Business trumps politics on Estonian-Russian border

By bne IntelliNews November 2, 2006

Steven Roman in Tallinn -

Estonia and Russia can't ratify an official border treaty, but cross-border trade is still flourishing. Chances are this trade could grow further with a bit more political will.

A few years ago experts were predicting that once Estonia joined the EU, its trade with Russia would boom. Proof that they were dead right can be found in Narva, on Estonia's eastern frontier, where, as far as international trade goes, the view couldn't be rosier.

Here dozens of trucks laden with EU-manufactured goods wait their turn for customs inspection before crossing the Friendship Bridge into Ivangorod, on the Russian side of the river. On another bridge a couple of kilometres south, railroad cars filled with oil and wood head in the other direction, bound for Estonia and points beyond.

The buzz of commerce isn't the only positive news at the Estonian-Russian border. Thanks to post-Cold-War investment the 334-kilometre line is dotted with modern facilities, the border guards of the opposite sides maintain excellent relations, and everyone, from Nato generals to Schengen inspectors, seems happy with the set-up.

With so much cross-border business and cooperation, one might get the impression that these two states were the closest of allies. The reality, however, couldn't be more different – a sad truth highlighted by the fact that the abovementioned border between them, de jure, doesn't even exist.

A line in the forest

The diplomatic blow-out, in which Russia tore up what would have been its first post-Soviet border treaty with Estonia, came in spring and summer 2005.

On May 18 in that year in Moscow, the foreign ministers of the two countries officially inked the five A4-pages and two maps that marked out their land and sea borders. The moment had been a long time in coming – it had taken years of negotiations for the two sides to come up with a final agreement in 1999, followed by yet more years of inexplicable stalling by the Russian administration.

Ehtel Halliste, spokesperson for Estonia's Ministry of Foreign Affairs, explained the long delays in getting the Russians to close the deal. "It always takes two to tango," she said. "From the Estonian side, there was a definite political will to sign those treaties; I'm afraid that the Russian side lacked that political will."

It looked like the wait was finally over when in late June last year, just days after the Estonian Parliament had ratified the treaty, Russian Foreign Minister Sergei Lavrov unexpectedly announced that Russia had "withdrawn" its signature from the document, an unprecedented move in the world of diplomacy.

Russia's complaint wasn't the treaty itself, but the preamble to the Estonian Parliament's ratification act, which referred to the Tartu Peace Treaty that Estonia signed with then-Soviet Russia in 1920. Lavrov's initial accusation was that the reference could pave the way for future territorial claims against Russia. Soon the clamour from Moscow officialdom widened to include cries that Estonia had politicised the treaty, and that its behaviour was "nationalist," "isolationist" and "uncivilised."

Whatever the Russian's reasons for pulling out of the deal, their action meant the hard-won treaty was effectively dead. A glimmer of hope came this August when the Russian side requested a restart of negotiations on the issue, but the Estonians, for their part, can't figure out what more there is to work out.

"Both sides are actually happy with the border as it is now… therefore we answered that we will not negotiate on that, but what we would like to do, and what we are eager to do, is to communicate with the Russian side to find a way to come out of the stalemate," said Halliste.

As strange as the story sounds, this kind of deadlock is a typical state of affairs between Russia and Estonia. "It's not just this issue, there are 10 other questions which are up in the agenda of Estonian-Russian relations," said Marko Mihkelson, vice-chairman of the Estonian Parliament's Foreign Affairs Committee.

Ever since Estonia broke from Moscow's rule in 1991, its relations with Russia have been strained at best, and soured even further once the Baltic states joined Nato in 2004. Nowadays Moscow, it seems, never misses an opportunity to slam Estonia in the international press, and Russian jets frequently prod their way into Estonian airspace, each time provoking a flurry of official complaints.

Speaking on what it would take for bilateral relations to improve, Mihkelson pointed to one determining factor. "It's purely a question [of whether] there is interest from the Russian side to have normal partnership relations with Estonia and EU countries," he said.

Boom times

Luckily for the business world, the border treaty – or lack thereof – has absolutely no practical effect on the border itself, and just as observers predicted, Estonia joining the EU in 2004 was the magic pill it needed to clear away diplomatic hurdles and boost trade with Russia.

Specifically, when the Partnership and Cooperation Agreement between the EU and Russia came into play on June 1, 2004, the problem of so-called "double tariffs," whereby Russia charged twice the usual duties on goods coming in from Estonia, was suddenly a thing of the past.

Now Estonia is experiencing something of an export boom with regards to Russia, a natural trading partner with its 150m-strong market.

"In 2005 exports to Russia rose by 50% and in 2006 such rapid increase has continued," said Mario Lambing, an expert from Estonia's Ministry of Economic Affairs and Communications.

Russia is Estonia's fourth largest export partner – last year this small country sent €400m worth of its goods eastward, everything from machinery, equipment and foodstuffs to textiles and auto seat belts. On the import side, €754m of mainly fuels and raw materials came into the Estonian market.

An even bigger story for Estonia is its growing role as gateway for goods in transit from the rest of the EU to the Russian market. According to most estimates, the business resulting from transit trade makes up somewhere between 4%-10% of the nation's gross domestic product, and like Estonia's own exports, it has jumped recently.

A spokesman for the Association of Estonian International Road Carriers said that truck traffic across the border has gone up by about half since Estonia joined the EU, adding that many Western European firms prefer to use Estonian border crossings in order to keep their goods, especially those headed for St Petersburg, on EU roads for as much of the trip as possible.

Jelena Kazina, sales manager for the Estonian trucking company Allando Trailways, also cited Estonia's good port and warehouse facilities as an attraction for transit shippers. Her estimate is that transit through Estonia has nearly doubled and last summer reached the point where there was actually a shortage of trucks in the country, which caused delivery prices to Moscow to temporarily shoot up 40%


Despite the recent increases in volume, the road isn't always smooth for Estonian exporters and there are still plenty of bumps along the trade route.

For one, companies are by no means immune to the whims of Russian officialdom – a fact that became clear this July and August when a declaration by Russian President Vladimir Putin that checks on incoming cargo weren't stringent enough prompted customs inspectors to methodically rake through every shipment.

The result was that the usual one-day wait at the border crossings stretched to four or five days, and queues at the Latvian-Russian border reportedly reached as long as 20 kilometres. At one point in August, truck drivers in Narva were so frustrated by the delays that they staged a spontaneous sit-in, temporarily blocking the auto lanes. Even now that the situation has returned to normal, Estonian companies complain of continual customs hang-ups and frequent, surprise changes in documentation requirements.

One Estonian building materials producer, who asked not to be named, said the situation with Russian customs had actually got worse since Estonia joined the EU.

"I would say about 30 or 40% more difficult than it was before," said the representative. "Russia is more interested in helping their own companies than importing the goods from other countries."

Natalja Kalaud, director of sales development at Kreenholm, Estonia's largest textile producer, said it has sometimes taken up to three weeks for their products to reach St Petersburg, a mere 120 kilometres away, and that the firm now plans to set up a Russian branch specifically to alleviate the problem.

"I think we have a lot of potential small customers in Russia, but they can't provide this customs clearance," she said.

For other Estonian companies, such as the seat-belt manufacturer Norma, it's the instability of the Russian market that's causing trouble. According to the company's latest annual report, sales to Russia dropped 12% in 2005 due to a sudden, increased demand for foreign-made cars.

"[It's] like Russia always is," said the company's sales director. "You need to keep in mind it's a very risky market."

However great the risk or the logistical hurdles, access to the Russian market will likely prove too tempting for Estonian companies and their EU counterparts to pass up and the prognosis is that the flow of goods across the Estonian-Russian border will only increase. And fortunately for those involved, no amount of bad blood at the top levels of government is likely to stand in the way of that.

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