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By John Helmer in Moscow

The last time Russia was obliged to teach strategy to the ruling powers of the Baltic Sea — in the 18th century, they were the Swedes – at the Battle of Grengam (pictured), the Russians claim they won. But so do the Swedes. The outcome, however, was that the Swedish navy could no longer hope to bottle up the Russian fleet in the Gulf of Finland.

For the next three hundred years, there have been two constants in Russia’s Baltic Sea strategy that don’t change with the vicissitudes of who’s in or out of power in the Kremlin, or along the Baltic littoral.

One is that for its economic prosperity and security, Russia must find as many alternatives as possible to the high seas of the Baltic for getting its goods to and from market. As volumes of energy exports rise, that means finding ways around, under, or over the NATO-controlled chokepoint of the Danish Straits.

The second constant was as plain during Napoleonic times, as it became obvious after the end of the Soviet Union allowed the non-Russian Baltic states to declare independence. As Russians see it, they must not be obliged to depend on the ports of potentially hostile states on their borders. If they don’t have Russian alternatives, they must build them from scratch. And so they have.

The first imperative has been driving Nord Stream, the undersea Baltic pipeline to deliver Gazprom gas from Arctic wells, through St. Petersburg, to the German town of Greifswald.
Baltic Pipeline System (BPS)-2, a crude oil network being built on land by Transneft to Primorsk and Ust-Luga, on the Gulf of Finland, is driven by a commercial variant of the same idea. It will make sure Russian crude oil exports avoid the Belarus and Polish refineries, and the Polish oil ports.

The second imperative has taken time and money to materialize. But in a briefing for Prime Minister Vladimir Putin in July, Sergei Ivanov, the deputy prime minister in charge of the transportation sector, delivered a progress report on eliminating Russian dependence on the non-Russian ports of the Baltic for export and import operations. A decade ago, Ivanov said, 75% of Russian export and import cargoes were shipped through the non-Russian ports. Today, the Russian ports account for 87% of the volume, while just 13% moves through the foreign ports.”In the foreseeable future”, Ivanov added, “we will completely escape dependence on foreign ports.”

Five and six-month data, collected and published by Freight.ru of St. Petersburg, reveal that eleven months of trade crisis, commodity price collapse, and misery at the Baltic Exchange have been helpful for the Russian ports on the Baltic, if only compared to their rivals. Russian oil export volumes through the Baltic state ports have grown by 5.8%, compared to 2008, to 28.5 million tonnes; Tallinn and Ventspils account for two-thirds of this aggregate.

But port loadings in the Russian northwest have been growing much faster — by 14%, compared to 2008, to 58.2 million tonnes (5-month period). Coal shipments for the five-month period were 7.7 million tonnes at the non-Russian ports, down 14%; 11.4 million tonnes at the Russian ports, principally Ust-Luga and Murmansk. The aggregate is almost unchanged. Market share for coal loadings is shifting slowly but surely to the advantage of the Russian ports. A similar trend can be seen in the Baltic metal trade. Based on four-month data, the Russian ports report 4% growth in tonnage; the non-Russian ports are down 30%.

Among the Russian ports on the Baltic, St. Petersburg remains the dominant one for dry cargo, while Primorsk leads for oil. But St. Petersburg has been hard hit by the fall-off in domestic consumer demand. This triggered a 33% drop in container movements in the four months to April 30, and a 58% fall-off in foodstuff cargoes. Timber, a staple export from St. Petersburg, fell 88% by volume in the same period, because of new tax and regulatory disincentives on the shipment of unprocessed logs. The other Russian ports on the Baltic are Vysotsk, a petroleum products specialist; Vyborg; and Kaliningrad.

Ust-Luga, for the time being the newest Russian port for the Baltic trades, is planning to challenge Primorsk and Vysotsk, with the completion of two new oil export terminals. The present Ust-Luga bunker complex (ULBC) is to be expanded by Transneft, the state pipeline company, to receive and load up to 30 million tonnes of crude oil per annum (600,000 bd) from the Baltic Pipeline System-2 (BPS-2), a new network which Transneft started building in June. Tanker loading will commence in 2012, Transneft says.

The second terminal, Bulk Cargo Complex (BCC), is being built by Gunvor, the Russian oil trader controlled by Gennady Timchenko. It will load petroleum products supplied by the nearby Kirishi refinery, whose feedstock will also come from the BPS-2. At present, Ust-Luga’s principal cargo is coal and coke. Ust-Luga’s new container terminal, currently being built by the National Container Company to 3 million Teu annual capacity, has been delayed beyond the scheduled August start date, on account of falling box volumes, and an argument between NCC’s shareholders, First Quantum and the Far Eastern Shipping Company (Fesco), over who should pay for completion.

While these indicators are relatively promising for Russia’s Baltic trades, there are signs that the old and new ports on Russia’s Northern Route – Arkhangelsk, Murmansk, Vitino, and Varandey – are growing in their importance for oil, gas liquids, and coal volumes, and for the vessels to service the trade. These routes and ports avoid the Baltic entirely.

The latest cargo data available indicate that in the five months of this year to May 31, Murmansk, on the Barents Sea (13 on the map), Arkhangelsk (on the White Sea, 9, 11), Vitino (White Sea, 12), and Varandey (on the Pechora Sea, 5) transported just over 22% of the oil cargoes shipped from Russia. As planned Arctic oil and gasfields come on stream, and gas liquids and LNG processing plants are built, the volumes for shipment and the tanker numbers required for the export routes will grow faster than in the Baltic. A new oil port at Indiga (Pechora Sea) is on the drawing-boards, and a LNG terminal on the White or Pechora Sea side of the Yamal peninsula. In a decade or so, Gazprom and Novatek are likely to be producing and loading LNG which will follow a northern route to Canada and the US. Earlier plans to build an LNG plant and tanker terminal near St. Petersburg, on the Gulf of Finland, appear to have lost favour. However, because of the enormous sums of money required to bring the Arctic energy boom onstream, the current credit crunch and spending limits of the Russians and their partners are giving the Baltic trades something of a respite. It won’t last.

Another short-term fillip for the Baltic is seaborne tourism to Russia. In May, Prime Minister Putin signed a new visa-free order for ferry passengers taking 72-hour trips to designated Russian ports. The measure had been sought by the local tourism industry, especially St. Petersburg, since ferry passengers were hit with the visa restriction four years ago. Worst hit in the interval have been ferry lines operating between Finland and other Baltic states. The new measure extends to the ferry lines the same visa-free regulation that has been in force since 2005 for the cruise lines. St. Petersburg, Vyborg, and Kaliningrad have been designed in the new order; along with Sochi and Novorossiysk on the Black Sea, and two fareastern ports, Vladivostok and Korsakov. Industry sources estimate that the additional tourist arrivals from resumption of passenger ferry service will generate up to €150 million in revenue. In 2008, more than 300 cruise ships made 72-hour portcalls at St. Petersburg with more than 350,000 tourists.
There is bad news too in the Baltic, which Russian fleet operators, ports, and shipyards share with the counterparts to the west.

The most exposed to the downturn in freight rates and container movements is Fesco, the largest of the internationally listed Russian fleet operators, which is facing a projected revenue fall of 35% this year to $863 million, and a 44% contraction in earnings (Ebitda) to $230 million. By year’s end, according to investment bank calculations, Fesco will run a $39 million bottom-line loss. Worst hit in the Fesco’s group’s divisions will be the rail division, followed by containers and ports, with shipping performing better, if only relative to the other business divisions in the group. The loss projection is substantially larger than has been predicted by Fesco chief executive and owner, Sergei Generalov. “Time charter contracts entered into by the group’s shipping segment in 1Q09 (when the Baltic Dry Index was still hovering around the 2,000 below mark), coupled with notable declines in vessel utilization, will weigh on the segment’s results in 2009,” reports Troika Dialog bank analyst, Kirill Kazanli. But the rebound he expects in 2010 will be much better for shipping than the other transport modes. He also reports that container volumes, on which the company’s port and logistics business depends, appear to have stopped dropping in May.

Tough times in Russia also make for takeover opportunities, asset raids, and bitter conflict. The St. Petersburg ship[yards of the United Industrial Group (Russian acronym OPK) have been set back in their to secure new vessel orders from the oil and gas companies, as the latter slow down their investment in the Arctic. OPK’s controlling shareholder, and owner of Severnaya Verf (Northern Shipyard) and Baltiysky Zavod (Baltic Plant), has been unable to sell his yards to the state shipbuilding corporation, nor get St. Petersburg city approval for relocating the yards and selling the land for more lucrative urban development.

The lure of boom orders for new tankers, auxiliary vessels, and offshore drilling and production platforms, has also triggered competition for state-backed investment in new or expanded shipbuilding plants on the Gulf of Finland. Last December, the Vyborg Shipyard announced it was applying for state loan of about $770 million to build tankers for Gazprom and Rosneft. The proposed new yard, to be built near Primorsk on the Gulf of Finland, is controlled by Basil Gorelov, Sergei Kolesnikov, and Nikolai Shamalya. A rival group called Summa Capital, owned by Zyavudin Magomedov, is proposing for the same state bounty to build nearby.

In July, competition over port terminal and shipping assets on the Gulf took a muscular turn, as police raiders, acting at the behest of Bank St. Petersburg (BSP), grabbed assets worth more than a bank valuation allows, and despite a court order invalidating the seizure. The target — Vitaly Arkhangelsky’s Oslo Marine Group (OMG), which has told Fairplay it came under attack at its St. Petersburg headquarters, when police ordered personnel out of their offices and started searching office files. Arkhangelsky said it was the latest in a series of property raids and asset seizures, which began in June, and involve OMG shipyard, vessel, and port terminal businesses.

A briefing by Arkhangelsky and OMG papers indicate that the Western Terminal, occupying an 8-hectare site on the water at St. Petersburg, has two berths, with another in construction. It has been used primarily for loading and unloading of outsized cargoes, and for timber exports. It was bought by the group in 2007, when the BSP loan was presumably negotiated. Two other terminals, Baltic Shipping Mechanic and Onega, the Vyborg Shipping Company, and the Vyborg Port are listed among the group’s marine assets. It also runs a logging and timber export business; a marine insurance company; and a leasing agency.

Apart from the fight over West Terminal, Arkhangelsky has filed for voluntary bankruptcy for Vyborg Shipping Company (VSK). No ruling from St. Petersburg’s Arbitrazh Court is expected on that until the end of August. Just three vessels are in the current OMG fleet. OMG’s website reports that between June and August of last year, it placed orders for newbuild vessels from yards in the Netherlands, Croatia, and Poland, worth a total of €492 million. Arkhangelsky has paid a call on the chairman of the state savings bank in Moscow, German Gref of Sberbank, to ask him to bail out his business with enough cash to ward off BSP’s attacks.

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