is baltic

Estonia, Latvia and Lithuania have achieved significant integration since independence from the Soviet Union. But regional co-operation appears to be losing its impetus, with some joint projects, including a trans-Baltic railway, progressing more slowly than planned. Jacopo Dettoni reports. 

Estonia, Latvia and Lithuania, collectively referred to as the Baltic states, have achieved impressive progress in terms of regional co-operation and integration. The three countries came together to reconnect with their Baltic Sea neighbours in Scandinavia and Europe as a whole in the early 1990s after decades of Soviet domination. 

That process gained new impetus when they joined Nato and the EU in 2004, which granted them frictionless access to the European market, as well as access to EU funding programmes. Encouraged by the European Commission, Baltic states authorities endorsed and set in motion several major regional projects. These aimed to strengthen co-operation and integration, from safety and security to trade and transport, and compensate for the relatively small size of their institutions and economies. 

However, some of these projects are now struggling to meet expectations as models of regional governance are showing strain, and the initial push towards a common Baltic identity that can be traced back to independence has gradually weakened. This has exposed the deep differences among the states, with Rail Baltica’s woes proving just one example of this disharmony.

Out of steam?

“Rail Baltica is a good example of stakeholders and shareholders being unable to strategically align and implement that alignment in detail beyond political statements,” says Baiba Rubesa, who led the project’s joint venture between the three Baltic states until September 2018, when she suddenly resigned just a few weeks before the natural end of her mandate.

Rail Baltica entails the development of an 870-kilometre railway corridor running through the three Baltic states. Stretching from the Estonian capital of Tallinn through Pärnu, Rīga, Panevėžys and Kaunas, all the way to the Lithuanian-Polish border, it enables connections with the European railways system (the existing railway network in the Baltic region was developed in Soviet times and relies on a Russian track gauge, which is incompatible with a standard European gauge). A second phase would extend the railway from Tallinn to Helsinki through an underwater tunnel. 

Widely considered as a once-in-a-lifetime project for Baltic countries, the project has a €5.8bn price tag, with the EU expected to finance 85% of the eligible costs, and an economic multiplier of €18.2bn, according to figures from RB Rail, the joint venture between the three countries tasked with implementing the project.

“Politically, everybody will claim they support the project. But in reality there has been a continuous renegotiation of what the project is all about... Co-operation in the Baltic states is as easy or difficult as co-operation within other regions. Yet I wish for a more regional interest-driven co-operation, rather than a very local interest-driven co-operation,” says Ms Rubesa.

She criticised all three countries as she resigned, calling for a deep overhaul of the project’s governance, including a bigger involvement by EU institutions in RB Rail’s supervisory board. She even questioned the feasibility of the project in the current circumstances.

Sibling rivalries

If the problems that Rail Baltica is experiencing are not an exception in the context of a multi-billion-dollar, crossborder project of this magnitude, they are also symptomatic of how quickly political seasons change in the Baltic region, as well as in Brussels.

“It was easy for the Baltic states to co-operate right after independence because we had a common intention to integrate in the EU, we had common enemies, we had this assumption that neighbouring countries have to help each other because we are ‘brother countries’,” says Dana Reizniece-Ozola, finance minister of Latvia.

“Later, when we had to learn to really find agreement on the basis of mutual advantage, it has been psychologically difficult, which is why it’s been quite difficult to come to the agreement on crossborder projects. Not only in transportation, but the vision of a regional liquefied natural gas platform has also failed. However, in regional governance there are very good examples – such as the Baltic Energy Market Interconnection Plan [Bemip] – and I’m very proud of it.”

When cooperation works

Bemip is the result of several rounds of negotiations between Baltic states, their neighbours in the north (Denmark, Finland and Sweden) and the east (Poland and Germany), as well as the European Commission. This led to the signing of two memorandums of understanding (MoUs) in 2009 and 2015. 

The project aims to integrate the Baltic states’ electricity network and gas networks into the continental European network, including their synchronous operation. Several major crossborder infrastructure projects – for example, Estlink, Nordbalt and the LitPol Link (connecting the three Baltic states with Finland, Sweden and Poland, respectively) – have already been completed and “significantly improved” the Baltic countries’ integration in the EU energy market, according to the European Commission. Full synchronisation with the EU grid is now expected for 2025.

Yet the political season that led to the signing of the Bemip MoUs is over and the current political environment is as complicated as ever. Latvia is currently struggling to form a government after October 2018 elections, whereas both Lithuania and Estonia face major elections in 2019, where voters will be called to elect, respectively, a new president and parliament. EU parliament elections are also coming up in 2019.  

“I do think that we are slowing down in terms of the dynamism of regional co-operation, although at the same time it’s important not to forget the achievements of the past decades. There is now a very strong network of business and political ties. All kind of connections are there,” says Christian Ketels, a Stockholm-based chief economist at Boston Consulting Group.

“Today it is necessary to recognise that we are at the end of one chapter, which was very much about the reintegration of the Baltic states with the rest of the Baltic Sea region. On that account, mission accomplished. The next phase is a different one; it’s more about ways to deepen collaboration to find real economic opportunities as a region. It’s going to be difficult as the Baltic countries are still fundamentally very small markets. At the same time, there are major political events unfolding at an EU level – Brexit, for example – and the integration of the Baltic Sea region doesn’t have the same level of urgency and support it had a couple of years ago.”

Uncertain future

The Baltic states remain ambitious over the future of regional co-operation. Besides Rail Baltic and Bemip, other major projects are beginning at a regional level. Together with the European Bank for Reconstruction and Development, they are working on the development of a pan-Baltic capital market. They also signed a new MoU to launch a 5G corridor, thus leveraging their knack for innovation. Once the corridor is functioning it is set to become a testbed for self-driving cars. 

The economic case for these projects is clear, as integration is the only way forward in a combined market of 6.2 million people. However, their political case in a Europe of Brexit, populism and migration challenges may no longer be so clear.

This article is sourced from fDi Magazine
fDi Magazine

Global greenfield investment trends

Crossborder investment monitor

fDi Markets is the only online database tracking crossborder greenfield investment covering all sectors and countries worldwide. It provides real-time monitoring of investment projects, capital investment and job creation with powerful tools to track and profile companies investing overseas.

Click here to find out more about fDi Markets

Corporate location benchmarking tool

fDi Benchmark is the only online tool to benchmark the competitiveness of countries and cities in over 50 sectors. Its comprehensive location data series covers the main cost and quality competitiveness indicators for over 300 locations around the world.

Click here to find out more about fDi Benchmark

Research report

fDi Intelligence provides customised reports and data research which deliver vital business intelligence to corporations, investment promotion agencies, economic development organisations, consulting firms and research institutions.

Find out more.