Kalamaja and Pelgulinn districts on the same peninsula, but closer to the Old Town.

Many Tallinners once looked askance at Kalamaja and Pelgulinn much as they look at Kopli now, but their popularity began to soar five years ago with a wave of renovation and construction. Bohemians came first, then young, upwardly mobile types. By this standard, Prangli has already jumped the queue into Kopli.

But then, he says he likes “to be first”.

22 April 2008

Estonia feels the pinch of Moscow's pique

Without Russian oil, terminal to become a shopping mall

By Eric Jansson
Published by the Wall Street Journal Europe, 22 April 2008

TALLINN, Estonia - Most of the world has long forgotten Estonia's dispute with Russia one year ago, which saw the Baltic nation's oil supplies cut and its high-tech economy hit by a massive cyberattack. Not Endel Siff.

A leading Estonian businessman, Mr. Siff made a fortune shipping Russian fuel through the Milstrand Oil Terminal, a well-maintained 14-hectare terminal on the coast of the Baltic Sea, and through other sites. With oil prices setting records world-wide, business should be good. But Milstrand, where Mr. Siff is chairman of the supervisory board, has filed papers to transform itself into an upscale shopping center. The plan is to load the terminal's equipment on a barge and ship it to the highest bidder. That is because Russian oil companies never resumed the flow of oil to the level upon which Milstrand depends.

The terminal's plight represents a practical example of what can occur when Russia's political sensitivities toward neighboring countries combine, officially or unofficially, with its might as an exporter of natural resources. It can generate fallout long after the initial dispute disappears from the headlines.

Shipment of oil in the Baltic has been increasing overall, but Russian oil companies have redirected much of their transit flows away from Estonia and toward newly built terminals such as Primorsk and Ust-Luga around St. Petersburg. In recent years, Russia has temporarily cut off natural-gas supplies to Ukraine and Belarus and ceased oil deliveries to Lithuania and Latvia; an embargo on trade with Georgia continues. Many analysts see Dmitry Medvedev's selection by Russian President Vladmir Putin as his successor as a way of entrenching what they describe as Mr. Putin's approach of using Russia's natural-resources wealth as a source of geopolitical leverage; the president-elect is chairman of Gazprom, a giant state-owned energy company. Senior Russian government officials don't publicly acknowledge using such leverage.

Mr. Siff's reaction demonstrates a built-in weakness of any strategy that would aim to punish independently minded neighbors with economic pressure. Estonia, which joined NATO and the European Union in 2004, has shifted the bulk of its trade from Russia, and increasingly bases its economy on services, high tech and other industries less dependent on its resource-rich neighbor. Georgia is still pressing hard for membership in the North Atlantic Treaty Organization, Moscow's primary gripe, and gaining strong support in the EU from countries such as Estonia that also have come under Russian pressure.

Unless the flow of Russian oil resumes -- a prospect considered unlikely in the near term -- Milstrand aims to convert its site to tap into the strength of Estonia's consumer economy. Approved unanimously by the company's board and awaiting public planners' approval, the plan foresees deconstruction of tanks and pipes, the conversion of three underground Soviet-built nuclear-bomb-proof tanks into public water storage, and the erection of a shopping area.

"If we do it, we will just dismantle everything, put it on a barge, advertise and sell to the highest bidder," said Mr. Siff, 50 years old, looking out his window at the terminal's gleaming white tanks, tidy lawns and railway link. With its 125,000-cubic-meter storage capacity, Milstrand is Estonia's seventh-largest terminal.

For Mr. Siff, such thinking represents an extraordinary about-face. The collapse of the Soviet Union in 1991 found him well-connected as a project manager in charge of exports at a Soviet trade organization. After tiny Estonia regained independence, he parlayed his position, expertise and entrepreneurial spirit into status as one of the country's top tycoons. His N-Terminal company co-owns Milstrand with Voorsterburgh Investeringen of the Netherlands.

Then came the spat that climaxed one year ago next week: a quarrel over the fate of a symbolically sensitive Soviet war memorial, the Bronze Soldier. When Estonian officials moved the memorial from downtown Tallinn to a suburban cemetery, ignoring Russian objections, ethnic Russians sparked riots here and a siege of the Estonian Embassy in Moscow and, Estonian officials allege, Russian hackers carried out a state-sanctioned "cyberwar" against the country's online infrastructure. The dispute also catalyzed an unofficial trade boycott.

While the street violence and cyberspace attacks soon subsided, "there is unfortunately no recovery" in oil-transit volumes, said Urmas Glase, a spokesman for Estonian railway company Eesti Raudtee. The railroad's data show that monthly Russian oil-transit volumes fell by roughly one-third after the Bronze Soldier incident. Cargo volumes of timber, paper, metals and chemicals fell sharply, too.

Oil transit in other parts of the Baltic is a different story. Seaside terminals around the Baltic last year handled 170 million tons of oil, mostly from Russia, bound for the Danish Straits, 13% more than in 2006 and about 113% more than in 2000, according to the Helsinki Commission, an intergovernmental maritime monitor in the region.

Estonia's trade with other EU countries far exceeds its trade with Russia, yet if Russian companies redirect trade away from Estonia, transit-linked businesses in the small country feel the pain. Estonia's finance ministry earlier this month cut the country's gross-domestic-product-growth forecast to 3.7%, the lowest level since 1999, when local businesses were hit hard by a Russian financial crisis. Domestic dynamics have led the slowdown, but international factors including the global credit crunch and the slowdown of Russian commercial traffic also count.

Few Estonian businesses have suffered as direct a hit as Milstrand. After transporting 1.7 million tons of Russian diesel in 2006, last year it handled fewer than 400,000 tons, only 24,000 of which flowed through during the second half of the year. What arrives is "brought in by independent traders," said Gaspard Boot, who sits on Milstrand's supervisory board with Mr. Siff.

"Of course, we have our connections with Russian oil companies. We can press them, but we cannot move mountains either," he said, noting that Russia has a financial interest in rerouting transit to its own oil-export facilities in the Baltic. Moscow has invested billions over the past decade, building up Primorsk and other sites, where Mr. Boot said Russian companies enjoy low costs through "positive discrimination" on fees.

Some companies are investing in Estonian oil-transit infrastructure now while the market is down. Mercuria Energy Group, a Swiss-registered oil trader, acquired a Tallinn terminal, Eurodek, shortly after the Bronze Soldier incident. "Sure, we're not making as much money as the terminal did two years ago," said David Ensor, Mercuria's vice president for communications. "We like the look of it as a long-term strategy investment."

By contrast, Mr. Siff's idea to shut Milstrand -- a plan Mr. Boot describes as having "a 90% chance," with the permitting process under way -- shows that at least some of the region's oil-transit businesses outside Russia prefer not to wait, or feel they can't afford to. Over time, such moves could deprive Russian oil companies of options in Baltic ports such as Estonia's that are more reliably ice-free than Russia's.

"Transit is not really the best industry to be in," Mr. Siff said. "My interests are really in high tech now." He said he is investing in laser technologies being developed in North Carolina and test-marketed in the EU.

02 April 2008

Decision time for NATO

For the first time since NATO’s initial eastward expansion in 1999, the alliance may be forced to say “no”. That is the bad news. In a roundabout way it might be the good news, too.

By Eric Jansson for Balkan Insight

With American power globally in crisis and European power defined as ever by ill-coordinated aspiration, Russian power ascends these days on the strength of natural resources wealth, strategic clarity and Western strategic discombobulation.

Atmospheric conditions do not look favourable for another round of NATO expansion, especially with coalition forces fighting toward an uncertain outcome in Afghanistan.

So should the alliance kick itself for putting the security of five European countries on the line at this awkward time?

Maybe, or maybe not.

As with past rounds of expansion, the choice being considered at this week’s NATO Summit in Bucharest is seen by almost everyone as a test of the alliance’s unity, strength and resolve.

The possibility of a rancorous internal dispute about expansion looks like bad news. However, such a disputatious moment may invite a welcome change in the way NATO handles European security.

The three western Balkan countries in question – Croatia, Macedonia and Albania – do not pose major problems as potential new member countries, even despite Macedonia’s never-ending “name” dispute with Greece.

By contrast giant, politically-fractious Ukraine and spunky, territorially-riven Georgia are tougher calls, their respective “Orange” and “Rose” revolutions notwithstanding. The very real challenges they face within are complicated by the strategic reality that they live in Russia’s shadow, like it or not.

Overt German opposition to the proposal that Ukraine and Georgia be given NATO membership action plans, known as “MAPs”, has created a strained dynamic. This could also impact Croatia, Macedonia and Albania’s prospects amid the diplomatic horse-trading in Bucharest.

Indeed, for the first time since NATO’s initial eastward expansion, in 1999, the alliance may be forced to say “no”.

Neither in 1999 nor in 2002, when the alliance triggered a second round of expansion it ultimately carried out in 2004, did NATO actually turn anyone down. In both these previous eastward rounds of expansion, which together brought ten new member countries in to the alliance, NATO opted against “big bang” expansions yet found ways to renew the hopes of those candidate countries it determined should wait, such as Macedonia and Albania.

This neat scenario is not guaranteed to repeat itself even if all three western Balkan candidate countries this week receive invitations to join. Ukraine and Georgia could still get turned away.

For the two former Soviet republics, denial of MAPs would feel a lot like “no”.

At that point, proclamations of NATO’s love and admiration will mean little. If Kiev and Tblisi come away disappointed, whatever the circumstances, count on Moscow to crow victory.

Kremlin officials make no effort to hide their disgust at the alliance’s consideration of further expansion into what they regard as Russia’s natural sphere of influence, its “near abroad”. The NATO membership since 2004 of Estonia, Latvia and Lithuania – countries which endured illegal Soviet occupations from the Second World War until 1991 – continues to sicken Russia’s neo-imperialists. Add Ukraine and Georgia, and their condition only gets worse.

Some observers and participants believe this is precisely why NATO must expand as rapidly as possible: Moscow must be shown again that it has “no veto”. Indeed, George W. Bush used the “no veto” language on Tuesday on a state visit to Kiev.

The argument makes some sense. But flip it over and one sees that Kremlin opposition to NATO expansion has itself become the anti-“veto” lobby’s imperative for expansion. Moscow has no veto, and to demonstrate this point NATO must expand, the thinking goes.

By logical extension, if NATO opts not to give MAPs to Ukraine and Georgia, then Russia will have been handed a veto by implication.

This is illusory. Somewhere between the veto Moscow in fact lacks and the imperative for NATO expansion driven by fear of Russian neo-imperialism exist the sober interests of the alliance in its present form – balanced internally by debate, compromise and even disagreement.

These sober interests clearly include the stabilisation of the western Balkans, a region in which the alliance has become deeply involved in its expanded post-Cold War mission. As such, an offer of membership to the western Balkan countries under consideration makes clear sense – especially when one considers the stabilising influence such a move could be expected to have in and around Kosovo.

The alliance’s interests less obviously include eventual NATO membership for Ukraine and Georgia, though they may include this, too. Deciding whether or not they do is likely to be rancorous business.

Fine. A strong case can be made for rancour as the very basis of NATO’s health.

This is meant to be an alliance of robust democracies in their collective military capacity, not a sissy circle of risk-averse technocrats. NATO is headquartered in Brussels, but it is not the European Commission. Its decisions should be the product of hard disagreements, worked out not through the watering-down of national interests but rather through the testing of national interests in the cold light of reality. Anything less generates distinctly insecure security policy.

If Germany holds its ground and NATO is seen to lack unity and resolve over issues of expansion this week, commentators will opine that the alliance’s fundamental unity and resolve have been imperilled, despite its unrivalled military strength. We should ignore such drivel.
NATO’s fundamental unity, strength and resolve are defined not by what happens in Bucharest but by Article 5 of the North Atlantic Treaty. This is the portion of the North Atlantic Treaty in which NATO members agree “an armed attack against one or more of them in Europe or North America shall be considered an attack against them all” and, consequently, will trigger “collective self-defence”.

Article 5 “makes” NATO, and were it ever to prove unviable in practice it would break NATO in a way that a poor outcome in Afghanistan could never do. It is also why NATO should expand with care.

While sorting out this week how collectively to take care of members countries’ national interests and considering also those of partners outside the alliance, if NATO cannot agree about all five countries whose security is on the line, an opportunity will have been lost. Differences of opinion in the alliance will appear, but not institutional fissures.

Indeed NATO may prove stronger in the long run if its European member countries become more effective, not less, at forcing fruitful debates rather than partnering passively with the sole superpower on the team, as has sometimes been the case.

It might not make for a happy summit. But for those, including many in Washington, who have long asserted that Europe should take greater responsibility for European security: isn’t that what this is?