ESTONIA COURTS CHINESE INVESTMENT IN PORTS

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SUBJECT: ESTONIA COURTS CHINESE INVESTMENT IN PORTS


1. (SBU) SUMMARY: With two new deals in the works - a
commercial investment agreement between Estonian and
Chinese ports, and a state-level bilateral shipping
agreement - Estonia has come out ahead of potential
regional competitors in attracting Chinese capital to
its shipping sector. These agreements will help promote
Estonia as a desirable transit point for trade between
the EU and the Far East. They may also enable Estonian
transit companies to reduce dependence on Russian goods.
END SUMMARY.


2. (U) Estonia has been a player in Baltic trade since
the days of the Hanseatic League of the 13th century, so
its appreciation of commerce via sea is well-ingrained.
So are its profits. The Port of Tallinn handled the
third-highest volume in the eastern Baltic in 2007: 36
million tons. (Note: The top two were both in Russia --
Primorsk (70 million tons) and St. Petersburg (60
million tons). The total freight turnover in the eastern
Baltic Sea for 2007 reached 378 million tons. End Note)


3. (U) The Port of Tallinn comprises 5 distinct ports:
The largest - Muuga - lies just east of Tallinn and
handles the majority of cargo shipments in Estonia. The
Tallinn Old Town Harbor is a combined passenger and
container port in the city center. The Port of
Paljasaare handles cargo and containers on the western
edge of Tallinn. South Paldiski port lies 50km west of
Tallinn, and the Port of Saaremaa is on Estonia's
largest island, off the western coast. In addition,
Estonia has numerous municipal and private ports - the
largest of which are the private Port of Sillamae (30km
from the Russian border) which handled 1.77 million tons
of goods in 2007, and the North Paldiski port, which
handles under one million tons of goods per year.

GO EAST, YOUNG MAN


4. (U) For years, part of the GOE's long-term economic
growth strategy has been to promote the country as a
stable hub, transit center, and business platform.
Estonia's ports are accessible to Russia and positioned
on the trade route to the Far East. The GOE's patient
and persistent overtures to China are now paying off.
Estonia and China are moving to conclude two cooperative
agreements: one a bilateral shipping agreement between
Estonia and China, and the other a commercial investment
agreement between the Tallinn and Ningbo ports.

STEP ONE: Tallinn and Ningbo Ports Talk Investment


5. (U) In January 2008, Estonia's Port of Tallinn and
the Ningbo Port of China jointly announced a declaration
of intent to build a 2.33 billion EEK (USD 220 million)
container terminal and Chinese goods distribution center
at Muuga Port. The project will be built in three
phases across 107 hectares of the present harbor. The
Port of Tallinn's initial plan called for completion by
early 2011, but a start date will not be set until the
final investment deal is signed. The first phase of the
terminal is projected to have a capacity of nearly one
million container units (TEU) per year. (Note: For
comparison, Finland's largest container terminal at the
Port of Kotka handled 570,880 TEU in 2007. End Note.)
The new terminal would be the first major distribution
center for Chinese goods on the Baltic Sea, and would
serve the markets of northwest Russia, Scandinavia and
the Baltic countries.

STEP TWO: Estonia and China Talk Trade


6. (SBU) In mid-March, the Estonian Ministry of Economy
sent a delegation to Beijing to negotiate a bilateral
shipping agreement. According to Raul Allikivi, head of
the Ministry of Economy's Policy Division, the new
shipping agreement is necessary to address issues not
covered in sufficient detail in the EU-China agreement
on market access and cooperation on maritime affairs
that came into force March 1. The bilateral Estonia-
China agreement will cover mutual recognition of
documents, granting of shore leave, and tax questions,
and will play an important role in enhancing the
cooperation between the Tallinn and Ningbo Ports. Once
other Estonian ministries have cleared the agreement,
the GOE has to get the European Commission's endorsement
before final approval.

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WHY ESTONIA?


7. (SBU) Through patient diplomacy, Estonia positioned
itself as a target for investment by Chinese ports. The
groundwork for the January commercial agreement was laid
during a succession of senior-level bilateral visits
that have taken place since 1994. Mait Martinson,
Estonia's Ambassador to China from 2002-2007, speculated
that Ningbo Port chose Estonia because it has several
advantages over other ports in the region. Finnish
ports do not possess the logistical advantages of
Estonia, with easy rail access to Russia, points south
in the Baltics and the rest of Europe. Lithuania's
ports do not have the same capacity to handle large
container ships and volumes. Russian ports often freeze
in winter, and their workers do not display the same
level of reliability and work ethic that exists in
Estonia. Latvia, he noted, has been less diplomatic
with China over time on issues such as Tibet and Taiwan.
All in all, Martinson said, Estonia comes out as "...
the most stable and pragmatic..." of all the suitors for
Chinese maritime investment.


8. (SBU) On the other side of the deal, the Chinese
Embassy in Tallinn talks bullish on trade opportunities
with Estonia. Economic Counselor Liu Mingguo emphasized
that China encourages cooperation and investment in
every field. Estonia is very active, the country is
welcoming to Chinese, and there is steady progress on
educational and cultural ties between the two countries.
In Liu's opinion, the only obstacles to even greater
cooperation with Estonia is the long distance between
the countries, and the relatively difficult process
Chinese businessmen face in getting visas to Estonia.
When we asked if China sees Estonian-Russian relations
as a possible hindrance to trade, Liu responded that
"...if there is mutual interest between companies in
Estonia and Russia then the problems can be taken care
of." Liu emphasized that the formal investment
agreement between the Port of Tallinn and Ningbo is not
signed yet, but he hoped that both parties will continue
making progress. The Port of Tallinn is drawing up its
business plan for the deal announced in January, and
hopes to sign the final agreement by the fall of this
year.


9. (SBU) Comment: Estonia's efforts to court
cooperation with China on developing its ports took on
even greater significance this past year. Although 14
months have passed since the Bronze Soldier riots, the
impact of Russia's informal boycott of Estonia are still
significant in the transit sector and it appears
unlikely transit trade will fully rebound anytime soon.
The Port of Tallinn's 2007 net profit dropped nearly 44
percent when compared to 2006. Coal shipments are down
almost 90 percent, and oil transit is down nearly 20
percent from the levels they were at prior to April

2007. GOE, rail and port officials consistently point
to expanding connections with China as an important
component of Estonia's strategy to diversify its transit
sector.

PHILLIPS