ESTONIA COURTS CHINESE INVESTMENT IN PORTS

UNCLAS SECTION 01 OF 02 TALLINN 000211 SENSITIVE SIPDIS COMMERCE FOR ITA LEAH MARKOWITZ PLEASE PASS USTDA E.O. 12958: N/A TAGS: ECON EINV EWWT CH EN 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. TALLINN 00000211 002 OF 002 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