Yaroslav Shedov's blog

The Chance for Perezagruzka: Why do the Baltic States and the EU Need Russian Participation in Rail Baltica?

September 22, 2021
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1. Two Sides of The Same Coin: From Russian to Chinese Dependence

As it has been discussed in my previous article on Rail Baltica, one of the primary aims of this project is to ensure that the Baltic States will become less dependent on Russia. Will this task be so trouble-free? Will the Baltic States have enough economic power to be independent of any non-EU countries, and will Rail Baltica have enough financial feasibility to be fully independent of any external players? Or is it more rational to find common ground with Russia in this particular field and try to make a deal where both parties will be better off?

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Source: sumin.lrv.lt

So far, we can only see that it is highly likely that Chinese finances can simply become the mere substitution for Russian dependence. Chinese investments have made their way to the Baltic States and Rail Baltica. For instance, Chinese companies have successfully won the bid for the construction of the final section of Rail Baltica that is located in Poland, a 71 km section of line between the towns of Czyzew and Białystok. The Polish-Chinese consortium PUT Intercor (the consortium comprises the Polish company Intercor and the Chinese Stecol and Sinohydro Corp), won a contract worth 747 million euros. While any potential economic cooperation with Russian companies in any EU project nowadays may be considered “toxic”, the cooperation with Chinese companies has not raised any concerns so far. As it was discussed in my previous article “Europe…. From Lisbon”, the Chinese financial support may cause trouble and the precedent in Montenegro is a great example of it. A Chinese-financed highway in Montenegro caused a disastrous problem for the local budget. The Montenegrin government had to freeze public sector wages and raise taxes, whereas the country’s debt has increased to 80% of the GDP.

With the help of 17+1 initiative (Lithuania has decided to leave that format of cooperation with China in March 2021.) China has already increased its presence in the Baltic States. For instance, the largest engineering company in Lithuania, Elektros Tinkle Institutas, was purchased by a subsidiary of Energy China and North China Power Engineering (NCPE), a large state-owned enterprise. In Latvia, a Chinese genomics research company, MGI, has started the construction of a technology park near Riga airport. While it would be quite surprising to find out that a Chinese citizen, Huang Jianhua, has managed to purchase 40% of Factum Interactive, a Latvian polling agency. In Estonia, China’s major state-owned investment, CITIC Telecom CPC, has acquired the Estonian subsidiary of the Dutch Linx Telecommunications B.V., which operates the interconnects between Estonia, Finland, and Sweden. It is indeed not the first time China has expressed interests in the telecommunication /internet cables in third countries and has become one of the stakeholders in the companies that exploit them (e.g., the Finnish project Arctic Connect).

The unclarity in relations between the Baltics States and Russia has made the Russian companies stop transshipment of oil through the port of Ventspils, Latvia, and other ports in the Baltic States and start to take all their cargo to domestic ports in the St. Petersburg area. Meanwhile, Belarussian goods may also be redirected to Russian transport hubs, especially taking into consideration the political disputes between the Belarussian government and the Baltic States. If the transit of Russian freight trains is gone, the only alternative is Chinese cargo. The first train with Chinese imported goods arrived in Riga in 2016. The train that arrived from China to Riga brought textiles and sanitary engineering, while Latvia did not have anything to offer in return. Still, the former chairman of LDZ Logistikia, Verners Lūsis, suggested that Riga and Latvian ports would become the key transport hubs in Eurasia. It goes without saying that Rail Baltica may help to achieve that aim. However, it is not as simple as it could be. The former Latvian Minister of Transport, Anrijs Matīss, said that there would be little opportunity for such an ambitious concept of making Latvian ports the key transport hubs. The reason for that is because it would be expensive and time-consuming to develop a transit corridor through local ports.

However, “strangely enough” was to find out that cooperation with Russian cargo companies is needed to help transport Chinese cargo to Latvia. One of the results of the 17+1 summit in Riga in 2016 was the signing of a memorandum of cooperation between LDZ Logistika (a subsidiary of Latvian Railways) and Russian rail cargo company PJSC TransContainer. The document assumes cooperation between the companies in attracting Chinese cargo. As for the core idea of Rail Baltica–to reduce dependence on Russia–the geopolitical situation, and the outflow of Russian cargo traffic from the Baltics, as Deputy State Secretary on sectoral issues at the Ministry of Transport of Latvia, Denis Merirands, said that sometimes there was a situation when politics was politics, and business was business. Indeed, it is hard to disagree with this logic. That is why I find it crucial to find common ground of potential cooperation between Russia and the Baltic states in Rail Baltica project and analyze the potential benefits of it for businesses and the people of these countries, and the rest of the EU.

2. Tourism and the successful story of high-speed “Allegro”

One of the definite advantages of Russian participation in Rail Baltica for the Baltic States and such cities as Warsaw and Berlin is a potential increase in the number of tourists, and there has already been a successful example of it–a high-speed train Allegro. A joint venture of national operators, Russian Railways (RZS) and VR, Finland operate trains manufactured by a French multinational rolling stock manufacturer, Alstom. At an average speed approaching 220 km/h, the train offers a 3h 30min journey between Helsinki and St. Petersburg. There is no doubt that Allegro plays an important part in the economy of Helsinki and Finland and has become a booster for the growth of the tourist flow. Since its launch in December 2010, for two years there was a steady growth of tourists’ coming to Finland and Helsinki in particular (see Figures 1, 2 and 3). Only the devaluation of the Russian ruble caused a slight decrease in the number of tourists coming, but nevertheless, after 2016, the figures started to show steady growth, while in 2019 most foreign tourists were still from Russia. It should be taken into account that tourists using Allegro high-speed trains are not only Russian citizens but also tourists from Russia and other countries.

Figure 1 Yearly nights spent and arrivals by foreign tourists in Uusimaa (Helsinki Region) of residence from 2011-2019, all accommodation establishments, arrivals

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Source: Statistics Finland https://pxnet2.stat.fi/PXWeb/pxweb/en/StatFin/StatFin__lii__matk/statfin_matk_pxt_11j1.px/chart/chartViewColumn/

Figure 2 Yearly nights spent and arrivals by foreign tourists in Finland from 2011-2019, all accommodation establishments, arrivals

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Figure 3 Top 5 countries of origin in each region in 2019

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Source: Business Finland, 2019 https://www.businessfinland.fi/4958c7/globalassets/julkaisut/visit-finland/tutkimukset/2020/2019-review---travel-in-finland.pdf

The pre-pandemic figures were also looking promising: In January-February 2020, 79.4 thousand passengers were transported by Allegro trains, which is 12.4% more passengers than in the same period in 2019.

According to the Russian Railways (RZD), in 2019 nearly 560 thousand passengers were using the services of Allegro trains. It is 15.7% higher than in 2018. At the same time, in the first half of 2017, passenger traffic by Allegro trains increased by 30% compared to the same period in 2016. The high-speed train services between St. Petersburg and Helsinki were used by 229 800 passengers during that period and Allegro train services nearly approached pre-economic crisis indicators of the first half of 2014, when the passenger turnover was about 253 300 people.

The growth in the attractiveness of Allegro trains was facilitated by flexible tariffs marketing initiatives (bonus programs for frequent RZD passengers), reduced travel time, the use of additional trains during peak demand, and additional services. Moreover, passengers can make a free transfer to Helsinki-Vantaa airport by using the Allegro ticket. Despite the economic crisis caused by the pandemic, Finland and Russia are interested in the construction of a high-speed railway line between Helsinki and Moscow. After the launch of that line, the travel time between the capitals of the two countries will be reduced to about six hours. Finnish foreign trade minister, Ville Skinnari, after a meeting with members of the Russian government and RZD officials in January 2021, said: “Finland is interested in such a project that would help increase the flow of tourists in both directions, and we are ready to continue discussing this initiative with the Russian government.” Finnish officials have already started to take the first steps in upgrading their railway line. The Finnish Ministerial Committee on Economic Policy has already approved a section of the line to be upgraded and a plan to finance the construction of a high-speed line to connect the Finnish capital, Helsinki, and the Russian border. The estimated cost will be €2.65 billion.

The case study with Allegro train has clearly shown that even despite the economic crisis, such projects as this can bring economic benefits and still have the potential for future development. Indeed, it will also be promising for such cities as Tallinn and Riga, and Latvian coastal towns such as Jürmala. There are also a significant number of tourists from Russia coming every year and a quite significant number of Russian-speaking minorities living there. Since 2016, there has been a steady growth in the number of Russian tourists visiting Estonia: in 2016 there were nearly 201 000 tourists, while in 2019, 260 000 visitors traveled to Estonia. Only more tourists from Finland have visited Estonia. In 2019, most tourists came to Latvia from Russia (279,000), followed by Germany (243,000) and Lithuania (209,500). In the case of Latvia, connecting Riga with St. Petersburg, Pskov, and the Russian North-West by high-speed train may have even more economic boosters for the country due to a large number of destinations provided by various low-coast airlines from Riga International Airport. Pskov does not provide any international services, Novgorod does not have any airport, while Russian low-cost airline Pobeda has not managed to agree with St. Petersburg Pulkovo airport on slots for international flights. Currently, WizzAir is the only low-cost airline that has recently started its international services but had to stop that activity due to the pandemic ban on international tourism. It is still unclear how often and to how many destinations Wizzair will operate from St. Peterburg. Likewise, Air Baltic, which operates from Riga International Airport has been popular among Russian tourists for a long time. Before the ban on international tourism due to the pandemic, Russia was one of the most popular Air Baltic destinations: from Riga, it flew to Moscow Sheremetyevo Airport 26 times a week, and to St. Petersburg–22 times a week. Moreover, the Irish low-cost airline Ryanair decided to open its base at Riga airport and significantly expanded its route network from Latvia. Indeed, the high-speed trains from the Russian North-West to Riga will be able to transport many more new travelers who would like to travel from Riga International Airport by low-cost airlines.

3. Cargo

Even despite the fact that Russia has started to divert its cargo from the Baltic States to its ports in St. Petersburg, it is vital for its economy to keep at least what is left and try to redirect the cargo that is transported by lorries onto trains. If nothing is done, Latvia may face another economic crisis. About 9% of the country's GDP is transported, and almost 70% of transit is of Russian origin. The only alternative is Chinese goods, but, as has been discussed above in the article, there is little opportunity for any potential game-changer growth.

The throughput capacity of the Latvian railway network is 100 million tons per year. The record figure for freight traffic was recorded in 2014 at 58 million tons of cargo, mainly due to the transportation of Russian goods, where more than 85% of products were coal from the Kuzbass region. According to the head of LDZ, Māris Kleinbergs, in the first half of 2020, the country’s railway transported only 11 million tons, which represents a catastrophic drop caused by a 78% reduction in the volume of coal transported from Russia.

Last year was indeed the most difficult one for the transit industry in Latvia. The volume of transported goods that passed the Latvian Railway dropped by 41.9%. The volume of foreign cargo transported was 16.3 million tons, which is twice lower than in 2019. The head of LZD suggested that not only the economic crisis caused such a significant drop, but mostly the Russian decision to divert its cargo to Russian ports in the St. Petersburg region.

The former minister for Transport of Latvia, Anrijs Matiss, considers that it might be difficult to see ‘the light at the end of the tunnel’ in the Latvian Rail Transport system. In his opinion, the current geopolitical situation only adds oil to the fire and there is still no country that could replace the Russian cargo. In his view, politics is the key thing that has to be blamed for the current problems the Latvian Railways have faced, and at the end of the day, Latvia and other Baltic states might have to use its close geographical proximity to Russia for the benefit of their businesses and transport projects, otherwise, more job losses are inevitable. He also said: “It is impossible to make rational business decisions if politicians use aggressive political rhetoric among themselves. I am by no means calling for abandoning the principles of our country (Latvia) and the general course of the EU's foreign policy, but we must remember what our geographic position is and who our nearest neighbors are. We will not be able to develop transit services, for example, with China or India, if we have bad relations with our neighbors, which deprive us of transit.” The geopolitical vicious circle that Russia, the Baltic States, and the EU are now in, is indeed damaging all of these countries, especially their businesses. The chairman of the board of the Baltic Association-Transport and Logistics, Ivars Landmanis, noted that it would be impossible to stop any cooperation with Russia and Belarus as the border countries “must maintain economic relations.” In his view, businesses have always tried to maintain close economic relations, but nowadays the political agenda has become dominant, and due to political differences, cooperation is being curtailed, the volume of cargo decreases, so the terminals simply do not need so many workers, which results in layoffs and “working with losses, the enterprise cannot survive for long. It has a certain limit.”

Taking this situation quite seriously, there was a meeting arranged between Māris Kleinbergs, chairman of the board of the Latvijas Dzelzcelš (Latvian Railways), and First Deputy Managing Director of Russian Railways, Sergey Pavlov in 2020. The aim of the meeting was to discuss any potential cooperation that can be still possible between countries in the Railway transport sector. One of the key initiatives that were proposed was an idea to launch a passenger route from St. Petersburg to Kaliningrad via Riga. Taking into account the current state of the Latvian Railways, there is no doubt that if it is possible to launch that train and if it is a high speed one, the Rail Baltic project and the Latvian Railways will only be better off.

4. Why does it all matter?

Every project or any political decision has to bring value to society. The importance of such projects is not simply about finances and numbers. It is also about cultural dialogue and interaction. By having more opportunities for quick and comfortable ways of traveling between Baltic and Russian cities, people will interact more with each other. In the long run, this will have a more positive impact on the political dialogue between these states. It is unacceptable that the Baltic States and Russia have quite a number of trade deals with far-land countries, while they have not managed to establish any efficient economic ties between each other.

The Rail Baltica project could be a great opportunity for re-discovering relations between the Baltic States and Russia. The traumatized relations between Russia and the Baltic States have been even more undermined by the pandemic when the traveling, political dialogue, and any kind of interaction between people were shut down. Russian participation in such an ambitious project would be a big step and a potential successful attempt to restore, even by an inch, relations between Russia and the Baltic states, while also bringing a positive outcome to the rest of Europe.


1 From Russian, the word “perezagruzkameans “reset.That term has already been used during the meeting between Russian Foreign Minister Sergey Lavrov and U.S. Secretary of State Hillary Clinton when the U.S. officials presented a red button with the English word “reset” and what was intended to be the Roman alphabet translation of the Russian word “perezagruzka”, but instead it was written “peregruzka”, which ironically means “overcharge” or “overload.”

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