Russia's ports a challenge, not a threat

  • 2005-02-16
  • By Ben Nimmo
RIGA - The growth of Russia's ports have stolen headlines across the Baltics this year, and the figures are spectacular.
St. Petersburg Port, the region's largest, saw cargo figures jump 21.7 percent, while the Primorsk crude oil terminal, which began operations in 2001, recorded a 152 percent leap. Compared with these, progress in the Baltic states was derisory: only Riga reached double-digit growth, and Liepaja and Klaipeda actually declined.

This is not the only disturbing trend. Riga may have posted 10.4 percent growth, but it was mainly due to a boom in coal transport: 79.8 percent growth year-on-year. In most other sectors of cargo, except containers, the state capital posted losses. The situation was even worse in Ventspils, where despite a 152 percent increase in coal volumes, the port's total cargo throughput only rose by 1.8 percent.

This is worrying for three reasons. First, coal is a low-margin cargo. Second, its dust carries an environmental cost. Third, being a large-volume product controlled by relatively few producers in Russia, coal is highly vulnerable to changes in Russia's political scene.

The latter is no small concern since for strategic reasons the Kremlin has already decided that as much Russian production as possible should be shipped through the country's own ports. And it's the Baltics that suffer and will continue to do so.

Primorsk's crude oil pipeline opened in 2001. Throughout 2002, deliveries to Ventspils declined, and in January 2003 they ceased altogether. At that point, according to Andris Maldups, chief of the transit policy department at Latvia's Transport Ministry, "Russia's five main oil companies wrote to the deputy prime minister calling the decision artificial."

At the very least, the economic logic for closing the pipeline can be questioned. Its result 's more trade for Primorsk 's cannot. But similar considerations apply to Russia's railways. Current tariff structures mean that the cost of sending a rail cargo into the Baltics is up to three times higher than the cost of sending it to St. Petersburg. For this reason Baltic businessmen blame much of their ports' difficulties on Russia's "unfavourable policy regarding tariffs."

"Russia's unfavorable rail tariff policy has been a significant hindrance to further growth," says Trofim Teriochin of Klaipeda Port.

Says Maldups, "Metal cargoes have gone because of the tariffs." The coal might also disappear if Russia opens a new coal terminal on the Gulf of Finland, he warns.

In both Latvia and Estonia, transit goods account for up to 80 percent of port activity. Klaipeda's figures are less stark, with transit cargo accounting for only 32.2 percent of throughput, but practically all that cargo is in oil products, which are coveted by St. Petersburg. Right across the Baltics, the industry depends on Russian transit. According to Edgars Suna, head of the newly-formed strategic development unit at Riga Free Port, "The Latvian market is far too small to ensure growth. We rely on Russia's economy and Latvian-Russian political relations."

Arguments cut both ways

Several factors, however, render that reliance less risky 's not least the ports' desire for change. As Vladimirs Makarovs, director of Riga Port's strategic planning department, points out, "We're lucky to have the coal, but we have to attract other cargoes, and our long-term vision is to attract production facilities to Riga Free Port." To that end, Riga Port is already negotiating with half a dozen foreign investors. Similarly, Klaipeda Port opened a new cruise-vessel quay in 2003 and a new dry-fertilizer terminal in 2004, and is now planning new ro-ro and container terminals, while Tallinn Port has enlarged its container terminal, leading to a 14 percent jump in container handling.

Another important factor is EU accession. According to Vladimirs Makarovs, "the European Commission expects cargo flows within the EU to increase by 50 percent in the next decade, and the Baltic states are at the point of this development."

Domestic cargo volumes have already increased: the share of domestic cargo in Lithuania rose by 6.5 percent last year. High-value cargoes are increasing, with container volumes up in Latvia and Lithuania as well as Estonia, and while this trade is still small compared with bulk cargoes, the trend is encouraging.

Equally important, the Baltic states now have a voice within the EU, and according to Andris Maldups, Russia's rail tariff policy is under EU pressure. If the Kremlin has boosted its own ports for political reasons, other political arguments are now coming into play.

Even among bulk cargoes, not all is gloomy. If crude-oil transit in the Baltics has withered, oil products are performing steadily (down 3.6 percent in Latvia's ports and 3 percent in Klaipeda, up 8 percent in Tallinn), and while St. Petersburg recently announced plans to increase its oil-product capacity to 15 million tons a year, the combined total of oil products passing through the Baltics' ports in 2004 was close to 45 million tons. This flow is unlikely to vanish any time soon.

Turning the tide

The strongest argument in the Baltics' favor is capacity. Russia's economy is booming, and Russia's ports cannot handle all the cargo. Complaints have already been heard in St. Petersburg, with tailbacks in marshalling yards and increasing waiting times. Winter operations are hampered by ice. Meanwhile, the Baltics' ice-free ports have capacity to spare and are investing in state-of-the-art infrastructure. Even with current figures, Russia's ports are feeling the strain, and the figures are heading upward. As Andris Maldups puts it, "Either they are going to build some new ports very quickly, or they will have to let cargo out through other ports."

But Moscow may be changing its mind. Recently, a number of key figures have criticized transport policies. According to the newspaper Dienas Bizness, these include both representatives of Russia's railways and the Transport Ministry. Discount tariffs and slow turnarounds in Russian ports are eating into railway incomes. Russia's transport minister has been quoted as saying, "We reduced tariffs so that our ports could invest, develop and improve competitiveness. We haven't achieved our goals. If the ports don't start investing, the Transport Ministry will abolish the reduced tariffs."

For their part, the Baltics are confident about maintaining a competitive edge. "The growth of Russia's ports is not a threat," says Erik Sakkov, marketing director of Tallinn Port. "It is a boost for further improvements."

"Economics still dictate the rules," adds Suna. "As economic interest in Russia grows, it will become easier to take the right political decisions."

Maldups agrees. "If cargo can go where it wants to, not where the politicians want to send it, I still believe we'll have the transit trade."

Second-guessing the Kremlin has never been easy, but with economic and political interests beginning to coincide, the tide looks set to turn in the Baltics' favour.