Essential, political and socioeconomic changes have taken place in the Baltic Sea region since the late 1980s. The anti-communist revolution of Eastern Europe in 1989 started in Poland. After the dismantling of the Soviet Union in 1991, four new independent states came into being on the shores of the Baltic Sea: Russia, Estonia, Latvia and Lithuania. In the mid 1990s, Finland and Sweden – together with Austria – joined the European Union. In May 1st 2004, eight transitional economies joined the EU, four of which are on the Baltic Sea: Poland, Estonia, Latvia and Lithuania. Germany and Denmark are “old” EU-countries with harbours on the Baltic Sea.
National economies in the region under review have hardly any common denominators. The Russian Federation is the richest country in the world as far as natural resources are concerned.
The population of Russia is close to 150 million. On the other side of the scale is Estonia with a population of less than 1,5 million. The overall population of the Baltic states is less than 8 million. Finland is one of the affluent West European countries with competitive industries, none of which can be called labour intensive. The rather small national economy of Finland with about 5 million inhabitants is a typical post-industrial service society with high nominal wages.
In the Baltic Sea region there is one special feature linked with the post-soviet geography: when all 15 former Soviet republics became independent states in 1991, the Kaliningrad region remained a part of Russia. This province is a former part of Germany, Eastern Prussia, which was annexed by the Soviet Union after World War II. Kaliningrad oblast is an exclave separated from Russia proper via Lithuania and Belarus. Presently, this exclave is geographically within the EU, but administratively a part of Russia.
This short research report is not attempting to cover all economic details in the Baltic Sea region.
The focal point is the development of the Russian external economy and transportation routes connected with it: this development affects many neighbours of Russia, including Finland.
In the early period of Russian transition, economic activity decreased dramatically. Severe mistakes were made in the economic policy. This negative trend reached a culmination point in 1998, when a deep currency crisis took place in Russia (for details, see Tiusanen: Development of the Russian Rouble – The Crisis of 1998 and Its Aftermath).
The radical depreciation of the Russian rouble in the late 1990s affected negatively Russian transit traffic via Finland (for details, see Kilpeläinen: The Development of Transit Traffic via Finland in
1997-2003). At the same time, some interesting structural changes in this sphere of business took place.
As the above mentioned NORDI-publications describe, a very strong recovery took place in the Russian economy at the turn of the century. The most important background factor in this turnaround is the world market development of raw material prices. In the first year of the 21st century, exporting of oil and other minerals was very profitable. This trend has been extremely beneficial for the resource-rich Russia.
The post-crisis boom in the Russian economy has very concrete repercussions on exports and imports of the country. Export volume of commodities, especially oil, chemicals and metals, has expanded strongly. Strongly increasing purchasing power amid the export boom has positively affected the demand of high quality importables (electronics and consumer durables).
It is not surprising that these factors have put the Russian transportation system under heavy pressure. The country has rapidly created new port capacities at the bottom of the Gulf of Finland.
It is obvious that Russia’s limited access to the Baltic Sea shores does not offer an optimal
solution to the transportation problems from a geographical point of view. However, Russia seems to be determined to maximize self-sufficiency in traffic linked with its own foreign trade in the long run.
From a Finnish point of view the situation is interesting. At the turn of the century, Finland had lost market shares in the transit traffic. This is not surprising, because the competing routes (ports in Russia and in the Baltic states) have cost advantages in comparison to Finland. Nominal gross wages calculated at official exchange rates are several times higher in Finland than in Russia and the Baltic states. Bulk product traffic is price-sensitive.
The need of value added logistical (VAL) services has grown in Finland after the Rouble crisis of 1998. The need to adjust the export regime to specific Russian import rules grew. These services have a big influence on employment in South East Finland. The risk connected to this part of transit traffic is linked to the large amount of investment made into VAL warehouses and port infrastructures. The services connected to Transsiberian railway traffic are under the risk of change. The continuation of this traffic totally depends on the decisions of the new shareholding company, Russian Railways Ltd. The turnover of cargo coming in via the TSR is mainly connected to the VAL services.
The high price of oil helps the Russian economy and the increasing flow of import goods keeps Russian ports busy. It is clear that the logistical structures of Russia are interesting investment objects for capital rich Russian companies and multi-national logistics enterprises.
In this context, Finland’s position in price competition is not good. However, Finland has a good quality profile as a safe storage and commercial transition point. The future of transit traffic via Finland highly depends on these matters. The global operators are willing to pay a good and reliable service for high price products entering the Russian market.
This is the second publication of the two separate studies of logistics on the border region between Finland and transitional Russia. The first part “Development of Transit Traffic via Finland in 1997 – 2003 by Jaakko Kilpeläinen clarified the changes in the volume and content of the transit traffic to Russia. This second study analyses the competing routes via Baltic states. It tries to find solutions to the tightening competition by approaching the idea of a cross border zone of South East Finland as a possible next competitive edge.