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.

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