June 12 (Bloomberg) -- Estonia’s transport industry, a key contributor to the Baltic economy’s contraction last quarter, has been further harmed by neighboring Russia’s conflict with Ukraine that flared in March, Economy Minister Urve Palo said.
Cargo volumes, heavily dependent on oil product shipments from Russia, have declined “drastically” in the past few months, Palo, 41, who replaced Juhan Parts in March when her Social Democratic Party entered the government, said in an interview yesterday in the capital, Tallinn.
Estonia’s economy entered a technical recession in the first quarter following a four-year recovery from a record contraction in 2008-2009, because of to a weaker transport industry, energy and exports. While the impact from Russia’s annexation of Crimea and unrest in eastern Ukraine has been “small,” the conflict remains the biggest risk for the Baltic nation, central bank Governor Ardo Hansson said yesterday.
“Based on conversations with our entrepreneurs who say Russian partners are afraid the European Union will use sanctions, I wouldn’t dare assume the decline in transport is over,” Palo said.
Russia’s economic slowdown and its push to steer cargoes through its own ports on the Baltic Sea have reversed trade growth between the former Soviet neighbors since last year, when falling transport revenues slowed Estonia’s economic growth to a four year-low of 0.8 percent. Russia accounted for 11 percent of Estonia’s exports and 7 percent of imports in April, according to statistics office data.
The geopolitical situation in Ukraine and Russia poses a “major threat” to Latvian Ventspils Nafta AS’s terminal and port businesses, Chairman Robert Kirkup said in an online news conference today. An escalation leading to additional sanctions would have “terrible consequences” for Latvian businesses, he said.
Cargo volumes handled by rail operator AS Eesti Raudtee fell 38 percent from a year earlier in May, pushing the decline in the first five months to 22 percent, the state-owned company said this week. Loading of goods at AS Tallinna Sadam fell 12.5 percent in that period, according to data on the country’s largest port operator website.
The ministry will decide on measures to adapt to lower transport volumes from September after monitoring the situation in the coming months, Palo said.
“In the longer term, relying so heavily on shipments from Russia just isn’t sustainable, so we need to look more at the North-South axis,” she said.
The Baltic countries plan a high-speed rail link with central Europe, Rail Baltic, which Estonia’s government says is strategically important for the country’s security. The nations are counting on EU aid to build a 1,200-kilometer (746-mile) track from Poland through Lithuania, Latvia, Estonia and -- by ferry across the Gulf of Finland -- to Helsinki.
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