The Baltic Course  

Waiting for trains

Baltic state free ports step up pace and wait for their train to come in

By Maris Biezaitis

The golden business rule of time is money demands that no market player stand still. So if we look at the Baltic Sea as a huge train station, the five major Baltic state sea ports and their free-zones aren't exactly dozing on the bench while most of them seem to be waiting for their train to come in Klaipeda minds the gap

By saying waiting for trains, we mean both figuratively and literally, because in many cases, port terminal capacities are doing just that - waiting for the next train-load of cargo. Lithuania's Klaipeda free port isn't exactly on the high-speed train to Rotterdam at the moment, but time is being put to use and the loud speaker is warning that the 2K express is on its way.

The 2K project could be getting some serious traffic for Klaipeda in the not too distant future if Russia pulls through with promises to lower railway rates the route's two final stops in Klaipeda and nearby Kaliningrad. Russian businesses understood quite some time ago that the growing amount of trade and mainly Russian and CIS exports should be catered also by Russian ports rather than relying on, for example, Baltic state ports to invest in high-class terminals and thus skim the last cream before exporting to the West. This is why Russian railways charge less for cargo heading to a Russian port than they do for cargo crossing land borders, say, into the Baltic states, The result has been enough financial incentive for filling the capacities of most Russian ports, but to get to Russia's Kaliningrad enclave, one first has to cross Lithuania.

So far any development in Russia, especially economic improvement, has only barely been echoed in the backwards region of Kaliningrad, actually one of the best placed ports on the Baltic Sea rim. As Russia gradually opens up and recovers from the last economic crisis, Kaliningrad is one place to be looked at. The next wave of EU enlargement promises to surround just about the entire Baltic Sea, making it the union's only internal sea. Obviously, everyone wants to be in when the party starts, so Klaipeda and Kaliningrad agreed to the 2K deal, making railway rates from Russia to both ports equal. So far only Kaliningrad has reaped the benefits of this agreement, but something has stirred lately leading to more developments promising also Klaipeda better days to come.

Our previous article on Baltic state free ports spoke of Klaipeda's problems with passing a free port law failing to include regulations that actually work and that are favored by companies operating in the port, but they seem to be getting over this. The Klaipeda free port's director for strategy, Vladas Sturys, said that the main problem at the port now is a lack of space. With no sub-leasing permitted at the port, land expansion is a key issue for the port that is reportedly all booked up. Nevertheless, Sturys says "the general view is optimistic, because Russia's economy is growing and relationships are getting better," adding another catch phrase on everything depending on the price.

Lower prices is exactly what a Russian-Lithuanian company expected to manage the 2K cargo will be offering, squeezing all other forwarders out of the market by offering 20 percent lower rates. The company is to be 80 percent Russian owned. No doubt such a project will be of benefit to Klaipeda, probably better than recent suggestions from hands-full Kaliningrad on a feeder service to Klaipeda. But Sturys said the Moscow-based 2K forwarding company has not started working yet and this means that it is still on the drawing board. As Valdas Lukauskas from the port's marketing department put it: "the situation is still risky and uncertain," as investors are "waiting on developments in Russia and the Russian railway tariffs."

As it waits for these trains to come in, Klaipeda is going ahead with infrastructure improvements, dredging the port to 14 meters, boosting railway access and general logistical improvements. The port expects a new cruise ship terminal to be completed by the end of the year and an agreement was recently made with Denmark's A.Espersen on establishing a fish processing plant in the free port, earmarking almost 5 million euros of investments. Another 45 million US dollars expected to be invested by US steel company Penninox on a high-tech steel processing plant making 100,000 tons steel alloy products a year are still questioned, as the project moves into its fifth year.

Meanwhile, Lithuanian officials are speaking of investments this year being crucial to securing a large enough market share, as Russian and CIS countries are urged to take a more active role towards investments in the country's only major port.

Latvia checks the schedule

EU accession negotiations have pushed Latvia towards putting order to its previously messy legislation on free-zones and ports. Some Klaipeda-based companies in Lithuania have said that by following EU requirements too strictly the result is basically no free port at all. Latvian legislation covering the country's three major ports has introduced a new common final date for 2017 along with a string of other regulations, including ones that have caused the European Commission to threaten re-opening the competition chapter, closed last year. No matter how much Latvian ports would love to hang on to some kind of additional incentives for attracting investors, thus increasing their competitiveness, negotiators are still walking the path of conformity towards EU standards.

In a sense, the EU will bring enough advantages to ports in the Baltics anyway, and the process is inevitable if the small states want to balance their economies between two neighboring giants. Mentioning Norway as an example, many are recently saying that even without being EU members, the Baltics will still have to conform to EU requirements for want of not being economically isolated, adding that Norway, a non-EU state, is even quicker at passing European Commission directives than one or two (Sanita: dazs labs) EU member countries.

Liepaja. Even if the ports are calling for more liberal tax policies, their not wasting time just breathing hot air. Liepaja, the smallest of Latvia's three major ports, is working hard on improving the port's infrastructure, ready for any influx of cargo and raising quality of services at the same time. Again, the Russian railway tariff is to blame for recent lows, although past years have seen the port post impressive growth statistics. Abi Zhiv, the Liepaja Special Economic Zone's deputy board chairman, said that its all in the price, explaining that if Liepaja offers to handle your cargo for 100 dollars a ton and a Russian port can afford to handle it for 5 dollars less, then there's no doubt which one to choose, especially when your cargo weight in tons goes by the millions.

This generally means that the major price factor determines that cargo increase for Baltic state ports will occur mainly only when Russian ports have their hands full and some cargo spills over to the nearby ports located in the Baltics. But another measure is also quality, and if the Russian railway rates no longer discriminate Baltic state ports, some companies may prefer to choose just these ports for exporting their goods. With Russia making a comeback, exports are expected to rise anyway, so even though there may not exactly be a queue of investors waiting to open new plants and terminals in Liepaja, the port is pushing ahead with its current 5-year development plan.

Abi Zhiv said that the port is taking loans from Hansabanka for building new loading yards, fixing and expanding railway access, erecting warehouses and so on, in other words, making use of its time. Besides this, DG Terminals, an oil storage and handling company recently joining the list to Liepaja's special economic zone, is still intent on building six new crude oil reservoirs at the port, replacing the current six aging reservoirs with modern environmentally friendly equipment. Raising these standards will ensure passage on trains still scheduled to come. Recent announcements for an industrial park at the Liepaja airport may also help boost the port's business.

Riga. With Latvia trying to close the chapter on taxation in EU negotiations, the so-called state support program for port companies will be legitimized upon entering the union. But the loss of some points still has some people spitting chips. Latest amendments have also put a ban on financial services in free zones, and the financial services center planned for Riga is a project now put to the side. Juris Kanels from Eirokonsultants told the BC that the EU negotiations are currently taking the upper hand. It's complicated enough for Latvia to harmonize what it already has created, let alone trying to negotiate new ideas at the same time. Things may pick up again after the country completes negotiations, then being able to play by clear cut rules. Meanwhile the port looks like it will be going ahead with the development of a business and residential center on the Andrejosta peninsula.

The Riga freeport administrator Leonids Loginovs told Latvian Television earlier this year that with Russian and Kazakhstan plans to boost exports, the construction of the planned Baltic Oil Terminal, initially planning a turnover of 10 million tons of oil products a year, now cut down to 6 million, is highly likely, adding that the terminal does not intend to compete for cargo already handled at other Latvian ports. Media reports claim that the project expects from 100 to 150 million US dollars worth of investments, while local environmentalists are shaking their heads at the idea of another 500 odd train carriages of oil products cruising through the capital city each day.

But demand is reportedly high, claim port officials, and even B.L.B. Terminals in Riga has started pushing for constructing a new terminal, as current capacities are all used up. Loginovs echoed this by stating that none of the port's terminals stand empty, however, plans for the Uksoil terminal investing some 500 million dollars in a huge gas processing and mineral fertilizer terminal are unlikely to pull through, as the vicinity of half the country's population and no agreements on supplies from Russia yet has put the good idea back on the shelf.

Increasing ferry traffic is also to effect the Riga port, with an attempt at renewing the Riga-Stockholm route launched this year and increasing cargo coming on ferries from Western Europe, the Riga free port also has large plans for expanding its passenger terminal. The port's serious plans for expanding territories is a move also to be looked forward to.

Ventspils. Being linked to Russia via liquid supplies from Russia via pipeline, the Ventspils freeport has been enjoying the direct express subway for years, an advantage over all other Baltic state ports. But the Baltic leader is struggling to keep these positions as competition gets tougher than ever. Back on its feet after a fall in turnover late last year, the port is doing its best to stake out new ground and defend positions already held, last year still being the port's best in terms of turnover for the past decade.

Top quality heatable Kazakhstan oil would be welcomed arms wide open in Ventspils, said the president of Ventspils Nafta, Igors Skoks. Adding that the large investments required for handling the heavy oil that needs to be heated in winter would only be used if  supply guarantees are negotiated, but that the company is ready to do so. For now it looks like the Kazakh oil will mostly be headed for Russia's own ports, as everyone can smell the value in it, and until Primorsk can expand no more, its seems that no large guarantees will be made for this export.

In any case, the Ventspils free port has reported better results for the first months of this year than previously expected, but better results were still caused mainly by Russian railway tariffs favoring Russian ports. Talk has been heard of Russia even planning another new port on the Gulf of Finland to handle projected turnover, but the chairman of the Ventspils free port, and mayor of the city, Aivars Lembergs, said in early May that Russia is planning to cut rail tariffs as of early July this year, adding that Ventspils will be waiting to see if this really happens. Besides this, ports in the Baltics and Russia are also waiting to see Russia lift its oil export restrictions agreed upon with OPEC.

Ventspils officials claim that in general the port has no problem with equipment and that infrastructure is improving all the time. Ventspils port officials recently visited Rotterdam, aiming to gain experience in the port's coal handling business. Ventspils has just started loading coal on to Panamax vessels, thus being the first Baltic Sea port to do so. Loading coal in Ventspils will also make delivery time much shorter than going through Murmansk in Russia, so the port is putting big hopes also on this sector.

Ventspils representatives are still fighting hard for clear government policies on ports and a more liberal taxation system, but foreign policy goals look like they will be sacrificing some of the advantages Latvian ports may have been able to introduce. Even so, Latvia and the Baltic states joining NATO and the EU is not expected to bring any huge explosion in investments for the port, said Aleksandrs Kapusts, marketing director for the freeport, adding that NATO enlargement is more related to the world's business giants rather than small and medium companies. Kapusts also said that taxation incentives are the driving force for attracting investors to a port, and that these issues are key to the ports further development.

Analysts claim that the port should use the benefits offered by EU requirements and keep Russia's World Trade Organization goals in mind, as well as the growing interest of Russia and the EU to increase trade relations. This should see Russia easing competition conditions for business both inside and out of Russia. The Baltic states already have a foothold in the transit sector between the EU and Russia, and all sides should learn to use this to their advantage.

Tallinn: one foot on the train

As Ventspils officials still call for more liberal taxation policies, its nearest competitor Tallinn is hot on its heels, almost catching up on results posted by Ventspils in the first quarter of this year. Quite appropriately, one of the main culprits for Tallinn's success story is often said to be the zero percent corporate income tax for reinvested profits. Time will still tell whether Estonia manages to hold on to this rather attractive tax regulation, as Estonia remains one of the favorites alongside the other Baltic states for the next round of EU enlargement, and the European Commission has so far only said that the reinvested tax benefits will have to go.

But with attitude towards the region as a whole improving, positive trends are still expected to come.  Tallinn is expending port facilities, improving logistics and certifying its systems for quality standards, while it looks as if the port of Tallinn is not really complaining of any lack of investor interest. The fall is expected Tallinn to see a new ro-ro terminal at its Paldiski south port, taking vehicle distribution away from a similar center in Finland. The Paldiski center will be handling cars for Estonia and the booming market in  Russia. 

Tonis Segerkrantz, Member of the Management Board at the port of Tallinn, said that The Port of Tallinn has been successful in raising interest of foreign investors thanks to decisions on acquiring extra land to be added to the port territory and that it plans to develop the Estonian Logistics and Industrial Park in the Muuga Harbour and possibly also the Old City Harbor together with foreign investors. Potential foreign investors have reportedly been very active in co-operating with the port, adding that the port's flexibility is also a major bonus for port clients and closeness top the Russian border giving a geographical advantage. Considering infrastructure improvements and expansion, Segerkrantz said "we are sure we will be able to attract more foreign investors also in the future."

Today is seems that the port can't exactly complain about any lack of business and it looks like if any Baltic state ports have already caught the train, the Tallinn will definitely have been the first. But a lack of space at the port of terminal is not the only problem it could complain about. Tallinn has no direct pipelines from suppliers, so the railway is its major artery for cargo supply, and here we get back to trains and waiting.

Traffic to Tallinn has been so intense recently, that its has been complaining of traffic jams, just like Russia's St. Petersburg and Kaliningrad. The amount of cargo being supplied to the port is just too much for the railway to handle. Estonia's railway is even hiring train engines from Latvia and diverging some of the stock on a detour through Latvia and then back up to Tallinn. So Tallinn port terminal's are watching part of their capacities stand still, as they wait for their trains to arrive at the port. Russia is also struggling to deal with this problem, and a recent incentive on renewing traffic across Lake Peipsi may also ease the strain on Estonia's north-eastern transit route.

Waiting room full

Recent years have seen most Baltic state major ports a little on the gloomy side, as they waited for Russia's economy to perk up, but now that this is happening the general tone is positive and seems to be saying that even if our train has been re-scheduled or cancelled again today, tomorrow we'll still be here and even better prepared for jumping onto the east-west express. The fierce regional competition will not allow Baltic ports to start dozing in the waiting room and if the Baltic state ports keep up with their current pace, it could be other EU member ports that'll have to do the worrying after these competitive ports start playing as equals by the same rules in the next few years.

Chart: Turnover at Baltic state ports Q1 2001 (mln. t)