RUSSIAN BEAR HUG SQUEEZES ESTONIAN ECONOMY

C O N F I D E N T I A L SECTION 01 OF 04 TALLINN 000347

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/NB AND INR
MOSCOW FOR DWIGHT NYSTROM

E.O. 12958: DECL: 05/24/2017
TAGS: ECON PGOV PREL ETRD RS EN
SUBJECT: RUSSIAN BEAR HUG SQUEEZES ESTONIAN ECONOMY

REF: A) TALLINN 290QB) TALLINN 297

Classified By: DCM Jeff Goldstein for reasons 1.4 (b) & (d)


1. (C) Summary: In the three weeks since the April 26-27
Bronze Soldier riots, Estonia has faced pressure from an
array of trade-disrupting measures from Russia. Cyber
attacks on government and financial websites have been costly
and have raised international concern and support. GOE
officials have called on NATO to address the issue and cited
the need for an international legal framework for dealing
with cyber attacks. In addition, disruptions in rail and
truck traffic, an informal boycott on Estonia goods and other
measures have put a strain on some Estonian businesses. A
GOE study estimated that if maintained over the long run
transit disruptions could cost Estonia 2-3 percent loss of
GDP, although there are some indications that the disruptions
are already starting to ease. Estonia has prioritized
addressing Russian behavior via the EU, although GOE
officials indicate Estonia won,t move to block EU-Russia
cooperation. End Summary.

Unofficial Trade Sanctions Begin
--------------


2. (C) Following the April 26-27 riots surrounding the GOE,s
removal of the Soviet-era Bronze Soldier statue, Estonia has
been subjected to an array of trade-disruption measures
initiated by Russia. These measures, which GOE officials
note are similar to those previously applied against other
neighboring countries including Ukraine, Georgia and Poland,
include:

-- Arbitrary use of phyto-sanitary regulations on meat and
other food products;

-- Discouraging Russian consumers from purchasing Estonian
goods;

-- Announcing sudden, unscheduled maintenance on vital
transit arteries;

-- Artificially slowing border traffic by use of customs and
inspection bureaucracy; and

-- Pressuring Russian companies to break long-term contracts
with Estonian firms.

Cyber Attacks
--------------


3. (C) In addition to these &traditional8 measures, since
April 27 Estonia has been subjected to Distributed
Denial-of-Service (DDOS) cyber attacks against key government
ministry websites and commercial enterprises via &bots8
(computers under the control of a third party). Although
investigations into these cyber attacks are ongoing, and no
one has claimed responsibility for them, the political nature
of the attacks clearly suggests coordinated Russian
involvement. Initially, the attacks concentrated on key GOE
websites (e.g., the State Chancellery, Parliament, Ministry
of Foreign Affairs, and Ministry of Justice). They forced
the GOE to ratchet up Estonia,s broadband capacity over
eightfold to remain operational. While successful in this
cyber arms race, increasing its broadband capacity so
drastically has been extremely expensive for the government.
Estonia,s small size proved to be an asset in responding to
the cyber attacks, because a handful of decision-makers could
quickly coordinate responses, and discard ineffective
strategies, as the attacks unfolded. Elion, Estonia,s main
telecommunications and internet provider, worked closely with
the GOE to rapidly provide increased broadband capacity as
the attacks increased. Jana Vanaveski, an advisor to
President Ilves, told us that the improvements the GOE had
made in preparation for e-voting during the March
parliamentary elections had bolstered the GOE,s ability to
respond to the cyber attacks.


4. (C) On May 1, the cyber attacks expanded to include
Estonian commercial websites, principally banks (e.g.,
Hansabank and SEB),websites of Estonian newspapers (e.g.,
Postimees and Eesti Paevaleht),and Falck AS Security
(Estonia,s largest private security company which provides

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the Embassy,s Local Guard Force). The private sector,
especially the banks, often had better defensive measures in
place than the government did, and was consequently better
able to contain the attacks. However, containment came at a
cost. With over 90% of Estonians dependent upon online
payments, banks had to close foreign access to increase
domestic access capacity and provide ad hoc service to its
largest foreign clients through alternate sites. Hansabank
officials told us that while their tactics were ultimately
successful, they cost the bank an estimated 10 million Euros
($13.4 million) in lost revenue. While Estonian authorities
are not sure from which country the perpetrators behind the
GOE website attacks were operating, they are convinced that
the people behind the commercial bank attacks operated from
within Estonia.


5. (C) The GOE was quick to accuse the Government of Russia
of involvement in these cyber attacks. On May 2, Foreign
Minister Urmas Paet released a statement that the MFA had
proof that some of the attacks originated from Russian
government internet service provider (ISPs) addresses.
However, officials from Estonia,s Computer Emergency
Response Team (CERT) and Cyber Defense experts have privately
informed us there is still no &smoking gun8 that links the
attacks to Moscow. However, the unprecedented nature of
cyber attack against a nation state has received wide
international coverage. On May 17, Minister of Defense Jaak
Aaviksoo told the press that while he didn,t think the cyber
attacks against Estonia were a breach of NATO,s Article 5,
NATO needed to resolve how to respond to cyber attacks
against its member states. NATO sent a team of cyber experts
to assess the situation May 10-12. At Post,s request, a
EUCOM cyber warfare expert joined the NATO team to provide an
independent, technical assessment and analysis. The U.S.
Secret Service has also offered to send experts to Estonia.

SIPDIS
On May 14, Minister of Justice Rein Lang expressed his
gratitude to the Ambassador for the USG,s assistance in
Estonia,s investigation. Like Aavikisoo, Lang emphasized
the need for the international community to begin the process
of establishing a legal framework to address cyber attacks.

Boycotts on Estonian Products; Pragmatism Based on Experience
-------------- --------------


6. (SBU) Immediately following the riots, there were numerous
accounts of an informal Russian boycott on Estonian goods.
While Russian authorities insisted there was no official ban,
press reports said that stores throughout Russia had
announced that they would stop carrying Estonian products
like Kalev chocolates (Estonia,s largest confectionary
exporter) and Estonian meat products. Russian shops
reportedly received letters from the state Veterinary and
Food Board that Estonian products did not meet Russian
sanitary standards. The actual impact of the &unofficial8
boycott is difficult to quantify. GOE officials have
consistently downplayed its importance, noting that since the
1990s, Estonian exporters have taken steps to diversify their
markets and reduce reliance on Russia. For example, the
Russian market counts for less than one-third of Kalev,s
total exports and only a few percentage points of total
sales. Overall, only 23 percent of all Estonian food and
agricultural exports went to Russia in 2006 (less than 7
percent of overall GDP).


7. (SBU) At the request of the Ministry of Foreign Affairs,
the Estonian Chamber of Commerce surveyed its members from
May 4-11 regarding the impact of these unofficial Russian
measures on their business. For the most part, Estonian
firms responded that they had not experienced direct
restrictions on their business with Russia, and that they
planned to &wait and see.8 However, responses showed that
the cumulative effect of these two weeks of uncertainty had
put a chill on the business climate between the two countries
and reminded Estonian companies that &Russia is still
Russia.8 A survey of hotels and travel agencies conducted
by the tourism department of Enterprise Estonia (the Ministry
of Economy,s trade promotion board),found that while few
had any cancellations during the past three weeks, 52 percent
thought the events since April 26-27 had a negative impact on
business. (Note: Only 4.7 percent of tourists come from
Russia, and most of those travel here for the New Year,s
holiday. End Note.)


TALLINN 00000347 003 OF 004


Disruption of Transport Sector: Rail and Road Blockages
-------------- --------------


8. (SBU) Cargo rail service between Estonia and Russia was
also disrupted after the riots. On May 1, the Russian state
railway (RzD),announced that its coal cars bound for
Estonian ports and points south suddenly needed repair, but
that companies with contracts for the month of May could use
their own coal cars if they could provide them. At the same
time, RzD announced the need to repair rail lines leading
into northern Estonia through Narva. The Estonian National
Railway (EVR) confirmed to us that their daily volume of
inbound freight trains dropped almost immediately from 32 to

16. As of May 23, EVR,s daily volume was still hovering
around 25 per day, or roughly 75 percent of the pre-riots
level. Our contacts at EVR told us that a sustained volume
of less than 25 trains per day would force the railway to lay
off workers, cancel planned investment in infrastructure, and
raise passenger fares. On the other hand, the Director of
the Port of Tallinn, through which much of the transit trade
passes, told Ambassador Phillips on May 25 that he expects
transit traffic to be back to normal levels by the end of
June, since re-routing oil shipments is very costly for the
Russian exporters.


9. (SBU) Wood veneer producer Balti Spoon, which imports 70
percent of its lumber from Russia, told us that about
one-fifth of their annual supply from Russia was pending when
the disruption to rail transit occurred. By the time they
had worked out alternate routes to get the Russian lumber in
through Latvia, (which would have added 5-10 percent to their
cost) direct rail connections were back to normal. Companies
dependent on Just-In-Time delivery, such as the oil transit
company PakTerminal, were more directly impacted during these
three weeks.


10. (C) An internal study done by the Ministry of Economic
Affairs and Communications the first week in May, estimated
that Russian trade-disrupting measures could cost the
Estonian economy as much as 2-3 percentage points of economic
growth if they continue until the end of 2007. The bulk of
this would be transit fees lost to EVR, which put in place
plans to furlough workers and halted planned investment
projects immediately following the slowdown of inbound
freight from Russia. MFA Director General for External
Economic Issues, Priit Pallum told us, however, that most
Estonian companies are downplaying the situation, at least in
the short run, for two reasons. First, they hope that the
political difficulties will die down and business will return
to normal; and second, they do not want to expose the extent
of their losses, and thereby encourage competitors in Russia
or elsewhere to try to take business away from them. In
Pallum,s estimation, the most potentially damaging of all
the GOR,s recent tactics is the pressure on Russian
companies to break long-term contracts with Estonian firms.
&If Russian businessmen get the message from higher up that
they are not going to be allowed to deal with Estonian
companies, they will orient their long-term planning
elsewhere, to other suppliers,8 Pallum said. Officials at
EVR and Tallinn,s Muuga Port also told us they know that if
the capacity and reliability of competitor ports such as St.
Petersburg or Primorsk ever rises significantly, their
Russian customers may go away for good, although even here,
they expressed doubt that the expansion of Russian ports
would be able to keep up with the continued expansion of the
Russian economy.

Bridge Over Troubled Relations
--------------


11. (SBU) On May 10, the Russian Federal Roads
Administration (Rosavtodor) announced that it would soon bar
all vehicles weighing over 13.5 tons from traversing the
Narva river between Ivangorod, Russia and Narva, Estonia, due
to unspecified safety concerns. The Narva bridge is the
primary crossing point for all cargo trucks passing between
the EU and Russia in northern Estonian ) approximately 140
trucks per day in each direction under normal circumstances.
The weight restrictions were imposed from May 16-18, forcing
trucks returning to Estonia to take a much longer southern
route (at Petseri) and creating long lines at the bridge.
According to the MFA, the Narva Bridge passed a safety
inspection two years ago for trucks up to 41 tons; the

TALLINN 00000347 004 OF 004


Russian authorities were not in a position to evaluate the
bridge because it is under Narva city jurisdiction; and a
border crossing agreement between the two countries requires
at least 90 days, notice before restricting traffic. After
several false starts, Estonian and Russian transportation
officials finally met on May 22 and agreed to create a group
of Estonian and Russian experts to examine the bridge decide
on its future use. Road signs on the Russian side announcing
the weight limit have been removed, and traffic is now
crossing normally.

Estonia,s Response
--------------


12. (C) The GOE has prioritized addressing Russian behavior
multilaterally, through the EU (and NATO on the cyber
attacks). Drawing on his own long experience working with
Russia, the MFA,s Pallum discounted the usefulness of
engaging Russian officials directly. The instructions come
from the Kremlin, he noted, so it is simply not useful to try
and resolve issues with officials at a working level. This
has been tried in the past and failed, Pallum explained.
Even when there are good relations between Russian and
Estonian counterparts, the Russian officials do not have the
authority to make any decisions. Rather, according to
Pallum, Estonia has and will continue to urge the EU to unite
behind &strict talk with Russia ... and a strong position -
the only thing the Russians understand.8 Nobody would
benefit more from Russian involvement in organizations like
the WTO and OECD than Estonia, Pallum added, but only if they
act like a normal international partner. Within the EU, the
GOE,s priority is consensus building. Jana Vanaveski
emphasized that Estonia wants to continue its &pragmatic8
approach and move forward; it is not interested in blocking
specific cooperative efforts between Russia and the EU - like
the EU-Russia Partnership and Cooperation Agreement. Estonia
is very familiar with Russian tactics she said, now other
member states see them as well.

Comment
--------------


13. (C) Estonia,s success in recent years in re-orienting
its economy away from Russia has clearly made it less
vulnerable to Moscow,s use of economic tools for political
pressure. At the same time, the cyber attacks Estonia has
endured have demonstrated to the international community a
new vulnerability of national economies in the digital age.
The main economic lesson from Estonia,s experience of the
past few weeks may be the reality of not just the physical
threats to 21st century market economies, but the virtual
ones as well. End Comment.
PHILLIPS