The Golden Handcuffs of Chinese Investment

China’s investments in the Baltic countries are so far insignificant, but the Chinese have their eyes on large strategic infrastructure projects, developments that are simultaneously tempting and worrying to the Baltics.

During a dinner at a start-up conference in Estonia’s capital Tallinn three years ago, Peter Vesterbacka, one of the men who took the Angry Birds game to the masses, tapped the shoulder of Marina Kaljurand, Estonia’s then-Foreign Affairs Minister. “We just decided to build a tunnel,” he said.

Fast forward to August 2019, and Vesterbacka has allegedly secured a provisional 15 billion euros and agreed with three construction companies to build what may become the world’s longest undersea railway tunnel connecting Tallinn and Helsinki, Finland’s capital.

The trick? The money and the builders come from China.

So far, Chinese investment in the Baltic countries has been negligible. However, this project, along with a few other strategic infrastructure developments eyed by the Chinese, has the potential to become the largest China-related investment in northern Europe. And this may turn out to be a deal-breaker, especially as the European Union (EU) has started screening foreign direct investment to safeguard Europe’s security and strategic interests.

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Many Questions, Few Answers

Finest Bay Area Development proposes to build the approximately 100-kilometer Tallinn-Helsinki tunnel in the Gulf of Finland by the end of 2024. Perhaps unsurprisingly, Estonia’s government is skeptical of the developer’s claims. “We don’t have the information that would let us decide whether the plan can be theoretically fulfilled. What I do believe is that it cannot be done by [the proposed deadline] 2024,” said Jaak Aab, the Minister of Public Administration responsible for the tunnel’s planning procedures on the state side.

“The time schedule provided together with the request [for launching spatial planning procedures] is not realistic, nor is it in accordance with the law,” the minister stated in a letter to Finest Bay Area Development at the end of July.

Aab also doubts the developer’s claims that the tunnel would serve 51 million passengers and 22 million tons of cargo a year, which would be a nearly six-fold and four-fold increase in traffic, respectively, compared to today.

The Baltic countries are also planning to build Rail Baltica, an EU-funded railway connection between Tallinn and Warsaw. Estonia wants the undersea tunnel to use European width standards for the tracks and to include a link with the new line, which would allow passengers and cargo to travel from Helsinki to Berlin without changing trains. However, Finest Bay Area Development has ignored these requests. According to the current plans, the tunnel would end near the Tallinn airport, between 30 and 60 meters underground.

Estonia’s key questions about the project relate to security. What if the developer doesn’t finish the construction? What if the tunnel is sold to a third party? What kind of leverage would the owner and operator of the tunnel have over Estonia and Finland? The developer hasn’t provided answers to allay the government’s concerns.

High-Profile Lobbyists

Finest Bay Area Development partners in the project include some of the biggest companies in the world. This July, the developer signed a memorandum of understanding with Touchstone Capital Partners, GAMA Holdings, China Railway International Group (CRIG) and China Railway Engineering Company (CREC). Touchstone Capital Partners China Fund, with an investment portfolio of 100 billion US dollars, would finance the project, while CREC, listed among the 500 biggest global companies, and its subsidiary CRIG would build it.

Although Estonia’s government is not yet jumping on Vesterbacka’s Chinese train, the developer remains hopeful. “All we want as of now is to start the planning process. I don’t believe that Estonian government would decide that it doesn’t want the tunnel,” said Paul Künnap, a partner at the Sorainen law office that represents Finest Bay Area Development.

To push through a project of such scale, the developer sought to hire the former Estonian Prime Minister Taavi Rõivas as an advisory board member, said a source with knowledge of the matter.

Leslie Leino, a leading China expert in Estonia, said it would be worrisome to see this common Chinese tactic employed in Estonia. “Chinese always hire a well-connected local in their large investment projects. They need someone who can call the decision-makers on their mobile phones,” he said. “In China’s case, we need to be aware that all such contacts eventually lead to the Communist party.”

Rõivas, who has been a vocal supporter of the project and is well acquainted with the Finnish entrepreneur Vesterbacka, denied that such an offer was on the table. “There hasn’t been a specific offer for which to say yes or no. There have been discussions on how to ensure that the tunnel would really happen. As of now, there is no formal connection and I’m not sure if there ever will be one,” he said to Postimees/Re:Baltica.

Interest in Ports

Building infrastructure to create new trade routes is at the heart of China’s Belt and Road Initiative which aims to expand China’s connections with Asia, Europe and Africa. To promote the initiative and gain public support for Chinese investment, China has been working with some EU countries in separate groups since 2012.

The proposed tunnel would form a part of the Belt and Road Initiative, as would Baltic ports in which the Chinese are also interested.

Andrus Ansip, the longest-serving prime minister of Estonia (2005 – 2014) and a former EU commissioner, witnessed strong Chinese interest in Estonian port infrastructure firsthand when China’s Ningbo port wanted to cooperate with the state-owned port of Tallinn. Ansip vetoed that deal but claims it wasn’t because of security concerns. “I didn’t see any business potential in it. There are several large ports [closer to Europe] that have a competitive advantage,” he told Postimees/Re:Baltica.

In addition to building infrastructure, China’s investments promise to boost cargo volumes as Chinese shipping companies are expected to divert their cargo through ports built and/or operated by Chinese companies. The main player here is China Merchants Group (CMG), one of the world’s largest container shipping companies.

The Baltic ports are vying for the Chinese investments and cargo with land-locked Belarus, where CMG together with the Belarussian government (as a minority shareholder in a joint venture) have been developing an industrial park, The Great Stone. Lithuania can provide the port facilities to serve the park, its officials believe.

“It is unlikely that Klaipėda can be a serious part of the Silk Road,” said Artūras Drungilas, the corporate affairs director at the Klaipėda Seaport Authority. But he is convinced that Klaipėda should become the port through which cargo to and from The Great Stone is shipped. According to him, it’s already happening as materials for the construction of the industrial park arrive in Belarus via Klaipėda.

Yet the port of Klaipėda is not the only one with such goals. Nearly every port in the region – Gdansk in Poland, Muuga in Estonia and especially Latvian ports – want a piece of the action.

Lithuania at the Forefront

Lithuania has been the most persistent in building a relationship with China to boost its transit infrastructure. The buzz about “building new silk roads” started in 2010, which marked a significant spike in interest observed from Beijing. By the end of 2011, the first freight train from China arrived and in 2012 a local business newspaper noted an increase in the frequency of China’s business delegations to Lithuania.

Its port of Klaipėda attracted Chinese business interest from the very beginning. But Rimantas Žylius, the Minister of Economy at the time, was unconvinced. The Chinese proposed a joint venture with the Lithuanian government, which would have to issue a state guarantee for the project. Then the joint company would get financing from China Export Import Bank. At the same time, Chinese diplomats publicly complained about the quality of Lithuania’s workforce.

The joint venture in Klaipėda did not take off. In 2013, Dalia Grybauskaitė, Lithuania’s then-president, met with the Dalai Lama, Tibetan spiritual leader. The fallout of this meeting was a nuclear winter in the relationship between Lithuania and China that lasted for nearly two years.

Algirdas Butkevičius, then-Lithuania’s Prime Minister, worked hard to thaw relations and get a tete-a-tete meeting with Chinese officials. His determination paid off, and in 2015, the port of Klaipėda, Kaunas free economic zone and Lithuania’s railway company Lietuvos geležinkeliai signed letters of intent with CMG to cooperate in developing logistic chains. In 2016, CMG said it had chosen Lithuania as its base for further expansion in Central and Eastern Europe.

CMG brought other Chinese business with it. Soon after the letters of intent were signed in 2015, fintech company International Business Settlement (Globebill) announced plans to base its European headquarters in Vilnius. The company, working to simplify cross-border payments between China and the EU, planned to invest three million euros in its Lithuanian operation.

Chinese giants don’t travel alone, and the operator of the Klaipėda Free economic zone is counting on that. “Chinese, once they set their foot in the harbor, invest in the city and in the free economic zone, too. That’s their usual concept, that’s how they operate worldwide,” explains Eimantas Kiudulas, CEO of Klaipėda’s free economic zone. He has a designated employee to deal with CMG and last year five possible leads for investment were identified, but there’s no tangible outcome yet.

Meanwhile, the biggest prize – the expansion of Klaipėda’s port – is yet to be claimed. It took four years for Klaipėda’s port authority and local city council to agree on the port’s expansion plan, to cost 800 million euros. This summer the plan was submitted for governmental approval.

Gitanas Nausėda, the newly elected Lithuanian president, told reporters in Klaipėda that port expansion should not be forced and Chinese investments should be considered carefully as they could pose a threat to national security, Lithuanian news agency BNS reported.

Red Line – Ownership

Klaipėda’s port is planning to expand on sea and land. The outer harbor is where the larger container ships could dock. “One of the main uncertainties is whether the state will allow Chinese companies to participate,” says Vaidotas Šileika, CEO of Klaipėdos konteinerių terminalas, a container cargo company which is eagerly looking forward to the port’s expansion as it is running out of space. “And, of course, conditions, under which the Chinese would invest.”

According to market players, the port would most likely be developed through a tender for a concession, but the port would remain in Lithuanian hands.

Ownership of the port infrastructure is the red line for Latvian ports, too, which has prevented noticeable Chinese investments in its transit business.

Ports, Rail Baltica and tourism are the three areas in which China seeks cooperation, Latvia’s then-Prime Minister Māris Kučinskis said after meeting with his Chinese counterpart Li Keqiang in Riga in 2016. Eager to learn more about Rail Baltica, that same year Chinese delegations visited railway companies in all three countries.

Chinese interest in Rail Baltica should not be surprising, as it is the biggest infrastructure building project in the Baltic countries. In 2015, China’s prime minister had expressed his country’s interest in helping build Rail Baltica to the head of the Latvian government, Laimdota Straujuma. Straujuma responded that as Latvia is a part of the EU, there would be an open tender, and Chinese companies could take part along with everyone else, she confirmed to Re:Baltica.

Baiba Rubesa, the former CEO of the joint Baltic venture RB Rail coordinating the building of Rail Baltica, remembers that for a while, Chinese business delegations were arriving almost every month. Their message was clear: China is not interested in bits and pieces, it wants to build it all. Once it became clear that it would not be possible due to the open competition, the visits dried up. The head of RB Rail business development, Kaspars Briškens, confirmed that there hasn’t been a single visit by a Chinese delegation during the last year.

China’s embassy in Estonia, which was approached for a comment for this series, did not reply to questions.

Proud To Be on the Map

While the results in boosting transit between China and Latvia are far from impressive, the representative of the Latvian Transport ministry in China, Helmuts Kols, is beaming with pride. “We have put in a lot of work which will bear fruit in the future,” he says. “Before, if you wrote ‘Latvia’ in the internet search programs, the first story you would get would be about the march of the blondes. Now it is often replaced by the stories related to transport and logistics.”

He claims that Latvians have allegedly persuaded Air China to include the country in the list of potential direct flights, but for it to happen the number of Chinese tourists visiting Latvia needs to increase. Around 22,000 Chinese visit Latvia every year, and this number has stalled since 2016.

Kols also boasts that the number of containers arriving in the port of Riga from the Far East has jumped by 330 percent between 2017 and last year. In reality, that means an increase from 3,000 to 10,000 containers (which was about 2,1% of all containers passing through Riga’s port in 2018).

Last, but not least, Latvia has managed to put itself on Chinese maps in the direct sense of the phrase. Until recently, China used a map where the railway links to Latvia were possible only via St. Petersburg, Russia. Belarus, in its presentations, was using maps where no rail connection between Latvia and Belarus existed. That has changed, claimed Kols: “This is an investment which will repay itself in this century, because no one will have a motivation or an interest to rewrite the maps again.”

“There are no more illusions, in Lithuania or the Western world, that China comes with an olive branch, and it is only business,” concludes Robertas Mažeika, a member of Lithuania’s support group for Tibet. “We also see that European unity is being tested. We must not think that China is ‘there’ – it is everywhere. And if we don’t maintain our vigilance, there’s going to be more of it”.

This article has been originally published on RE: BALTICA and is reposted here with permission.