Identifier
Created
Classification
Origin
09TALLINN35
2009-02-05 13:41:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tallinn
Cable title:  

Estonian - Russian Relations (Part 1):

Tags:  PGOV PREL EFIN ECON EINV RU EN 
pdf how-to read a cable
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FM AMEMBASSY TALLINN
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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 03 TALLINN 000035 

DEPARTMENT FOR EEB/CBA, EUR/NB AND INR/EC

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: PGOV PREL EFIN ECON EINV RU EN
SUBJECT: Estonian - Russian Relations (Part 1):
Economy

Ref: Tallinn 10
Tallinn 18

UNCLAS SECTION 01 OF 03 TALLINN 000035

DEPARTMENT FOR EEB/CBA, EUR/NB AND INR/EC

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: PGOV PREL EFIN ECON EINV RU EN
SUBJECT: Estonian - Russian Relations (Part 1):
Economy

Ref: Tallinn 10
Tallinn 18


1. (SBU) SUMMARY AND COMMENT: Estonia's economic ties
with Russia are modest and relatively straightforward.
Bilateral trade with Russia has held steady for
several years at around eight percent of Estonia's
total, with imports dominated by mineral fuels.
Exports are spread across all sectors. Inward direct
investment from Russia is about two percent of
Estonia's total, concentrated in transit and real
estate. Russian businessmen characterize the
relationship as basically good, as long as politics
can "stay out of it." Observers from across the
Government of Estonia (GOE) concur that Estonia is
"saved by its small size" whereby it is easy to track
investors and investments (making it hard for Russia
to infiltrate the economy). The Ministry of Defense
(MOD) keeps a close eye on the facets of the economic
relationship that might impact on energy or cyber
security, another factor limiting Estonia's
vulnerability. Estonia will remain dependent on
Russia for much of its oil and gas over the next
decade - and will no doubt hit periodic bumps in the
road on transit and trade issues - but Russian
economic ties are less consequential than are
Estonia's ties with other Baltic Sea neighbors, and
the wider European Union. END SUMMARY AND COMMENT.


2. (U) Estonia has close but limited economic ties
with Russia, built on a long history of complex
relations with its eastern neighbor. Since Estonia
re-gained independence in 1991, Russia's importance to
the economy has steadily receded in favor of stronger
trade, investment and business ties with Scandinavia,
Latvia and Lithuania. Russia's influence in the
Estonian economy is evident primarily in the transit
sector. This was seen acutely in the summer and fall
of 2007, when inbound coal shipments plummeted by
almost 90 percent, and petroleum by 50 percent,
following the April 2007 riots following the GOE's
decision to relocate a Soviet-era statue from central
Tallinn (the 'Bronze Soldier'). Even then, Russia's
decision to re-direct this cargo from Estonian to

Russian ports is seen by GOE officials less as the
result of those events, than as a strategic decision
by Moscow to use the Primorsk and Ust-Luga ports
inside Russia instead of Estonian ports, as expansion
projects and warmer winters increase annual capacity
at those competitors. While these losses now appear
to be permanent, the estimated impact of lost transit
revenues on Estonian GDP is less than one percent.

Bilateral Trade and Investment: Steady but Modest


3. (U) Estonia's 2007 GDP (roughly USD 15 billion) is
on par with the annual revenues of U.S. Steel, near
the bottom of the Fortune Global 500, or equal to half
the state domestic product of North Dakota. In 2007,
net bilateral trade between Estonia and Russia
accounted for 4 percent of Estonian GDP, down from 7.4
percent in 2006. While exports from Estonia to Russia
are diverse, (foodstuffs, chemicals, machinery, and
vehicles each comprise 10-20 percent),imports are
skewed 60-70 percent toward fossil fuels and minerals.


4. (U) Foreign direct investment (FDI) between Russia
and Estonia appears even less significant to both
economies than trade. Russia's share of total FDI in
Estonia has hovered around 2 percent since 2004,
roughly equivalent to the U.S. share of FDI during
that same time. Russian investment is concentrated
mostly in smaller, privately owned ports such as
Sillamae and North Paldiski (both former Soviet
military sites),the transit sector, and small amounts
in real estate. The leading foreign investors in
Estonia are Sweden and Finland, both of which are
dominant in the financial sector. Together, these two
countries make up over 65 percent of FDI, with no
other single country having more than 5 percent.
Russia receives about 8 percent of Estonia's outbound
FDI, with the clear majority (63 percent) going to
Latvia and Lithuania.

Beneath the Numbers: Don't Mix Business and Politics


5. (SBU) The Estonian-Russian Chamber of Businessmen
(ERPP) has 21 members (compared to 112 in the
Estonian-American Chamber of Commerce). Victor

TALLINN 00000035 002 OF 003


Novokreshchenov, a member of the ERPP's board, told us
they focus primarily on promoting business relations
and cooperation agreements between Estonian and
Russian firms. Among ERPP's membership, there is a
heavy emphasis on marine insurance and re-insurance
brokers, customs agents and other transit-related
companies. Yuri Netchayev, director of one such firm
that is affiliated with Wells Fargo, told us that
Russians are still interested in doing business with
Estonia "...as much as allowed by the political
situation." Companies on both sides are not turning
away from one another, he noted, but officials on both
sides consider it less risky to go through neighboring
countries first, using trucks registered in Latvia or
Finland, for example. Sometimes, officials on the
Russian side of the border will advise the ERPP on how
best to get shipments through based on the
circumstances. Asked about influence from Moscow on
economic ties between the two countries,
Novokreshchenov commented that Moscow's influence is
most pronounced with respect to raw materials, over
which Moscow has the greatest control, and is seen as
less of an impediment for private companies dealing in
services or processed goods.


6. (U) ERPP member companies deal more or less equally
with Estonian- and Russian-speaking customers, and few
feel a need to learn the Estonian language to do
business here. As for the Estonian government's
influence on the bilateral business climate, the ERPP
members with whom we spoke felt there was little
chance that a government led by PM Andrus Ansip would
improve the business dynamic - signaling a Russian
perception that Ansip's Reform Party (at least) has an
anti-Russian bias. This perception is heightened by,
but not solely attributed to, Ansip's decision to move
the Bronze Soldier statue. None of the members with
whom we spoke were especially concerned by the
periodic, seasonal crossing delays (up to 34 hours in
May 2008) that trucks experience at the Russian border
at Narva. These ERPP members felt that bureaucratic
slowdowns were just a fact of life in Russia - not
unique to crossings at the Estonian border, and that
this was proof of the success of Vladimir Putin's
crackdown on corruption a few years ago was a success.

How Much Russian Influence?


7. (SBU) Several key Estonian interlocutors told us
that the small size of the Estonian economy, and the
low number of key players within it, made it hard to
hide any sizeable business activity. Priit Pallum,
Director General of the Estonian MFA's Department of
External Economic and Development Cooperation,
acknowledged that "There is some trade circumvention
in every economy, and Russia is no exception." He
felt confident, however, that any Russian impact on
Estonia's economy (over and above the official 4
percent from trade) would be apparent. Mart Kivine,
Advisor both to the Finance Minister and President
Ilves, said that Estonia is "saved by its small size"
and added that it is hard for him to see Russian
investment posing a risk to Estonia. (Note: Estonia
does not screen foreign investors, but it does require
licenses for banking, mining, transport, water supply,
etc. to set ownership responsibilities. End Note.)
"There are those in Estonia who see an opportunity to
make money doing business with Russia, and those who
see risk," MFA's Pallum said, "and the two groups
basically do what they each think is in their own best
interest."


8. (SBU) One GOE institution that spends more time
thinking about risk than opportunity is Estonia's
Ministry of Defense (MOD). Though not directly
charged with looking at the economy, the MOD has a
strong interest in energy- and cyber- security,
stability of financial markets, and FDI in sensitive
sectors of the economy. MOD's Director of Policy
Planning, Christian-Marc Liflander, told us that, in
fact, the impact of the transit sector in 2007 was
exaggerated (related to the Bronze Soldier riots),and
that global markets are far more important to
Estonia's economy. The real economic concern with
respect to Russia, he said, is the fact that capital
is concentrated in the hands of so few, who themselves
are subject to manipulation inside Russia. In
Liflander's assessment, Russia does not try to exploit
foreign customers if it is getting a market price from

TALLINN 00000035 003 OF 003


them, and in fact favors them over domestic buyers.
The Ministry of Finance's Kivine echoed this fairly
pragmatic assessment, noting that Estonia has "...no
systematic dependence on Russia in any area of
trade...", and that Russian investors likely would
find greater returns on their capital in larger
markets such as Finland or Sweden.


9. (SBU) While Kivine and Liflander did not see any
current evidence of a major economic vulnerability
towards Russia, both drew the line at strategically
sensitive areas of the economy. Liflander noted that
the MOD had already opposed the idea of Estonian banks
off-shoring their computer servers. If that were the
case and in the event of another 2007-style cyber
attack, Estonians would have no access to electronic
banking or ATMs if the state had to again cut internet
access with the outside world. He and Kivine both
cited the example of the state-owned Port of Tallinn -
the country's largest - as another place the GOE would
step in to restrict foreign investment, especially
Russian investment. "What would happen if NATO
decided to conduct a maritime re-supply exercise in
Estonia, only to find that the private owners of the
port suddenly declared that it was closed for
'repairs'"?, Liflander asked. Still, Estonia has
privatized as far as it feels it can do prudently.
Gazprom's 37 percent ownership of Eesti Gas, the
primary retail gas distributor in the country, has
raised no significant concerns. While neither Kivine
nor Liflander saw any significant vulnerability
resulting from Estonia's economic ties to Russia,
neither saw greater involvement as desirable either.
Someday, if there were greater transparency and
accountability in Russian markets and investors, this
might change, but neither thought this likely in the
foreseeable future.


10. (U) A NOTE ABOUT ENERGY: Estonia relies on Russian
oil and gas for half of its heat production (fifteen
percent of total energy consumption). Estonia does
not rely on Russian energy sources for electricity as
domestic oil shale deposits provide 90 percent of the
demand, and domestic peat, wind and shale oil gas
provide the rest.

DECKER