RUSSIA’S NEW BALTIC POLICY: SIX YEARS AFTER LOSING ITS MAJOR OUTLETS TO THE BALTIC SEA, RUSSIA IS DETERMINED TO RE-ESTABLISH ITS PRESENCE THERE

Russia’s new Baltic policy: Six years after losing its major outlets to the Baltic Sea, Russia is determined to re-establish its presence there

John Varoli

A recurrent theme in Russian history has been the country’s quest for outlets to the sea. Throughout the centuries, the search propelled Russia northward to the Baltic and the Arctic Seas, southward toward the Black Sea and Indian Ocean, and eastward toward the Pacific. Almost 300 years ago, Peter the Great brought Russian might to bear on the Baltic Sea and opened "a window to Europe." Now, following the collapse of the USSR, President Boris Yeltsin is trying to re-establish Russia’s presence on the Baltic.

Over the next 15 years and at a cost of over $3 billion, Russia plans to build three new ports on the Gulf of Finland. The three will have a planned annual capacity of 95 million tons. Also planned are the renovation and enlargement of the port of St. Petersburg and the refurbishment of Russia’s beleaguered merchant fleet in the region.

When the USSR collapsed in 1991, five of its most modern ports, with a throughput capacity of 65 million tons a year, went to the Baltic states. Russia found itself left with three smaller and outmoded Baltic ports with an annual capacity of 22 million tons. Russia is currently paying the Baltic states around $1 billion each year for the use of ports. By the year 2000, Russia’s costs may reach $3 billion annually. This might be a more cost-effective arrangement than investing in alternative port capacity in Russia, but it appears that the Russian political elite so dislikes such "dependence" on countries with which Moscow’s relations are strained, that it favors the development of Russian ports in the Gulf of Finland.

There is also, of course, a Russian Baltic port in Kaliningrad, but Kaliningrad is now an exclave, and lacks settled and workable transit agreements to cover freight passing through Lithuania or Poland to the rest of Russia. The port of Kaliningrad has been modernized and upgraded, but the transit problems remain.

Accordingly, President Yeltsin in December 1992 ordered the construction of three new ports in Leningrad Oblast — at Ust-Luga, Primorsk, and Batareinaya Bay. Financial difficulties and lack of political will kept the project on hold until late 1996, when construction finally began on the port at Ust-Luga. Visiting St. Petersburg this past June (1997), Yeltsin reaffirmed his commitment to the project with another decree that designated the three ports as the main transit point for Russian trade and a cornerstone of Russia’s economic security. "Just as Peter the Great opened a window onto Europe 300 years ago, Russia’s economic future will to a large extent be decided today on the shores of the Baltic Sea. Our ancestors understood that a country’s greatness is determined not only by military victory but by peaceful labor and honest trade with neighboring countries," Yeltsin said. In August, Russian transport minister Nikolai Tsakh reiterated Russia’s determination to complete the three ports on time.

A strong interest has also been expressed in the project by the private sector since the new ports are seen as giving Russia fresh outlets to sell its natural resources on world markets. The port at Batareinaya Bay, for example, which will cost $500 million to build, will be entirely financed by Surgutneftegaz, Russia’s third largest oil company, which is actively seeking access to world markets. Oneksimbank, Russia’s largest private bank, recently extended Surgut a $80 million credit for this specific project.

In addition to commercial rewards, Russia is determined to use the ports as a strategic and political counter to NATO’s eastward expansion and the desire of the three Baltic states to join the alliance. During Yeltsin’s visit to St. Petersburg in June of this year (1997), presidential press secretary Sergei Yastrzhembsky said the new terminals would reduce Russia’s reliance on ports in the Baltic states. "The Baltic countries should think hard about their policy toward Russia," he added. When completed, the new Russian ports will, it is argued, deal a blow to the economies of the Baltic states which at present rely heavily on income earned from transit trade between Russia and other European countries. It is estimated that as much as 90 percent of the Baltic states’ entire cargo turnover comes from, or is bound for, Russia, and it is worth bearing in mind that the total volume of Russian cargo is currently growing by between 15 and 20 percent annually. Tax revenues from the port of Ventspils alone account for as much as 30 percent of Latvia’s budget costs, while 25% of Latvia’s GNP is connected to the Russian transit trade.

The Russian government is predicting that by the year 2010, when the three new ports are expected to be operational, Russia’s trade through the Baltic states will decrease from the current level of 42 million tons per annum to 10 million tons. By that time it is envisaged that Russia’s own Baltic ports will be handling a total of 80 million tons of cargo annually, up from its current level of 19 million tons.

The impact of Russia’s new ports will be felt not only in the Baltic states but also inside Russia itself. The governor of Leningrad oblast, Vadim Gustov, predicts that by the year 2001 the three ports will be bringing his region $1.5 billion annually in tax returns. But the project has provoked friction between Gustov and his counterpart in the city of St. Petersburg (which also has the administrative status of an oblast). Although the two regions will not be competing directly for cargo — the ports in Leningrad oblast will handle mostly oil, timber and coal, items that St. Petersburg does not usually handle — they are engaged in intense rivalry for political influence and financial investment. Each covets the prestige of being seen as Russia’s "Window on the West" and "European Gate." As long as the port project remained on paper, there was little competition between the two. But in 1996 gubernatorial elections brought new governors to power in both regions — Vadim Gustov in Leningrad oblast and Vladimir Yakovlev in St. Petersburg. Both are energetic and ambitious men, determined to project the image (in stark contrast to their predecessors) of capable administrators who can get things done. Both seek to exploit their region’s favorable location and turn it into a major international transport hub with sea, air, rail and road links. The three ports have been Gustov’s pet project ever since he came to power in September 1996, and he uses every opportunity to promote them with verve and energy. He can often be heard at press conferences boasting that "the rebirth of Russia begins in Leningrad oblast."

A brief overview of the three ports follows:

Ust-Luga

Located 110 kilometers southwest of St. Petersburg, this port will cost about $170 million, and handle fertilizers, coal, timber and containers. Construction got under way in late 1996. On completion in 2010, the annual volume of cargo will be 35 million tons. The first half of the port, capable of handling 17 million tons per annum, is planned to be operational by the year 2001. In early 1997, Leningrad oblast signed an agreement with Rosugol, Russia’s largest coal company, to cover a sizable chunk of the financing. In return, Rosugol will get its own coal terminal as an outlet to world markets for the coal it mines in the Komi Republic.

Batareinaya Bay

Located 60 kilometers southwest of St. Petersburg, this port will annually export 15 million tons of petroleum products, such as diesel and oil lubricants. Construction began in June 1997. When the port is completed in 2001, Surgutneftegaz will be the first private Russian company to have built its own port, which it needs to export the goods produced at its oil refinery in Leningrad oblast. Senior Surgut official Viktor Manoilin told Prism that the money Surgutneftegaz saved through switching its exports from ports in the Baltic states to its own facilities will enable it to realize its investment in three years. The first tankers should be heading west in the year 2000.

Primorsk

Located 100 kilometers northwest of St. Petersburg, this port, with a planned annual capacity of 45 million tons, will be Russia’s largest point for the export of crude oil, petroleum products, and natural gas when it is completed in 2010. A total of 20 percent of all Russian crude oil exports, which are currently estimated at 110 million tons annually, is planned eventually to flow through this port. The discovery of huge oil reserves at the Timano-Pechorsk oil fields, on the border between the Komi Republic and the Khanty-Mansi Autonomous okrug in northern Russian north, is driving this port’s construction. The governments of both Komi and Khanty-Mansi support the project but it is not clear who will build and pay for the oil pipeline to Primorsk. The port’s high cost, estimated at $2 billion, raises doubts, especially since it is not expected to recoup its costs for 10 years. Foreign investment is crucial to this project. A Swedish firm, Arne Larsson, is reported to have agreed to pay for half of the first terminal. Leningrad oblast officials plan to lay the first stone on this port in early October, and the first terminal, with a capacity of 4.5 million tons, should be up and running by the year 2001.

The port of St. Petersburg

Russia’s third largest port, handling 20 percent of the country’s cargo, the port is a vital part of the city’s economy. Unlike Leningrad oblast, which needs millions of dollars to build the infrastructure around its ports — roads, electric power lines and rail connections — St. Petersburg already has such infrastructure in place, even though an overhaul will be necessary. In the early 1990s, city leaders hoped that the port’s rejuvenation would lead to the city’s rebirth. But as investment for modernization was not forthcoming, costs began to rise and quality fell. According to Kirill Androssov, associate director of the investment bank Hansa Investment, "the port is not competitive at the moment. For example, prices in St. Petersburg are now 20-25 percent higher than in Tallinn."

The Leontief Center, in its "Strategic Development Plan for the City of St. Petersburg" currently being prepared for city hall, urges the city authorities to make full use of the port. To quote from the Plan, "The city’s most promising opportunity for development lies in its favorable geographic location linking Russia with the outside world. St. Petersburg has the potential to become a key center of international trade, a point of transit between the outside world and Russia’s interior."

These plans have recently moved a step closer to reality. In early August, the Consortium of Banks Investing in Ports (OBIP) acquired control of 60 percent of the port’s voting shares and 40 percent of the total volume of shares. While 50 percent of this consortium is owned by well-known local financial institutions, the other half is owned by Nazdor, a Liechtenstein-based company that has the analysts guessing. Some believe it is connected to Oneksimbank, which is already heavily involved in the region’s ports and owns half of the Northwest Shipping Company, the region’s largest merchant fleet. OBIP has promised to modernize the port with a multi-million dollar investment and make it competitive

Some experts warn, however, against underestimating the potential of the Baltic states. Lev Savulkin, an economist at the Leontief Center, thinks that the Baltic ports will be able to adjust to the winds of change and continue to provide stiff competition to the new Russian ports in the transit trade business. He told Prism that "Geography favors the Balts. It is easier to get to European markets from Lithuania or Latvia than from Leningrad oblast. Also, the Balts are planning to modernize their ports and they provide more favorable tax and customs duties than Russia." The Ventspils port, for example, where 60 percent of the workers are ethnic Russians, is digging in for a tough and prolonged battle with Russia. On January 1, the port acquired special tax status that increases its attraction for shippers, and it is implementing a $100 million modernization program.