C O N F I D E N T I A L SECTION 01 OF 04 TALLINN 000347
SIPDIS
SIPDIS DEPARTMENT FOR EUR/NB AND INR MOSCOW FOR DWIGHT NYSTROM
E.O. 12958: DECL: 05/24/2017
TAGS: ECON, PGOV, PREL, ETRD, RS, EN
SUBJECT: RUSSIAN BEAR HUG SQUEEZES ESTONIAN ECONOMY
REF: A) TALLINN 290QB) TALLINN 297
Classified By: DCM Jeff Goldstein for reasons 1.4 (b) & (d)

1. (C)
Summary: In the three weeks since the April 26-27 Bronze
Soldier riots, Estonia has faced pressure from an array of
trade-disrupting measures from Russia. Cyber attacks on
government and financial websites have been costly and have
raised international concern and support. GOE officials have
called on NATO to address the issue and cited the need for an
international legal framework for dealing with cyber attacks.
In addition, disruptions in rail and truck traffic, an
informal boycott on Estonia goods and other measures have put
a strain on some Estonian businesses. A GOE study estimated
that if maintained over the long run transit disruptions could
cost Estonia 2-3 percent loss of GDP, although there are some
indications that the disruptions are already starting to ease.
Estonia has prioritized addressing Russian behavior via the
EU, although GOE officials indicate Estonia won,t move to
block EU-Russia cooperation. End Summary.

Unofficial Trade Sanctions Begin
--------------------------------

2. (C)
Following the April 26-27 riots surrounding the GOE,s removal
of the Soviet-era Bronze Soldier statue, Estonia has been
subjected to an array of trade-disruption measures initiated
by Russia. These measures, which GOE officials note are
similar to those previously applied against other neighboring
countries including Ukraine, Georgia and Poland, include:
-- Arbitrary use of phyto-sanitary regulations on meat and other
food products;
-- Discouraging Russian consumers from purchasing Estonian goods;
-- Announcing sudden, unscheduled maintenance on vital transit arteries;
-- Artificially slowing border traffic by use of customs and inspection
bureaucracy; and
-- Pressuring Russian companies to break long-term contracts with
Estonian firms.

Cyber Attacks
-------------

3. (C)
In addition to these `traditional' measures, since April 27
Estonia has been subjected to Distributed Denial-of-Service
(DDOS) cyber attacks against key government ministry websites
and commercial enterprises via `bots' (computers under the
control of a third party). Although investigations into these
cyber attacks are ongoing, and no one has claimed
responsibility for them, the political nature of the attacks
clearly suggests coordinated Russian involvement. Initially,
the attacks concentrated on key GOE websites (e.g., the State
Chancellery, Parliament, Ministry of Foreign Affairs, and
Ministry of Justice). They forced the GOE to ratchet up
Estonia,s broadband capacity over eightfold to remain
operational. While successful in this cyber arms race,
increasing its broadband capacity so drastically has been
extremely expensive for the government. Estonia,s small size
proved to be an asset in responding to the cyber attacks,
because a handful of decision-makers could quickly coordinate
responses, and discard ineffective strategies, as the attacks
unfolded. Elion, Estonia,s main telecommunications and
internet provider, worked closely with the GOE to rapidly
provide increased broadband capacity as the attacks increased.
Jana Vanaveski, an advisor to President Ilves, told us that
the improvements the GOE had made in preparation for e-voting
during the March parliamentary elections had bolstered the
GOE,s ability to respond to the cyber attacks.

4. (C)
On May 1, the cyber attacks expanded to include Estonian
commercial websites, principally banks (e.g., Hansabank and
SEB), websites of Estonian newspapers (e.g., Postimees and
Eesti Paevaleht), and Falck AS Security (Estonia,s largest
private security company which provides

TALLINN 00000347 002 OF 004

the Embassy,s Local Guard Force). The private sector,
especially the banks, often had better defensive measures in
place than the government did, and was consequently better
able to contain the attacks. However, containment came at a
cost. With over 90% of Estonians dependent upon online
payments, banks had to close foreign access to increase
domestic access capacity and provide ad hoc service to its
largest foreign clients through alternate sites. Hansabank
officials told us that while their tactics were ultimately
successful, they cost the bank an estimated 10 million Euros
($13.4 million) in lost revenue. While Estonian authorities
are not sure from which country the perpetrators behind the
GOE website attacks were operating, they are convinced that
the people behind the commercial bank attacks operated from
within Estonia.

5. (C)
The GOE was quick to accuse the Government of Russia of
involvement in these cyber attacks. On May 2, Foreign Minister
Urmas Paet released a statement that the MFA had proof that
some of the attacks originated from Russian government
internet service provider (ISPs) addresses. However, officials
from Estonia,s Computer Emergency Response Team (CERT) and
Cyber Defense experts have privately informed us there is
still no `smoking gun' that links the attacks to Moscow.
However, the unprecedented nature of cyber attack against a
nation state has received wide international coverage. On May
17, Minister of Defense Jaak Aaviksoo told the press that
while he didn,t think the cyber attacks against Estonia were a
breach of NATO,s Article 5, NATO needed to resolve how to
respond to cyber attacks against its member states. NATO sent
a team of cyber experts to assess the situation May 10-12. At
Post,s request, a EUCOM cyber warfare expert joined the NATO
team to provide an independent, technical assessment and
analysis. The U.S. Secret Service has also offered to send
experts to Estonia.

SIPDIS

On May 14, Minister of Justice Rein Lang expressed his
gratitude to the Ambassador for the USG,s assistance in
Estonia,s investigation. Like Aavikisoo, Lang emphasized the
need for the international community to begin the process of
establishing a legal framework to address cyber attacks.

Boycotts on Estonian Products; Pragmatism Based on Experience
-------------------------------------------------------------

6. (SBU)
Immediately following the riots, there were numerous accounts
of an informal Russian boycott on Estonian goods. While
Russian authorities insisted there was no official ban, press
reports said that stores throughout Russia had announced that
they would stop carrying Estonian products like Kalev
chocolates (Estonia,s largest confectionary exporter) and
Estonian meat products. Russian shops reportedly received
letters from the state Veterinary and Food Board that Estonian
products did not meet Russian sanitary standards. The actual
impact of the `unofficial' boycott is difficult to quantify.
GOE officials have consistently downplayed its importance,
noting that since the 1990s, Estonian exporters have taken
steps to diversify their markets and reduce reliance on
Russia. For example, the Russian market counts for less than
one-third of Kalev,s total exports and only a few percentage
points of total sales. Overall, only 23 percent of all
Estonian food and agricultural exports went to Russia in 2006
(less than 7 percent of overall GDP).

7. (SBU)
At the request of the Ministry of Foreign Affairs, the
Estonian Chamber of Commerce surveyed its members from May
4-11 regarding the impact of these unofficial Russian measures
on their business. For the most part, Estonian firms responded
that they had not experienced direct restrictions on their
business with Russia, and that they planned to `wait and see.'
However, responses showed that the cumulative effect of these
two weeks of uncertainty had put a chill on the business
climate between the two countries and reminded Estonian
companies that `Russia is still Russia.8 A survey of hotels
and travel agencies conducted by the tourism department of
Enterprise Estonia (the Ministry of Economy,s trade promotion
board), found that while few had any cancellations during the
past three weeks, 52 percent thought the events since April
26-27 had a negative impact on business. (Note: Only 4.7
percent of tourists come from Russia, and most of those travel
here for the New Year,s holiday. End Note.)

TALLINN 00000347 003 OF 004

Disruption of Transport Sector: Rail and Road Blockages
-------------------------------------------------------

8. (SBU)
Cargo rail service between Estonia and Russia was also
disrupted after the riots. On May 1, the Russian state railway
(RzD), announced that its coal cars bound for Estonian ports
and points south suddenly needed repair, but that companies
with contracts for the month of May could use their own coal
cars if they could provide them. At the same time, RzD
announced the need to repair rail lines leading into northern
Estonia through Narva. The Estonian National Railway (EVR)
confirmed to us that their daily volume of inbound freight
trains dropped almost immediately from 32 to 16. As of May 23,
EVR,s daily volume was still hovering around 25 per day, or
roughly 75 percent of the pre-riots level. Our contacts at EVR
told us that a sustained volume of less than 25 trains per day
would force the railway to lay off workers, cancel planned
investment in infrastructure, and raise passenger fares. On
the other hand, the Director of the Port of Tallinn, through
which much of the transit trade passes, told Ambassador
Phillips on May 25 that he expects transit traffic to be back
to normal levels by the end of June, since re-routing oil
shipments is very costly for the Russian exporters.

9. (SBU)
Wood veneer producer Balti Spoon, which imports 70 percent of
its lumber from Russia, told us that about one-fifth of their
annual supply from Russia was pending when the disruption to
rail transit occurred. By the time they had worked out
alternate routes to get the Russian lumber in through Latvia,
(which would have added 5-10 percent to their cost) direct
rail connections were back to normal. Companies dependent on
Just-In-Time delivery, such as the oil transit company
PakTerminal, were more directly impacted during these three
weeks.

10. (C)
An internal study done by the Ministry of Economic Affairs and
Communications the first week in May, estimated that Russian
trade-disrupting measures could cost the Estonian economy as
much as 2-3 percentage points of economic growth if they
continue until the end of 2007. The bulk of this would be
transit fees lost to EVR, which put in place plans to furlough
workers and halted planned investment projects immediately
following the slowdown of inbound freight from Russia. MFA
Director General for External Economic Issues, Priit Pallum
told us, however, that most Estonian companies are downplaying
the situation, at least in the short run, for two reasons.
First, they hope that the political difficulties will die down
and business will return to normal; and second, they do not
want to expose the extent of their losses, and thereby
encourage competitors in Russia or elsewhere to try to take
business away from them. In Pallum,s estimation, the most
potentially damaging of all the GOR,s recent tactics is the
pressure on Russian companies to break long-term contracts
with Estonian firms. `If Russian businessmen get the message
from higher up that they are not going to be allowed to deal
with Estonian companies, they will orient their long-term
planning elsewhere, to other suppliers,' Pallum said.
Officials at EVR and Tallinn,s Muuga Port also told us they
know that if the capacity and reliability of competitor ports
such as St. Petersburg or Primorsk ever rises significantly,
their Russian customers may go away for good, although even
here, they expressed doubt that the expansion of Russian ports
would be able to keep up with the continued expansion of the
Russian economy.

Bridge Over Troubled Relations
------------------------------

11. (SBU)
On May 10, the Russian Federal Roads Administration
(Rosavtodor) announced that it would soon bar all vehicles
weighing over 13.5 tons from traversing the Narva river
between Ivangorod, Russia and Narva, Estonia, due to
unspecified safety concerns. The Narva bridge is the primary
crossing point for all cargo trucks passing between the EU and
Russia in northern Estonian ) approximately 140 trucks per day
in each direction under normal circumstances. The weight
restrictions were imposed from May 16-18, forcing trucks
returning to Estonia to take a much longer southern route (at
Petseri) and creating long lines at the bridge. According to
the MFA, the Narva Bridge passed a safety inspection two years
ago for trucks up to 41 tons; the

TALLINN 00000347 004 OF 004

Russian authorities were not in a position to evaluate the
bridge because it is under Narva city jurisdiction; and a
border crossing agreement between the two countries requires
at least 90 days, notice before restricting traffic. After
several false starts, Estonian and Russian transportation
officials finally met on May 22 and agreed to create a group
of Estonian and Russian experts to examine the bridge decide
on its future use. Road signs on the Russian side announcing
the weight limit have been removed, and traffic is now
crossing normally.

Estonia,s Response
------------------

12. (C)
The GOE has prioritized addressing Russian behavior
multilaterally, through the EU (and NATO on the cyber
attacks). Drawing on his own long experience working with
Russia, the MFA,s Pallum discounted the usefulness of engaging
Russian officials directly. The instructions come from the
Kremlin, he noted, so it is simply not useful to try and
resolve issues with officials at a working level. This has
been tried in the past and failed, Pallum explained. Even when
there are good relations between Russian and Estonian
counterparts, the Russian officials do not have the authority
to make any decisions. Rather, according to Pallum, Estonia
has and will continue to urge the EU to unite behind `strict
talk with Russia ... and a strong position - the only thing
the Russians understand.' Nobody would benefit more from
Russian involvement in organizations like the WTO and OECD
than Estonia, Pallum added, but only if they act like a normal
international partner. Within the EU, the GOE,s priority is
consensus building. Jana Vanaveski emphasized that Estonia
wants to continue its `pragmatic' approach and move forward;
it is not interested in blocking specific cooperative efforts
between Russia and the EU - like the EU-Russia Partnership and
Cooperation Agreement. Estonia is very familiar with Russian
tactics she said, now other member states see them as well.

Comment
-------

13. (C)
Estonia,s success in recent years in re-orienting its economy
away from Russia has clearly made it less vulnerable to
Moscow,s use of economic tools for political pressure. At the
same time, the cyber attacks Estonia has endured have
demonstrated to the international community a new
vulnerability of national economies in the digital age. The
main economic lesson from Estonia,s experience of the past few
weeks may be the reality of not just the physical threats to
21st century market economies, but the virtual ones as well.
End Comment.

PHILLIPS