The logistics sector of the Baltic states is an intriguing niche that has progressed leaps and bounds in the late 20th and ongoing 21st century. After gaining independence from the Soviet Union, the countries Estonia, Latvia and Lithuania focused on restoring the values of liberal democracies, open societies and promoting private enterprise. In a matter of a few years, the Baltic nations joined the European Union and fostered more robust financial systems, allowing them to be classified as high-income economies with equally high Human Development Index. This story of success influenced each and every sector of their market, including the one that holds our interests here at New Silk Road Network, which is logistics.
Overview of Transport and Logistics in the Baltic States
Transport and logistics form the third largest sector in the Lithuanian economy, for Latvia, 14% of its GDP emanates from this sector, and Estonia —with one of the largest port enterprises in the Baltics — employs over 8% of its population in this sector. These figures evidently indicate the centrality of the logistics within the Baltic nations. Naturally, the geographical location plays a strategic role in the relevance of the logistics sector in the Baltic economies. The Baltic coast shared by these three countries continues to remain busy to this date, maintaining transportation flows and connecting the markets of Europe, Asia and the Americas. The growth of East-to-West connectivity has also been reflected in these transit gateways. The ports of Klaipeda, Tallinn, Riga and Ventspils are some of the busiest interfaces, moving high volumes each day. Apart from the traditionally established sea freight, the region is also known for the dense road freight sector and the growing rail logistics.
Baltic states have historically had a high share of international road freight transport, which is popular even today and continues to expand. In 2020, road freight accounted for 77% of the total inland freight transport. After joining the European Union, many individuals focused on setting up road freight divisions in their logistics business as they could now leverage the EU’s open border policy, simplifying trade with other European nations. Routes also moved eastwards, towards Belarus, Russia, reaching all the way to Kazakhstan. With the ongoing Russian-Ukrainian strife, many felt the effects within this industry as trade of various goods with Belarus and Russia were sanctioned, along with financial sanctions that made payments to / from these two nations impossible. Newer routes and newer trade relations were established to cope with the changes. On the other hand, rail freight has not been on par with road freight but has always been one of the preferred alternatives. The Rail Freight Corridor North Sea-Baltic, also known as Rail Freight Corridor No. 8, comprises 9600km of rail lines connecting Baltic ports to Central Europe and North Sea Ports. It essentially acts as a bridge between eastern and western Europe. This corridor has strengthened and integrated trade among EU members. Despite the well-achieved growth, there are miles still to go in terms of connectivity and ease of movement with the Baltics. To safeguard and promote infrastructural developments, two ongoing projects promise an optimistic future for the logistics industry: The Three Seas Initiative and Rail Baltica.
The Three Seas Initiative & Rail Baltica: Synchronising Infrastructure
The Three Seas Initiative was launched in 2015 to “correct the infrastructural imbalance which runs on an almost entirely east-west axis”. This includes solving the problems related to energy transportation via pipelines, digital infrastructure and transportation. Though primarily a security initiative, the ultimate goal of this project is to promote interconnectedness between the European nation-states situated between the three seas: the Baltic, Adriatic and the Black Sea. Some of the projects include synchronising the Baltic power grid with western Europe through projects like the Polish-Lithuanian gas interconnector (GIPL), thereby fostering diverse gas resources and reducing reliance on third-country supplies. In the digital infrastructure sector, the project ‘The Three Seas Digital Highway’ is working to develop communication infrastructure, fibre optics and 5G technology. The transportation progress within this initiative comprises the further improvements of ‘Via Baltica’ and the extensive rail infrastructure project, ‘Rail Baltica’.
In the case of Baltic states, a large section of their freight volumes moves by road in Europe. For Lithuania, almost 90% of their freight transport with Europe travels by road. This surmounts to increased traffic all along the routes, and the current status quo of the roads inadequately supports the movement of freight and passenger traffic. Via Baltica is one of the most essential transit arteries passing through Eastern Europe. It is one of a kind and connects the three Baltic states to move transport in the North-South direction. Thus, the project Via Baltica aims to create a high-quality road network in compliance with the requirements set by TEN-T while ensuring freight mobility and environmental protection. Within this project, plans are also laid concerning the implementation of ITS and traffic management solutions, allowing the safety and security of freight and passengers and ultimately developing single data exchange protocols to foster interoperability. In parallel to the ongoing improvements of Via Baltica, Rail Baltic emerges as an exciting endeavour to alleviate the pressure of road freight traffic in the Baltics.
Rail Baltica is described as a greenfield rail infrastructure project that seeks to integrate Baltic and European rail networks. Along with Latvia, Lithuania and Estonia, the project also includes Poland and, indirectly, Finland. The project started in 2010 and, with a 10-year-long construction period, is all set to complete in 2026. Essentially, a large section of the construction is to switch the Baltics from the Soviet-era broad gauge to the European narrow gauge. The rail lines are also electrified and, in turn, environmentally friendly. This project is critical to the EU’s North Sea-Baltic TEN-T corridor. So far, the direct freight trains are already moving between Duisburg, Germany and Kaunas, Lithuania. The estimated cost of the project is 5.8 billion euros, however, a cost-benefit analysis performed by Ernst & Young indicates 16.2 billion euros in socio-economic benefits. The report also clarifies an integral aspect, that is “Rail Baltica is not an improvement of existing infrastructure but important new mode in the overall passenger and freight ecosystem in the Baltic States Estonia, Latvia and Lithuania” (p. 11). This implies that the broad gauge will continue to remain and potentially will not be hindered by these new developments. It also compares Rail Baltica and road freight, predicting rail to be price competitive with road transport, as road transport generally follows the same route as railway, thus allowing the rail service to compete in terms of speed and cost. Volumes can therefore be distributed between rail and road, thereby reducing the burden on road freight, which is already dealing with the perpetual problem of driver shortage and bottlenecks at prominent crossings.
With the growing uncertainty due to the Ukraine-Russia conflict, a significant portion of direct trade with Russia and Belarus has reached a standstill. However, there are no sanctions on importing and exporting agricultural goods and fertiliser. This means that some amount of trade is still underway between Russia and the EU, thereby making the Baltics critical to that trade. Thus, Rail Baltica emerges as the alternative to ensure higher trade within European regions and smoother movement of goods through interoperability and multimodality. At the same time, one can’t help but observe that the choice of a rail gauge is not just developmental but a political one, where integration with European infrastructure will allow the Baltics a closer economic and, thus, cultural assimilation. Yet, questions remain about the post-war impact on trade and logistics with Belarus and Russia and whether Rail Baltica delivers on its promises upon completion.