All Quiet on the Western Front

Despite Russia’s accession to the WTO, Kaliningrad region continues to experience discriminatory tariff policy from Lithuania and Belarus. The region seeks to have a deepwater port, professionals debate its project feasibility, authorities have found an investor and mull over a cruise terminal.

In tariffs crossfire

The Russian enclave located on the territory of the former East Prussia suffers from its unique position within the EU borders. The main problem hindering the development of its transport and transit potential lies in the continuing discriminatory tariff policy pursued by Lithuania and partly by Belarus. Sergei Kolomeyts, the head of the Kaliningrad Railways who spoke at the recent 5th Baltic Transport Forum, claimed that Lithuanian Railways’ high tariffs hinder the development of the port of Kaliningrad. He presented the statistics showing that the share of Lithuania in the cost of delivery of gasoline from Surgut to Kaliningrad, makes up 6% (depending on the distance), and on transit tariffs - 54%. Belarus’ share reaches 11% and transit tariffs - 13%. The transit tariff in Lithuania is EUR 0.1511 per t/km, Belarus EUR 0.0197 per t/km, Russia - only EUR 0.0064 per t/km. In other words, the Lithuanian rate exceeds as much as 23.6 times that of Russia!

If we take another cargo, say gas condensate from Limbaugh station, the transit rate in Lithuania will be 0,025 euros per tonne-km, in Belarus - 0,014 euros per t/km, in Russia - only 0,006 euros per t/km. In other words, the Lithuanian rate exceeds that of in Russia by more than four times, and twice as much the rate in Belarus...

This imbalance makes Kaliningrad-bound traffic unprofitable, so the lion's share of goods goes to the Lithuanian port of Klaipeda.
Thanks to this scheme, the above port is developing quite well. Vice Minister of Transport and Communications of the Republic of Lithuania Saulius Girdauskas, by this year-end investment in the port of Klaipeda expansion is predicted to total about $ 397 million (more than LTL 1 billion). Of that, $ 125.5 million (LTL 330 million) will be public investment, and nearly $ 271 million (700 million litas) – private money. The funds are aimed at upgrading the the port’s infrastructure and quays, dredging, including the construction of liquefied natural gas (LNG) and Ro-Ro terminals. The Lithuanian official said that aggregated throughput of the ports of the Baltic States (Latvia, Lithuania and Estonia) will double in five years.

According to data presented at the forum by Gudvalis Stasys, Deputy Director General, Director of Freight Transportation Directorate of Lithuanian Railways, about 25.8 million tonnes of Russian exports are shipped annually through Klaipeda port terminals.

To be fair, we have to acknowledge that previously Russian port of Ust-Luga had diverted an essential part of cargo flows away from local ports and that there are also some tariff barriers on Russia’s end. According to all accounts, this problem should be resolved at the negotiating table, the parties will have to meet halfway, but so far they have not made any attempts.

The Ust-Luga – Baltiysk ferry line seems to be the only chance, but the solution also has some ‘pitfalls’ and created by Russia at that. Despite the fact that the ferry service performs transportation between Russian ports, the goods and passengers are subject to mandatory customs procedures. Sergei Kolomeyts suggested that the line be exempted from customs formalities through some amendments to the legislation. He noted that the operator plans to deploy the third ferry on the service, and the RZD mulls investment in a car-ferry complex.

Meanwhile, Russian stevedoring companies in Kaliningrad are virtually deprived of transit cargo flows. Talking about the cost-effective cargo, like containers, the local ports container traffic is provided by internal consumption, the supply of spare parts for the region based automotive assembly plants. But one major importer AUTOTOR has reduced the OEM components imports and this has immediately affected the container throughput of the regional terminal operators. General Director of Baltiyskaya Stevedoring Company (BSC, member of NCSP Group) Sultan Batov complains that his company may fail to hit this year target, 200,000 TEUs, because of the reduced car parts imports.

Dim outlook

Against this background, the statement of Deputy Minister of the Kaliningrad Region’s Infrastructure Alexei Klyuneyev on an investor for a deepwater port project has sounded rather surprising. He did not disclose the investor but added the name will be announced shortly. The Kaliningrad deep-water port project has long been hatched but in the end the funds for construction allocated in the federal program were partly redistributed to the construction of the outer harbor Bronka, based near St. Petersburg.

Initially, the project of a deepwater container hub in Kaliningrad region able to compete with Polish terminals and Klaipeda has drawn fire from the expert community.

Alexei Klyuneyev vowed that the project will be reviewed to become “less theoretical” and more practical. The project will take into account the competition with neighboring rival ports. The official said that the government is considering the Yantarniy and Pionersky villages as possible construction sites for the container port. Investment in the project is estimated at RUB 36.6 billion, to be made through public-private partnership.

The construction of a cruise terminal for the FIFA World Cup 2018 is yet another project mentioned by Alexei Klyuneyev. According to the official, the cruise terminal project is valued at 5 billion rubles. The project will be implemented at the expense of federal funds. The terminal is planned to have one or two piers that will be able to accommodate ultra-large cruise liners. "We came to the conclusion that it would not make any sense to build the terminal unable to receive the most modern ships of appropriate size", Klyuneyev told journalists.

BSC also has its own investment program, which aimed at increasing its facility capacity to 300,000 TEUs a year, expandable to 400,000 TEUs. The company head Sultan Baltov believes that the target will be achieved, in particular, through utilization of a neighboring train ferry terminal, mentioned above. The operator also stakes on containerization of some cargoes. Yet it is not clear how they are going to ensure all these volumes.

Anyhow, all of these projects are still not quite attractive for private investors and therefore will require funding through the federal budget. Their feasibility is also questionable.

Informally, the transport businesses in Kaliningrad talk about a ‘St. Petersburg lobby’ that has “grabbed a bigger piece” of cargo flow for the Gulf of Finland-based Russian ports (St. Petersburg and Ust-Luga) and about the attitude towards the enclave as a kind of "not quite" the Russian territory (the same situation with the customs control on Ust-Luga – Baltiysk ferry line).

On the other hand, the federal officials can also be understood. To achieve a reduction in tariffs from the Baltic states and Belarusians Russia will also have to make concessions in other areas, perhaps even political. And it is an open question whether the development of Kaliningrad is more important for Moscow. To develop the western region’s transit potential the tariff issue has to be resolved first. The WTO tools won’t work in this case, on the contrary it will be used against Russia by the EU (concerning the same automotive industry), but not vice versa.

It seems that the country’s transport industry is doomed to enjoy only internal needs and the infrastructure will be supported only through the federal budget.

Vitaly Chernov.