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RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTL #0035/01 0361341
ZNR UUUUU ZZH
R 051341Z FEB 09
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 1019
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 
 
¶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