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Threats fly in Estonian conflict

01 Jun 2006

THE ROW between Baltic Rail Services and the Estonian government looks likely to boil over this summer.

Last month the Ministry of Economic Affairs sent a letter to BRS, which holds 66% of shares in Eesti Raudtee, accusing the company of breach of contract. Unless BRS made good within 60 days what the ministry termed 'violations' of its contract, the government would terminate the deal. As the government holds the other 34%, this would effectively be renationalisation.

On April 20 the cabinet authorised the ministry to take steps to end the contract after Prime Minister Andrus Ansip had answered questions in Parliament three days earlier (RG 4.06 p184). Ansip said that it would be for Parliament to decide whether to buy back the company, while the Ministry of Economic Affairs would determine the price. 'Buying back the railway can be discussed if the price is fair and acceptable to the state or the Estonian taxpayer', he said.

Ansip did not consider privatisation of Eesti Raudtee a mistake, but he drew attention to the sale process, where the state kept a 'golden share' which gave it a right to veto major decisions, even though it remained a minority stakeholder. This was in conflict with European Union legislation.

BRS has taken the golden share issue to the Stockholm Court of Arbitration, which Economics Minister Edgar Savisaar said in April was one reason why the deal should be ended. For good measure, BRS is seeking to sue the government for 5·3bn kroons in a Washington court.

Complicating the affair is a report by the Estonian intelligence service which warns that the railway should not fall under the control of Russian companies as this would pose a security risk. Local media reports suggest that this is the real reason for the government's move to renationalise.

BRS Chairman Ed Burkhardt opines that the government has been influenced by Russia's Severstaltrans group, which is trying to force down the cost of shipping its goods through Estonia. Meanwhile, Prominvestor, another Russian group which is partnered with German consultancy TransCare, has expressed serious interest, presenting a detailed proposal to Savisaar in April. This calls for the railway to be split up, with the infrastructure sold to the state at a price to be determined by an independent expert.

Other potential bidders are watching events closely. Transgroup Invest, which owns the coal terminal at Muuga, is reported to have set up a partnership with Amber Trust, a US-Scandinavian investment group, to bid for the BRS share. Germany's Railion is thought to be another contender with big ambitions - it is currently considering a through service between Germany and Shanghai.