Robert Anderson in Tallinn -

"It's winter for Estonian transit for the next 10 years," sighs Endel Siif, once one of the biggest local entrepreneurs in the Russian oil export business. Siif has given up hope that the trade will recover and sold his share of the Pak terminal near Tallinn last year after 20 years in the oil transit business.

Transit trade from Russia through Estonia - once one of the Soviet Union's main export channels - has collapsed since the "Bronze Soldier" dispute just over a year ago. The economy ministry estimates that the decline in transit trade since last April's disturbances cut Estonian GDP growth by up to 1.5 percentage points in 2007 and that this year the loss of trade could cost up to 2% of GDP.

Russia restricted trade through Estonia after the government there moved a Red Army World War II memorial from the centre of Tallinn to a cemetery in the suburbs, triggering a diplomatic clash, a wave of "cyber" attacks, and riots in Tallinn and outside the Estonian embassy in Moscow.

Initially, trucks were blocked from crossing the main bridge at Narva into Estonia and the rail line to the border suddenly required repairs. These restrictions were temporary, but the decline in trade has proved to be permanent. Siif was just one of the first to realise that the transit trade won't recover its former glory and that Estonia better start looking around for other business.

Re-routed

Oil and oil products, which used to represent almost three-quarters of the transit trade, are being re-routed to other Russian ports or to neighbouring Latvia. Estonia used to export one-quarter of Russia's oil products, but the government now says that Russian oil companies have been instructed to re-route their shipments. At the same time, Russian state-owned railways - which transports the oil shipments - has cut the number of trains crossing the border each way from a peak of 36 per month in the spring of 2007 to around 17-20 today.

According to state-owned Estonian Railways, cargo carried on their tracks fell 44% in the first four months of this year compared with a year ago. Oil products fell 33%, while mineral fuels (coal) slumped 97%, and fertilisers, metals, chemicals, timber and grain were all sharply down.

For trucks, delays at Russian customs have created huge queues trying to cross the frontier, though these are also common on the Finnish and Latvian borders. In Narva, the predominantly ethnic Russian city on the Estonian side of the border, city officials say there are often 400 trucks waiting for around three days on each side.

Estonia's ports face the toughest challenge to adapt to the new environment. Port of Tallinn, the state-owned operator of five Estonian ports, handled 32% less cargo in the first five months of this year compared to a year ago, with oil down 18.5%.

Estonia's punishment represents part of a pattern of Russian behaviour that its neighbours have become used to. Soviet-era oil pipelines to Latvia and Lithuania are already closed because their governments defied Moscow in the past. At the same time, Russia has pursued a clear long-term strategy to redirect oil exports to its own ports and to cut out intermediaries.

Estonian transit trade was always living on borrowed time and the Bronze Soldier dispute has simply accelerated its decline. "It's made the railway focus much more quickly on things that were probably inevitable," says Stephen Archer, Estonian Railways' finance director. Tallinn Port concurs: "It maybe came a year or two earlier than we thought because of political reasons," says Sven Ratassepp, spokesman.

Estonia's advantages as a transit country are its closeness to Russia, its infrastructure and most importantly its deep, ice-free ports, which have developed an expertise at speedily unloading and reloading cargo. But Russia is developing its own ports at Primorsk and Ust-Luga and building direct pipelines and rail links to them. Estonia already lost crude oil transit after Primorsk and its oil pipeline became fully operational, and light oils are also now increasingly being transported by product pipeline to Russia's Baltic ports.

Estonia remains competitive in heavy oils moved by rail, but this market is bound to diminish as Russia does more and more of its own refining. Tallinn's advantage in speed is also less important now in a market where oil and oil products are often stored until prices rise or demand requires.

Some Russian cargo - particularly coal - has simply been stockpiled because there is still not enough capacity in the Baltic to handle all of Russia's exports, demonstrating how politics is overriding economics. "It's hurting Russia too and Russian capital, but it's a political battle," says Archer. "It's about Russia being big and strong and demonstrating influence in this region."

Main losers

In Estonia the big losers are Estonian companies and small Russian intermediaries. Estonian Railways has lost market share in cargo transit to Russian-owned players on its tracks who specialise in heavier oils. Its market share is now just under 50% for cargo, compared to two-thirds in the first half last year. It made 300 workers redundant last year and expects to make further cuts in its 2,100 workforce this year. "It's been really tough," says Archer, but he adds: "Some of the business we have lost was not the most profitable for the railways."

In the ports, operators of terminals that specialise in coal or light oils have suffered the worst and smaller players are being squeezed out by global or Russian companies that are better able to maintain supplies. Siif's sale of half of Pak to Royal Vopak of the Netherlands is typical of this trend.

The Estonian authorities are putting a brave face on the slump in transit trade. The government downplays the trade's importance, estimating that it represents around 5% of GDP, down from around 10% at the start of the decade. "Russia is really not very important for us - we don't face east," says President Toomas Hendrik Ilves, adding that the cost of the Bronze Soldier dispute has been overblown. "I don't think anyone is really that upset."

Some politicians have almost welcomed the decline in transit trade, which was once seen as one of the country's great blessings. "I'm not sure we want to be this big hub between east and west," says Foreign Minister Urmas Paet.

Critics say the transit trade is low value-added, makes the economy dependent on Russia's economic performance (and therefore more volatile), and corrupts the Estonian business environment. The transit trade also brings costs, notably from heavy truck traffic. "I'm really glad the dependence on transit trade has dropped," says President Ilves.

Yet the Estonian transit industry now has to find other business or go out of business. The big hopes are car transport and the container business, this time going west to east rather than vice versa to satisfy Russia's booming demand for consumer items. In the past, only one-quarter of the total cargo traffic went from west to east. Already in the first four months of this year container cargo on Estonian Railways has increased by almost 90% from a very low base.

Tallinn Port has signed a memorandum of understanding with Ningbo port in China to make Muuga, near Tallinn, the main container port for Chinese exports in the eastern Baltic. In the first phase, Tallinn will invest €55m in developing a 27-hectare site at the port in order to handle up to 500,000 TEU containers per year with a long-term ambition for up to 4m.

Sillamae port near Narva, which has been badly hit by the decline in light oil transit, is also building a container terminal with a capacity of 800,000 TEU, though aimed at traffic going east-west.

Imports to Russia are less easy for Russia to manipulate than its oil exports, but if Estonia is going to remain a transit hub, it will still need good relations with its former overlord. In particular, Russia will have to be persuaded to streamline custom procedures and invest in infrastructure including container-unloading facilities. "If you have permanently bad relations with Russia it's hard to be successful," says Erik Terk, a consultant who has advised Tallinn Port and Estonia Railways.

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