• 2006-01-25
Even though both sides have expressed an interest in cutting a deal, it remains to be seen whether the Estonian government and Baltic Rail Services, the owner of Estonian Railways, will be able to finalize an agreement. If the devil is in the details, then this is one deal bound to contain a nasty legion. At this point it is hard to imagine that the counterparties could agree on terms, let alone price.

Nevertheless, it's almost for certain that the Economy Ministry, run by Center Party leader and "Putinophile" Edgar Savisaar, will draft a plan to buy back Baltic Rail Services' 66 percent stake in Estonian Railways, which maintains the country's railway infrastructure and handles freight as well. The two other coalition parties, the People's Union and the Reform Party, are likely to approve the ministry's proposal, though when it comes time to talk price they will hit a logjam.

According to reports, Baltic Rail Services wants 3 billion kroons (192 million euros) for its stake. Government officials have, in so many words, suggested that this price originated somewhere deep in fantasyland. BRS paid only 1 billion kroons in 2000, they say, and there's no justification for tripling the price of the asset.

They're wrong. First, many asset prices have more than tripled in the Baltic over the past five years, largely due to booming economies and EU accession. That's precisely why it was a good investment for Baltic Railway Services 's it was a play on EU membership. Second, the railway is posting profits, and should continue to do so under keen management. Third, investments made into the infrastructure have improved asset quality. Fourth, as any sensible investor knows, when you purchase an asset you essentially pay based on projections of future performance; in this case, with Russia exporting more each year, that projection should be on the upside.

But Savisaar, who is hell-bent on imposing his economic vision on Estonia, will bend the Reformists to his will. The rhino, who has signed a memorandum of cooperation with United Russia, the Putin cronies rubber-stamping Kremlin legislation, will threaten to quash the squirrels, and the Centrists will win out.

This railway standoff is an embarrassing debacle for Estonia. It shows that there are still many Soviet-minded individuals running state ministries in Tallinn. Politicians easily forget that there were two co-signers to the privatization agreement of 2000: Baltic Rail Services and the government. They are quick to point out what the investor has done or failed to do, but they leave out the second half of the equation. As both a shareholder (33 percent) in Estonian Railways and regulator of the entire rail system, the government is under no less obligation to play fair, honor the previous Cabinet's commitments and increase shareholder value.

But that's the rub: shareholder value. (It's something you could never teach Savisaar.) That's why, among the government's other errors vis-a-vis Estonian Railways, bureaucrats didn't allow BRS managers to re-evaluate the book value of the railroad company's assets. By keeping assets valued low, politicians sabotaged BRS' its borrowing capabilities.

That's the difference between a Homo sovieticus like Savisaar and a western mentality. Instead of cooperating with the shareholder and increasing value, which in turn would have resulted in more dividend income and a better railroad, the populist Center Party leader saw someone making profit on what he believed belonged to the state. Envy set in, and since becoming minister last year he has done everything to undermine BRS.

Foreign investors beware.