• 2006-04-26

cartoon by Jevgenij Cheksters

The standoff between the Estonian government and Baltic Rail Services, a private company that owns a controlling stake in Estonian Railway, the nation's railroad operator, hit a new low last week when the Cabinet of Ministers decided to terminate the privatization agreement with the company over alleged contractual violations. The government gave BRS an ultimatum: 60 days to rectify the state's grievances, or the agreement gets tossed in the shredder.

Specifically, the Cabinet, which acted on a proposal from the Economy Ministry, based its decision on three arguments. First, BRS fell short on its pecuniary investment obligations; second, BRS collateralized a 6 percent stake in Estonian Railway against bank loans without the state's permission; and third, BRS has contested the government's ownership of a golden share in the Stockholm Court of Arbitration. (A golden share affords special rights to the owner, and usually belongs to the state. In the given case, the golden share was part of the original agreement with BRS signed in 2001, and thus the investor has no valid case, or so says the government. BRS claims that golden shares are contrary to EU law, which did not pertain to Estonian Railway five years ago.)
The government is adamant that if BRS failed to meet the 60-day deadline, it will carry out its threat. BRS, of course, will be reimbursed for the money it paid for the stake and investments made, or for the market value of the asset, whichever is more beneficial to the state.

As one can imagine, BRS executives went ballistic at the news. CEO Edward Burkhardt, a U.S. national with three decade of experience in the rail industry, was particularly dramatic, saying "the actions of the Estonian government are a direct parallel to Russia's treatment of Yukos shareholders, but being done in a nation that claims to have renounced its Soviet past."
Without condoning comparisons (always flawed) or bringing up history (always sensitive), Burkhardt is essentially correct when he asserts that BRS is being "railroaded" in much the same way the Kremlin has done in the past six years with some of Russia's top industrial assets. The "our-way-or-the-highway" approach by the Estonian government is embarrassing 's no, appalling 's for a country that prides itself on transparency and investor-friendliness. Something's rotten in Tallinn.
Economy Minister Edgar Savisaar, who has made it his personal mission to nationalize Estonian Railway, has become drunk on power; what is more surprising, however, is that the liberal Reformists, including Prime Minister Andrus Ansip, a group that has a good track record for promoting open market economics, have bought into Savisaar's argumentation and supported the termination. This is stupefying. How can it be that self-respecting, commonsensical politicians heed the advice of someone who shamelessly shuttles off to Moscow to cohort with the Kremlin's pocket party (United Russia), especially on something as monumental as the termination of a major privatization?

The government is not only wielding a golden share, but a golden hammer 's directly over the heads of investors. By pursuing Estonian Railway with such relentlessness, Savisaar and Co. are letting all companies know that they could become subject to the same arbitrary revisionism on the part of the state. Investors have been warned.