Note to reader The titles in the GMB series of Doing Business with… guides for each of the 10 countries that joined the European Union on 1 May 2004 were first published in hard copy over the 18 months preceding entry. Since publication, there have been changes in the law and regulatory environment in each country, both in the period up to accession as countries strove to complete the harmonization of their systems with the EU’s acquis communataire body of legislation and directives and during the 18 months since. In some countries there have been changes in the taxation regimes or in accounting regulations. Change has occurred in political environments too, following parliamentary elections or in the balance of coalition governments. The economic climate of some states has been affected by the continuing malaise of the EU15 economies. Six of the EU10 (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovakia) have entered the EU exchange rate mechanism 2, the eurozone’s ante-chamber, and expect to join in 2007 or 2008. The Central European states are less advanced in meeting the eurozone entry criteria and previous plans for early entry have been modified with entry dates slipping to 2009–2010 or later. All of these developments are reflected in the revised ebook editions, which GMB now offers in its online EU10 collection. The texts of the revised editions have been amended accordingly and the changes are tabled in the accompanying updates to each ebook for the benefit of readers who have been working with the original edition. Further updates are programmed at regular intervals and readers purchasing ebook editions now have the opportunity to take out annual subscriptions for the update services. In this edition of Doing Business with Estonia, updates are included for the following chapters: 1.2 and 3.3. Jonathan Reuvid Series Editor
Doing Business with Estonia
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GLOBAL MARKET BRIEFINGS
Doing Business with Estonia
Consultant Editors:
Marat Terterov and Jonathan Reuvid
GMB
Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published in 2003 and updated in 2005 by GMB Publishing Ltd. © GMB Publishing Ltd. and contributors Hardcopy ISBN 1-905050-22-4
E-book ISBN 1-905050-56-9
British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library
Library of Congress Cataloguing-in-Publication Data Doing business with Estonia / consultant editor,Marat Terterov and Jonathan Reuvid in association with Enterprise Estonia, Hedman Osborne Clarke. p. cm. -- (Global market briefing) Includes index. ISBN 1-905050-22-4 (Hardcover) 1. Estonia--Commerce--Handbooks, manuals, etc. 2. Estonia --Economic conditions--1991- --Handbooks, manuals, etc. 3. Investments, Foreign--Estonia--Handbooks, manuals, etc. I. Terterov, Marat. II. Clarke, Hedman Osborne. III. Enterprise Estonia. IV. Series. HF3639.7.Z6D65 2003 330.94798--dc21 2003011261
Contents Foreword Juhan Parts, The Prime Minister of Estonia List of Contributors Map 1: Estonia and its neighbours Map 2: Tallinn and surrounding districts Introduction Marat Terterov
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Part One: The Economy and the Business Environment 1.1 Country Profile Enterprise Estonia 1.2 Economic Performance and Market Reforms Professor Alari Purju, Tallinn Technical University Updates are given at the end of this chapter 1.3 Changes in the Estonian Business Environment upon EU Entry Urmas Varblane, University of Tartu 1.4 Foreign Direct Investment: ‘Think Nordic’ Douglas Clark, Director, Tenon Techlocate 1.5 Foreign Trade Enterprise Estonia
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Part Two: The Legal Structure and Business Regulation 2.1 General Legal Framework Hedman Osborne Clarke 2.2 Forms of Business Organization Hedman Osborne Clarke 2.3 Practical Procedures for Registration and Access to Data from the Commercial Register Hedman Osborne Clarke 2.4 Property Law Hedman Osborne Clarke 2.5 Employment Law Hedman Osborne Clarke
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2.6 Intellectual Property Hedman Osborne Clarke 2.7 Competition Law Hedman Osborne Clarke 2.8 Dispute Resolution, Attestation of Foreign Documents and Important Treaties Hedman Osborne Clarke
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Part Three: Finance, Accountancy and Taxation 3.1 The Financial Sector Bank of Estonia 3.2 Accountancy and Audit Deloitte & Touche 3.3 Business Taxation Deloitte & Touche Updates are given at the end of this chapter
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Part Four: Key Sectors of Trade and Investment 4.1 Energy Industry in Estonia Andreas Kaju, Marketing Project Manager, Estonian Chamber of Commerce and Industry 4.2 Engineering and Metalworking Industry Estonian Investment Agency 4.3 IT and Telecommunications Estonian Investment Agency 4.4 Chemical Industry Estonian Investment Agency 4.5 Food-processing Industry Estonian Investment Agency 4.6 Wood-processing Industry Estonian Investment Agency 4.7 Transport and Logistics Estonian Investment Agency 4.8 Construction Industry Estonian Investment Agency 4.9 Construction Materials Estonian Investment Agency 4.10 Electronics Industry Estonian Investment Agency
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4.11 Tourism in Estonia Piret Kallas and Ene Palmiste, Managers, Market Research Unit, Enterprise Estonia/Estonian Tourist Board
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Part Five: Appendices Appendix 1 Business Risk Assessment Appendix 2 Useful Contacts in Estonia Appendix 3 Contributor Contact Details
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Index
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Other titles in this series from GMB
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Foreword For 50 of the 85 years since its inception as a country, the Republic of Estonia has been occupied by foreign powers, while the democratic development of the past dozen years has brought us to the threshold of the European Union. In the autumn of 2003 there will be a referendum on the issue of joining the European Union, and accession will likely take place next year. The economy of Estonia, a nation of 1.3 million people, is very small. Our economic policy is based on the assumption that in order to secure the rapid and successful development of the economy of such a small country, Estonia should be a very competitive country in the world. Estonia’s competitiveness means, in other words, the ability to successfully export the country’s production. Here in Estonia we have understood that in achieving this goal, the creation of a business climate favourable to foreign investment has been of primary importance. To achieve this, the openness of the economy, business friendliness and education have been considered important issues in Estonia. In looking at our recent history, it can without doubt be said that we have been successful in this. Due to rapid and successful economic reforms, Estonia has been the most rapidly developing country in the region: during the past ten years the annual growth of the Estonian economy has been 5 per cent on average, and in the near future growth is expected to continue at the same rate. This is confirmed by various economic development ratings. In the competitiveness ranking compiled by the Institute for the Development of Economic Management, Estonia holds 21st place, which is a considerably higher position than any other Central or East European country. In terms of economic freedom, Estonia is at present in sixth position in the world together with Denmark and the United States of America. Which are Estonia’s main values that have helped us to achieve this success, and which make the investing here especially attractive? I will list four of them below:
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• Estonia’s geographic position. One of our neighbours is great Russia and Estonia possesses invaluable knowledge about how to do business there. • Stable financial system. Estonia’s stable fiscal system considerably decreases investors’ risks. Our interest rates are already as low as in Europe. • Estonia’s highly skilled and good and cheap labour force. In spite of the need to improve the quality of our labour force, the price – quality ratio is very good. • Estonia’s flexibility. The advantage of Estonia as a small country is our flexibility. When needed, the Government together with businessmen can react quickly to new situations. There is no rigidity characteristic of large countries. In conclusion, Estonia is one of the more beautiful places on this earth. Juhan Parts The Prime Minister of Estonia
List of Contributors Andreas Kaju is marketing project manager of the Estonian Chamber of Commerce and Industry. Bank of Estonia is Estonia’s central bank, which is situated in Estonian capital Tallinn. Founded in 1919 and re-established in 1990 Bank of Estonia performs its constitutional function – to maintain the stability of the national currency kroon by applying a fixed-exchange-rate-system based monetary policy. Other objectives are ensuring the value and integrity of the Estonian kroon in fulfilling the functions of the currency, promoting the efficiency and stability and support the development of the Estonian financial system, and maintaining cash circulation in Estonia. Bank of Estonia’s Governor is Mr Vahur Kraft. Deloitte & Touche Tohmatsu is one of the world’s largest auditing and consulting organizations. More than 92,000 people in over 130 countries serve nearly one-fifth of the world’s largest companies as well as large national enterprises, public institutions and successful, fast-growing companies. Its internationally experienced professionals deliver seamless, consistent services wherever its clients operate. Deloitte and Touche has offices in Lithuania, Latvia and Estonia, covering business for its clients in the Baltic markets. Enterprise Estonia, the national economic development agency works closely with Estonian and foreign businesses, their partners and Estonian regions on behalf of the Government of Estonia. It supports companies in order to innovate, grow, create new partnerships and reach international customers. Enterprise Estonia supports international businesses by creating and maintaining an environment that allows them to make the right investment decisions, find suppliers and partners in Estonia, and to trade profitably with Estonian companies. The Estonian Tourist Board (ETB) is part of Enterprise Estonia. ETB’s mission is to increase awareness of Estonia, and more specifically brand and market it as a tourism destination. To this end, ETB’s task is to: design, conduct and outsource market research on tourism
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supply/demand and trends, and publish market intelligence reports for tourism entrepreneurs; collaborate with and consult the Estonian tourism industry on product development, marketing and related research; design and organize the marketing of Estonian tourism products such as conference tourism, nature and eco-tourism, activities tourism etc under the Welcome to Estonia brand concept launched in 2002; develop and manage the Estonian Tourist Information Centres network; collaborate with international tourism organizations such as the European Travel Commission, Baltic Sea Tourism Commission, and the World Tourism Organization. Piret Kallas graduated from the Tallinn Technical University in International Economics and Business Administration. She has been active in tourism research since 1995 when she joined the Estonian Tourist Board (now part of Enterprise Estonia). She is responsible for designing and conducting tourism research both in Estonia and source markets, analysis of research results and publishing tourism reviews and statistics, and cooperates closely with international tourism organizations such as the European Travel Commission and World Tourism Organization. Piret has extensively researched the history of tourism in Estonia and contributed to the Estonian National Encyclopaedia. Ene Palmiste graduated with a Masters degree in Mass Communication from the University of North Carolina at Chapel Hill (USA) and joined Enterprise Estonia as a project manager in 2002. She previously worked as an information attachй in the Estonian foreign service. At Enterprise Estonia, Ene is responsible for designing and outsourcing tourism research both in Estonia and the major source markets as well as for publishing research reports. The Hedman Osborne Clarke office in Tallinn is part of an international law firm alliance with offices in 15 cities across Europe and Silicon Valley. The office was founded by Hedman Attorneys-at-Law, a leading Scandinavian law firm based in Helsinki, Finland. Opening in 1992 as one of the very first Western law firms in Estonia, the office has acquired broad experience in all areas of commercial law and related fields. Osborne Clarke, one of the UK’s most progressive commercial law firms, is renowned for international business law acumen and top quality IT/technology services. It has a commanding reputation in key corporate commercial areas and has won accolades from various legal publications and industry membership groups for management ingenuity and legal excellence. Osborne Clarke Alliance currently has more than 600 lawyers.
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The Tallinn office has a team of highly qualified Estonian lawyers with long practice interacting with their international counterparts and providing multi-lingual, international class legal services. In addition to work on commercial transactions, their lawyers have acted as experts in international development projects (PHARE, TACIS) and served on working groups providing counsel to various Ministries within the Estonian government. Their lawyers regularly contribute to learned publications and lecture on Estonian and international legal issues. Lisa Käärid from Canada and William Cronenberg from the US, both qualified lawyers in their respective homelands, augment the strong international credentials of the local staff. As is typical in the Estonian market, they provide the general range of corporate and commercial legal services. They act primarily for companies and financial institutions based in Finland, Sweden, the UK, US, Canada and Asia. In spite of a strong international focus, the firm counts many leading Estonian companies among its clients as well. Tallinn Technical University, Faculty of Economics and Business Adminstration (TTUFEBA) is one of the leading business schools in Estonia. TTUFEBA has established an extensive communication network with international and national companies. It has an appropriate infrastructure, which can be used within the framework of this project for research activities. TTUFEBA have been involved in research projects related to banking and finance, EU integration, industrial and competition policy, public procurement, foreign trade. The departments of TTUFEBA have participated in eight Phare ACE programs in recent years. Alari Purju, professor and dean of TTUFEBA, was educated at University of Tartu, Institute of Economics at Estonian Academy of Sciences and Central European University in Prague. He has worked as researcher in different scientific organizations in Estonia and abroad. Since 1997, he has been a professor at Tallinn Technical University. He has been adviser to the minister of economic affairs and actively published about economic reforms in transition economies. Main areas of scientific interests are macroeconomic aspects of public finance and policy, country and industry studies of trade, economic transition problems. Urmas Varblane is professor of international business at the University of Tartu, Estonia. His academic research has been concentrated on the role of the foreign direct investments in the transition economies, foreign trade policy and questions related
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with the economic integration of transition countries with the European Union. He has worked as an adviser to the Estonian Government and international institutions. Actively participating in the international research networks (ACE-PHARE, EU fifth framework projects etc). Between 1998 and 1999 he worked as a guest professor in the School of Slavonic and East European Studies in London. From 1993 to 2000 he also worked as vice director of EuroFaculty, an educational programme in Nordic countries, which supported implementation of modern academic education in economics, law and social sciences in Baltics. Douglas Clark, director of Tenon Techlocate is a development economist with over 15 years’ consultancy experience in international investment. He provides assistance to locations in Europe wishing to attract investment, and has particular experience in place marketing and the branding of locations for investment. Tenon Techlocate is the UK-based inward investment consultancy that works to bring together all sides of a fragmented marketplace, that is, companies looking to expand in Europe, the locations that are looking to attract them and the intermediaries that assist the corporate expansion process.
Map 1 Estonia and its neighbours
Map 2 Tallinn and surrounding districts
Introduction This is our first attempt at compiling a significant publication on the topic of doing business with Estonia. The readership of Kogan Page’s newly emerging Global Market Briefing international business series will be to varying degrees familiar with the recently independent Baltic states as one political and economic bloc, formerly controlled by the Soviet Union. However, far fewer individuals from our readership are likely to be familiar with the specific features of the economies and business environment of the individual ex-Soviet republics of the Baltic region. During the last decade, the Republics of Lithuania, Latvia and Estonia have been building on their newly re-established sovereignty and are now seeking to establish themselves in their own right as fully fledged emerging markets in the North-Eastern corner of Europe. From this perspective, Estonia, the smallest of the three countries with a population of less than 1.4 million and an area of just over 45,000 square kilometres, is regarded by many commentators as Central and Eastern Europe’s most successful transitional economy and emerging market. The Estonian government was amongst the most progressive of the reforming, newly independent ex-Soviet Republics in the early to mid-1990s. As in many of the states of Eastern Europe, Estonia embarked upon an aggressive programme of privatization of state property, as public enterprises constituted the bulk of the Estonian economy during the Soviet years. As early as 1993, the private sector was already contributing as much as 50 per cent to the Estonian GDP according to government statistics. By 1997, the figure rose to 67 per cent, when the bulk of the privatization programme was virtually complete. In a somewhat different experience from that of other former Soviet Republics, the Estonian privatization programme comprised concerted efforts to divest government enterprise to effective owners (ie strategic investors) and to promote good corporate governance rather than purely to maximize privatization revenues. The Estonian government also promoted a very liberal trade regime, abolishing virtually all tariff and non-tariff barriers to imports and exports in the initial reform years. Further reforms included liberalization of the majority of price controls (with the exception of some restrictions in public utilities and oil shale), implementation of
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effective legislation facilitating competition in the business sphere, and major financial sector reforms including currency convertibility and interest rate liberalization. The results of these reforms are well evident to the tourist or business visitor to Estonia today. Indeed, one is struck on first arriving in Tallin, the country’s capital and most populous city, by its essential similarities with the capitals of the Scandinavian states. Tallin is indeed a highly modern, European city with a particularly good land, sea and airborne transport infrastructure, a well-developed commercial sector, and thriving consumer and cultural life. If one considers the massive influx of tourists the city (and the country) receives from many regional European countries, this initial impression of the Estonian capital is enhanced further to put it on a par with other cosmopolitan, historical European capitals. The Nordic model of development which Estonia seems to have embraced is underscored further by the extremely high-tech nature of Estonia’s government and society. As the reader will discover in the various chapters in this volume, the Estonian government is amongst the world leaders in pioneering an initiative through which the meetings of cabinet ministers have been replaced by paperless sessions employing an internet-based document system. Penetration rates of internet use in the country are exceptionally high and the majority of society conducts its banking on the Internet. While it is clear that Estonia’s transition to a market economy has brought significant changes to this small Baltic country, from another perspective little has changed from Soviet times, as Estonia has justifiably retained its reputation in the former Soviet territories as arguably the most advanced state in the region. From a business angle, the Estonian market shows great promise. Growth in GDP has averaged at around 5 per cent annually since the mid-1990s, and despite a slow-down during the last quarter of 2002, was expected to reach this rate again during that year. Inflation was around 4 per cent in 2002. The international credit rating agencies – Moody’s, Standard & Poor’s and Fitch – all give Estonia either an A or an A1, and the country is generally regarded to be very low in terms of corruption and very high in terms of economic openness and competition. Estonia has already attracted nearly r4 billion in cumulative foreign investment since independence and enterprises with significant foreign equity contribute roughly a third of Estonia’s GDP. With a population of less than 1.5 million, such a volume of investment makes Estonia one of the most successful emerging markets in terms of foreign direct investment per head of population. Not surprisingly,
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Scandinavian (largely Finnish and Swedish) companies are by far the most significant investors in Estonia and the most noteworthy sectors to have attracted investment include finance, transport, communications and manufacturing. Furthermore, Estonia is likely to join the European Union in the next round of enlargement in May 2004, which will subsequently give investors in the country access to the EU’s vast network of trade agreements with over one hundred countries worldwide. The prospects for those contemplating doing business with Estonia, it seems, has hardly ever been more exciting. This book is designed for all parties contemplating Estonia as a market in which to do business and is primarily divided into four sections. In Part One, we provide the reader with a general background to the Estonian market, with a general discussion overviewing the Estonian economy, foreign trade patterns and foreign investment climate. We also provide a country profile, looking broadly at Estonia’s demographic, social and business development issues. The very topical issue of changes in the Estonian business environment after its anticipated integration into the EU is also discussed. Authors of Part One include Enterprise Estonia, Tallin Technical University and Tartu University, as well as the British consulting firm Tenon Techlocate. In Part Two, the renowned law firm Hedman Osborne Clarke provides the reader with a detailed discussion of Estonian business legislation, including topics such as forms of business organization, company registration procedures, property law, employment law, dispute resolution and intellectual property. In Part Three our authors – the Bank of Estonia and Deloitte & Touche – discuss topics relating to the fiscal and financial sectors of the Estonian economy, providing overviews of the country’s banking system and financial markets, taxation, auditing and accounting. In Part Four, Enterprise Estonia, the Estonian Tourism Board and the Estonian Chamber of Commerce take an in-depth look at the Estonian economy from a sectoral perspective. Our authors introduce no less than ten different industries central to the country’s economic activity and this part of the book will prove to be of major interest to foreign businesses not deeply familiar with the structure of Estonia’s increasingly diversified economy. In the Appendix we provide some analysis of the level of business risk associated with the Estonian market and present a list of contacts we hope will prove useful to investors perhaps not previously familiar with doing business with this Baltic country. Marat Terterov Oxford, England June 2003
Part One The Economy and the Business Environment
1.1
Country Profile Enterprise Estonia Introduction Estonia is situated in Northern Europe on the coast of the Baltic Sea, neighbouring Finland, Sweden, Latvia and Russia. A location at the crossroads of various cultures has given Estonia many economic and cultural advantages. On the heels of an extraordinary decade of transformation and growth, Estonia today has established itself as an open and liberal ‘happening country’, known as E-Estonia, or the Tiger of the Baltic Sea. In addition, Estonia is famous for its musical heritage, modern dance and brilliant animated cartoons. There are more than 1,500 islands, 1,000 lakes (constituting 5 per cent of Estonian territory) and 7,000 rivers and streams, and bogs and wooded swamplands of different types cover over a fifth of the country. Estonia’s coastline of 3,800 kilometres is about six times longer than the mainland borderline. Estonia is very rich in woods – forests cover almost half of its territory. Elks, wild boars, bears and lynxes are amongst Estonia’s common large mammals. About 10 per cent of Estonia is a nature reserve. Modern seaports and convenient air services make it easy to visit Estonia and visas are not required for citizens of most countries. Being understood is rarely a problem in Estonia, as you can easily get by with any number of languages, particularly English, Russian or German. Estonia is known above all for its beautiful capital of Tallinn. The Old Town of Tallinn is on UNESCO’s world heritage list and is one of the most romantic places in the world, with well preserved medieval architecture of churches, towers, burghers’ houses and the town wall.
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E-Estonia E-Government In August 2000, the government of Estonia pioneered the use of paperless sessions in its cabinet meetings by changing to a webbased document system. The objective of the web-based system is to computerize the preparation processes and proceedings of cabinet meetings, which includes preparing as many materials as possible digitally and thus reducing copying costs and delivery time. Ministers peruse draft bills and regulations, make comments and suggestions and vote entirely online at computer terminals. The new system, coupled with the use of digital signatures, eliminates the need to send mountains of paper between ministries for consultation. It gives ministers the possibility to participate in the session from anywhere. The system, created by Estonian IT companies, saves approximately EEK3 million (N192,000) a year in paper and copying costs.
E-Estonia In summer 2001 the Government launched the website Täna Otsustan Mina (I Decide Today). Ministries upload all their draft bills and amendments here, which allows people to review and add comments and proposals to the legislative process, as well as propose amendments to the existing legislation. Ideas gathering support among visitors will be taken under further consideration by the relevant bodies. The Government and a number of private companies announced the ‘Look@World’ project in 2001 as a result of which the percentage of Internet users in Estonia should increase from the present level to over 90 per cent – or exceed Finland’s corresponding indicator – within three years. The project focuses on further improvements to Internet access in Estonia, and private companies have announced that initially they are willing to invest a sum equal to the government’s yearly IT budget. In April 2002 the Look@World Foundation started an ambitious training project – the goal being that by spring 2004, 100,000 Estonians will have been taught basic computer and Internet skills. By January 2003, over 30,000 people had completed the training. Primary feedback indicates that 58 per cent of the participants have become regular Internet users.
Country Profile
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Since January 2002, the Citizenship and Migration Board has been issuing a new primary domestic ID card. In addition to many advanced security features, the card has a machine-readable code and a microchip containing the data on the card and two security certificates (long number series) to verify the individual and supply digital signatures. Possible future uses of the card include the integration of ID cards and banking cards and various access cards. The Estonian Penal Code has included articles on securityrelated computer and data crimes since 1997. Estonia is constantly updating and developing data-related criminal legislation. A survey conducted by the marketing research and consultation company EMOR in autumn 2002 indicates that 43 per cent of the Estonian population regard themselves as Internet users. The Internet is mainly used at work, followed by school and home. Almost all public employees have computerized workplaces. A home computer is owned by 33 per cent of the population and 68 per cent of these home computers are connected to the Internet. 43 per cent of Estonian people conduct their everyday banking via the Internet. Internet banking has become a common channel through which people perform transfers, pay for services, pay taxes, communicate with the tax board and so on. Access to various information and banking services through mobile phones using Wireless Application Protocol (WAP) is popular: the financial institution Hansapank alone has 13,400 WAP clients. The high level of Internet use in Estonia is largely due to the early adoption of the Internet by the research and higher education sectors and the existence of a developed telecommunications network. All Estonian schools are connected to the Internet as a result of the state-run ‘Tiger Leap’ programme implemented in 1997–1999. Even the three-student schoolhouse on the isolated Ruhnu Island (40 inhabitants) has an Internet connection. Thanks to ‘Tiger Leap’, schoolchildren are above-average users of the Internet. A shortterm goal is to have at least one computer per 20 pupils in every school.
A dynamic economy Estonia is considered to be one of the most advanced emerging markets in Central and Eastern Europe. Along with nine other candidate countries, Estonia completed accession negotiations with
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the EU in December 2002, and is expected to become a member of the EU in May 2004. Owing to Estonia’s rapid economic development, a liberal taxation system and a highly favourable location, the country is at the heart of Europe’s fastest growing market – the Baltic Sea Region, which has a population of over 90 million. Estonia is one of the leading Central and Eastern European countries in terms of attracting foreign direct investment. Successive governments have adhered to the principles of Estonia’s economic success: a balanced state budget, a stable convertible currency pegged to the euro (before 1 January 1999 to the deutschmark) and liberal trade and investment laws.
International ratings International credit ratings Moody’s: A1 Standard & Poor’s: AFitch IBCA: AThe Wall Street Journal/Heritage Foundation’s Index of Economic Freedom 2003 ranks Estonia as one of the freest economies in the world – sixth out of 161 countries. Transparency International ranks Estonia 29–30th of 102 countries, making it the second least corrupt country in Central and Eastern Europe after Slovenia. According to the World Competitiveness Yearbook 2002 published by the International Institute for Management Development, Estonia ranks 21st in the world, and it is considered one of the most competitive economies in Europe.
GDP The GDP growth of 5.8 per cent in 2002 places Estonia among the fastest growing economies in the region. The economy has grown by an average of close to 5 per cent every year since 1995. The continued growth of exports to Western markets, integration with Nordic countries, and institutional and regulatory reforms have laid a strong foundation for sustainable economic growth. The economy is likely to grow by 5–6 per cent per year in the near future.
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Money Estonia’s national currency is the kroon (EEK). One kroon is equal to 100 cents. The Estonian kroon is pegged to the euro, N1=EEK15.65. The Estonian monetary system is based on currency board regulation. The currency board and currency peg have been fixed by law since June 1992.
Taxes Estonia’s system of low, flat rate taxes – in particular, the flat 26 per cent income tax – is simple, with no ‘hidden extras’. Since 1 January 2000, all reinvested corporate profits are exempt from corporate income tax in order to encourage enterprises to reinvest their profits. The VAT system (set at 18 per cent) harmonizes with EU requirements. Employers pay social and health insurance tax at 33 per cent of the gross wage.
Banking The Estonian banking system is modern and efficient, with the strongest and best-regulated banks in the region. These provide both domestic and international services (including Internet and telephone banking) at very competitive rates. Both local and international firms provide a full range of financial, insurance, accountancy and legal services. Estonia has a highly advanced Internet banking system: 43 per cent of inhabitants make their everyday transactions via Internet banking.
Communications Estonia’s open economy, excellent transport links and central location make it an ideal base for production and distribution. Estonia has captured a considerable share of the rapidly growing transit trade through the Baltic Sea. The deepwater port and free trade zone of Muuga is one of the most advanced in the region. It serves as an entrance port for the Baltic and CIS markets. Passenger and freight links provide fast sea crossings over the Baltic Sea, while direct air connections give easy access to Tallinn from major European capitals. Estonian railways use the same gauge as that used throughout Russia and the CIS, making Estonia an attractive European hub for bulk shipment of goods from the Far East: 90 per cent of rail freight is transit traffic.
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Foreign investors, mostly Nordic, have made considerable investments into high technology and communication networks in order to modernize the ICT infrastructure in Estonia. As a result, the Estonian telecommunications sector is one of the most developed in Central and Eastern Europe. In recent years the number of fixed phone lines has decreased, as many consumers have switched from fixed phones to mobile phones. The main task of Estonia’s telecommunications policy is to ensure competition and openness in the field. The telecommunications sector was completely liberalized in January 2001, when the special monopoly rights of the Estonian Telephone Company ended. The advanced use of information technology demonstrates Estonia’s commitment to global competitiveness. The younger generation, in particular, has exemplary computer skills, and connection levels to the Internet (634 connected hosts per 10,000 inhabitants in August 2002) are higher than in many European Union countries.
Labour The availability of highly skilled, reasonably priced labour has been one of the cornerstones of Estonia’s rapid economic development. The adaptability and flexibility of the labour market has contributed greatly to changes in the structure of the economy. As the share of services in the GDP has increased from 48.3 per cent in 1993 to 60.9 per cent in 2000, so the share of industry and agriculture has declined accordingly.
Foreign trade Estonia has one of the most liberal trade regimes in the world. Free trade agreements with the European Union (EU), European Free Trade Association (EFTA), Latvia, Lithuania, Ukraine, Czech Republic, Slovakia, Slovenia, Bulgaria, Turkey, Poland, Hungary and the Faroe Islands cover more than 80 per cent of Estonia’s total trade turnover. Estonia’s main trade flows – around two thirds – are conducted with EU countries. The very liberal free trade agreement with the EU, which has abolished all customs restrictions with regard to industrial products and liberalized trade in agricultural goods, has been the main contributor to the shift in Estonian foreign trade. Estonia’s main trade partners are Finland, Sweden and Germany. Estonia’s major exports are machinery and appliances, wood and products thereof, textiles, agricultural and food products. The major imports
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to Estonia are machinery and appliances, agricultural and food products, and transport equipment.
Investment climate Foreign investors are guaranteed a level playing field with local firms, including unrestricted repatriation of profits and capital and the right to own land. There is a rapidly expanding supply of high quality commercial and office property, including a growing number of industrial parks. The establishment of Estonia’s first free trade zone at Muuga Port has further enhanced Estonia’s attractiveness to foreign investors. The legal framework is largely harmonized with the EU’s legislation. Many costs such as energy, labour, transport services and telecommunications, and buying or renting property are considerably lower than in other parts of the Baltic Sea Region. Nevertheless, Estonia has acquired a well-deserved reputation for the high quality of its products. Investors find they can achieve Scandinavian quality levels across a wide range of industries here, at lower costs. Estonia is one of the leaders in Central and Eastern Europe in terms of foreign direct investment per capita. FDI in Estonia totals approximately N4 billion.
Estonia at a glance Official name: Republic of Estonia. Short form: Estonia. National Day: Independence Day, February 24. Estonia declared its independence on this day in 1918.
Geography Area: 45,227 square kilometres. Estonia is a green land and forests cover around half of the country (20,155 square kilometres). Borders: total length: 1,445.4 kilometres, with a sea border of 768.6 kilometres and a land border of 676.8 kilometres. Distances from Tallinn: • • • •
Helsinki 85 kilometres Riga 307 kilometres St. Petersburg 395 kilometres Stockholm 405 kilometres.
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The Economy and the Business Environment
Climate: humid-temperate. Number of islands: 1,521. The largest islands are Saaremaa, Hiiumaa and Muhu. Estonia is a country of thousand lakes, the largest of these are Lake Peipsi and Lake Võrtsjärv. Highest point: Suur Munamägi (Great Egg Hill), 318 metres. Temperature range (daily average): –1.4°C in January 2001 and 20.5°C in July 2001.
Population The last official census was taken in 2000. Population: 1.37 million. Population density: 30 inhabitants per square kilometres. Proportion of population that is urban: 67.4 per cent. Proportion of population that is rural: 32.6 per cent. The birth rate in 2000 was 9.56 per 1,000 residents while the mortality rate reached 13.46 per 1,000 residents. Largest ethnic groups: Estonian (68 per cent), Russian (26 per cent), Ukrainian (2 per cent), Belarussians (1 per cent) and Finns (1 per cent).
Main cities The capital of Estonia is Tallinn (population 400,000 – 29 per cent of the total population). Other large cities and population are: • • • •
Tartu – 101,000 Narva – 69,000 Kohtla-Järve – 48,000 Pärnu – 46,000.
Language The official language is Estonian, which belongs to the Finno-Ugric language family and is closely related to Finnish. Along with Finnish, English, Russian and German are also widely spoken and understood.
State Type: parliamentary democracy. The head of state is the President, elected by the parliament or an electoral body.
Country Profile
11
Presidential term: five years. Current president: Mr Arnold Rüütel, elected by the Electoral Body on 21 September 2001. Next elections: September 2006. National legislature: the Riigikogu, a unicameral parliament of 101 members. Term: four years. The last elections, for the tenth Riigikogu, were held on 2 March 2003. Head of the government: Prime Minister, currently Mr Juhan Parts (Res Publica). Highest judicial power: Supreme Court. Administrative division: 15 counties, 205 rural municipalities and 42 towns. The last elections for local authorities were held on 20 October 2002. Electoral systems: proportional representation. There is universal suffrage for Estonian citizens over 18 years of age. Municipal elections: term = 3 years. All permanent residents over 18 years old, regardless of citizenship are eligible to vote in municipal elections. Next local elections: October 2005.
Currency The Estonian kroon (EEK): one kroon = 100 cents; N1 = EEK15.65.
Education There are 654 comprehensive schools, of which 542 are for Estonian speakers, 93 for Russian speakers and 19 work in both Estonian and Russian. There are 16 universities in Estonia, including 10 private universities.
Religion Since the Reformation movement in the 16th century, the Lutheran church has played the leading role in Estonia. Other larger active religions are Greek Orthodox, Russian Orthodox, Baptist, Methodist and Roman Catholic. Source: Ministry of Foreign Affairs: www.vm.ee/estonia
1.2
Economic Performance and Market Reforms Professor Alari Purju, Tallinn Technical University General developments Estonia is one of the most successful emerging market economies in Central and Eastern Europe. Its GDP has grown by an average of 5 per cent since the mid 1990s and this growth slowed down only slightly in the last quarter of 2002. Though the Estonian open economy is very dependent on the demand of foreign markets, particularly on exports to Scandinavian markets, the modest growth rates in those countries did not unduly influence Estonian GDP growth which was stimulated by domestic private consumption and investments. The growth outlook is clouded by uncertainty about the prospects of the world markets in 2003. The rather weak export demand in the EU is a source of concern about the sustainability of the current growth pattern. Increased domestic demand accompanied by a growing credit burden generates risks for the economy, especially in a small open economy where the main source of growth has been exports. Investments began to grow very rapidly in 2000. In 2002, growth at 16 per cent was achieved and capital formation accounted for 30.3 per cent of the GDP. Industry is showing signs of expanding its production capacities, and investments are growing fast. The Estonian monetary system has been based on a currency board arrangement since 1992. The kroon was first pegged to the German mark and, since 1999, to the euro. All kroons in circulation are backed 100 per cent by foreign currency and gold reserves. The currency board system with fixed exchange rates has created the necessary financial discipline and has made it possible to achieve relatively low inflation rates since the second half of the 1990s. Interest rate levels have also been pushed down: in 2002 the
Economic Performance and Market Reforms
13
consumer price index was 3.6 per cent and the average interest rate of long-term loans 7.8 per cent. In the government sector, budget revenues for 2002 were larger than expenditure and a surplus at the level of 12 per cent GDP has been created. Higher revenues in the public sector were supported by better tax discipline and higher than forecasted growth of GDP. However, several local governments had problems with the balance of revenue and expenditure, partly caused by unequal distribution of growth between regions.
Industries The structure of the Estonian GDP is similar to that of the GDP of developed countries. The share taken by trade, transport and the service sector has increased rapidly. Activities which previously had a very limited or non-existent role, such as commercial banking, business services and real estate, grow rapidly in new market economies. The share of the service industry in the GDP increased from 48 per cent in 1993 to 62 per cent in 2001. Traditional manufacturing industries like food processing, textiles and machinery went through major changes of ownership, technology and markets which caused a decline in output, as did the agricultural sector, which saw its share in the GDP decline to 3.4 per cent in 2001. At the same time, new enterprises in electrical machinery and apparatus, and the manufacture of radio, television and communication equipment and apparatus have sprung up and increased their output mainly through subcontracting for Scandinavian companies. Wood processing is another rapidly increasing branch, using domestic forest resources. The gross output of industry increased by 4.6 per cent in 2002. Promoting Estonia as a good place for transit trade has been an important target of the economic policy in recent years. Transit trade created around 7 per cent of the country’s GDP. Oil and oil products made up about two thirds of the freight that passed through Estonia’s ports, followed by fertilizers, container cargo, metals and timber. The total amount of cargo handled by Estonian ports was close to 40 million tons in 2002. Tourism has been a rapidly increasing service sector. In 2002 almost 3.5 million foreign tourists served by Estonian tourism firms visited Estonia. About 80 per cent of foreign visitors came from Finland. As a result of very intense traffic of vessels between
14
The Economy and the Business Environment
Tallinn and Helsinki, the number of same-day visitors from Finland increased steeply. A specific feature of the Estonian energy sector is oil shale, which accounted for 59.4 per cent of the primary energy supply in 2001. As much as 90 per cent of electricity was generated from oil shale, a fuel with low heating value. The production of electricity is concentrated in Narva, north-eastern Estonia. There are two thermal power stations, the Baltic (with a potential output of 1,435 MW) and the Estonian (1,610 MW) power station. The renovation of the Estonian power station based on the new technology of burning oil shale began in summer 2002. Estonia privatized its state-run companies in the 1990s, as did other Central and Eastern European countries. In 2002, the private sector generated 80 per cent of the economy. After concluding largescale privatization in the mid 1990s, the privatization of telecommunications, the energy sector and infrastructure continued until 2001. The Estonian Railway Company was privatized in 2001. The telecommunications market was deregulated at the beginning of 2002 following the sale of a large part of its shares to foreign companies and the public before 1999. In 2002, the state was retaining approximately 30 per cent of shares. The process of privatizing Eesti Energia, the state-owned energy company, began in 1995 but failed in 2002. The government decided to restructure the company and finance necessary investment with credits from international financial markets.
Financial sector The creation of a two-tier banking system with central banks responsible for regulation of the monetary and banking system in general and commercial banks providing companies and households with financial services was a major economic reform in all CEE countries including Estonia. At the beginning of the reform process, the Estonian government concentrated on implementing effective monetary and exchange rate policies and improving the regulatory role of the central banks. After recurrent financial crises, the central bank has since carried out a major restructuring of the banks, based on consolidation, privatization and opening the sector up to foreign participation. As a result, the country now has a banking sector characterized by improved supervision and governance, a high degree of concentration, and a large degree of foreign ownership.
Economic Performance and Market Reforms
15
The participation of foreign banks has been critically important. They have not only contributed much needed capital resources, but introduced new banking technologies, know how and good banking practices. They have improved the competitive environment and helped to restructure struggling domestic banks. There are concerns, however, about the concentration of economic power in the hands of foreign investors. In recent years, Estonia has developed a modern regulatory regime for the banking sector. For example, a law has been enacted that ensures the independence of the central bank, provides institutions and tools for better supervision of credit institutions, establishes legal reserve requirements, provides insurance for deposits and improves their payment and settlement systems. In 2002, 85 per cent of the share capital of the banking sector was owned by foreign banks, with Swedish Swedbank (controlling Hansabank, the largest bank in the Baltic market) and Skandinavska Enskilda Banken (owner of Union Bank, the second largest Estonian bank) the leading foreign investors. The Estonian banking system is modern and efficient, with the strongest and best regulated banks in the region. These banks provide both domestic and international services at very competitive rates. Estonia has an advanced Internet banking system: 43 per cent of inhabitants made their everyday transactions via Internet banking in 2002. A major positive influence on the banking sectors was the high priority assigned to negotiating membership of different international organizations, particularly the EU and the WTO of which Estonia has been a member since November 1999. International commitments have encouraged improved domestic regulation and market opening. They also created a binding framework for domestic political debates about various economic and financial issues.
Foreign direct investments Foreign investment has been one of the solutions to the structural changes necessary for development. A significant part of direct investment came from Sweden (41 per cent) and Finland (30 per cent). The most attractive sectors for foreign direct investors in Estonia were finance, transport, storage and communication, manufacturing, wholesale and retail trade. The total amount of foreign direct investment (FDI) into Estonia, which according to the Bank of Estonia was EEK60 billion
16
The Economy and the Business Environment
in end of 2002, places Estonia in a satisfactory position compared with other Eastern European countries. However, in 2002 the amount of FDI decreased from EEK9.4 billion in 2001 to EEK5.2 billion. The decrease was caused by the end of privatization and temporary low growth in Scandinavian countries which caused reevaluation of investment decisions. The main proportion of reinvested corporate profits, on the other hand, provided evidence that the business environment is still reliable and foreign companies are continuing their activities in Estonia. The investment climate has been supportive for foreign investors in Estonia. The legal framework has been harmonized with the EU and there is unrestricted opportunity for repatriation of profits and a very favourable tax system. Estonia has a flat 26 per cent income tax. Since 2000, all reinvested corporate profits have been exempt from corporate income tax in order to encourage enterprises to reinvest their profits.
Foreign trade Foreign trade has been one of the deciding factors of the country’s development. The total turnover of imports and exports exceeded the volume of the GDP by a factor of 1.5. The share of exports in the GDP was at 60–62 per cent during recent years. Estonia’s foreign trade policy has been somewhat unique: customs tariffs practically did not exist in the 1990s and there were minimal restrictions to enterprises developing foreign economic relations. Since 1 January 2000, a limited number of tariffs have been introduced on agricultural products against non-EU countries and those which do not have free trade agreements with Estonia. Estonian exports and imports have been rapidly increasing since 2001. While the weak demand for Estonian exports reduced the total amount of exports by 2 per cent in 2002, at the same time imports increased by 6 per cent and the foreign trade deficit grew. Machinery and equipment, still the largest section of exports, decreased by almost 30 per cent due to crises in the IT sector. Wood and wood products were up 11 per cent and textiles and textile products by 2 per cent. The most important import items were machinery and equipment with 29.7 per cent and transport vehicles with 10.8 per cent. Imports for manufacturing in Estonia and eventual re-export accounted for approximately one third. The structure of Estonian imports has been determined by the necessity to purchase fuel and other raw materials (eg cotton,
Economic Performance and Market Reforms
17
important for Estonia’s large textile industry). Machinery, mechanical appliances and electrical equipment are also significant imports. The geographical pattern of Estonian foreign trade changed substantially in the 1990s. Finland played a very important role, encouraged by its knowledge of these markets and its linguistic similarity. Finland also acted as a mediator for Estonian entrepreneurs. Another reason why Finland’s share in Estonian foreign trade is high is the large number of foreign direct investments from Finland and those enterprises created on the basis of those investments trade with Finland. Finland had a share of 24.2 per cent of exports and 17.2 per cent of imports, followed by Sweden with 15.3 per cent (exports) and 9.5 per cent (imports) and Germany (9.9 per cent exports and 11.2 per cent imports) in 2002. Since 1995, when Estonia’s main trade partners Finland and Sweden joined the EU, EU countries have become the main source of Estonia’s foreign trade. In 2002, the EU accounted for 68 per cent of Estonian exports and 58 per cent of imports. In the commodity structure of Estonian exports it is possible to see that traditional export items like textiles and food products declined in relative and absolute terms while machinery and equipment took the largest share with 24.8 per cent of Estonian exports in 2002. Wood and wood products accounted for 15.1 per cent of exports in 2002. Other items in this section were chip and fibreboard, plywood and construction details. Furniture has also been an important export. Textiles and textile products accounted for 12.1 per cent of exports in 2002. Subcontracting accounted for a major share of the exports of clothes and the amount of prêt-à-porter products has been increasing in recent years. The main markets were Finland and Sweden, which were also the major customers of subcontracting. Russia’s share of Estonian foreign trade declined dramatically in 1999 after financial crises and deep devaluation of the rouble, but then recovered and created 3.3 per cent of Estonian exports and 7.4 per cent of imports in 2002. For certain items, Estonian producers and traders are interested in having economic links with Russia. Transport vehicles accounted for an important share of Estonian exports to Russia (mainly as re-export but safety belts for the Russian car industry has been one important item). Among Estonian imports the dominant item was mineral products (mainly oil), making up one third of Estonian imports from Russia. As Estonia does not have an MFN agreement with Russia, Estonian exports suffered from higher customs tariffs.
18
The Economy and the Business Environment
Trade with the other Baltic countries, Latvia and Lithuania, has been rather modest. In 2002, Latvia’s share of Estonian exports was 7.4 per cent while Lithuania’s was 3.5 per cent. Estonia, Latvia and Lithuania signed the Baltic Free Trade Agreement in 1992 and it has been in force since April 1994. Additionally, since 1997 a free trade agreement on agricultural products has applied.
The labour market The situation in the labour market has steadily improved during the last couple of years and the unemployment rate declined to 10.3 per cent in 2002. There are major regional differences, ie the East Virumaa county with its dominantly Russian population has the highest unemployment rate at 18.9 per cent. That is more than twice as high as some other counties. The main problem of the labour market is its low quality of labour. During restructuring and application, new technologies and new industries have not managed to find enough skilled employees. The existing training system has not offered the necessary opportunities to retrain people. The vocational training system is in deep crisis and this is a major obstacle to future employment. A new law to create an unemployment insurance system was passed in 2001 and has been in force since January 2002. In order to be eligible for payments from the Unemployment Insurance Fund, a person must contribute to the fund for 12 months. Some analysts expected unemployment to increase at the beginning of 2003 because several big companies were expected to dismiss staff before unemployment insurance started to operate. However no dramatic changes occurred in this field during the first quarter of 2003.
Future developments Along with nine other candidate countries, Estonia concluded its accession negotiations with the EU in December 2002 and is expected to join the EU in May 2004. The invitation to join NATO came in November 2002. The importance of the EU is especially clear, because Estonia is one of the poorer of the new candidate countries. During the accession negotiations, the EU promised Estonia regional support for 2004–2006 of up to EEK3.7 billion per year. In addition to that,
Economic Performance and Market Reforms
19
EEK1–2 billion will go to agriculture. In comparison, the Estonian GDP was EEK106 billion in 2002. There are many other issues related to membership of the EU. Harmonization with the EU legislation improves market access by dismantling technical barriers to trade. However, there is also the danger that too early harmonization with EU regulations could constrain Estonian competitiveness and comparative advantage and thus slow down the growth. If Estonia joins the EU, the trade policy becomes an EU competence. Estonia has to implement the external trade policy of the EU. As Estonia currently has practically zero protection, it does not gain from falling import prices caused by further trade liberalization. EU integration will lead to an increase in the protection level toward non-EU suppliers and hence to trade diversion. However, the effect of implementation of EU tariffs will be fairly small because the majority of trade will be with EU members and the EU does not have a high protection level for raw materials, currently the major import of non-members of the EU.
S1
ONLINE UPDATES - 23 June 2005 Economic progress and outlook (Chap. 1.2) Estonia – Selected Indicators 2001 Change from previous year in % GDP (real) 6.4 Industrial output (real) 9.0 Gross fixed capital formation (real) 13.0 Consumer prices (yearly average) 5.8 Unemployment (yearly average) 12.6 Budget balance (ESA 95, in % of GDP) 0.3 in EUR mn Merchandise exports Merchandise imports Current account Current account (in % of GDP) FDI (inflow, net) Gross foreign debt (end of period) Gross foreign debt (in % of GDP) Import cover (in months) Average exchange rate: EEK/EUR Average exchange rate: EEK/USD
3,750 4,630 –376 –5.6 377 3,707 55.6 1.9 15.65 17.48
2002
2003
2004
7.2 8.3 17.2 3.6 10.3 1.4
5.1 9.9 5.4 1.3 10.0 3.1
6.2 8.3 6.9 3.0 9.8 1.8
2005 2006 Forecast 6.0 5.8 8.8 8.0 8.3 9.0 3.5 2.5 9.5 9.2 0.9 0.5
3,728 4,061 4,878 5,457 –759 –1,059 –10.2 –13.2 167 667 4,490 5,658 60.1 70.4 1.9 2.0 15.65 15.65 16.60 13.81
4,796 6,372 –1,117 –12.6 534 7,477 84.1 2.0 15.65 12.58
5,500 6,200 7,250 8,080 –1,090 –1,050 –11.1 –10.0 480 450 8,310 9,140 85.2 86.4 2.0 2.0 15.65 15.65 11.73 11.59
Sources: Bank Austria Creditanstalt Economics Department, Eesti Pank, ESA
Estonia selected indicators The Estonian Parliament elected a new government in April 2005 under Primer Minister Andrus Asnip, former Minister of Economic Affairs and leader of the liberal-conservative Reform Party, and with five Ministers from the previous opposition Centre Party. The change in the composition of the coalition denotes a shift from centre-right to centre-left but Mr Asnip has declared that there will be no change in the objective for Estonia to be ‘the best example of a newly democratic, transition economy’. Although slackening slightly in the fourth quarter, GDP growth rose to 6.2 per cent in 2004 from 5.1 per cent in 2003. Economic growth for 2005 and 2006 is expected to remain at high levels of 6.0 and 5.8 per cent repectively as Estonia moves forwards toward its target of joining the eurozone in 2007. In 2004, the growth components of
S2
domestic demand were balanced between rising private consumption to a growth rate of 6.1 per cent similar to the overall economy, and even stronger growth in gross fixed capital formation by 7 per cent year over year in real terms. On the supply side, value added increased by about 10 per cent, net of inflation, in each of the four sectors that are the main drivers of the economy: construction, manufacturing and, in the services ector, financial intermediation and tourism-related hotels and restaurants. Unemployment maintained its slow reduction in 2004, down to 9.8 per cent, and is expected to decline further in 2005 and 2006 down to 9.2 per cent. Inflation, on the other hand, is expected to continue rising from 3.0 per cent in 2004 to 3.5 per cent in 2005 before falling back to about 2.5 per cent in 2006. Foreign trade continues to expand strongly with export growth (goods and services) of 16 per cent in real terms in 2004 against a growth of 14 per cent in imports. As a result, the current acount deficit declined to 12.6 per cent as a percentage of GDP from the high level of 2003 and is forecast to be brought back to 10 per cent by the end of 2006. Tourism will play an increasingly important role, particularly from Russia and Scandinavia. However, the current acount deficit will continue above EUR1 billion and will impact on uncomfortably high and growing foreign indebtedness forecast to exceed EUR9 billion at 2006 year-end at 86.4 per cent of GDP. Gross foreign direct investment (FDI) inflow remained at about EUR750 million in 2004, but was reduced to EUR534 million net by increased Estonian investment abroad. Net FDI inflow is forecast to decline further to EUR450 million in 2006. Estonia’s budget surplus remains one of the strongest features of the economy and the balance is forecast to remain positive under the new government although reduced to 0.5 per cent of GDP in 2006. Estonia is unlikely to have difficulty in satisfying the Maastricht criteria for eurozone entry. April 2005, Bank Austria Creditanstalt Report 2 - 2005 and the Editor
1.3
Changes in the Estonian Business Environment upon EU Entry Urmas Varblane, University of Tartu Estonia began accession negotiations with the European Union in 1997. EU membership was regarded as the crowning end-point of its transformation from a planned to a market economy. The Copenhagen summit in December 2002 fixed the deadline of expansion at May 2004 and the accession negotiations were concluded. The process of joining the EU has caused a period of radical changes in the Estonian business environment. The following chapter is a rather limited attempt to outline these changes from the point of view of the potential foreign investor, to explain how EU membership could support successful implementation of economic reforms and therefore also improve the investment climate of Estonia.
Motivating factors of potential foreign investors In order to evaluate potential changes in the Estonian business environment following accession to the EU from the point of view of the foreign investor, a short overview of the major determinants of foreign investments follows. A research group in the Faculty of Economics and Business Administration of the University of Tartu has conducted several surveys among foreign investors since 1997. Based on these findings, the following key groups of determinants emerge: economic and political stability combined with rapid economic reforms, rapid market growth and low production costs (see Figure 1.3.1).
Changes in the Estonian Business Environment upon EU Entry Possibilities for market growth
21
3.86
Convertibility of the currency
3.72
Political stability
3.63
Free movement of capital
3.61
Rapid economic reforms
3.41
Production costs
3.36
Entry to Estonian market
3.2
Following competitors
2.69
Potential of CEEC market
2.6
Potential of CIS markets
2.57 0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Figure 1.3.1 Factors influencing the initial decision to invest into Estonia (where 1=no influence at all and 5=a very strong influence) Source: Survey data ‘Foreign Investor 2000’, Foreign Direct Investments in the Estonian Economy, ed. U Varblane, Tartu University Press, 2001
Joining the EU is a process of income level convergence We can now begin to analyse the impact of joining the EU on the most important motivating factors of foreign investors. As mentioned above, market growth is one of the most important determinants of FDI. Therefore potential investors are very interested in the level of income growth in Estonia when making the decision to invest. From the macroeconomic point of view, joining the EU means a process of convergence for Estonia, which could be explained as the process of diminishing the economic and social differences between income and price level in Estonia compared with the average EU level. The major aim of Estonia and other candidate countries is to catch up with industrialized EU member countries in terms of real income level. In the case of the candidate countries, the best way to measure income level is by using purchasing power parity (PPP) based GDP, which means that differences in the prices of goods and services in various countries are taken into consideration. Previous expansions of the EU have shown that the catch-up process is a lengthy one. The dream case of income level convergence is Ireland, where income level increased
22
The Economy and the Business Environment
within the period from 1988 to 2001 from 66 per cent of the EU average to 118 per cent. Certainly there are many specific reasons why Estonia could hardly repeat the Irish success story in such an impressive way. But Estonia has been rather successful in implementing economic reforms and achieved strong economic growth and its convergence towards the EU income level has been the strongest of the accession countries. Figure 1.3.2 shows the real income level of accession countries compared to the EU average. The first conclusion to be drawn is that Estonia started with a low level of income and has now joined the group of accession countries with a medium income level. During the last eight years Estonia has increased its income level from 32 per cent to 46 per cent of the EU income level. This is very rapid convergence and a clear message for potential investors that market growth is also going to be strong in the future. Assuming that Estonia could keep this growth rate up, it is possible that in less than 25 years Estonia will catch up with the EU average income level.
Growing economic and political stability is improving Estonia’s attraction to foreign investors Joining the EU will integrate the Estonian economy more deeply with the European economic sphere and will therefore improve the 80 70
71 64
63 62
60
52
50
45
46 49
46 39
40
32
32
30
37 28
36 24
28 30
32 26
20 10
1995
Romania
Bulgaria
Latvia
Lithuania
Poland
Estonia
Slovakia
Hungary
Czech
Slovenia
0
2002
Figure 1.3.2 GDP per capita in candidate countries compared with EU average (%) Source: Eurostat 2002
Changes in the Estonian Business Environment upon EU Entry
23
country’s medium- and long-term economic and political stability. This is one of the most important determinants sought by foreign investors and therefore any improvement in this respect is very important. The economic and political credibility of a country is measured by its risk rating: Fitch, Moody’s and Standard & Poor’s issue well respected commercial risk ratings and in Europe the Euromoney country risk ratings are the most important. In the decision-making process the potential investor is constantly checking risk ratings and this is extremely important for investors who are unfamiliar with the Estonian political and economic situation. In 1993 Estonia was listed for the first time in the Euromoney rating and held 122nd place in the overall ranking (see Figure 1.3.3). Since then the position has improved significantly and in 2002 Estonia was at the 44th position. At the same time the weakest ranking among current EU members was Greece in 25th place. After joining the EU, Estonia’s rating could further improve and may reach the level around 25–30 as the political and economic risks both decline. 180 160 140 120 100 80 60 40 20
Slovenia Estonia
Poland Latvia
Hungary Lithuania
Mar-02
Sep-01
Mar-01
Mar-00
Sep-99
Sep-98
Dec-97
Sep-96
Mar-96
Sep-95
Mar-95
Sep-94
Mar-94
Sep-93
0
Czech Rep. Russia
Figure 1.3.3 Euromoney risk ranking of Estonia compared with some of the other candidate countries and Russia 1993–2002 Source: www.euromoney.com
24
The Economy and the Business Environment
The importance of joining the EU is shown by the improved position of Estonia by Fitch and other risk agencies. Figure 1.3.4 indicates that already the penetration of foreign direct investment into Estonia is very high. But improvements in risk rating could further increase the attractiveness of Estonia for the new investors from the US, Japan and other more distant foreign investors, but also from EU member countries like France, Spain or Italy. 3,000
2,604 2,318 2,311
2,500 2,000
1,709
1,500
1,115 1,010
1,000
942
765
500
504
343
157 Russia
Romania
Bulgaria
Lithuania
Latvia
Poland
Slovak Rep.
Slovenia
Hungary
Estonia
Czech Rep.
0
Figure 1.3.4 Foreign direct investment per capita (US$) in some transition countries by the end of 2001 (calculations based on data from www.unctad.org and the Vienna Institute of International Economic Research (WIIW))
Further trade liberalization is improving access to the new markets The foreign trade policy of Estonia is distinct from other transition economies by the complete absence of tariffs and quantitative restrictions. This bold approach has brought an unprecedented reorientation of trade to the West. The share of Russia and other CIS countries in the Estonian export market has diminished from 80 per cent in the early 1990s to 4.5 per cent in 2002. It has been a very strong motivating factor for domestic firms to improve their competitiveness on the world market, but it has been highly evaluated also by the export oriented foreign investors (Varblane and Ziacik, 1999). Joining the EU means that further liberalization of trade with the EU will take place. It means that all investors active in Estonia may export and import products from other EU countries without any limitations. In addition, the trade relations of Estonia
Changes in the Estonian Business Environment upon EU Entry
25
and Russia will be normalized since Russia will be forced to eliminate ‘double tariffs’ on imports from Estonia. This may give a further boost to those foreign investors who would like to use Estonia as a gateway to the Russian market, which has up to now been hindered by Russian protectionism against Estonia caused mainly by political reasons. The Estonian food processing sector is also achieving free entry into the enlarged EU market. After joining with the EU, Estonian exporters will also be able to export freely into Magreb countries, Israel and many developing countries with which the EU has concluded free trade agreements. This is going to enlarge the potential list of target markets for export from Estonia.
Budget transfers from the EU are supporting structural change in the Estonian economy One of the major tasks in the Estonian economy is to go through rapid structural change, which will improve its ability to adjust to changes in the world market. It needs a high level of investments into sectors of the economy producing higher value added and high tech products, which generally allow for higher earnings. Investment in the infrastructure and local development are also needed to guarantee regional development. The investment capacity of Estonia and other candidate countries was several times lower than the EU average (see Figure 1.3.5) and per capita investment in Estonia was only N930 in 1998. This indicator has improved to approximately N1,000 per capita in 2002, but still remains far below the EU average. Budget transfers from the EU may be an important source of the structural upgrading of the Estonian economy. Applications for EU structural funds are limited to a maximum of 4 per cent of the GDP of the applicant country. The total financial support from the EU to Estonia during the period 2004–2006 is planned to total N1,021 million, of which 60 per cent will go towards the structural upgrading of the Estonian economy and improving its infrastructure (see Table 1.3.1). In per capita terms it means an annual supplementary investments of N252. During the next EU financial period of 2007–2013 this may even increase.
26
The Economy and the Business Environment 8,000
7,320
7,000
6,130
6,000 4,940
5,000
4,600 4,130 3,990 3,790
4,000 3,000
2,600
2,280
2,000
1,903 1,341
1,000
977 930 919
630 468
Latvia
Lithuania
Poland
Estonia
Hungary
Czech
Slovenia
Greece
Portugal
Sweden
EU15
Finland
Ireland
Germany
Denmark
Luxembourg
0
Figure 1.3.5 Total investment per capita in some EU and candidate countries 1998 (N) Source: Eurostat, 2001
Table 1.3.1 Planned spending of EU structural funds, 2004–2006 (Nmillion) POL
HU
CZ SLK
SLV EST LET
LIT
Agriculture 4,636 1,483 1,120 628 401 254 401 725 Structural policy 11,369 2,847 2,328 1,560 405 618 1,036 1,366 Internal policy 1,817 559 419 329 222 127 175 539 Administration 0 0 0 0 0 0 0 0 Cash advance 1,443 211 746 86 233 22 26 48 Total 19,265 5,100 4,613 2,603 1,262 1,021 1,638 2,677
CY MAL TOTAL 115 101 48 0 338 602
28
9,792
79 21,746 20 4,256 0 1,673 233 3,385 361 40,851
Source: Revue Elargissement, 36, p 1 (www.dree.org/elargissement/RapportsSite/REA36e.pdf)
However, it is critically important to invest in order to obtain longterm sustainable economic growth and to improve the investment climate of Estonia. Therefore it is useful to look at the opinion of foreign investors on the major problems of doing business in Estonia. Figure 1.3.6 presents the major problems emerging from the results of survey of foreign investors in Estonia. Three broad types of problems may be distinguished. The first is associated with the lack of skilled labour and problems related to the vocational and retraining system. The second is related to the
Changes in the Estonian Business Environment upon EU Entry Weak vocational retraining system Weak employee retraining system Lack of skilled labour Bureaucracy Weakness of competition policy Quality of existing labour Weak regional policy Inefficient innovation system Corruption High tax level Government attitude toward investors Lack of raw materials Custom tariffs Access to the land Activities of trade unions
27
2.6 2.72 2.77 3.02 3.18 3.23 3.29 3.44 3.46 3.66 3.81 3.97 4.08 4.09 4.32 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
Figure 1.3.6 Major problems of doing business in Estonia (where 1=major problem and 5=no problem), results of the survey ‘Foreign Investor 2001’, Foreign Direct Investments in the Estonian Economy, ed U Varblane, Tartu University Press, 2001
weak and inefficient innovation system, which does not support the upgrading of Estonian firms and does not allow them to fulfil more demanding roles in the networks of foreign investors. Thirdly, the Estonian government’s regional policy is weak and does not support the movement of potential investors to regions outside the capital. Many problems raised by foreign investors could be solved using EU structural funds together with Estonian co-financing. Structural funds have a positive role to play in at least the following four areas: 1. Implementation of EU structural funds requires the preparation of medium- and long-term economic development plans which will create stability in economic and social policy priorities. Potential investors want to know what the priorities of Estonian economic policy will be up to 2006, and very soon for 2007–2013. 2. In the near future there will be a rapid increase in investment in Estonian human capital. EU support will be channelled into reforming the vocational training system, retraining existing employees and retraining the unemployed. These measures combined should vastly improve the quality of the existing labour force and also increase the pool of available labour for potential foreign investors.
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The Economy and the Business Environment
3. The creation and renovation of the physical infrastructure needed to develop enterprises, especially in regions outside the capital, will be supported. The launching of a specially designed programme to create industrial areas with all required communication networks (roads, electricity, water systems, telecommunications etc) will be financed and this should also boost investment to these regions. 4. A rapid increase of investment in research and development is planned for the next few years, which means that potential partners to foreign investors may emerge among new spin-off firms financed by EU structural funds. EU structural fund investment of almost N1 billion will be distributed between 2003–2006 as follows: • • • • •
human capital development: 18.4 per cent; competition between enterprises 19.5 per cent; rural life and agriculture 20.7 per cent; local development and infrastructure 37.5 per cent; technical support 3.9 per cent.
Integration into EU market brings the growth of market efficiency One of the aims of implementing acquis communautaire is to ensure that after joining the EU market, competition is guaranteed. The increase in competition is an important factor driving the convergence of Estonian productivity toward the EU level. Despite the openness of the Estonian economy there are still several sectors, especially in the service industry, where free competition has not been secured but over the next decade all these sectors (energy, telecommunications etc) will be opened up. It is expected that as deepening specialization occurs in Estonia, economies of scale will increasingly form the basis for trade in Estonia. Estonia’s relatively low labour costs will still be used as a competitive advantage compared with other EU countries. Figure 1.3.7 indicates that the average hourly labour costs in the Estonian manufacturing industry (EE) was still only N2.8 in 2000. This is still seven times lower than the average of the EU-15 and nine times lower than Germany (D). Therefore, discussion of the erosion of Estonia’s cost advantage is premature. Labour cost differences exist and will not disappear in the medium term despite the relatively strong wage growth in Estonia over the last decade.
Changes in the Estonian Business Environment upon EU Entry
29
28.53
30
25.47
25
21.45
20.9
20 15 10
11.76 8.19
6.28
3.95 3.68 3.58 2.81 2.57 2.18
5 0 SI
PL
HU
CZ
EE
LT
LV EU-15
D
FIN
S
P
EL
Figure 1.3.7 Hourly labour costs in euros in the manufacturing industries of some accession countries (data from 2000) and EU member countries (data from 1999) Sources: Eurostat, 2002
Figure 1.3.8 presents data on the growth of labour productivity, wages and unit labour costs in the Estonian manufacturing industry between 1996 and 2001. These data clearly indicate that wage growth is outweighed by the even stronger growth of labour productivity. It means that unit labour costs have declined, or in other words every euro paid to the workers has produced more output than before. After joining the EU, the cost advantage combined with better market access should facilitate much broader use of the economies of scale effect. There are many reasons: better use of factors of production, optimization of management systems, the learning-bydoing effect etc. Economies of scale are more evident if the trading partners have a similar structure of production factors. Therefore catching up with EU member countries will equalize the structure of production in Estonia with other EU members and economies of scale and intra industry trade will become more significant. Estonia’s growing attraction as a business location and more intensive competition mean that local firms have at least two options. Firstly, in the near future co-operation between firms in Estonia should become more intensive and concentration of production will be unavoidable. Without an increase in production capacities, Estonian firms will not be able to use the potential of the large EU internal market. This co-operation may take different forms, starting from a simple agreement to share costs in the foreign market entry process and ending with mergers or acquisitions. Strategic alliances are a modern form of co-operation that is not widely used in Estonia. Another strategy available for Estonian firms is to find a strategic partner from the EU and use
30
The Economy and the Business Environment % 40 30 20 10 0 –10 –20 –30 I
II III IV I
II III IV I
II III IV I
II III IV I
II III IV I
II III IV
1996
1997
1998
1999
2000
2001
Real productivity growth (production per employee, %) Real wage growth (%) Unit labour costs (%)
Figure 1.3.8 Growth of productivity, wages and unit labour costs in the Estonian manufacturing industry, 1996–2001 (% compared with the same period in the previous year) Source: Estonian Statistical Office, Tallinn, 2003
their expertise in reaping the benefits of the EU market. This is a process that has already begun in the late 1990s and now the foreign penetration rate in the local manufacturing industry is more than 50 per cent. In some industries (paper, textiles and electric equipment) it has reached 80–90 per cent. Joining the EU may well result in another wave of mergers and acquisitions of Estonian firms by investors from the EU.
Conclusions Joining the EU does not automatically guarantee the rapid economic and social convergence of Estonia towards the EU level. However, integration will open many new opportunities, which Estonia should take advantage of. Integration is creating a stable political and macroeconomic environment, highly valued by foreign investors. Joining the EU will further liberalize foreign trade, reducing country risk and increasing Estonia’s attractiveness to foreign investors. Budget transfers from EU structural funds will rapidly increase investment in human capital, support the creation of social capital in society and put major emphasis on building up an innovation-based economy. Estonia’s cost advantages will remain in the short and medium term as productivity growth compensates for wage growth and unit labour costs are stable.
Changes in the Estonian Business Environment upon EU Entry
31
References Varblane, U and Ziacik, T. The Impact of Foreign Direct Investment on the Export Activities of Estonian Firms, Journal of East-West Business 5 (½) 1999, pp 173–190
1.4
Foreign Direct Investment: ‘Think Nordic’ Douglas Clark, Director, Tenon Techlocate Introduction Estonia is a small country with a big outlook. Drawing on its FinnoUgrian roots, it is the only post-communist Nordic country, offering a combination of tech-savvy people with established trading links to Eastern markets. Following Finland’s example, it is marketing itself as a Scandinavian country. Nicknamed the ‘Baltic Tiger’, its fast economic growth has been based on a policy of transparency, trust and free trade. Estonia has become one of Eastern Europe’s most free-market-orientated economies and is ranked sixth in the world in the 2003 Index of Economic Freedom. Estonia’s success as a free-market economy has developed over the last decade with priority placed on a high level of education, strong monetary policy, simple tax system, low tax burden, liberal trade regime and swift privatization of state-owned companies. Now looking to a high tech future, Estonia is well positioned to take advantage of its accession to the European Union in 2004. It offers investors a competitive cost location with easy access to the Baltic Sea Region’s market of 100 million consumers and it provides a bridgehead for business with Russia and many of the former Soviet Republics.
Foreign direct investment Direct investment flows into Estonia have followed several phases since the country’s constitution was established in June 1992. The first stage was the privatization of state-owned assets, which began soon after constitution. At that point, 90 per cent of
Foreign Direct Investment
33
companies were owned by the state. 1992 to 1995 were the main years of privatization. Estonia followed the Treuhand approach to selling state companies, where the entities were sold to strategic investors, showing no particular preference for local investors and employing a common basis of sale for all applicants. Estonia privatized for cash, not for vouchers as in the case of Russia. This phase of privatization had a few initial difficulties, with some Estonian companies failing to work efficiently due to their lack of experience of market economies. However, a second round of privatization addressed this and modern market economic practice has now become second nature for Estonians. One of Estonia’s success stories lies in its banking system, and this was driven by privatization. The largest bank is Hansabank, originally formed by nine private individuals, which employed 13 people at its launch in January 1992. It now employs over 3,000 staff and operates in Estonia, Latvia and Lithuania. In 1998, Swedbank of Sweden bought 53 per cent of Hansabank, and today it controls 55 per cent of assets and 58 per cent of deposits in the Estonian banking market. Another example of FDI in Estonia’s financial services is SEB of Sweden’s acquisition of a majority share in the Union Bank of Estonia, Estonia’s other main banking giant. By 1995, the privatization process had slowed down and the newly elected Estonian government established its strategy for selling the remaining large companies, including The Estonian Shipping Company, Estonian Telecom, Estonian Energy and Estonian Railways. By 1995, Estonia was experiencing positive growth, and with the exception of 1999 (due to the combined effect of the Asian and Russian financial crises), its economy has remained on a growth trend. Estonia secured 5.4 per cent GDP growth in 2001 and in 2002 GDP growth was 5.7 per cent, ahead of its projected growth figure of 4 per cent. A similar rate of growth is forecast for 2003. Other examples of FDI through privatization include: • The sale of The Estonian Shipping Company to the US Stanton Capital Group • Estonian Telecom’s privatization through an IPO, with 24 per cent of the company being sold to small investors and the rest sold to the TeliaSonera Group of Sweden and Finland. During 1995–1996, foreign direct investment flows were focused on privatization. Since 1996 however, reinvested earnings have been increasing, and are currently around 62 per cent of total FDI inflows.
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The Economy and the Business Environment
Other key trends in Estonia’s FDI growth are an increase in cross-border acquisitions and an increasing share of greenfield investments. Recent FDI projects in Estonia in 2002 include: • AS Sylvester, the largest forestry group in Estonia, was acquired by the Finnish Stora-Enso, an integrated forest products company employing around 43,000 people, in a deal believed to be worth c. N100 million • The decision by Kuzbassrazrezugol, the second biggest coal mining company in Russia, to build a coal terminal in the Port of Tallinn in a deal valued at c. N70 million • The decision by the Norwegian company Larvik Cell to build a cellulose plant – valued at c. N85 million • The first acquisition of an Estonian biotech firm, with Finnish FIT Biotech plc acquiring a minority share of the Estonian biotech company Quattromed • Galvex establishing a galvanized steel plant at Muuga Port – capital cost of N224 million The latest figures (see Table 1.4.1) show that the cumulative stock of Estonia’s foreign direct investment amounts to N3.96 billion. Companies partly or wholly owned by foreign investors account for one-third of the Estonian GDP, and over half of the country’s exports. This investment is particularly significant in finance, transport and communications and in manufacturing. The strong Nordic connection is illustrated by the number of Scandinavian countries investing in Estonia, in particular Sweden and Finland. Geographical proximity and cultural links combined with strong trading relations are the main reasons for this trend. Combined, Sweden and Finland have N2.66 billion invested in Estonia – two-thirds of total FDI stock (see Table 1.4.2). Table 1.4.1 FDI stock in Estonia by sector, September 2002 Sector
% of total
Finance Transport, storage, communication Manufacturing Wholesale and retail trade Real estate, renting and business activities Others
25.9 20.7 20.6 13.4 9.2 10.2
Source: Bank of Estonia (www.bankofestonia.info)
Foreign Direct Investment
35
Table 1.4.2 FDI stock in Estonia by source country, September 2002 Country
% of total
Sweden Finland USA Netherlands Norway Germany Denmark United Kingdom Others
41.2 26.0 8.3 3.9 3.3 2.6 2.4 2.3 10.0
Source: Bank of Estonia (www.bankofestonia.info)
Much of this FDI has been focused on Tallinn, the capital of Estonia, which to date has received around 80 per cent of the investment. Other FDI locations include the Harjumaa region surrounding Tallinn, the Lääne-Virumaa region to the east of Tallinn, and Tartu, the country’s university city which describes itself as ‘a city of good thoughts’.
Investment attractions A government survey of foreign investors in 1999 identified the main reasons for investing in Estonia as follows:
First-time investors • Potential market growth; • Financial stability (the convertibility of the Estonian currency and free movement of capital); • Political stability.
Re-investors • Labour availability and costs; • Financial stability • Low production costs. General feedback from foreign investors to the Estonian Investment Agency, the government agency which assists foreign investors,
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The Economy and the Business Environment
identifies key attractions as the country’s open economy, its flexible legal framework with no exchange controls or restrictions on foreign investment, the ability of foreign businesses to own land, the unrestricted repatriation of profits, the fact that all profits retained in the company are exempt from corporate income tax, the high level of spoken English and the modern business infrastructure, particularly in telecommunications. Although Estonia has a relatively small population of 1.4 million people, its location means that it provides an excellent base to reach wider markets both in the west and east. This strategic trading position is demonstrated by the strong growth of the Port of Tallinn, which is now the largest Baltic seaport in terms of freight turnover. Estonia’s strengths in telecommunications and the Internet are other saleable features for the country. It is typically Scandinavian in its adoption of new information technologies. Mobile phone subscription is high with over 724,000 mobile users; Estonian banks have more than 647,000 online clients and they lead the world in Internet banking; and all Estonian schools are connected to the Internet through the state-run ‘Tiger Leap’ programme. A recent global e-commerce survey by TNS Interactive has identified that Estonia has the highest Internet usage among countries in Central and Eastern Europe, and with a usage level of 39 per cent of the population, it ranks above countries such as Italy, Great Britain and France.
Weaknesses There is not that much to consider in terms of the potential weaknesses of Estonia as an investment location. The small size of the country is an issue in terms of market size; however this is countered by its status as a trading gateway. In terms of sourcing high-skilled labour, the potential labour pool will be smaller than that available in many other investment locations. The country’s strong reliance on Sweden and Finland, the predominant foreign investors, means that it is closely connected to the health of the economies of these countries. This may have a downside in difficult economic times. A key demographic in Estonia is the significant Russian population, which accounts for 28 per cent of the total population. With the economic growth achieved over the last few years, this group needs to be able to benefit equally alongside the Estonians, who make up 65 per cent of the total population.
Foreign Direct Investment
37
In terms of world recognition, Estonia is still a well-kept secret, and it needs to boost its identity as an investment location. The recent work of Brand Estonia, a branding exercise for the country, will help to raise its profile. Estonia’s present level of research and development activity is considered inadequate to sustain its competitive position over the long term. This issue has been recognized and the development of a knowledge-based Estonia is a major priority.
Investing in the future A significant issue for Estonia’s future will be EU membership. Estonia was invited to the first round of EU enlargement talks in 1997, ahead of its neighbours Latvia and Lithuania. EU membership will further reduce country risk as the EU will be supervising legislation. It will also allow Estonian entrepreneurs to gain access to a vast market, and open the labour market for Estonians. The Estonian currency, the Eesti kroon (EEK), is pegged to the euro under a currency board arrangement at a rate of N1 = 15.65 EEK. It is the only accession country that has pegged its currency to the euro. At some point around the year 2006, it is expected that the euro will go into circulation in Estonia, further integrating the country into the EU market. Estonia has come a long way over the last 10 years – it has created an open market economy; through extensive privatization it has brought in foreign investment which continues to grow through expansion, acquisition and greenfield development; and it has installed a modern business infrastructure. This investmentled approach is now being enhanced through a future focus on developing the country’s knowledge capabilities. ‘Knowledge-based Estonia’ is a research and development strategy that was adopted by the Estonian Parliament in 2001. It recognizes that the current low spend on R&D, currently 0.7 per cent of the GDP, is significantly below the EU and OECD average. Estonia aims to develop its innovative capacities and bring Estonian science to the global market. Particular areas of strength for Estonia are information technologies, biomedicine and material technologies. Through the development of an Estonian Innovation System, it aims to increase R&D activities to a level where it will account for 1.7 per cent of the GDP by 2006. The strategy’s themes are to strengthen the knowledge and skills base, increase innovation in companies, promote co-operation
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The Economy and the Business Environment
between industry and the science community, and to find international partners for Estonian science. The city of Tartu in particular, will play an important part in the delivery of this strategy, with key infrastructure elements including: • The Tartu Science Park Foundation, founded in 1992, which is mainly focused on the development of science and technologyintensive businesses, providing and developing suitable infrastructure and services; • The Technical University Innovation Centre, founded in 1998, connecting research and development results with industry and business in general; • The Tartu University Technology Centre, which was founded in 1996 as part of the PHARE Higher Education and Science Reform project (HESR); • The Tartu University Innovation Office, which promotes an innovative environment in the university and supports the transfer of the university’s scientific results, technologies and knowledge into the economy; • The EU Innovation Centre, stimulating Estonia’s participation in the EU Fifth Framework Programme via information and training exchange; • Tartu Biotechnology Park, set up by the Tartu Technology Park, the Estonian Genome Foundation and several biotech companies to offer infrastructure and support as well as specific services to biotech and medical companies. Estonia’s strengths in the application of information and telecommunications technology are evidenced by the high Internet penetration in the country. Actively used services include Internet banking (more than 90 per cent of transactions are electronic, with nearly 35 per cent of the population using Internet banking) and e-Tax Board (since spring 2001, income tax statements can be filled out online). The e-Government project launched in August 2000 features a virtually paperless executive branch with session voting performed electronically among a number of other features. The digital signature act which came into force at the end of the year 2000 has positively influenced public awareness of digital services. The early liberalization of the mobile communications market in Estonia has provided a competitive market with three mobile operators introducing a number of innovative features like mobile parking and mobile positioning services.
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Several projects have been developed between the telecom industry and the universities with purpose-built facilities established at Tallinn Technical University and Tartu University. The field of biotechnology is a major opportunity for Estonia, with the high profile launch of the Estonian Genome Project in 2001. This project aims to create a database containing information on around 1 million people’s genes and health, establishing the opportunity for diagnostics and treatment methods based on an individual’s genetic profile. Estonia understands the importance of developing a knowledgebased economy. It is likely that the FDI flows into Estonia over the next few years will move to a new phase – with increasing levels of technology-based investment, as Estonia continues to follow the Nordic pattern of economic development.
1.5
Foreign Trade Enterprise Estonia Overview Estonia’s proximity to the Nordic markets, its location between Eastern and Western Europe, competitive cost structure and highly skilled labour force have been the main sources of Estonian comparative advantage since the start of transition. Estonia is a well recognized advocate of free trade – there are no export tariffs in Estonia. Free trade agreements have been signed with the majority of European countries. In November 1999 Estonia became a member of the World Trade Organization (WTO). In 2004 Estonia will be among 10 countries joining EU. Membership of the WTO and in the future the EU will promote foreign investment in Estonia as well as increasing the security of both foreign and Estonian entrepreneurs by creating a reliable framework for implementing national economic and trade policies. From January 2000 the Most Favoured Nation Treatment Customs Duty Act came into force. According to the Act, foodstuffs originating from third countries are liable to customs duties. 6
N billion
5 4 3 2 1 0 1995
1996
Exports
1997
1998
1999
2000
Imports
Figure 1.5.1 Estonia’s foreign trade 1995–2002 Source: Statistical Office of Estonia
2001
2002
Foreign Trade
41
The share of subcontracting works in exports is still high, amounting up to 75–85 per cent in machinery and equipment, electronics and textile sectors.
Estonia’s foreign trade in 2002 According to the preliminary data, the value of Estonian foreign trade in 2002 was N8.7 billion, of which export was N3.6 billion (42 per cent) and import was N5.1 billion (58 per cent). In 2002 exports decreased by 2 per cent and imports increased by 6 per cent compared with 2001. Table 1.5.1 Estonian foreign trade 1995–2002, special trade method (Nbillion)
1995 1996 1997 1998 1999 2000 2001 2002
Export
of which re-exportation after inward processing
%
Import
of which importation for inward processing
%
1.2 1.4 1.9 2.2 2.2 3.4 3.7 3.6
0.28 0.31 0.50 0.72 0.73 1.51 1.41 1.12
23.2 23.0 26.7 31.8 32.6 43.8 38.2 31.1
1.8 2.2 3.1 3.5 3.2 4.6 4.8 5.1
0.27 0.30 0.47 0.65 0.70 1.43 1.19 1.00
15.6 13.5 15.1 18.5 21.6 31.0 24.8 19.6
Source: Statistical Office of Estonia
Main trading partner countries Over the past four years Estonia’s main export partner has been Finland, whose share in Estonia’s exports has averaged 24–33 per cent. Second is Sweden with a share of 14–23 per cent. Other important partner countries are Germany, Latvia, United Kingdom, Denmark, Lithuania, Norway, Netherlands and Russia. In 2002 the share of contract works decreased considerably, meaning that the growth of exports to Sweden was smaller than to other Eurozone countries and exports to Finland diminished by almost 30 per cent. Export to other main countries (except Latvia) increased by over 10 per cent. The share of EU countries in the
42
The Economy and the Business Environment Russia Netherlands Norway Lithuania Denmark
United Kingdom Latvia Germany Sweden Finland 0
200 1999
400 2000
600 2001
800
1,000
1,200
1,400
2002
Figure 1.5.2 Special exports to main partner countries, 1999–2002 (Nmillion) Source: Statistical Office of Estonia
total export was 68 per cent. Exports to CIS countries accounted for 5 per cent of total exports in 2002. Finland is also Estonia’s most important partner in imports, with a share of 17–28 per cent over the past four years. Germany takes second place with a share of around 10 per cent, and Sweden is close behind. A significant number of imports also come from China, Russia, Japan, Italy and Lithuania. The top 10 partner countries in imports changed in 2002 when USA and Poland replaced Denmark and the Netherlands. The decrease of imports from China and Germany was the largest. There was a remarkable increase of imports from Italy, USA and Sweden.
Trading by commodity groups Exports Estonia’s main export is machinery and equipment, which accounted for 24.8 per cent of total exports in 2002, but this category’s share has decreased over recent years. In 2000, machinery and equipment accounted for 37.4 per cent of total exports and in 2001 33 per cent.
Foreign Trade Netherlands Denmark Lithuania Italy Japan Russia China Sweden Germany Finland 0
200 1999
400 2000
600 2001
800
1,000
1,200
1,400
2002
Figure 1.5.3 Special imports from main partner countries, 1999–2002 (Nmillion) Source: Statistical Office of Estonia
Table 1.5.2 Main trade partners in 2002 % of exports
% of imports
1. Finland
24.8
1. Finland
17.2
2. Sweden
15.3
2. Germany
11.2
3. Germany
9.9
3. Sweden
9.5
4. Latvia
7.4
4. Russia
7.4
5. United Kingdom
4.8
5. China
5.2
6. Denmark
4.4
6. Italy
4.6
7. Lithuania
3.5
7. Japan
3.8
8. Netherlands
3.4
8. Lithuania
3.3
9. Norway
3.4
9. USA
3.2
10. Russia
3.3
10. Poland
2.8
Source: Statistical Office of Estonia
43
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The Economy and the Business Environment
Other Machinery and equipment Plastic and rubber Mineral products Transport equipment Raw materials and products of chemical industry
Wood and wood products
Metals and metal products Agricultural products and food preparations
Textile
Figure 1.5.4 Exports by commodity groups, 2002 Source: Statistical Office of Estonia
The second largest export article is wood and wood products, which accounted for 15.1 per cent of total exports in 2002, an increase of 2 per cent compared with 2000 and 2001. The industry’s major export markets are Finland, Sweden, United Kingdom and Germany. Textiles are third, with a share of 12.1 per cent of total exports in 2002. In 2000 and 2001 this figure was 11.4 and 11.3 per cent respectively. Agricultural products and food preparations account for 8.3 per cent of total exports and metals and metal products for 7.7 per cent.
Imports Machinery and equipment dominate the Estonian import market, with a share of 29.7 per cent of total imports in 2002 (38.5 per cent in 2000). The share of transport equipment was 10.8 per cent in 2002, and 6.9 and 8.9 per cent in 2000 and 2001 respectively. Agricultural products and food preparations accounted for 9.7 per cent of total imports and textile products for 8.2 per cent. Both categories have shown a slight increase in recent years: in 2000 their shares were 8.6 and 7.5 per cent respectively.
Foreign Trade
45
Other Wood and products of wood Articles of plastics and rubber
Machinery and equipment
Mineral products
Raw materials and products of chemical industry Transport equipment
Textile products Metals and products of metals
Agricultural products and food preparations
Figure 1.5.5 Imports by commodity groups, 2002 Source: Statistical Office of Estonia
Part Two The Legal Structure and Business Regulation
2.1
General Legal Framework Hedman Osborne Clarke Historical background Estonia’s recorded history begins with the Danish conquest in the 13th century. Since that time and up until the 20th century, various foreign, legal and judicial systems were in force. The Danes, Germans, Swedes, Poles and Russians all held sway at various times. During this period it was also not uncommon for different parts of the republic’s territory to be under the control of different foreign rulers and laws at the same time. In an unusual historical twist, even the modern day capital Tallinn was itself a ‘broken jurisdiction’ in medieval times. The ‘lower town’ was inhabited by merchants and tradesman and was strongly influenced by the legal system of the Hanseatic League. The ‘upper town’, which was inhabited by the Baltic-German aristocracy, had a different legal system. In one form or another this dichotomy survived until late in the 19th century. Despite the differences and frictions between the systems, which had a strong social basis, both had Germanic roots. German influence has always been very important to the development of Estonian legal thought, and this trend is obvious up to the present day. In 1710 Russian Tsar Peter the Great captured the territory of modern Estonia from the King of Sweden and incorporated it into his empire. Despite the imposition of the Russian legal system, the Baltic-German nobility retained its privileged status and continued to exert a strong influence over the legal administration of the Estonian territories. Estonia experienced a national reawakening in the latter half of the 19th century, which generated interest in the establishment of an independent Estonian State. The twin crises of the First World War and the Russian Revolution created a window of opportunity
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The Legal Structure and Business Regulation
for Estonian nationalists, and on 15 November 1917 the Estonian National Council declared itself to be the supreme authority in Estonia. Armed conflicts with both Russian Bolsheviks and vestiges of the Baltic-German forces ensued, but in the end Estonian forces with some Western assistance were able to clear their territory of foreign military forces. On 2 February 1920 the Tartu Peace Treaty was signed by Estonia and the USSR, which recognized Estonian Independence and delineated the borders between the two states.
Estonia between the world wars A Constitutional Assembly adopted the first Estonian Constitution on 15 June 1920. Estonian drafters were strongly influenced by the liberal constitutions of Germany, France and Switzerland. Estonia became a classical European parliamentary democracy. The Constitution vested supreme legislative power in the 100-seat unicameral parliament (Riigikogu). Universal suffrage was granted to all citizens aged 20 and over. The first Constitution did not establish a head of state. The Prime Minister, at that time called Riigivanem, represented the state in foreign relations. The most important questions were put to public referenda. The everyday life of the state was managed by a government consisting of seven to ten ministers. The early Estonian parliaments contained anywhere from 10 to 14 different political parties, and naturally the politics of the era were highly complicated and difficult. There were 21 different governmental bodies between 1919 and 1933, and the average period of each was less than nine months. Not surprisingly, there was considerable public dissatisfaction with the new state order. However Estonia was not an exception in this regard. For example, very similar situations prevailed in Lithuania, Finland and France during the same era. An important facet of early Estonian legal development was land reform. Estonia up until this time had a largely agrarian economy. In 1919, 58 per cent of the land in Estonia belonged to about a thousand large-scale manor complexes. The average large-scale farm was 62 times bigger than the average small farm, and two thirds of the population was landless. The objective of the land reform was to redistribute land from the Baltic-German nobility more broadly across the society. The former landowners received compensation for their expropriated lands and were generally allowed to retain a part of their land including their manor homes,
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51
but the size of the land plot was limited to that of an average farm. Land reform was completed by 1925 and at that time approximately 126,000 farms existed across the country. The first Constitution was amended in a public referendum in 1933. The new version of the Constitution reduced the powers of the Parliament and created an elected position of Head of State vested with sweeping powers. The first elected President of the Republic was Konstantin Päts. Within a half a year of his election Päts unilaterally dissolved the Parliament, and ruled by decree from that time on. The third Estonian Constitution was enacted by presidential decree in 1938. It retained the very strong executive branch, and restored the parliament as a bicameral body. The new parliament and the representatives of local governments re-elected Konstantin Päts as Head of State. In spite of the technical restoration of the legislature, political freedoms were sharply curtailed and the parliament could not be said to have possessed any effective power.
Soviet occupation Occupation and annexation of Estonia by the USSR in 1940 led to the liquidation of the existing Estonian government, nationalization of property and imposition of the Soviet legal regime. The Soviets were forcibly displaced by the Nazis, but returned by the end of the Second World War. Soviet law prevailed until 20 August 1991, when the Soviet Union collapsed. Estonia reasserted its independence based upon the principle of legal continuity of the original Estonian state. Independence Day is celebrated on 24 February, the date of the initial Manifesto of Independence in 1918.
The modern Estonian Constitution A fourth Constitution was drafted in the immediate aftermath of restored independence. The fourth Constitution was put to a public referendum and subsequently entered into force on 28 June 1992. This document embodies the values of modern legal and constitutional thought, and as in 1920 is powerfully influenced by the contemporary example of Continental Europe. Fundamental individual rights such as freedom of expression are strongly protected, and limitations on state power are clearly imposed. The rights to engage in private enterprise and form commercial undertakings
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are also recognized, and these rights are further extended to citizens of foreign states and stateless persons in Estonia.
The modern political and legal order Estonia once again has a parliamentary system of government. The parliament is a unicameral body with 101 seats. Estonia also has a president and well-developed judicial system, which help to ensure the balance of power in accordance with the terms of the Constitution. The parliament is elected according to proportional voting, based on percentages that each party receives in the election. Parliamentary elections are required by the Estonian Constitution at least once every four years. The President of the Republic is elected by the parliament for a five-year term. The current president is Arnold Rüütel. Laws are passed by the parliament but the president may use a veto to suspend the effect of these laws. The laws of the Estonian Republic are all published in the Riigi Teataja (The State Gazette). The Estonian Supreme Court is composed of 17 justices. The justices are appointed for a life term. The Chief Justice nominates candidates for the Supreme Court, which must then be approved by the parliament. The Chief Justice is nominated by the President of the Republic, subject to the approval of parliament. The Supreme Court is subdivided into four different chambers: the Criminal Chamber, the Civil Chamber, the Administrative Law Chamber and the Constitutional Review Chamber. These first three chambers examine cases in panels of at least three justices. Cases of constitutional review require a minimum of five justices. The Chief Justice of the Supreme Court is the chairman of the Constitutional Review Chamber. The independence of the Supreme Court from other branches of government is well established and it has an independent budget and administrative staff. Also important for the independence of the judiciary as a whole, all judicial oversight and disciplinary functions are handled by the Supreme Court. The legal system of Estonia is a Civil Law system of the type prevalent in Continental Europe. It has absorbed many foreign influences, but the German legal system remains the most influential. Civil Law has a tendency towards detailed codification of most legal issues, minimizing the influence of judicial discretion. In spite of this, there is a tendency to look to precedent in resolving controversial
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legal matters, which has been considered practical in the environment of rapid change since the restoration of independence.
Notaries in Estonia Notaries occupy a very influential position in the Estonian legal system. As in many other Civil Law countries, their role is far more significant then in places such as the United States. The structure of the notary system follows the principles of the Latin notary system. In Estonia a notary is neither a private businessperson nor a state official. They act in their own name and at their own liability, and the state is not responsible for their professional activities. The stated aim of the notary’s activity is to avoid potential disputes and promote the stability of the legal order. Notaries are appointed by the Minister of Justice for a life term. The number of people who can be appointed as notaries is strictly limited. Notaries are set up to be independent and impartial, and so are mainly regulated by law. The Minister of Justice does have limited powers of supervision. Notaries have a professional code of conduct, which imposes a duty of confidentiality towards clients. The notary’s fees for performing various services are established by law. It is prohibited to enter into any agreement to negotiate or reduce these sums. This has sometimes led to frustration on the part of foreign businesses that consider the fees for some transactions to be exorbitant. This is especially so in the case of larger transactions, since the basis for the fee is often a percentage of the value of the object of the contract or transaction, with no regard to the amount of actual work or risk of error etc. However, for very routine matters such as authenticating signatures the fees are fixed at comparatively reasonable rates. The adoption of new civil laws has further expanded the role of notaries. Many of the most important legal operations must be certified and registered by a notary to be valid. For example, all purchase and sale transactions with real estate must be notarized. In a transfer of real estate, the notary researches the title to the property and certifies the legal rights of the seller to transfer the property. The notary also bears responsibility for properly registering transfers in the land registry. If the notary makes an error that harms the interests of a buyer, that buyer has recourse against the notary, who is also required to carry professional liability insurance for such instances.
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Administrative divisions The territory of the republic is divided into 15 counties. These are further divided into numerous municipalities and towns. All are described in considerable detail on www.riik.ee, the official website of Estonia.
Foreign investment Estonia embarked on an aggressively pro-investment path soon after regaining independence in 1991. Estonia even went against the advice of the IMF by dropping the Russian rouble within months and re-establishing its own currency, the Estonian kroon. The kroon was freely convertible from the outset and pegged to the German mark at a ratio of 8 to 1. This peg has not been disturbed since, except to accommodate the elimination of the German currency in favour of the euro. The fixed rate of the kroon to the euro is approximately 15.65 to 1, based on the relative exchange rates at the moment Germany adopted the euro. In addition to its daring currency reform, Estonia implemented one of the most liberal foreign trade regimes in the world, and moved forward quickly with privatization and restructuring of the economy. By law foreign companies enjoy the same rights as domestic ones, including unrestricted repatriation of profits and the right to own land. Domestic companies can be fully owned by foreign companies or individuals. Estonia was rewarded with high levels of foreign direct investment and high rates of economic growth. Estonia also moved to make free trade and protection of investment treaties with the majority of European countries and the United States. In November 1999 Estonia became a member of the WTO. The more recent invitations to join both the EU and NATO have also enhanced Estonia’s attractiveness as a destination for foreign investment. However, there are some open questions about what will happen to trade promotion agreements with non-EU member states upon EU accession.
Estonia and the EU As Estonia comes closer to EU membership, it is to be expected that the harmonization of laws will play an important role in shaping
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both the legislation and the legal system itself. However there are more open questions about where things will lead than one might suspect at first glance. There is currently much debate within Estonia about what type of general economic policy, as a member state, it should pursue. This decision will undoubtedly have an impact on the development of the legal system, albeit in more subtle ways than the integration of the mandatory aspects of community law. This is because in spite of the convergence of laws and policies within the community, there is still a choice to be made whether to pursue a liberal or social market economy. Estonia has so far clearly taken the liberal approach. There has been some concern on the side of the community about Estonia’s highly favourable tax regime, in particular the zero taxation of re-invested corporate profits and flat rate income tax. Not surprisingly, more free market oriented member states such as the UK have come out in support of the Estonian position concerning the freedom of members to establish a favourable income tax regime. Member states pursuing social market policies are more concerned about the potential for ‘harmful’ tax competition. Inside Estonia, free market thinkers have gained favour with the argument that only liberal policies and strong foreign investment can help Estonia reach the growth levels needed to catch up with the rest of Europe. However, Estonia is certainly not without advocates for stronger social welfare legislation and EU membership may well favour the legislative choices preferred by this camp.
2.2
Forms of Business Organization Hedman Osborne Clarke When local or foreign investors choose to set up a new enterprise in Estonia, the law provides a number of forms that the enterprise may take. These forms include sole proprietorship (FIE), general partnership (TÜ), limited partnership (UÜ), private limited companies (OÜ), public limited companies (AS), and branches (Filiaal). Which type of form to use depends on the situation and goals of the enterprise in question. In general, the private limited company (comparable to the LLC in many other jurisdictions) is the most popular among foreign businesses of all sizes.
Sole proprietorship Any individual person may be a sole proprietor. A sole proprietor may be entered into the Commercial Register at their request. The petition should contain the information specified below, a specimen signature and the telecommunications numbers (telephone, fax etc) of the person. The following must be entered in the commercial register with regard to a sole proprietor: • the business name and area of activity of the enterprise, its base and address and the beginning and end of its financial year; • the name, personal identification code and residence of the sole proprietor; • other information prescribed by law. A sole proprietor will be entered into the commercial register if he or she is registered with the Tax Board as a taxpayer under the Value Added Tax Act.
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The business name of a sole proprietorship shall contain the given name and surname of the sole proprietor, and shall not contain an appendage or abbreviation referring to a company. The business name of a sole proprietor shall be clearly distinguishable from other business names entered in the commercial register. In his or her actions a sole proprietor is liable for the obligations with all of his or her assets.
General and limited partnerships The Estonian Commercial Code has flexible provisions for the formation of partnerships. Estonian partnership law is drafted in accordance with international standards. A general partnership allows business people to form an enterprise in which the profits and losses are shared equally or according to a specified formula. The general partners have no limitations on their liabilities for losses of the partnership. Both natural and juridical persons have the capacity to be partners in a partnership. Concerning limited partners, their liabilities are limited to the amount invested in the partnership as long as the limited partner has made a full contribution to the partnership as required by the partnership agreement. In fact, limited partners are particularly well insulated from liability under Estonian law, in that limited partners may exercise management control if the partnership agreement so provides, while at the same time maintaining limited liability. In other jurisdictions, such an exercise of management control could threaten the limited liability of that partner.
Limited companies generally Concerning the forms of enterprise known as corporations in North America, Estonian law recognizes two completely separate forms of corporations similar to the German corporate forms of AG and GmbH. These forms are significantly different from each other and Estonia has two different sets of corporate law, one set of rules for private limited companies (osaühing) and another for public limited companies (aktsiaselts). One main distinction between private and public companies in Estonia is that only public companies may be listed on a stock exchange. Generally, public companies are the larger organizations whereas private companies are smaller, but there is no maximum
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limit on the size of a private limited company. In addition, a private limited company is thought to be preferable when there is only one owner (eg a parent company), because this makes it easier for the parent company to manage its subsidiary. The minimum capital requirements for a company to be registered as a public limited company are higher than for a private company.
Public limited companies Estonian public limited companies must have at least EEK400,000 of stock capital (April 2003, approximately EEK15.65=N1). There are also various formalities about the division of and registration of stock. A public company may only have registered stocks and the stock must be entered in the Estonian Central Register of Securities. The more unique aspects of public limited companies in Estonia stem from their management structure. Estonian law on public limited companies has various standard requirements regarding the general meeting of stockholders and various auditing requirements. Public companies are required to have both a management board and a supervisory board. These two boards share duties that in Anglo-American systems of corporate governance would be borne by the board of directors. The meeting of stockholders has the usual functions that include voting on issues of stock capitalization and decreasing assets of the company, electing the auditor, handling issues related to merger or sale of the company and electing members of the supervisory board. Stockholders have no right to elect or nominate the members of the management board. As such the stockholders are an extra step removed from the management of the everyday business of the company (when compared with US, Canadian and English corporations.) As mentioned above, the supervisory board is elected by the stockholders. The general idea of the supervisory board is to safeguard the interests of the stockholders. The supervisory board is authorized to plan the activities of the company and give consent on all issues that are beyond everyday transactions. It has the right to examine all the documents of the company, must approve the annual budget of the company and it carries out other important supervisory tasks. In addition, the supervisory board elects the management board. The manager of the everyday affairs of a public company is the management board. This board handles all general business tasks
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that are not specifically left to the supervisory board by law or the articles of association. Each member of the management board can sign separately for the company, such that the management board is not usually as collective as the board of directors would be in a US corporation. Of course, a company can put restrictions on the management board by requiring it to act collectively in the articles of association. Estonian law also requires that at least half of the members of the management board of such a company reside in Estonia.
Private limited companies The most significant difference between a private and public limited company is that the shares of private limited companies cannot be listed on a stock exchange. Further, transfers of such shares have specific limitations, including a grant to other shareholders of a right of first refusal. Also, Estonian law requires that a notarized agreement be signed upon sale of the shares. In addition, the minimum share capital of a private limited company is only EEK40,000 compared to EEK400,000 for a public company. Some aspects of the management structure of a private limited company also differ from those of a public company. The most notable difference in management structure is that in many private limited companies no supervisory board or auditing is required. If a private company has less than three members on its management board, no supervisory board is required if the company has less than EEK400,000 in share capital. When a private limited company operates without a supervisory board, it functions much like a corporation would in the US that is not publicly listed. It should be noted that, similarly to a public limited company, Estonian law requires that at least half of the members of the management board of such a company be residents of Estonia. Sometimes this requirement is fulfilled by making a local hire, but foreigners often meet this requirement by obtaining living and working permission for Estonia (see Chapter 2.5). The members of the management board often perform more ordinary daily tasks than a board of directors of a US corporation would. The law has steadily imposed more and more personal liability on members of management boards, especially in situations where the interests of creditors are harmed. As a result, assuming such responsibility has become less popular, and many legal service providers no longer include board membership among their standard services.
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There are specific provisions of the Estonian Commercial Code that allow companies to switch from being a public limited company to a private limited company or vice versa with relative ease. For example, if a company chooses to incorporate as a private company in order to have the smaller share capital requirement and the relative flexibility of the private form, but later wishes to be listed on the stock exchange, the private limited company can be transformed into a public company. Fortunately, Estonian law provides a clear methodology for achieving this transformation as well as numerous other transformations, including the transformation from a partnership to a public or private limited company.
Branches Foreign business organizations also have the option to establish a branch (filiaal) in Estonia. A branch is an unusual form of business organization in that it is not recognized as a legal entity under Estonian law. The significance of this is that the home company is responsible for all the liabilities it incurs in Estonia. It is specifically designed to be a representative of a foreign enterprise. Notwithstanding the fact that a branch is not a legal entity, it must nonetheless have a director or directors, one of which must be a legal resident of Estonia. A director directs and represents the branch and organizes the accounting of the branch, including payment of taxes. The branch is regarded as a separate taxpayer by the taxation authorities. It must maintain separate accounting records, which enable the expenses and income of the branch to be determined. All companies that sell goods or provide services in Estonia must register as at least a branch office if they do not register in some other organizational form.
2.3
Practical Procedures for Registration and Access to Data from the Commercial Register Hedman Osborne Clarke The Estonian Commercial Register handles the registration of all business organizations. It also receives regular reporting from registered entities, and maintains a public database of information about enterprises operating in Estonia.
Company registrations To found an Estonian company, the founder(s) must prepare a memorandum of association and articles of association. The memorandum of association must bear the properly legalized signatures of all the founders. This legalization of the signatures can be carried out by an Estonian notary, a properly authorized Estonian Consul abroad, or with a valid apostille (see chapter 2.8). After executing the founding documents, but before presenting these to the commercial register, the founders open a special bank account in the name of the company for receiving payments of the initial share capital. Funds deposited into this account will be effectively embargoed until the company registration is complete. It is possible for share capital contribution to be in non-monetary form, but special rules apply to non-monetary contributions and these cannot come in the form of any service to the company. If one of the founders of an Estonian company is a foreign company, then proof of the existence of the foreign company in its home jurisdiction is required. Documentation concerning foreign founders must also be either apostillized or legalized through the Estonian Foreign Ministry, and translated into Estonian.
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A memorandum of association must set forth at minimum: • The business name, location, address and area of activity of the company; • Names and residences of the founders; • Amount of share capital; • Value and number of shares (if there will be multiple classes of shares, then more details about the rights and distribution of the shares); • Sum to be paid for the shares and the time, place and method of payment; • In the event there will be a non-monetary contribution, details about that contribution, its value and the method used to appraise this value; • Names and personal details concerning the management board, supervisory board (if applicable), auditors and procurators (if applicable); • Estimation of the establishment costs and method for paying them. In addition to the memorandum of association and the articles of association, the following documents are required for submission to the commercial register: • Application for registration; • Bank certification of share capital contribution; • If a non-monetary contribution is being made, further details as required by law; • Notarized or legalized signature samples from the members of the management board; • Contact details of the company (telephone, fax, email etc); • A notice from the Estonian Securities Register regarding the registration of the shares (in the case of public limited companies); • Other documents if required by law. No later than six months after executing the memorandum of association, all necessary documents must be submitted to the commercial register together with the application for registration. This application must be signed by all the members of the company’s management board and include the following information: • Name of the company; • Areas of activity, location and address of the company;
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Amount of share capital; Date the articles of association were approved; Names and personal details of the management board; Representation rights of the members of the management board; Start and end dates of the financial year.
Registration of a branch To register a branch of a foreign company, the director of the branch must submit a petition to the commercial register. The following must be appended to the petition: • an official certificate concerning the existence of the company in its home country (extract from a commercial register or a copy of a registration certificate); • the permission to found the branch if this is provided by law; • an authorization document certifying the authority of the director of the branch or a copy of a resolution appointing the director; • a copy of the articles of association or partnership agreement of the company, certified according to the laws of the home country, if submission of the articles of association or partnership agreement to a register is also required in the home country of the company; • telecommunications numbers (telephone, fax); • notarized specimen signature of the director(s). The petition for entry of a branch in the commercial register and other petitions submitted to the commercial register shall be signed by the director of the branch. If a branch has several directors, several directors shall sign the petition if they only have the right to represent the branch jointly. Information to be entered in the commercial register is as follows: • • • •
the business names of the branch and company; the location and address of the branch and company; the area of activity of the branch; the register in which the company is entered and the registration number if entry in a register is prescribed by the law of the home country; • the legal form of the company; • the country under whose law the company operates in the home country;
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• the amount of share capital of the company if this is entered in a register of the home country of the company; • the date of adoption of the articles of association of the company and of amendments to the articles of association if these are entered in a register of the home country of the company; • the names, personal identification codes and residences of the directors of the branch; • the directors who may represent the branch differently from the provisions of subsection 385 (3) of this code; • the names of the legal representatives of the foreign company; • the beginning and end of the financial year of the company and whether the company must publish an annual report. Detailed inquiries can be made for a fee after concluding a contract with The Ministry of Justice of Estonia Centre of Registers.
Access to data from commercial register Information on commercial entities registered in Estonia is maintained in a central database, which can be accessed by the public. This database contains not only the electronic files of the Commercial Register, but also the register of non-profit associations and foundations and the registry of commercial pledges. Two forms of inquiry can be made: a simple inquiry and a detailed inquiry. The simple inquiry can be made by anyone, free of charge. Detailed inquiries can be made for a fee after making a contract with the Centre of Registers. It is possible to make a contract by post for the use of the inquiry system based on the server of the Central Commercial Register. Upon filling in a form at the website of the Centre of Registers (www.eer.ee) one can receive a draft contract. The information on this website is presented in Estonian, English and German. Under the latest rules it should also be possible to submit the contract in digital form with a valid digital signature. The response to a simple inquiry will include: • • • • • • •
Name of the business or other organization; Registry code; General status; Locality of registration; Share capital; Address; Date of registration.
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In addition to the foregoing, the response to a detailed inquiry will include: • • • • • • • • • • • •
Information on commercial pledges, if any; Information on registered shares, if any; Statement of areas of activity; Limited information about the articles of association; Information about bankruptcy procedures, if applicable; Identities of persons serving on the management board and others having registered representation rights; The founders of the company, and supervisory board members if any; The financial year of the company; Annual reports; Principal activity of the company; Contact information; Shareholders (not necessarily a complete listing in the case of public limited companies).
The cost of a detailed inquiry is currently EEK25 (approximately N1.60).
2.4
Property Law Hedman Osborne Clarke Basics of Estonian property law The Estonian system of property law is similar to the German system. As in most countries the legal regime of property is divided into two main groups: movable property (akin to personal property or chattels in common law systems) and immovable property (akin to real property or real estate in common law systems). Immovable property is subject to registration in the land register (or immovable property register), reflecting the data about the immovable, its owners, mortgages, etc. Trade of immovables is register-centred, which means that ownership passes from one person to another not upon payment of the sales price and signing the sales contract etc, but from the moment the new owner is registered in the land register. There is a basic right to own property and land in Estonia. Land can only be expropriated according to certain detailed regulations found in the Expropriation of Immovables Act. In some ways this law is clearer than, for instance, the US constitution on this matter. Estonian law clearly defines which public purposes are adequate for expropriation and creates a calculation mechanism for compensation. In addition, there are very few specific restrictions on the ownership of property. Estonian property law is quite remarkable in this regard considering how recently Estonia was part of a socialist regime, and the lack of such strong pro-ownership laws in other CEE countries.
Restrictions on the sale of property Despite the relatively liberal approach in Estonian property law towards non-Estonians, there are some restrictions on the ownership of real property. The debate in this area has intensified
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recently as EU membership becomes a more imminent prospect. A new piece of legislation, the Law on Restricting the Ownership of Real Property, entered into force on 1 April 2003. There are other restrictions contained in special laws dealing with the denationalization of property. In practice, even taking into account the most recent changes, the restrictions do not greatly restrict foreigners’ rights. The vast majority of foreigners interested in real property in Estonia wish to buy either apartments or private homes and there are no special requirements for buying and selling these types of properties. The situation is similar for business concerns wishing to buy or lease commercial premises. The most recently imposed restrictions relate to purchases of agricultural and forest lands. These were imposed because of concerns about the possibility of foreigners buying up large tracts of rural land in an uncontrolled manner. There are also restrictions applying to the border regions of the country for security reasons. Real estate consisting of agricultural land can be acquired without restriction by: • Estonian citizens; • EU citizens who have lived in Estonia for at least the last three years acting as private entrepreneurs in the agricultural sector; • Legal entities registered in the Estonian Commercial Register, provided they have listed agricultural production among their statutory fields of activity and have been active in the agricultural sector for at least the last three years. The same conditions apply for legal entities registered in EU countries if they have entered a branch in the Estonian Commercial Register. Real estate consisting of forest land can be acquired without restriction by: • Estonian citizens; • EU citizens who have lived in Estonia for at least the last three years acting as private entrepreneurs in the forestry or agricultural sector; • Legal entities registered in the commercial register, provided they have listed forestry or agricultural production among their statutory fields of activity and have been active in at least one of these sectors for at least the last three years. The same conditions apply for legal entities registered in EU countries if they have entered a branch in the commercial register.
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EU citizens or companies not meeting the above criteria can still generally acquire tracts of agricultural or forest land up to 10 hectares without any particular restrictions. For them to buy any larger tract requires the recommendation of the local municipal council and the permission of the local county governor. For persons who are not Estonian or EU citizens, or companies not registered in Estonia, the recommendation of the local municipal council and the permission of the local county governor are required to acquire agricultural or forest land in any amount. A county governor has 60 days from receiving an application (with the recommendation of the local municipal council appended) to render a decision concerning a proposed purchase. In the event of rejection, it is still possible to appeal to the Minister of the Interior. In practical terms, since Estonia has a strongly pro-business political climate, land needed for any sort of business enterprise, even if it is agricultural, is likely to obtain the approval of the county governor. At the Ministry of Internal Affairs level, the test is that the transaction can only be disapproved if it is contrary to the public interest, the security of Estonia or some act. As a result, a buyer with lawful business interests (excluding perhaps pure ‘speculation’) is likely to succeed. Stricter restrictions still apply in certain areas, where sale of the land may only occur with the consent of the government. These include smaller islands in the Baltic Sea, and certain coastal areas and towns, but do not apply to the larger islands of Saaremaa, Hiiumaa, Vormsi or Muhu, which are the most popular areas for tourism. As usual however, most projects that would create a significant number of jobs would probably pass the generally worded requirement that allows action to be taken for reasons significant to the state. Despite how complicated the rules may seem, many subsidiaries of foreign enterprises own their own land and Estonia’s land ownership regime is often thought to be the mostly friendly to foreign enterprises in Eastern Europe. The above mentioned restrictions do not apply to the acquisition of property pursuant to the Land Reform Act, transactions between common owners, and acquisition of real property by the spouse, child or parent of the seller. There are also separate rules concerning inheritances.
Land reform Trade of property in Estonia is still affected by the fact that all land was nationalized during the Soviet period. This meant that the only
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landowner was the state and there were no sales of land. With the enforcement of the Property Law Act, pieces of land began to be registered in a new land register, making the registered plots tradable and restoring an open market for land more or less as it existed before the Second World War. However, there were many issues created by the use of land and buildings during the Soviet era that were not subject to easy or quick solutions. Most of the first registered plots of land (often together with buildings) were those that were being restored to previous owners who could prove they held legal title to the property prior to June 1940, or their successors. The property restitution process started soon after the restoration of independence in 1991. While property restitution enjoyed broad support, it created a number of conflicts of interest that required compromise solutions. Further complicating this situation was the fact that many owners or their successors now resided abroad, since there was a large exodus from Estonia during and immediately after the end of the Second World War. In the case of successors particularly, many had never been to Estonia and did not speak Estonian. Most residential properties restored to previous owners were occupied during Soviet times. The blanket eviction right preferred by most newly restored owners was deemed politically unacceptable. In many cases tenants purchased the right to live in their apartment or home for what during the Soviet period was a considerable sum. The compromise struck was to allow previous owners to reclaim their properties, but to give the tenants very strong rights, mainly in the form of controlled rent set at an artificially low rate by the government and very high barriers to eviction. Predictably, this arrangement led to considerable dissatisfaction on both sides. The presence of rent control tenants can greatly reduce the market value of a property, in some cases practically to zero. Rent levels started out so low that there was no incentive on the part of the owner to invest in the property or expend any effort to manage it. In fact quite the opposite, in many cases the owner wilfully neglects the property in the hope that the tenants will abandon it, automatically terminating their lease. As one might expect, the incentive for tenants in this situation to look after or improve the property is correspondingly low. As a result, even today it is not unusual to see very run down buildings located in prime areas, despite a bustling market in real estate finance and renovation. Fortunately there is hope and progress in this situation. The rent control arrangements imposed by the government are not indefinite, although they have been extended more than once and no one
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can say when they will finally end. Also, the government has slowly but surely been raising the rent ceilings, with the intention of eventually reaching market levels. In the meantime, many tenants and their landlords reach some accommodation to relieve the situation. In some cases, a price is agreed and the tenant buys the apartment or property in question from the owner. In others, the parties agree some amount of compensation for the tenant to voluntarily relinquish the premises. In more intractable cases, the tenants may either decide to move out on their own, and of course some finally pass away. In this manner, the potential social time bomb is being slowly defused. Another common troublesome situation that arose in the course of restitution was the status of buildings erected during the Soviet era. Such buildings had generally been regarded as ‘movable’ property, with the underlying land being technically leased from the state. In the course of land reform, the owners of such buildings generally acquired the right to privatize the land ordinarily needed to support and use the building, according to a prescribed method of calculation. Former owners who were not able to reclaim their land or parts of it for this reason were given privatization vouchers as compensation, which could be redeemed for their cash value or used to acquire a different piece of land. There is still a considerable stock of real property in state hands that is scheduled for eventual privatization. Much of it is former private property that was simply never reclaimed. The deadline for filing claims for restitution of nationalized properties has now long passed.
2.5
Employment Law Hedman Osborne Clarke Overview Estonian employment law confers basic rights on employees and prescribes specific rules about the way labour contracts must be formed and how they should be interpreted. Generally speaking, the labour laws of Estonia are modern labour laws in the tradition of Western Europe. The main way that Estonian labour law differs from North American labour law is in a few extra protections that it grants to workers. The most notable is that in order to terminate an employment contract an employer must find a good cause for firing a worker – meaning a specific failure to perform his or her duties properly. This is of course in stark contrast to the law in North American jurisdictions, which generally provides that workers may be terminated in any circumstance, so long as discrimination is not involved and sufficient notice is provided. Employment contracts must always be in a written form (albeit a work relationship that is not covered by contract may be interpreted as an employment contract nonetheless). The employer has to conclude employment contracts with all employees, including managing directors. Another peculiarity of Estonian labour law is the requirement for each worker to have an employment record book. Each employee must have an employment record book, which includes all jobs held by the employee. Employment contracts are generally concluded for an unlimited period. Fixed-term labour contracts may be concluded only on special conditions provided in the law and for a maximum duration of five years. The probation period may not exceed four months. The minimum duration of annual vacation is 28 calendar days. Additionally there are 11 national holidays per year. To terminate an employment contract of unlimited duration, the employee must inform the employer one month in advance. The employer may terminate the labour contract only in cases provided
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in the law and the term of notice usually ranges from two to four months, depending on the duration of the employment contract. Additionally, two to four months’ salary must be paid as compensation to the employee. The employer may terminate an employment contract without the term of notice if the employee has materially violated the employment contract or the employer has lost confidence in the employee. The breach of contract by the employee, however, must be serious. If the violation is of minor importance, the employee may at first be warned or punished otherwise in accordance with the rules on disciplinary punishment and in case of a second violation the employment contract may be terminated. Another restrictive section of the labour law can be found in regard to overtime. Working time together with overtime shall not exceed an average of 48 hours per week during a four-month recording period. Employees shall not be required to work overtime for more than four hours per day. The duration of a shift together with overtime shall not exceed 12 hours. Based on the foregoing, the average overtime may be eight hours per week. Under certain circumstances an employee may be required to work overtime with his or her consent to the extent of 200 additional hours per year. A 50 per cent premium must be paid for overtime work. Another restriction of note is that there is a total ban on pregnant women working between 10pm and 6am, with no exceptions. Women have the right to maternity leave for 140 calendar days starting at least 70 days before childbirth. During this period, the mother receives 100 per cent of her average wage for the previous six months. A woman also has a right to childcare leave until the child is three years old. During childcare leave, the woman’s employment contract is suspended and she is paid a childcare allowance from the state budget according to the State Family Benefits Act.
Foreigners living and working in Estonia Foreigners who wish to take up residence and work in Estonia are required to have both a residence and a work permit. It is possible under some circumstances to have a residence permit without a work permit, but not vice-versa. Naturally the situation for citizens of EU member states, as well as others, will change dramatically upon accession: in fact applicants from EU member states already get preferential treatment. However, the rules in this area have been unstable and confusion occasionally results.
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The Aliens Act defines employment as: • • • •
work as a sole proprietor; work under an employment contract; work under a services contract; work according to any other type of contract.
When an Estonian employer (which may also be a foreign owed domestic company) wishes to employ a foreigner, the first step is to submit an application to the local branch of the Labour Market Board in order to receive its consent for the issuance of a work permit. In addition to a standard application form completed by the employer, the following supporting documentation is required: • diplomas certifying the educational background of the foreign applicant; • documents certifying the previous working experience of the applicant; • a copy of the applicant’s passport; and • a supporting letter prepared by the employer. The supporting letter must prove that the applicant is necessary to the company and possesses special skill or knowledge not available from the local labour market. The Labour Market Board is required to grant or deny consent within 15 working days of receiving the application. If consent is granted, the applicant may proceed to submit an application to the Migration Board. It is important to note that the consent of the Labour Market Board is valid only for two months. Therefore, the full application to the Migration Board must be submitted in a timely manner. The following documents must be submitted to the Migration Board when applying for a residence and work permit: • application from the employer with the consent of the Labour Market Board; • identity document of the applicant (passport); • one front view colour photograph of the applicant (40x59 mm); • an additional application form for a residence permit; • a standard application form for an identity card to hold the residence and work permits; • document certifying the payment of the state fee. The state fee for applying for a residence and work permit is currently EEK1,500 (750 + 750).
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The number of aliens who can immigrate to Estonia is tightly restricted. The annual immigration quota for aliens is not more than 0.05 per cent of the annual permanent population of Estonia. Certain groups are exempt from the quota: citizens of any EU member state, Norway, Switzerland, Iceland, the United States or Japan. Persons who can prove ethnic Estonian origin are also exempt. The quota is allocated on a first come first serve basis at the beginning of each year, and is typically filled before the end of January. However, exceptions to the quota are possible. If a foreigner is excluded due to the quota but their presence in Estonia is justified in the national interest for developing the economy, education, science or culture, the Minister of Internal Affairs may grant an exception. Seeking an exception requires a justified proposal from the Minister of the Economy, Minister of Finance, Minister of Culture or Minister of Education. If an exception is granted, a corresponding letter must be submitted together with all other required documents to apply for a residence and work permit to the Migration Board. A residence and work permit may be granted for up to five years. Typically, upon first application the permits are granted for one or two years. The duration of the permit is based on the discretion of the Migration Board. A residence permit may also be issued without a work permit on condition that a person can prove a legal income to ensure his or her subsistence. The person applying must be otherwise entitled to a residence permit under the terms of the Aliens Act (ie quota provisions), and the issue of the permit must be justified and not damage the interests of the Estonian state. The legal income must correspond to the minimum amounts established by the government. In this case the residence permit is granted for a period of up to two years. Such permits are typically given to spouses and dependants of people legally living and working in Estonia. Since 2002, digital identity cards have been issued by the Migration Board to all citizens and residents of Estonia. The ID card is a mandatory document for domestic use. The ID card contains the holder’s surname, given names, sex, citizenship, date of birth, place of birth, personal code, photo, signature, date of issue and date of expiry, and document number. For resident aliens, the ID card also contains work and residence permit data. In addition to many security features, the card has a machine-readable code and chip, an electronic device containing the visual data on the card, and two security certificates (long number series) to verify the individual and supply digital signatures.
2.6
Intellectual Property Hedman Osborne Clarke Overview The State Patent Office was re-established on 3 December 1991 (it had ceased operations in 1940), and re-commenced operations on 10 March 1992. Thereafter, the following legislation was passed, in chronological order: • Trademarks Act – passed on 27 August 1992, entered into force 1 October 1992; • Copyright Act – passed on 11 November 1992, entered into force 12 December 1992; • Patent Act – passed on 16 March 1994, entered into force 23 May 1994; • Utility Models Act – passed on 16 March 1994, entered into force 23 May 1994; • Industrial Design Protection Act – passed on 18 November 1997, entered into force 11 January 1998; • The Protection Of Layout Designs Of Integrated Circuits Act – passed on 25 November 1998, entered into force 16 March 1999; • Geographical Indication Protection Act – passed on 15 December 1999, entered into force 10 January 2000. Estonia has also ratified several international treaties, including the following, listed below in chronological order: • Convention Establishing the World Intellectual Property Organization (WIPO) – Estonia has been a member state since 5 February 1994; • Paris Convention for the Protection of Industrial Property and the Patent Cooperation Treaty of 1970 – since 24 August 1994; • Berne Convention for the Protection of Literary and Artistic Works – since October 1994;
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• Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks – since 27 May 1996; • Budapest Treaty on the International Recognition of the Deposit of Micro-organisms for the Purposes of Patent Procedure – since 14 September 1996; • Locarno Agreement Establishing an International Classification for Industrial Designs – since October 1996; • Strasbourg Agreement on International Patent Classification – since February 1997; • Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks – since 18 November 1998; • Rome Convention (Performers, Producers of Phonograms and Broadcasting Organizations) – since April 2000. Any discussion of Estonian intellectual property legislation must take into account the fact that the country is among the first wave of new members to the European Union due to join in 2004. On 1 February 1998 a Europe Agreement (Association Agreement) between Estonia and the European Union came into force, which recognized Estonia’s objective of accession to the EU and provided a framework for Estonia’s integration into the European Union. Part of that process is the approximation of Estonian laws with those of the European Union, including in the field of intellectual property. Accordingly, much of Estonia’s legislation has been amended, or drafted, to accommodate EU directives. Although the legal regulation of most aspects of intellectual property has been in place since 1992, enforcement has been unreliable. In recent years, however, the competence of the police and the courts has seen substantial improvement, helped to a large extent by the new Penal Code (entered into force 1 September 2002), chapter 14 of which lays down punishments for infringement of intellectual property rights. For the most part, punishments range from a fine up to a three year prison term, but intentional commercial infringement of a patent, utility model, trademark or layout-design of an integrated circuit is punishable with up to five years in prison. Articles 221–223 of the same chapter specifically deal with piracy.
Trademarks There is a working regulation of trademarks based on the Trademarks Act passed in 1992 and subsequently amended. However, a
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qualitatively new level of regulation will be reached on 1 January 2004 as the new Trademarks Act, which has already been passed, enters into force. A trademark is defined as being a mark used to distinguish a person’s goods or services from similar goods or services of other persons. The classification system of goods and services is adopted from the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks. Application for protection of a trademark must be made to the Estonian patent office. The application must be in Estonian and contain the mandatory information required by the Act. Any symbol or combination of symbols capable of being represented graphically may be registered as a trademark, provided that it distinguishes the applicant’s goods or services from those of others. Sound and aromatic marks cannot be protected. Registration may be refused on absolute grounds, because they do not qualify as distinguishing trademarks or breach a requirement therefore; or they may be refused on relative grounds because they conflict with an earlier trademark, existing intellectual property rights, or the personal rights of others. Earlier trademarks include those registered previously in Estonia and those for which an application has been filed in Estonia, as well as those trademarks that have been registered in another country pursuant to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (with an earlier filing date or date of priority). The priority of a trademark is determined either (i) based on the filing date of the registration application with the Estonian Patent Office, or (ii) based on the filing date of the first application for registration of the trade mark in a state party to the Paris Convention for the Protection of Industrial Property (Convention priority) if the registration application is filed with the Estonian Patent Office within six months after the filing date of the first application. Foreign applicants may only apply for a trademark in Estonia through a patent agent. Legal protection starts after registration, but retrospectively as of the filing date of the registration application of the trademark. Trademark registrations are valid for 10 years and are subject to further renewal for 10 years. The holder of a trademark is required to use the trademark (use for the purpose of identifying its goods, or granting a licence to use the trademark will suffice). Lack of use for a period of five years is
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grounds for other parties to file a revocation application invalidating the holder’s trademark registration. Correspondingly, the trademark owner has the exclusive right to use the trademark. This means the right to prohibit use of a trademark that is identical or confusingly similar to the registered trademark by other persons in order to designate the same or similar goods and services. The new Act will make regulation more specific, especially in relation to contestation, dispute resolution and collective trademarks. Also, some new concepts previously absent from Estonian trademark law will be introduced, such as the commercial lease of a trademark and the regulation of warranty marks.
Copyright The Copyright Act entered into force on 12 December 1992. Since then, the Act has been amended on numerous occasions by parliament, primarily due to the requirements imposed by the European Union in the course of the accession process. The stated purpose of this Act is to ensure the consistent development of culture and the protection of cultural achievements, the development of copyright-based industries and international trade, and to create favourable conditions for authors, performers, producers of phonograms, broadcasting organizations, producers of first fixations of films, makers of databases and other persons specified in the Act, for the creation and use of works and other cultural achievements. This Act is the basis for all copyright legislation in Estonia since it clearly states that the copyright legislation of the Republic of Estonia consists of this act, and other acts drafted on the basis thereof. The Act is expressly subordinated to any conflicting international agreements to which Estonia is a party. The Act also includes some specific territorial and citizenshiprelated provisions that enter into force upon accession to the European Union concerning the protection of databases, computer programs, rental rights and lending rights, communication to the public by satellite and cable retransmission. In all other aspects these areas are already regulated in line with EU standards.
Patents The stated purpose of the Act is to regulate relations which arise in connection with the legal protection of patentable inventions in the
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Republic of Estonia. The legal and philosophical basis for granting patent protection is a social agreement: in exchange for the inventor’s input into the general development of science and engineering, society will provide the right to use the invention exclusively for his/her own purposes for a specified term and receive profits from such use. Accordingly, patents are subject to a time limit. The term of a patent in Estonia, as in most European states, is 20 years. An invention is patentable if it is new, involves an inventive step and is susceptible to industrial application. An invention itself is not directly defined in the legislation of Estonia. In this context an invention means a solution to technical problems. A patent application must be made to the Estonian Patent Office and contain the mandatory information required by the Act. Patent applications are filed in Estonian, except abstracts of the subject matter of the invention, which are filed in Estonian and English. The Act provides for submission of an international application which is a patent application filed on the basis of the Patent Cooperation Treaty entered into in June 1970 in Washington. An international application shall be prepared pursuant to the Patent Co-operation Treaty and the implementing regulations and administrative instructions thereof, and filed with the Patent Office, which is the receiving office, in English or German; a state fee and fees prescribed by the Patent Co-operation Treaty shall be paid. The Estonian Patent Office is the receiving office for international applications of Estonian citizens or of persons whose residence or seat is in Estonia. A patent shall be valid for twenty years as of the filing date of the patent application, as mentioned above. A state fee shall be paid each year for the continued validity of a patent application and patent. The filing date of a patent application is deemed to be the beginning of the year of validity. The chief and authorized processor of the patent register is the Patent Office. The Patents Act is expressly subordinated to any conflicting international agreements to which Estonia is a party.
Utility models Utility models are granted legal protection in the same way that new inventions are protected by patent. In comparison, however, utility models do not involve as great an inventive element. The inventive step of a utility model may be conventionally identified as a new engineering solution providing a useful technical result
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The author of the invention and a legal successor of the author have the right to apply for the registration of a utility model and to become the owner of the utility model. If an invention is created in the performance of contractual obligations, the right to apply for the registration of a utility model and to become the owner of the utility model is vested pursuant to the contract. A registration application may contain only one invention. Therefore it cannot be a combination of inventions related to one inventive idea. In order to register a utility model, an application must be filed with the Patent Office. If the residence or seat of an applicant is outside Estonia, the registration application can be filed either by the applicant or through an authorized patent agent. The registration application may be filed on the basis of a patent application concerning the same invention that is being processed by the Patent Office but not later than 10 years after the filing of the patent application. In compiling the registration application, the applicant must ensure the compliance of the invention with the novelty and inventive step criteria, because the Patent Office does not check for these elements. It should be taken into consideration that the application for a utility model cannot be amended if litigation is started against the utility model in court. Therefore although compared to applications for a patent the registration of a utility model is cheaper, faster and easier, the risk of annulment of the protection in case of a challenge may be greater. The Act also provides for international registration applications. International registration applications are filed on the basis of the Patent Co-operation Treaty entered into on 19 June 1970 in Washington. The Patent Office is the designated office for international applications in which Estonia is indicated as the designated or elected state. The register is maintained by the Patent Office. A utility model registration is valid for four years as of the filing date of the registration application. This period may be extended initially for four years and thereafter for another two years.
Industrial designs The Industrial Design Protection Act defines industrial designs as the two or three-dimensional design of a product. By design, the Act refers to the set of features that separately or in combination form the shape, configuration, ornamentation, colours, texture and material of a product.
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Industrial designs may have variations, which are alterations of the industrial design that produce a similar overall impression on persons knowledgeable in the field. Each variation is subject to separate registration under the Act. In contrast, a set of industrial designs is a logical group of industrial designs belonging to the same class (under the Locarno Agreement Establishing an International Classification for Industrial Designs), and that are designed in the same manner. The Act treats a set of industrial designs as though it were one industrial design. Legal protection is available for industrial designs if they are (i) new, (ii) have an individual character and (iii) may be used for manufacturing industrial or handicraft products. Novelty and individual character must be on a worldwide basis. Legal protection is afforded after registration in the State Register of Industrial Designs (which is maintained by the State Patent Office). The Patent Office will grant registration of the industrial design if the object of the industrial design complies with the formal requirements of the Act. However, the Patent Office does not examine for novelty, individual character or whether the design may be used for manufacturing. The applicant is responsible for these aspects of the registration. Within 10 business days of the industrial design being registered, the Patent Office will issue a certificate confirming the owner’s exclusive rights in the industrial design. The registration is also published in the Official Gazette of the Patent Office. Interested persons may file a challenge against registration of the design within three months of the date of publication of notice of the registration in the Official Gazette. If no such challenge is filed, or all challenges are rejected, then the Patent Office will issue a Registration Certificate. The Act distinguishes between the author of the industrial design and its owner. The author has the inalienable moral right to require disclosure of his/her name as author, or the right to prohibit such disclosure. In comparison, the owner of an industrial design has the exclusive right to manufacture products according to the industrial design, and to distribute, sell, offer for sale, import, export or stock for the aforementioned purposes products which are manufactured according to the registered industrial design. As a corollary to this right, the owner has the right to prohibit others from manufacturing on the basis of an identical or confusingly similar design, as well as trade in a product manufactured according to the registered industrial design.
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Registration of an industrial design is valid for five years from the date of filing of the application therefore. The registration may be renewed five-years at a time for up to 25 years from the day of filing the initial application.
Protection of layout-designs of integrated circuits The legal protection of layout-designs of integrated circuits provided for in this Act is independent of protection provided for in the Copyright Act. The term ‘integrated circuit’ means a product, in its final form or intermediate form, in which the elements, at least one of which is an active element, and some or all of the interconnections are integrally formed in or on a piece of material and which is intended to perform an electronic function. The ‘layout-design of an integrated circuit’ means the threedimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all of the interconnections of an integrated circuit, or such reproduction of three-dimensional disposition prepared for an integrated circuit intended for manufacture. Layout-designs of integrated circuits that are original and have not been commercially exploited in any part of the world for more than two years prior to the submission of the layout-design of the integrated circuit for registration in the state register of layoutdesigns of integrated circuits (hereinafter register) are granted legal protection. Legal protection is granted for up to 10 years. The applicant must be a citizen or resident of Estonia or of a country belonging to the WTO, or have used his/her layout-design of an integrated circuit in the named countries for business purposes. Legal protection does not extend to the technology of manufacturing layout-designs of integrated circuits or to information recorded therein. The owner of a layout-design of an integrated circuit has the exclusive right to reproduce and commercially exploit the layout-design of the integrated circuit. The register is maintained by the Patent Office. Therefore the application for registration of layout-designs of integrated circuits must be filed with the Patent Office. The Patent Office does not verify the novelty of the registration application. All disputes related to such applications must be resolved in court (if not otherwise settled). The owner of the layout-design of an integrated circuit may, by way of a licence, grant the use of the rights of the owner of the layout-design of an integrated circuit to one or several persons (holder of rights or licensee) in part or in full.
2.7
Competition Law Hedman Osborne Clarke Overview The Competition Act is the primary source of Estonian competition law. This new Act came into effect in October 2001 and brings Estonian competition law into compliance with EU requirements. The Act covers: • • • • • •
Prohibition on agreements and concerted practices; Dominant position; Merger control; State aid; Unfair competition; State supervision and liability.
From a geographical point of view, the Act applies to arrangements restricting competition in Estonia. Thus arrangements made outside of Estonia may come under the scrutiny of the Act if they affect competition in the Estonian market.
Agreements and concerted practices Agreements between undertakings, decisions by associations of undertakings, concerted practices (‘arrangements’) which restrict competition, including fixing of prices, limiting production, share markets, exchange information in a manner which restricts competition, agree on the application of dissimilar conditions to equivalent agreements, or make entry into an agreement subject to acceptance of supplementary obligations (‘tying’) are prohibited. It should be noted that these restrictions do not apply to arrangements of minor importance. Arrangements are to be considered of minor importance if the combined market share of the total
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turnover of the undertakings involved does not exceed 10 per cent in the case of a vertical arrangement and 5 per cent in the case of a horizontal arrangement. Agreements and arrangements, which would otherwise infringe on the above rules, may be granted an exemption: if an agreement falls within a block exemption, or if none is applicable, by notification of the agreement to the Estonian Competition Board (ECA) and the ECA granting an individual exemption. Since June 2002 Estonia has recognized block exemptions issued by the Estonian government, including special provisions concerning horizontal arrangements (ie agreements between competitors) and vertical arrangements (ie firms at different levels of the supply chain). The block exemptions currently in force cover: a) horizontal agreements; b) vertical agreements; c) motor vehicles distribution and service; d) technology transfer; and e) insurance agreements. Under the provisions of the Act, the proceedings in respect of an application for an individual exemption must be completed within two months.
Dominant positions The Act prohibits the abuse of a dominant position by an undertaking. There are no exemptions for this prohibition. As a rough guide, dominance should be considered whenever a business has at least 40 per cent of the relevant market or if its position enables it to operate in a particular market to an appreciable extent independently of competitors. Examples of behaviour which may run foul of this prohibition include: a) charging unfair prices; b) limiting production; c) offering dissimilar conditions to equivalent agreements with other trading partners; d) unjustified refusal to sell or buy goods.
Merger controls Merger control (as it is understood in the EU) entered into force in Estonia in October 2001. Pursuant to the Act a concentration is subject to control by the ECA if the aggregate worldwide turnover of the parties to the concentration exceeds EEK500 million (about N32 million) and the aggregate worldwide turnover of each of at least two of the parties to the concentration exceeds EEK100 million (about N6.4 million) and if the business activities of at least
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one of the merging undertakings or of the whole or part of the undertaking of which control is acquired are carried out in Estonia. A concentration is deemed to occur where: a) two or more previously independent undertakings merge; b) one or more persons or undertakings acquires control of the whole or part of another undertaking; c) one or more persons creates joint venture performing on a lasting and independent basis. However, transactions are not deemed to be concentrations, if the transactions are carried out as an internal restructuring of a group of undertakings. The Act sets forth a definition of control: opportunity for one or more persons by purchasing shares, on the basis of a contract, transaction or articles of association or by any other means, to exercise direct or indirect influence on another undertaking which may consist of a right to exercise significant influence on the composition or decision making of the management bodies or use or dispose of all or a significant proportion of the assets of the other undertaking. The filing of a merger notification with the ECA is mandatory if the above thresholds are crossed. If the concentration crosses a threshold, a merger notification to the ECA must be made not more than one week after the conclusion of the agreement or transaction in question. It is important to consider that documents submitted to the ECA should as a general rule be made or translated into the Estonian language. However, in practice the authority also accepts documents in English, if one of the parties involved is foreign. Also foreign-to-foreign mergers are subject to Estonian merger control, if the turnover thresholds are crossed and if the business activities of at least of one of the merging undertakings or of the whole or part of the undertaking of which control is acquired are carried out in Estonia (for example if one of the parties has an Estonian subsidiary). A concentration, which is subject to review by the ECA, must not be put into effect before it has been approved by the ECA. Upon receiving notification, the ECA has one month to approve the concentration, decide that the concentration is not subject to merger control rules, or opt to initiate a further investigation. The vast majority of actual cases have been settled within one month. In total there were 26 merger control cases in Estonia in 2002.
State aid The new Act strengthened state aid control and now contains the main principles of EU state aid control.
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Unfair competition Unfair competition is defined as dishonest business practices and acts which are contrary to good morals and practices, including publication of misleading information and misuse of confidential information. Although the Act contains stipulations about unfair competition, disputes related to unfair competition fall within the jurisdiction of the courts. The ECA does not take part in such cases.
Enforcement and sanctions The competition enforcement agency in Estonia is the ECA, headed by a Director appointed by the Minister of Economics and Communication. The Authority is an administrative subdivision of the Ministry of Economics and Communication, but has substantial independence. The Act gives the ECA significant powers. It has the right to perform all investigations essential to the fulfilment of its duties, power to demand information and documents, and to issue precepts and impose penalties etc. In respect of merger control, the ECA may block a transaction or attach conditions to its approval. If a party fails to comply with the requirements of the Act (for example by not filing a merger control application, entering into agreements which harm free competition, etc) the fines for undertakings range from EEK50,000 up to EEK25,000,000. In addition to these fines, physical persons (including the management of the undertakings concerned) may face criminal sanctions, which range from fines to imprisonment for up to three years.
2.8
Dispute Resolution, Attestation of Foreign Documents and Important Treaties Hedman Osborne Clarke Courts The Estonian Constitution explicitly states that judicial power is to be exercised exclusively by the courts. Judges are appointed for life to guarantee their independence from political influence. The court system of Estonia consists of three levels. The courts of the first instance are the city, county and administrative courts. The first appellate courts are the district (or circuit) courts, and the highest court is the Supreme Court. City and county courts are permitted to examine civil, criminal and administrative cases. Administrative judges of the regular city and county courts ordinarily handle administrative cases, but the law also provides the possibility of establishing separate administrative courts in certain circumstances. Currently there is an administrative court in Tallinn. The President, at the proposal of the Supreme Court, appoints the judges of these courts. The judges of the courts of first instance handle either civil and criminal law cases or administrative cases. The administrative cases include smaller law violations not serious enough to belong to the field of criminal law and also disputes arising from public law. Issues of public law include tax disputes and complaints regarding administrative acts. Decisions made by the courts of the first instance are reached by a single judge or by one judge and two assessors. Estonian citizens who are between 25 and 65 years of age and who live permanently in Estonia, may act as assessors. Persons who have been punished
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for an intentional crime, are of poor health, have lived in their current municipality for less than a year, or who work in the court system, prosecutor’s office, police or defence forces may not be assessors. Assessors are elected to five-year terms by secret ballot of the relevant municipal government. Assessors receive immunity from legal prosecution that can be lifted only by the municipal government which elected them to the position. Estonian civil procedure requires that parties pay a so-called ‘state fee’ in order to file their claim before the court. In most cases the amount in question is equal to approximately 3 per cent of the value of the relevant claim. The exact calculation methods for arriving at the correct state fee are prescribed in the Law on State Fees. This type of fee provides a strong deterrent to persons who would file claims for large amounts without strong grounds for doing so. However, it can also have the effect of preventing parties with valid claims from filing them, if they cannot afford to take the risk of paying such state fees on top of other litigation fees. For cases not involving a direct pecuniary sum (for example recognition of ownership, adoption of a child, etc), there is a comparatively low fixed state fee. Estonian civil procedure is based on the principle of equality of the parties. The court is not obliged to search for evidence or to bring witnesses before the court to testify. Decisions are rendered according to the facts, documents, and statements presented by the parties themselves. District (or circuit) courts act as courts of appeal. Their principal function is to review the decisions of the courts of first instance. Unlike appeal courts in some other jurisdictions, these courts are free to examine decisions of the lower courts made concerning the facts of the case, as well as procedural matters and questions of interpretation of the law. In contrast, at the Supreme Court level only instances of alleged violation of procedure or misapplication of the law are considered. Similarly to the US Supreme Court, the Estonian Supreme Court is the Court of Constitutional review. Unlike at other levels, only a duly admitted member of the Estonian Bar Association may argue before the Estonian Supreme Court. The Supreme Court is not required to take every case of significance; the court may choose which cases it wishes to review. More specifically an Appeals Selection Committee consisting of the judges of the Supreme Court decides whether or not the court shall consider a case. This board has a rotating membership of three. The court shall consider a case if any of the three reviewing justices consider it sufficiently important.
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Arbitration It is most common for commercial disputes in Estonia to be handled through the courts. However, there is a sound legal basis for the use of commercial arbitration, and the Estonian Chamber of Commerce and Industry has a recognized and respected Arbitration Court. The use of arbitration is still comparatively novel in Estonia; however it is gaining popularity and trust among the local business community. Also, because foreign arbitral awards can be recognized in Estonia, arbitration is often a preferred method of dispute resolution by foreign entities. Parties may freely agree to submit a dispute to arbitration; however more commonly parties insert an arbitration clause into their agreements specifying that any disputes arising between them will be submitted to arbitration. Estonian legislation regulating arbitration applies to both domestic and international arbitration. Estonia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention was ratified by Parliament on 16 June 1993. As a result awards secured in Estonia are fully enforceable in every other contracting state and vice versa. According to current law, the Arbitration Court of the Estonian Chamber of Commerce and Industry (ECCI) is the only permanent arbitration institution on Estonia. Under Estonian Law arbitration is defined as a process for resolving disputes between economic entities. The regulations of the Arbitration Court at the ECCI are drafted in accordance with the UNCITRAL Model Regulations on Arbitration. The Arbitration Court applies the laws the parties have specified. If the parties have not specified a governing jurisdiction then Estonian law is applied. The Arbitration Court may also resolve a dispute according to general principles of justice if the parties so stipulate. Also, the Arbitration Court may conduct its proceedings in a foreign language provided there is sufficient knowledge of that language among the pool of potential arbitrators. In general about 20 claims are filed every year to the Arbitration Court at the ECCI. About 70 per cent of the petitions are international, ie with at least one non-Estonian party. The most common disputes concern sales contracts, leases, employment contracts, building contracts and shipping trade contracts. The information available is limited; however there has been positive feedback from foreign parties who have participated in arbitration proceedings in Estonia. The speed of the process, with most decisions being rendered within three to five months, is particularly appreciated.
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Attestation of foreign documents The Attestation Act came into force on 1 February 2002, with the exception of two provisions addressing documents issues abroad and powers of attorney which have been attested by officials abroad. They were already in force as of 14 December 2001. The issue of the use of powers of attorney which have been signed abroad had previously been very problematic. Such powers of attorney were rejected by the Land and Commercial Registers due to a decision rendered by the Supreme Court in November 2000. In that decision, the court held that a power of attorney that had been signed, certified and legalized in Finland was insufficient for use in Estonia. Section 57 of the new Attestation Act addressed that problem. It specifically provides for recognition of certain foreign officials whose attestation of powers of attorney is recognized as being equivalent to attestation by an Estonian notary – provided that the power of attorney is stamped with an apostille or legalized after attestation. A regulation of the Ministry of Justice, passed on the basis of the Attestation Act, states that notaries from the following countries are recognized as equivalent to Estonian notaries, for the purposes of attesting to powers of attorney (ie to attest to the identity and capacity of the donor): Argentina, Austria, Belgium, Bolivia, Brazil, the Dominican Republic, Ecuador, Guatemala, Spain, Holland, the Honduras, Croatia, Italy, Japan, Columbia, Costa Rica, Greece, Lithuania, Luxemburg, Latvia, Malta, Mexico, Monaco, Nicaragua, Panama, Paraguay, Peru, Poland, Portugal, France, Romania, Germany, El Salvador, San Marino, Slovakia, Slovenia, Switzerland, Chile, Turkey, the Ukraine, Hungary, Uruguay, Russia and Venezuela. Also recognized are attestations by notaries public in Louisiana, notaries in Quebec, scrivener notaries in London and notaries in Puerto Rico. Further, duly authorized officials in the following jurisdictions will be recognized as equivalent to Estonian notaries for attesting powers of attorney: USA (with the exception of certain non-continental holdings), Andorra, Australia (excepting certain islands), Bulgaria, China (with some areas excepted), Ireland, Israel, Iceland, Canada, South Korea, South Africa, Norway, Sweden Finland, Great Britain and Northern Ireland (with some exceptions), Denmark, New Zealand, Georgia and the Vatican.
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It is important to note that, after the power of attorney has been notarized, it will still have to be stamped with an apostille or legalized (depending on the country of origin). Generally, this legislation has made it simpler to use foreign-issued powers of attorney in Estonia.
Important treaties Estonia has concluded the following international agreements with the following partners: Free trade agreements are in force with the European Union, European Free Trade Association (EFTA), Latvia, Lithuania, Ukraine, Czech Republic, Slovakia, Slovenia, Bulgaria, Turkey, Poland and Hungary and the Faroe Islands.
Investment promotion and protection agreements Sweden, in force since 20 May 1992 Norway, in force since 15 June 1992 Finland, in force since 3 December 1992 Germany, in force since 3 December 1992 Denmark, in force since 24 February 1993 Poland, in force since 6 August 1993 Switzerland, in force since 18 August 1993 The Netherlands, in force since 1 September 1993 China, in force since 1 June 1994 The United Kingdom, in force since 16 December 1994 Israel, in force since 23 May 1995 Ukraine, in force since 5 July 1995 Czech Republic, in force since 18 July 1995 France, in force since 25 September 1995 Austria, in force since 1 October 1995 Latvia, in force since 23 May 1996 Lithuania, in force since 20 June 1996 Belgium, in force since 11 December 1996 The United Stated of America, in force since 19 February 1997 Greece, in force since 7 August 1998 Spain, in force since 1 July 1998 Turkey, in force since 29 April 1999 Belgo-Luxembourg Economic Union, in force since 23 September 1999 Italy, in force since 9 May 2000
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Double taxation avoidance treaties Finland, in force since 30 December 1993 Sweden, in force since 31 December 1993 Denmark, in force since 30 December 1993 Norway, in force since 30 December 1993 Latvia, in force since 31 December 1993 Lithuania, in force since 31 December 1993 Poland, in force since 9 December 1994 United Kingdom, in force since 19 December 1994 Iceland, in force since 10 November 1995 Czech Republic, in force since 26 May 1995 Canada, in force since 28 December 1995 Ukraine, in force since 30 December 1996 Italy, in force since 22 February 1998 Byelorussia in force since 22 July 1998 Moldova, in force since 24 July 1998 The Netherlands, in force since 8 November 1998 Germany, in force since 29 December 1998 Ireland, in force since 29 December 1998 China, in force since 8 January 1999 USA, in force since 30 December 1999 Kazakhstan, in force since 19 July 2000
Part Three Finance, Accountancy and Taxation
3.1
The Financial Sector Bank of Estonia Macroeconomic introduction Despite weak external demand Estonian GDP increased by 5.8 per cent in 2002. Both domestic demand and higher private sector borrowing activity sustained this growth. Together with individual large investments (in an Estonian context) this delivered more than 4 per cent growth difference with the euro area and turbulent domestic demand-sustained economic growth by quarters. Although the economic growth was accompanied by a current account deficit exceeding 12 per cent of GDP, according to preliminary estimates, Estonia and its economy were increasingly credible due to integration into the European Union and NATO. This was also sustained by the 1.2 per cent government surplus and the inflation rate drop to 3.6 per cent.
Mainstream financial sector In 2002, the Estonian financial sector continued its dynamic development, characterized by constant financial deepening in all major domestic financial markets. Different markets developed in different ways. The volume of financial assets mediated through banks and bank-owned leasing companies grew the most. The real sector debt load as a percentage of GDP added six percentage points, reaching 47.5 per cent by the end of the year.
Banking Seven credit institutions operate in Estonia: Hansapank (Hansabank); Eesti Ühispank (Union Bank of Estonia); Sampo Pank (Sampo Bank); Eesti Krediidipank (Estonian Credit Bank); Tallinna Äripank AS (Tallinn Business Bank Ltd) and Preatoni Pank (Preatoni Bank), as well as Nordea Bank Finland Plc
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Estonian Branch. In 2002, the share of foreign owners in the share capital of banks increased from 85.7 per cent to 86.7 per cent. A high concentration of foreign capital is also characterized by the fact that according to end-of-year balance sheets, banks with a high share of foreign holdings owned over 97.5 per cent of the sector’s total assets. Besides six representative offices of foreign credit institutions already in operation (Landesbank Schleswig-Holstein Girozentrale; Norddeutsche Landesbank Girozentrale; Verains und Westbank AG; Osuuspankkien Keskuspankki OYJ; Svenska Handelsbanken and Parekss Banka), two more were added in 2002: International Bank of St Petersburg from Russia and Akciju komercbanka ‘Baltikums’ from Latvia. The Estonian representative office of Svenska Handelsbanken terminated its activity at the beginning of 2003. Despite intensifying competition, changes in the sector’s division of the banking market in 2002 were insignificant. Due to above-average lending activity, the assets of Nordea Bank Finland Plc Estonian Branch grew the fastest. Taking into consideration the increasing share of financing through leasing associations, banking groups’ market shares in financing domestic real and public sectors remained relatively stable. Small banks kept their role as providers of specialized services. In the external markets of Latvia and Lithuania, loan and deposit stocks in Hansapank’s daughter banks went up and their profitability improved. More intensive restructuring of affiliates of the groups led to a more pronounced integral concept of the Baltic economic space by different products and risk management strategies and financial objectives. Geographical expansion of the
Eesti Ühispank 29.9% (31.6%)
Sampo Pank 8.6% (7.2%) Nordea Pank 6.8% (6.5%)
Tallinna Äripank 0.4% (0.4%)
Preatoni Pank 0.1% (0.2%)
Hansapank 53.2% (53.1%)
Eesti Krediidipank 1.0% (1.1%)
Figure 3.1.1 Market shares of consolidated groups of credit institutions at the end of 2002 (in brackets at the end of 2001)
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market within the group was seen in making Hansa Leasing Russia operational in the fourth quarter of 2002. Ratings assigned by international rating agencies to banks were mostly upgraded, reflecting relatively strong creditworthiness for a transition economy. Table 3.1.1 Credit ratings issued by Moody’s Investors Service to Estonian banks (as of January 2003)
Long-term deposit Short-term deposit Financial strength
Hansapank
Eesti Ühispank
Sampo Pank
A1 Prime 1 C
A2 Prime 1 C-
A3 Prime 2 D+
Upgrading acknowledged the strong capitalization of banks, high profitability and sound financial standing and also reflected a more defined perspective in the EU direction, improving Estonia’s economic policy outlook. Assets and liabilities of banks
The banks’ assets grew in 2002 by EEK13.3 billion to a record high of EEK81.5 billion by end-December. More than 42 per cent of the banks’ total assets came from real and public sectors’ loan portfolio, which continued its expansive development in 2002 due to a sustained interest rate decline as well as tightening competition in the financial market. Together with leasing association-mediated resources, the domestic debt of the real and public sectors reached EEK54 billion by the end of the year, adding more than 25 per cent over 12 months. Financing of housing and commercial real estate showed the most aggressive growth whereas the annualized growth of housing loans and leasing was close to 54 per cent. Besides real estate loans, lending to the public sector (primarily industry and transport) increased; and there was a slight increase in the financing of hotel and catering services. The growth of funds channelled into commerce and construction remained on the level of 2001. As well as ample growth in lending, a growing share of securities portfolios characterized the total assets of banks in 2002, the main reason being the financing of banks’ affiliated leasing companies becoming more bond-based. Due to the broader liquidity framework of monetary policy, the banks preferred bonds to deposits in foreign banks in the structure of their liquid assets.
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On the liabilities side, the growth in deposits could not keep up with the growth of loans. The growth of the largest and most stable source of resources for banks – private depositing (40 per cent of all deposits) was suspended in nominal terms in 2002. The all-time-low interest rate inhibited placement primarily in low-return time deposits, sending the share of demand deposits up by a couple of percentage points to approximately 60 per cent. However, the successfully launched mandatory pension scheme (the so-called II pillar) shows that the propensity of households to save is developing towards long-term, more profitable and sophisticated products. At modest deposit growth, banks have had to involve external resources in order to cover loan demand. While in the first half of the year the share of external resources was kept stable, from July the share of external borrowing started to grow quickly, reaching a quarter of all liabilities by end-year. Parent banks played a significant role in the sharp growth of external reserves: their share in involved resources more than tripled in a year, accounting for over 40 per cent of external borrowing at end-year. Profitability and risks
In 2002, banks maintained their relatively good profit-earning ability, facilitated largely by an expanding loan base. This trend will only continue if lending quality remains high. According to unaudited data, the banking sector earned EEK1.2 billion profit in 2002, with all banks ending the year positively. The main source of the profit was net interest income of EEK2.4 billion, growing at the expense of the expanding interest-earning loan portfolio of the banks and depreciating resources. The shrinking resource price is not only linked to interest downfall in domestic and international money markets but also to changes in the structure of the resources involved. Although domestic resources remain the cheapest, the difference compared with borrowing from parent banks is really insignificant. Although the banks receive most of their income from interest, the share of non-interest income has been growing from year to year. This trend continued in 2002 when the share of non-interest income reached 38 per cent in the banks’ profit base. Service charge income grew most in the banks with a large market share, who besides an increase in the volume of service charges accompanying growing lending, also expanded their profit base by introducing service charges for some services that had previously been free. The ‘pay-with-card’ campaign, organized jointly by the banks, also had an encouraging impact on the growth of non-interest income.
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Income from the volume of card payments accounts for 15–20 per cent of the total service charge income in the banking sector. The banks’ profitability can also be attributed to their improved efficiency and the inhibited growth of administrative costs. In 2001 the income-expenditure ratio improved from 69 to 65 per cent. Productivity gains in financial mediation can be seen in the price spread contraction by 45 base points to a record low of 3.7 per cent. Capital adequacy rose from 14.4 per cent in December 2001 to 15.3 per cent 12 months later, despite a rapidly growing loan portfolio (and accompanying risk assets). Reinvested profits in 2001 and also to some extent the new capital adequacy guidelines enforced on 2 July 2002 contributed to the growth in capital adequacy. The new normative recalculation allows that investments are not deducted from the equity of affiliated companies. Despite weaker economic growth outlooks and contemporaneous expansive lending, the quality of the loan portfolio did not deteriorate significantly in 2002. Housing loans grew most rapidly whereas loans over 60 days overdue accounted for a mere 1.2 per cent. The quality of the commercial real estate was below average and overdue loans exceeded 3 per cent. Overdue loans were responsible for an annualized 2.2 per cent of the loan portfolio whereas provisioned loans reached 1.7 per cent. The banks’ liquidity buffer did not change much against 2001: the share of liquid assets in the banks’ balance sheets remained at the same level. However, the maturity of banks’ liabilities became significantly shorter, which became increasingly evident in the second half of the year, while domestic depositors preferred demand deposits to time deposits and the remaining maturity of the Table 3.1.2 Estonia’s largest banks as of 31 December 2002 Rank Bank
City
Assets, EEK million
1. 2. 3. 4. 5. 6.
Tallinn Tallinn Tallinn Tallinn Tallinn Tallinn
48,785.0 21,258.0 5,851.0 1,257.2 596.1 154.7
Hansapank Eesti Ühispank Sampo Pank Eesti Krediidipank Tallinna Äripank Preatoni Pank
Share Capital, EEK million 793.4 665.6 323.1 85.3 84.4 100.0
Note: EEK/r, fixed rate 15.64664 Note: As of 31 December 2002 Nordea Bank Estonia Branch reported aggregated assets of EEK6,2 billion (banking + leasing). Source: Bank of Estonia
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resources involved from the international market shrank. Due to a sharp growth in highly liquid assets at the end of the year, the liquidity indicator recovered slightly in December. The ratio of liquid assets and liabilities was 58 per cent at the end of 2002, compared with 54 per cent in the previous year.
Securities market Bond market
The bond market was mostly subject to changes in the structure of issuers. While in previous years, issuers were primarily foreign credit institutions, in 2002 the volume of their issues shrank. This led to a reduction of a third in the volume of bond issues – from EEK6.4 billion in 2001 to EEK4.3 billion in 2002. Local banks and undertakings increased the volume of issue and their share rose to 80 per cent of the total volume of issues. Also, new issuers from local undertakings have come to the market. In 2002, the maturity of bond issues continued to accumulate for between six and twelve months. Following money market interest rates the weighted median interest rate of kroon bonds declined from 4.0 per cent to 3.7 per cent. Longer maturity and an increasing number of higher credit-risk issues by local undertakings have slightly inhibited the decline of the average interest rate of the bonds. The turnover of the secondary bond market reached EEK4.6 billion – primarily due to growing investment funds and new pension funds under the second pillar. Stock market
An exceptional rise against stock exchanges in other Central and East European countries was a characteristic of the stock market in 2002. The Tallinn Stock Exchange Index (TALSE) rose by 47 per cent, reaching 212 points. Nevertheless, there was a setback: the deepening recession of the international stock exchanges also hit Tallinn Stock Exchange in April. In August the stock exchange started to recover due to foreign investor interest and the stock exchange index had exceeded the level of April by November. Listed shares revealed a broad price increase in 2002: besides listed shares, prices for less market-capitalized undertakings also went up. The price growth was not accompanied by growth in turnover: the average daily turnover remained at the level of 2001 (EEK16 million). At the end of February 2002, the switchover to the HEX trading system took place in the Tallinn Stock Exchange (as the Helsinki Stock Exchange Group had become a majority shareholder). Four foreign brokers (Credit Suisse First Boston, Mandatum
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Stockbrokers, Nordea Securities and Kaupthing Sofi) joined the Tallinn Stock Exchange and three of these have become operational. Parallel to the switchover, thorough changes and amendments in the rules of the Tallinn Stock Exchange took place to comply with the new Securities Act and HEX listing requirements. Harmonization with the EU directive also amended the conditions for the admission of securities to the stock exchange listing, prospectus and information disclosure. The above amendments will make the securities market more transparent and reliable.
Table 3.1.3 Listed securities at the Tallinn Stock Exchange (Tallinna Börs) as of May 2003 Shares Security
Issuer
List
Baltika share Eesti Telekom share Hansabank share Harju Elekter share Merko Ehitus share Norma share Tallinn Department Store share Estiko E-share Kalev share Klementi A-share Rakvere Meat Processing Plant share Saku Brewery share Tallinn Pharmaceutical Plant share Viisnurk share Estonian Privatization vouchers
AS Baltika AS Eesti Telekom AS Hansapank AS Harju Elekter AS Merko Ehitus AS Norma Tallinna Kaubamaja AS AS Estiko AS Kalev AS Klementi AS Rakvere Lihakombinaat Saku Õlletehase AS Tallinna Farmaatsiatehase AS AS Viisnurk Eesti Vabariik
Main Main Main Main Main Main Main
No. of securities List List List List List List List
5459950 137383178 79342109 5400000 8850000 13200000 6788200
I-List I-List I-List I-List
5978146 7877500 1321875 37721700
I-List I-List
8000000 1250000
I-List Free Market
4499061 20004083
Bonds Bond
Issuer
List
No. of securities
Port of Tallinn bond 19.03.2006
AS Tallinna Sadam
Bonds
10000
Source: Tallinn Stock Exchange (www.hex.ee)
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Investment funds In 2002, investment funds sustained rapid growth similar to 2001. By the end of the year, the total assets of the funds reached EEK4.3 billion. Interest and money market funds accounted for about half of the asset growth whereas higher-yield interest rate funds continued preferential growth against money market funds. Thus, the share of money market and interest rate funds reached 58 and 31 per cent respectively by the end of the year. The overall drop in interest rates in world money and capital markets sent the average productivity of investment funds downward. In 2002, the successful launch of the last phase and second pillar of the pension reform – mandatory pensions – also had an impact on the fund market. The reform brought two new management companies from insurance companies and there are now 15 pension funds and six management companies in the ‘II-pillar’ fund market. From early May to end-October 207,000 individuals, ie 35 per cent of the employed population, joined the ‘II-pillar’. Pension funds have collected contributions of about 37,000 individuals since September 2002 and 170,000 since March 2003. By the end of the year the value of mandatory pension funds exceeded EEK170 million.
Insurance Balanced development continued in the insurance market. Voluntary pension schemes have gained popularity in parallel with the final implementation of the pension reform. Contributions under the supplementary funded pension scheme added 35 per cent over the year. This growth accounted for about half of the EEK445 million total volume of gross premiums (source: Estonian Association of Insurance Companies). The transfer of the portfolio of Nordika Elukindlustus (Nordika Life Insurance) to ERGO Elukindlustus (ERGO Life Insurance) as of 1 July, as a result of special measures imposed on the former to protect policy holders, changed the structure of market participants. The revamped market brought along sustained growth in the productivity of insurance companies. Due to the rapidly developing real estate and consumer market, growth in the non-life insurance market also accelerated, leading to a total of EEK1.6 billion of gross premiums in 2002, an 18 per cent increase on 2001. The biggest increase was recorded in compulsory motor TPL insurance and insurance of commercial and private individuals’ property. This accounted for 31, 42 and 15 per cent respectively of total premiums.
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Monetary policy In Estonia the central bank, Bank of Estonia performs its constitutional function – to maintain the stability of the national currency with applying fixed-exchange-rate-system based monetary policy. The fixed exchange rate and its stringent monetary policy foundation constituted a starting point for restructuring of the economy in the early years after the reintroduction of the kroon. Their coimpact was rapidly revealed both on stabilizing price level and in lower interest rate level. In the current economic policy environment the exchange rate system supports also the smooth nominal and real convergence of Estonia’s economy with that of the EU economy. Estonia’s monetary policy principles in their openness and transparency comply with internationally accepted good practice. Thus, a reliable foundation has been set for elaborating the entire national economic policy. 2002 marked ten years from Estonia’s monetary reform, which introduced the Estonian kroon, established the currency board system and fixed the exchange rate of the kroon against the German mark (1 DEM = 8 EEK). Since 1 January 1999 the exchange rate of the Estonian kroon has also been fixed against the euro, the currency of the European Economic and Monetary Union (1 EUR = 15.6466) .The Estonian kroon is freely convertible, ie there are no restrictions on the free movement of capital between Estonia and foreign countries. Currency board arrangement is a special kind of fixed exchange rate system where the upper limit of base money (notes and coins in circulation and credit institutions’ deposits with the central bank) emission depends on the amount of central bank’s foreign reserves. This ensures an automatic cover to the kroon, as the decrease of central bank’s reserve will not jeopardize preservation of exchange rate. The constitutional function of Eesti Pank to maintain the stability of the national currency means essentially the development of a long-term price stability-oriented monetary policy. Price (including interest rates) developments in a small open economy with the fixed exchange rate are primarily subject to external impacts. The task of the monetary policy framework would be to secure that the external signals reach domestic prices unchanged and thereby to allow smooth adjustment of the price level and structure with that of developed market economies. The monetary policy consistency together with specific strategic objectives is one of the most significant factors in directing the development of the economy, also in shaping inflation expectations.
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EMU – strategic goal of Estonian monetary policy Considering the small size of the Estonian economy and openness towards the EU, entering into EMU and the Eurosystem, out of all options, is best suited to the strategic goals of Estonian monetary policy. Estonia’s participation in the EMU with a significant economic partner – the EU, sustains Estonia’s long-term stable economic growth, securing contemporaneously the stability of our currency, low inflation rate and participation in economic policy discussions about the future of the EMU. Prior to joining the EMU Estonia has neither technical nor economic necessity to change monetary policy foundation. The exchange rate of the kroon fixed against the euro supports continuous integration with the European economic space whereas the currency board arrangement sets additional guarantees to perform reliable economic and monetary policy.
Recent regulatory adjustments in the financial sector In 2002 an important change in the organization of financial system policy was the launch of the unified Financial Supervision Authority (FSA: www.fi.ee). From 1 January 2002, three Estonian financial sector supervision authorities – Banking Supervision Department of the Bank of Estonia, Securities Inspectorate and Insurance Inspectorate (the latter two are currently under the jurisdiction of the Minister of Finance) – were unified into a single supervision agency. The main objective of the FSA is to supervise market participants’ compliance with financial sector legislation and regulations. Its additional objectives are to protect the interests of clients and investors by safeguarding their financial resources and its tasks are to enhance the stability, reliability, transparency and efficiency of the financial sector, reducing systemic risks and promoting prevention of abuse of the financial sector for criminal purposes. The FSA is operationally independent. It has all necessary powers to take appropriate action against market participants, in particular to issue and revoke licences. According to the Act, the FSA has its own budget financed by fees from market participants. The Bank of Estonia continues to be responsible for systemic stability issues, including issuing banking sector regulations and building up the financial sector safety net. After commencing oper-
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ations, the FSA formalized co-operation with the Bank of Estonia and the Ministry of Finance by Memoranda of Understanding. The FSA is administratively affiliated with the Bank of Estonia. Most importantly, the central bank, being responsible for systemic stability, will maintain a very close analytical and policy relationship with the FSA. Among other initiatives, in October 2002 the FSA and the Central Bank advised commercial banks to observe lending risks more carefully in the present situation where demand for loans is high, in order to maintain high loan quality. The Guarantee Fund Act was passed in 2002 to ensure further development of the financial sector’s safety network, with the launch of the Guarantee Fund (www.tf.ee) responsible for deposit guarantee, investment protection and pension protection schemes.
Links www.bankofestonia.info www.fi.ee www.tf.ee www.hex.ee
3.2
Accountancy and Audit Deloitte & Touche Introduction Accounting and auditing in Estonia are regulated by two main laws: the Accounting Act (dated 20 November 2002, came into force on 1 January 2003) and the Authorized Public Accountant Act (dated 10 February 1999) which are based on IAS and the 4th and 7th directives of the EU. The Accounting Act outlines the basic principles and rules which must be followed in accounting records, stocktaking and annual reporting. The law also designates the institutions responsible for adopting and introducing methodological guidelines concerning accounting, and the penalties which may be imposed for violating the law.
Structure The Accounting Act extends to all legal persons and sole proprietors registered in Estonia and to foreign companies who have a registered branch or other permanent establishment in the country. The Authorized Public Accountant Act determines the requirements for auditors, the bases for passing the examination of professional competence, the legal bases for the professional activities of auditors and the organization of the Board of Auditors. The Accounting Act includes the following sections: • • • • • • •
general provisions; accounting management; general requirements for financial statements and annual reports; annual group reporting; special requirements for governmental institutions; special requirements for other institutions; layout of balance sheet and profit and loss account;
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• • • •
valuation rules; rules for the content of notes; management report; regulations on the completion and signing of annual reports of companies; • auditing and disclosure of the report. The Accounting Act also applies to institutions and organizations which are financed from the state and municipal budgets, to all public organizations, their associations, foundations with limited numbers of participants, religious organizations and trade unions. According to the current legislation, accounting records shall: • clearly display the transactions and financial result of a company; • give a true and fair view of its financial position. The records shall be kept in such a manner as to enable any person who is qualified in accounting to clearly identify: • the financial position of a company; • the business transactions made in a given period of time; • the beginning and the sequence of each transaction. The accounting principles addressed in the Accounting Act are those of: • • • • • • • • •
business entity principle; going-concern assumption; materiality concept; consistency and comparability principles; matching principle; reliability (objectivity) principle; prudence (conservatism) principle; disclosure principle; substance over form principle.
Practice The length of a financial year is 12 months. The financial year of an entity being founded, changing its financial year or being terminated, or in other cases prescribed by law, may be shorter or longer than 12 months but shall not exceed 18 months. The financial year
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is deemed to be a calendar year, unless otherwise provided in the articles of association. The measure of value must be a monetary unit of the Republic of Estonia (Estonian kroon) and the statutory accounting reports must be prepared in the Estonian language. All the codes, abbreviations, separate letters and symbols used in accounting records shall be explained. The accounting records and all the confirming documents shall be stored in Estonia. Each entry in the accounting ledger must be confirmed by a document justifying that entry in the prescribed form. An annual report consists of: • • • • • • • •
management report balance sheet; profit and loss statement; cash flow statement; equity movement report; accompanying notes; board and council conformation of the annual report; auditors report.
All annual reports are subject to a mandatory audit by a certified public auditor nominated by the shareholders of the company if at least two of the following thresholds are exceeded: • • • •
total assets – EEK3,000,000; net turnover (for companies) – EEK6,000,000; net income (for non-profit entities) – EEK6,000,000; total number of employees in the reporting year – 5.
Essentials Estonian accounting principles are in line with the international accounting standards which apply in their respective fields. The Accounting Act applies to the permanent establishments (branches, departments) of foreign companies registered with the Commercial Register of the Republic of Estonia. The Accounting Act applies to banks, credit institutions and insurance companies, farms and fisheries and individual businesses with some differences in reporting. Companies which form part of a group shall have the same accounting period.
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Where a partner in a business activity is a foreign person, a second accounting language, which has been agreed upon by the parties, may be used. A company may freely appoint a certified public auditor to perform an audit. An auditor may be appointed to conduct a single audit or for a specific term. A company must submit a copy of the audited annual accounts, the management report and the auditor’s report after the annual report was approved by the shareholders to the commercial register but not later than six months after the end of the financial year. A foreign company shall maintain separate accounts concerning the branch. Accounts concerning the branch shall be maintained pursuant to the requirements of the Estonian Accounting Act. If the foreign company must disclose an annual report, the director of the branch shall submit an unattested copy of the audited and approved annual report of the company and a report on the activities of the branch to the commercial register of the location of the branch not later than one month after approval of the annual report and seven months after the end of the financial year.
Concerns A company’s confidential information shall be disclosed to the auditors and to the tax administration reviewing the declared taxes, as well as to other state institutions in accordance with procedures provided for by the legislation. Although other information included in the accounting records is considered to be a commercial secret, the information and data included in an annual report are not classified as a commercial secret of the company.
3.3
Business Taxation Deloitte & Touche Introduction Estonia regained its independence in 1991 as a result of the breakup of the Soviet Union. It has since made considerable efforts to integrate both economically and politically with Western Europe. It is expected that Estonia will join the European Union in May 2004. The process of privatization of state enterprises was more or less completed by 2000. As a rule, foreign investors have the same rights and are granted the same privileges as Estonian investors.
Structure The following forms of business are available in Estonia: • • • • • •
Private limited company Public limited company General partnership Limited partnership Commercial association Sole proprietorship
Foreign entrepreneurs may also register branch offices in Estonia.
Resident entities Resident companies are not subject to tax on their annual income. Instead they are subject to tax at a rate of 26/74 only when a profit is distributed. A company is considered to be resident in Estonia if it is founded or formed under Estonian law. A foreign tax credit is available for foreign tax paid on dividends abroad.
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Capital gains derived by resident companies and permanent offices of non-resident companies registered with the Estonian authorities are exempt from tax. Non-resident companies without a permanent establishment in Estonia are taxed at a rate of 26 per cent on capital gains derived from Estonian sources. Capital gains derived from sales of shares and securities are exempt from tax. However, when at least 10 per cent of the shares of a company are sold and if real estate and buildings account for 75 per cent or more of the assets of this company, the capital gains are subject to tax in Estonia. As the income is not taxable, there is no way to carry forward loss for tax purposes.
Non-resident entities Permanent establishments of non-resident companies registered with the Estonian authorities are not subject to tax on their income. They are subject only to tax at a rate of 26 per cent on profit distribution and certain payments made by them. Any entity that is registered and established in any country other than Estonia is considered non-resident. Permanent establishments of non-resident entities in Estonia are considered resident entities separate from their non-resident parent entities.
Practice Since 2000, instead of taxing the profit of resident legal persons, the distribution of profits as well as transactions that can be treated as hidden distribution of profits is now taxed. The taxation of profit has been shifted from earned profits to the distribution of profits. The term distribution includes dividends and certain expenses which can be considered allocation of profit, for instance, fringe benefits, gifts and expenses and payments not related to business. The tax rate for taxable expenses is 26/74 (35.135 per cent), thus the effective tax rate is similar to the income that is taxable through withholding tax at 26 per cent. As a rule, business expenses are deductible for corporate income tax purposes if they are directly connected to the generation of taxable income.
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Investment Incentives Foreign investors may acquire up to 100 per cent participation in Estonian business entities. The government guarantees repatriation of profit and capital. A commercial undertaking must be entered in the Commercial Register before economic activities may commence.
Depreciation As income is not taxable no depreciation is applied to assets for tax purposes. Valuation of fixed assets does not affect taxation. If fixed assets are available to employees, members of management or the supervisory board, shareholders or other related persons at a lower price then market value taxation may take pace.
Allowable business expenses and deductions As accrued profit is not subject to tax in Estonia, all business related expenses are deductible according to the accounting principles. Research and development
Research and development expenses are immediately deductible when they are incurred. Interest
Withholding tax at a rate of 26 per cent is imposed on interests paid to resident and non-resident individuals and to non-resident companies. Interest paid by resident banks to resident and nonresident individuals and to non-resident banks in certain circumstances is exempt from withholding tax. Personnel costs
Salaries, wages and similar employee compensation may be deducted. Any fringe benefits granted by an employer to employees are subject to income tax at a rate of 26/74. According to the law, any goods, services, other remuneration in kind or monetary appraisal benefits and gifts which are granted to an employee in connection with the employment relationship or being a member of the directing or controlling body of a company or long-term contractual relationship shall be understood as constituting fringe benefits. The tax value of fringe benefits shall be determined on the basis of fair market value.
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Provisions
With the exception of financial institutions, companies are not permitted to deduct amounts set aside as bad or doubtful debt provisions for tax purposes. Charitable donations
Resident legal persons pay income tax at a rate of 26/74 on donations granted to naturalized persons and non-residents, taking into account the exemptions mentioned below. Income tax is not charged on gifts and donations granted to legal persons and churches, congregations, associations of congregations, trade unions and parties entered in the List of Non-profit Associations Entitled to Income Tax Incentives, to a person who owns a hospital, to a state or local government scientific, cultural, educational, sports, law enforcement or social welfare institution, or a manager of a protected area in a total amount not exceeding one of the following limit values: 1. 3 per cent of the amount of the payments subject to social tax pursuant to Social Tax Act made by the taxpayer during the same calendar year; or 2. 10 per cent of the annual profits for the last financial year of a taxpayer dissolved as of 1 January of a calendar year, calculated pursuant to the accounting legislation.
Withholding taxes Withholding tax usually applies to various payments made to nonresidents and naturalized persons. Income tax is withheld upon the making of a payment. Income tax shall not be withheld on the following payments: • payments made to resident legal persons; • payments made to non-resident legal persons’ permanent establishments registered in Estonia; • payments made to sole proprietors entered in the commercial register or registered with the local Tax Board office if the payments are the business income of the recipients or are related to acquisition of property from sole proprietors, including under the conditions of financial lease. Income tax is withheld from: • salaries, wages and other remuneration subject to income tax paid to a resident naturalized person, and remuneration paid to
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members of the management and controlling bodies of a legal person, taking into account the deductions allowed under the law. Rate: 26 per cent; salaries, wages and other remuneration paid to a non-resident, and remuneration paid to non-resident members of the management and controlling bodies of a legal person. Rate: 26 per cent; remuneration of service fees paid to a naturalized person on the basis of a contract for services, authorization agreement or any other contract under the law of obligations, including payments made under a contract prescribed in the Sport Act. Rate: 26 per cent; interest subject to income tax, paid to a non-resident or to a resident naturalized person. Rate: 0–26 per cent; dividends subject to income tax, paid to a non-resident. Rate: 0– 26 per cent; insurance indemnities, pensions, payments from a pension fund, scholarships, grants, lottery prizes, maintenance support or other payments which are subject to income tax and paid to a non-resident or to a resident naturalized person. Rate: 26 per cent; rent from a commercial or residential lease or payment for encumbering a thing with limited real rights, paid to a non-resident or to a resident naturalized person, and royalties paid to a resident naturalized person. Rate: 26 per cent; royalties paid to a non-resident. Rate: 15 per cent; payments made to a non-resident artist, sportsman or sportswoman for activities conducted in Estonia, and payments made to a third person who is a non-resident or a naturalized person for activities conducted in Estonia by an artist, sportsman or sportswoman. Rate: 15 per cent; payments to a non-resident for services provided in Estonia. Rate: 15 per cent; payments to a legal person located in a low tax rate territory for services provided to an Estonian resident. Rate: 26 per cent; payments made under a contract of pension insurance with income tax incentive and payment made from pension funds. Rate: 10 per cent.
Estonia has signed a number of tax treaties, which stipulate different tax rates or exempt some types of payments from Estonian income tax. See Table 8 on Deloitte & Touche’s website for the effects of Estonia’s treaties on payment of dividends, interest and royalties to non-resident companies and individuals.
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Book-keeping and corporate assessments
A legal person is obliged to file an income tax return for the month of taxation by the 10th day of the month following the period of taxation regardless of whether or not any taxable expenses have incurred. Income tax should be transferred to the tax authorities by the same date. An enterprise is obliged to file the annual accounts to the tax administrator by a date no later than six months after the end of the financial period. Other taxes and employers’contributions
The rates of other significant national taxes and employers’ contributions are: • VAT standard rate: 18 per cent • VAT on imported goods and services: 18 per cent • VAT on books, entertainment, medicine, funeral services: 5 per cent • VAT on exports: 0 per cent • Social security contributions (employer only): 33 per cent • Unemployment insurance contribution (employer): 0.5 per cent • Unemployment insurance contribution (employee): 1 per cent In the case of VAT, companies with an annual turnover in Estonia exceeding EEK250,000 (N15,978) are required to register for VAT. On imports, the taxable amount is the sales price or customs value, plus customs and excise duties, insurance and freight. A credit mechanism is in place, similar to that used in other European VAT systems, so that the VAT burden falls solely on the final consumer. A number of goods and services are exempt from VAT, including health and social services, training, insurance, postal services, services relating to shelters for the protection of children and young persons, transportation of sick, injured or disabled persons in special vehicles, the leasing or letting of immovables, credit or financial services specified in the list established by the regulation of the Government, the organization of lotteries or gambling, and lottery tickets, imported goods concerning which, pursuant to the customs rules, a declaration of goods need not be submitted when they are carried through customs. Miscellaneous taxes
• Estonia has established custom tariffs of imported agricultural products. The tariffs are applicable to imports from countries
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with which Estonia does not have a free trade agreement. Imports from the EU and most other European countries are exempt from duty. The taxes imposed on imports include also excise tax and VAT; Estonia levies excise duty on imported goods. The list of items covered is quite short and includes spirits, beer, tobacco, motor vehicles, motor fuel, packaging materials and gambling activities. Excise tax is not paid on domestic products exported from Estonia; Naturalized and legal persons are obliged to pay stamp duties on juridical operations according to established rates; There are no property taxes in Estonia except the land tax. The annual land tax rate is between 0.5 and 2 per cent of the taxable value of the land, which is determined pursuant to the Law on Land Value. The land tax is paid four times a year, in equal instalments; Local councils are legally entitled to impose nine different local taxes. These are personal tax, local income tax, sales tax, boat tax, advertising tax, street and road closing tax, cargo vehicles tax, domestic animal tax and entertainment tax.
Essentials • Permanent establishments of non-resident entities in Estonia are taxable on their profit distribution as resident entities; • Any tax due on income paid to non-resident entities from Estonia is generally withheld at source; • Separate tax returns must be filed by each of the companies included in a group. A loss incurred by a resident group company may not be transferred to another resident group company; • The employer generally withholds at source the tax due on employees’ income.
Concerns Branches, like other resident entities, must withhold taxes from payments made to non-residents. If the tax authorities find that a company’s tax return does not reflect the taxpayer’s full liability, they will demand an additional payment and may impose a penalty. Harsh penalties are imposed if tax evasion is suspected.
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ONLINE UPDATES - 28 June 2005 Business taxation (Chap. 3.3) Corporate tax Company profits remain untaxed but a distribution tax is now paid on distributed profits at 24 per cent of the gross distribution (ie 24/76 of the net dividend). The distribution tax applies to resident companies and to permanent establishments of foreign companies. A company is deemed to be resident in Estonia if it is founded under Estonian law. Certain income of non-resident companies is taxed by witholding. The distribution tax is to be reduced further from 24 per cent of the gross distribution in 2005 to 22 per cent in 2006 and 20 per cent in 2007.
Individual tax Non-residents are taxed on Estonian-source income only. Individuals are treated as resident in Estonia for tax purposes if they have a place of residence there or if they stay in Estonia for 183 days in any 12month period. Resident individuals are taxable on their worldwide income and are charged at a flat rate of 24 per cent in 2005, which is to be reduced to 22 per cent in 2006 and 20 per cent in 2007 in line with corporate tax on distributed profits.
Capital gains Capital gains of companies are now taxed as part of the distribution tax payable when a distribution is made. Individuals are exempt from capital gains tax on the sale of their main residence. Otherwise, individuals’ capital gains are generally taxed as income.
Administration and compliance Companies are required to submit monthly returns in respect of their corporate distribution tax together with any tax due by the tenth day of the month following. Employees’ income is taxed by withholding. Registered sole proprietors having business income make quarterly advance payments of tax. Individual tax returns are due by 31 March and a final payment of tax is due by 1 July of the year following the tax year.
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Additional tax information • • • • • • •
There is transfer-pricing legislation and some anti-haven. (CFC) rules and general anti-avoidance provisions. There are no thin-capitalization rules. There is no provision for group taxation. There are no tax incentives. Estonia has concluded more than 25 tax treaties. Other taxes include: business registration fes, capital duty, customs duties, gambling tax and municipal boat tax, as well as land tax, local sales tax and property transfer tax.
Source: Deloitte Touche Tohmatsu, 20 May 2005
Part Four Key Sectors of Trade and Investment
4.1
Energy Industry in Estonia Andreas Kaju, Marketing Project Manager, Estonian Chamber of Commerce and Industry Overview The general economic decline has been reflected in the energy industry as a result of decreased production requiring less electricity and so less oil shale. In 1999, the industry’s main problems were related to the lack of opportunities to reform oil shale energetics and the sector’s readiness to join the European Union. On 7 January 1999, the Plan for Restructuring and Privatizing AS Eesti Energia (Estonian Energy Ltd) and AS Eesti Põlevkivi (Eesti Põlevkivi Ltd) was approved. On 8 June 1999, the government’s consent was given to the Ministry of Economic Affairs’ plans to restructure the energetics sector. It was agreed that negotiations should proceed to establish a trading company on the basis of the Eesti Energia AS enterprises Eesti Elektrijaam and Balti Elektrijaam. Eesti Energia AS will own 51 per cent of the shares of this public limited company. The Government agreed to contribute 226,150 shares (worth EEK96,300,000) to increase the owner’s equity in the joint stock company. The Government of Estonia negotiated with the US company NRG for the privatization of Estonia’s two largest electric power stations. Under the plan, NRG would have acquired a 49 per cent holding in the Narva Electric Power Stations, which in turn would have held 51 per cent of the shares in Estonian Oil Shale. In January 2002, the Estonian Government put its talks with NRG on hold. The Board of Estonian Energy is drawing up a list of alternative proposals on how to finance the Narva plants renovation, and must present this to the Minister of Economy by 15 March.
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The three Baltic states want to open their energy markets to free competition so that large producers could freely choose from which country to buy electricity. Preparation of this ambitious project would cost around 1.5 million USD in two years. The idea of the Baltic common energy market is to provide a real outlet for Estonia’s liberal energy law. The effective law allows large producers, who consume about 15 per cent of the domestic energy output, to buy electricity where they find it more advantageous. The opening of the Baltic energy market does not require building new power plants or grids, but devising common regulatory measures and launching measuring systems.
Electricity In 2000, 8,513 GWh of electricity was produced, 3 per cent less than the previous year (8,518 GWh). Electricity exports increased by a total of 61.7 per cent in 2000, with the majority of exported electricity destined for Latvia. Exports to Russia decreased by 30 per cent. 2000 saw a very dry summer and as Latvia mainly produces electricity in hydropower stations, it was forced to buy more electricity from Estonia than in previous years. In 2000, losses declined by 5 per cent compared to the previous year. This is a result of the measures applied by AS Eesti Energia to reduce losses, which paid special attention to the timely delivery of electricity bills and collection of payments. Investment in guaranteeing and developing the reliability of the distribution networks has been increased. The Electric Safety Act came into force on 1 May 1999 when Decree No 22, of 20 January 1999, on the Extent of Safety Zones of Electricity, Gas and Distance Heating was approved. Safety zones are land areas, air space or water body surrounding lines, gas and distant heating pipelines and dwellings connected to them, where – according to the Energy Act section 15 subsection 3 – restrictions are set on the real estate owner’s or possessor’s activities due to the riskiness and protection needs of technical networks.
Oil and gas industry and equipment market The restructuring of Eesti Gaas AS began in 1998 with the goal of cutting costs and increasing operations efficiency, and subsidiaries are being integrated into a single company. Since January 1999, the Republic of Estonia has not held shares in Eesti Gaas AS. The
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strategic investors of Eesti Gaas AS include three large foreign gas enterprises: Ruhrgas AG of Germany, OAO Gazprom of Russia and Fortnum OY of Finland. Small shareholders, the majority of which are private and legal persons, hold 27 per cent of the shares. AS Eesti Gaas sold 825 million m3 of natural gas in 2000 ie 15 per cent more than in 1999. Natural gas use increased in heat and power cogeneration, industries and for local heating purposes. The 2000 net turnover of AS Eesti Gaas amounted to 948.3 million Estonian Kroons (66 million USD) which is 24.4 per cent more than in 1999.
Renewable energy In comparison with member states of EU, Estonia is performing quite well. Around 9 per cent of the primary energy production is based on using renewable supplies. This figure is expected to grow to 11 per cent by 2005 due to Estonia’s abundant peat and forestry reserves, and the lesser impact of biomass use on the environment in comparison with the use of either oil shale or oil fuel. The main obstacle in using wind in the energy production is the high capital cost, which makes the price of this kind of energy rather high, compared with the relatively low price of electricity generated on the basis of oil shale.
Environmental legislation Estonia’s development in terms of environmental legislation is also important for the energetics sector. Estonia has passed environmental reform legislation in recent years. Estonia’s objective is accession to the EU and so is committed to harmonization with the EU’s environmental law. The changes are based on EU environmental legislation and principles of modern environmental law. Official negotiations between the EU and Estonia on the environmental chapter began in December 1999 and have been temporarily closed since June 2001.
National legislation Outline provisions of Estonian environmental law are included in: • Estonian Constitution; • Estonian Nature Conservation Act (entered into force 15 March 1990);
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• Sustainable Development Act (entered into force 1 April 1995); • Pollution Prevention and Control Act (entered into force 1 May 2001); • Environmental Supervision Act (entered into force 7 July 2001); • Environmental Impact Assessment and Environmental Auditing Act (entered into force 1 January 2001); • Pollution Charge Act (entered into force 21 May 1999). The Estonian Constitution asserts that natural wealth and resources are national riches and must be used economically. Everyone has a duty to preserve the environment and to compensate for any damage they cause. The Sustainable Development Act enacts principles of national strategies based on principles authorized by the Rio de Janeiro Conference of 1992. The Estonian environmental law is complex, dynamic and variable. International environmental standards have been incorporated into Estonian law and so environmental legislation is often duplicated. Often, environmental legislation is in the form of government regulations (Procedure for Keeping Records of Calculated and Incoming Pollution Charges and Submitting the Relevant Information; Procedure for Marking of Hazardous Waste) and enacts political rather than legal regimes. Also, civil liability schemes in the Estonian environmental regime are insufficient.
International co-operation Estonia has entered into international environmental conventions and bilateral environmental agreements. It is a signatory to the following conventions: Arhus (1998); Espo (1991); Helsinki (1992); Kyoto protocol (1997); Geneva (1979); Vienna (1985); Washington (1973); Rio de Janeiro (1992) etc (for more detailed information see www.envir.ee/eng/conventions.html).
Environmental supervision Environmental supervision is exercised by the Environmental Inspectorate, the Land Board and local government bodies and agencies.
Preventive environmental measures Requirements for construction
Requirements for construction are enacted in the Construction Act (entered into force 2003). Building design documentation is
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obligatory for construction activities. In high density areas the general principles of planning are enacted in detail planning. Construction may begin if the local government gives building permission. Building permission includes the order of supervision of construction. Local government gives permission of use for the construction and according to which the construction will be entered into the register. Permission of use also determines the extent of construction. In cases of rebuilding where the extent of construction is to change, new building design documentation and building permission is required. The Construction and Planning Act also determines for which cases environmental impact assessment is necessary. Environmental impact assessment
The environmental impact assessment is based on the Environmental Impact Assessment and Environmental Auditing Act (entered into force 1 January 2001) and its objective is to consider the environmental impact of decision-making process and to observe and estimate the impact of economic activities. Environmental impact will be assessed if the construction brings about a significant environmental impact or in actions involving the subsurface, ie using natural recourses. The main principle of the assessment is that the developer should prove by environmental impact assessment that planned actions will not cause substantial deterioration. The assessment must be performed by a licensed expert supervised by the Minister of the Environment. The licence is based on this assessment and is issued by the local Environmental Inspectorate. The licence will not be granted if the supervising authority proves that environmental standards cannot be achieved in the way the developer has planned. Impact assessment is also a source document for the application for an environmental permit. Environmental auditing is performed if actions may involve increased risks. Increased risks are specified in the Environmental Impact Assessment and Environmental Auditing Act. Environmental auditing is a systematic investigation into an enterprise’s activities. Auditing is required to find out the possible environmental risks. Environmental auditors are registered by a committee established by the Minister of the Environment. The Environmental Inspectorate has the authority to impose an administrative fine for violation of environmental laws or standards.
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Environmental permits
Environmental quality requirements establish maximum tolerances for sources of pollution, such as noise level, vibration, radiation etc. Emission requirements are imposed on waste water and vehicle exhaust gases. Technology requirements are mostly imposed in areas with obvious environmental risks, for example filtration and cleaning devices. Environmental permits may be segmented or integrated. Segmented permits will depend on which environmental elements will be affected. For example waste permits, water permits, atmosphere air pollution permits etc are issued. Segmented permits are issued in accordance with legal acts regulating the corresponding field of activity. Bases and procedure for issuing the integrated environmental permit are established in the Pollution Prevention and Control Act (entered into force 1 May 2001). The integrated permit is compulsory for operations in the following areas: • • • • • • • • • • • • •
Production of electricity, energy, fuel, coke; Refining liquid and gaseous fuel; Production and processing of metals; Processing materials with mineral origin; Chemical industry; Waste handling; Pulp and paper industry, and tanning and textile industry; Food industry; Livestock farming; Heat treatment with organic suspensions; Production of plywood and particle board; Disposal or recovery of animal waste; Production of graphite.
Applications for integrated permits should be made to the local Environmental Inspectorate. The application should contain the information specified in the Pollution Prevention and Control Act. The environmental authority’s decision to issue an environmental permit should be based on the principles of avoidance of pollution, assessment of environmental impact, best available techniques and legislative requirements. The authority may refuse to issue the permit if the nature of activity does not follow environmental standards, is not accordance with the law or if false information is presented.
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The pollution charge
The objective of establishing a pollution charge is to prevent and reduce possible damage caused by the release of pollutants or waste into the environment. The pollution charge is paid for the release of pollutants and waste specified in the Pollution Charge Act into the environment. The pollution charge is not imposed if pollutants or waste are released into the environment: • in quantities or in a manner for which a permit is not required; • due to force majeure; • to prevent pollution on an even larger scale or an accident which may cause loss of life. The pollution charge must be paid by the owner of an immovable if pollutants or waste are released into the environment from the immovable of the owner according to the wishes of the owner. If pollutants or waste are released into the environment from land used on the basis of a right of superficies by a superficiary or from land adjacent to a structure as a movable by the owner of the structure, the obligation to pay the pollution charge shall also apply to such a superficiary or owner.
4.2
Engineering and Metalworking Industry Estonian Investment Agency The Estonian engineering and metalworking industry has a history dating back to the second half of the 19th century. Today it is a growing modern industry with strong links to the Scandinavian and Western European engineering clusters.
Electronics 7%
Other 4%
Engineering and metalworking 13%
Chemical industry 14%
Textile industry 14%
Food industry 24%
Woodprocessing and furniture 24%
Figure 4.2.1 Structure of Estonian industry 2001 Source: Statistical Office of Estonia
The turnover of the engineering and metal working industry in 2001 was close to N400 million. This number derives from a definition of the industry including the following sub-sectors: metal processing, machine building and transport vehicles and parts. Thus the production value of, for example. electrical products
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manufacturers is not included. This aggregate turnover figure represents about 13 per cent of the total industrial output of Estonia. The number of employees in the industry is about 11,000. The engineering and metalworking industry is quite scattered with 300–400 companies, the majority of which are SMEs. However, the largest companies strongly dominate in terms of turnover, one example being Norma (producer of car safety equipment) with a turnover of N51 million in 2001. As the industry is characterized by a large share of subcontracting work for international clients, the generally small size of the companies gives them flexibility to comply with speciality orders. The companies in the industry tend to focus on increasingly complex and higher value-added production such as machine building, special tooling, trailers, coastguard ships etc. Engineering plants are equipped to make quality products and to build largesized equipment. For the manufacturing of precision components and tools, CAD/CAM technology and modern machine tools are used.
Rising competitiveness The engineering and metalworking industry has shown an annual productivity rise of 15–18 per cent over the last few years. This development continued in 2001 as, to give one example, labour productivity in the machine building industry rose by more than 20 per cent on 2000. Coupled with continuous investment into new technology, this provides a solid base for further growth. Estonia is an ideal base for manufacturing as it imposes no tariffs on imported materials and semi-finished products. Growing intra-industry co-operation allows enterprises to achieve economies of scale, respond quicker to changes in the markets and to move up the supply chain.
Competitive labour Employment costs in Estonia are only a fraction of those in Western European countries. The productivity and experience of the workforce further enhance this advantage. The average monthly salary in the engineering and metalworking industry is in the range of N400–450. The industry’s high export ratio demonstrates the quality of its workforce and products. The average share
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of highly qualified workforce is about 65 per cent in the industry, with an even higher share in the special tooling companies. The industry’s engineers and specialists are trained at Tallinn Technical University and at Tallinn College of Engineering, while other highly skilled employees are trained at numerous vocational educational institutions throughout Estonia.
Subcontracting It is estimated that 60 per cent of the turnover of the Estonian engineering and metalworking industry derives from subcontracting. Even though this implies that Estonian companies often lack their own developed products, it has proven to be a fast way for the industry to grow. The combination of low costs and geographical proximity to Scandinavia and Western Europe makes Estonian companies ideal subcontracting partners. Machine Building 24%
Metal Processing 43%
Transport Vehicles and Parts 33%
Figure 4.2.2 Sectors of the engineering and metalworking industry 2000 Source: Statistical Office of Estonia
Transport vehicles and parts sector This sector’s traditional strengths in shipbuilding and ship repairing are now increasingly being complemented by growing production for various European automotive companies and their suppliers. Experience in subcontracting to the Swedish Volvo, Saab
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and Scania or their suppliers has raised the competitive level of Estonian companies due to the transfer of know how and new technologies. High quality combined with competitive costs are attracting more and more businesses to this sector through more orders to local companies and new foreign direct investment. AS Norma, part of the Autoliv group – one of the world’s leading companies in the automotive safety sector, produces safety belts for the Eastern and Western European as well as the CIS markets. Norma was the first Estonian company to obtain a QS 9000 certificate. Several companies are now ISO-certified and the number is quickly growing as export contacts develop. Besides safety belts, Estonian companies manufacture mufflers, cattle-guards, cables, roof-lifting mechanisms, car window glasses, electronic equipment, carpet coverings, plastic components and tools to European car manufacturers. Estonian companies are also involved in the production of ships, buses, trailers and specialpurpose vehicles. The sector’s annual sales are approximately N130 million and more than 80 per cent is sold on the export markets. The dominating type of production is subcontracting and investment in research and development is low. About 3,000 people are employed in the sector and the average monthly salary is N400–500 (Q4 2001).
Metal processing sector In the metal processing sector, oriented towards the global market, the product range includes galvanized sheet steel, steel profiles for construction, heavy metal structures, machined components and containers. Other products are ventilation equipment, retail accessories, mailboxes, stoves etc. An important part of the metal processing sector is the special tooling companies. These companies are expanding with a highly skilled workforce and modern technology. The CNC machine tool park, the CAD/CAM technology and a tight co-operation between them, enable tooling enterprises to produce plastic injection moulds, die-casting moulds and sheet metal press tools of high quality and to respond to their clients’ needs quickly. The sales of the sector amount to about N160 million and the export share of the major companies’ turnover is 60 per cent. Latvia, Sweden and Finland are the main export markets. About 3,500 people are employed in the metal processing sector and monthly salaries range from N350–450 (Q4 2001).
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Key Sectors of Trade and Investment Machine Building 19% Transport Vehicles and Parts 43%
Metal Processing 38%
Figure 4.2.3 Distribution of exports between subsectors of the engineering and metalworking industry Source: Statistical Office of Estonia
Machine building sector The main products of the Estonian machine building sector are agricultural and forestry equipment, peat machinery, heat exchangers, robot bodies, boiler equipment etc. About 50 per cent of the sector’s annual sales of about N100–110 million are exported and the major markets are Finland, Sweden and Germany. Subcontracting accounts for some 50 per cent of sales. About 3,800 people work in the machine building sector and their monthly salaries range between N320 and N360 (Q4 2001).
Exports The Estonian engineering and metalworking industry exports most of its production and its value as one of the major sources of export revenue is steadily increasing. Echoing Estonia’s general trade structure, the main market for the Estonian engineering and metalworking industry is Western Europe and especially Scandinavia. The Estonian engineering and metalworking industry exports about two thirds of its production. Finland and Sweden in particular have become increasingly important export markets in recent years. Exports to Russia mainly consist of car seat belts from Norma.
Engineering and Metalworking Industry
Chemical products 13%
Others 2%
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Engineering and metalworking 15% Electrical equipment and apparatus 9%
Food products 12%
Textile products 20%
Wood and wood articles 29%
Figure 4.2.4 Estonian exports by commodity, 2001 Source: Statistical Office of Estonia
Latvia 15% Finland 40%
Russia 18%
Germany 7% Sweden 20%
Figure 4.2.5 Main export markets, 2000 Source: Statistical Office of Estonia
Research and development At the beginning of the 1990s, larger engineering companies had several research and development facilities, but the heavy restructuring of recent years has shifted the focal point of research from companies to state-funded research institutes. The Estonian Technology Agency (ESTAG, www.estag.ee) was created in 2001 and
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financed from the state budget. Its objective is to develop Estonian business through the support of technological and innovative projects. The demand for research and development in the engineering industry has also been relatively modest due to the amount of subcontracting. However the importance of product development and research is bound to increase in the future, and Estonia has the facilities and staff to meet the demand. Already there are good examples of Estonian and international companies co-operating to finance research projects.
Standardization The National Standards Board of Estonia – www.evs.ee – is responsible for standardization, metrology and accreditation in Estonia. Most Estonian standards in the field of engineering and metal processing have been directly adopted from European standards. Exporting companies mainly follow the standards of the export destination countries. Numerous companies have obtained ISO certificates, a need dictated by the industry’s significant share of subcontracting.
Companies in the industry The engineering and metalworking industry consists of a very large number of companies, but few of these account for a substantial share of the sector’s total turnover of N400 million.
Transport companies Several companies work as subcontractors to the automotive industry, such as the seat-belt producer Norma (owned by Swedish Autoliv and with a turnover of N51 million in 2001), Universal Industries, Pioneer, Baltcoach, Metec, Silwi, Respo Haagised and Bestnet. Some of the sub-sector’s companies (Silwi, Baltcoach, Respo Haagised) assemble vehicles or trailers, whereas others produce various spare parts for vehicles.
Shipbuilding The Estonian shipbuilding industry is dominated by the Baltic Ship Repairers and Loksa Shipyard. Baltic Ship Repairers is a
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company with traditions back to the beginning of the 20th century. Over the last few years it has rapidly expanded its operations and in 2001 the company had a turnover of N130 million and 3,000 employees (1,500 in Estonia). Loksa Shipyard, owned by the Danish Odense Steel Shipyard, has a turnover of about N15 million. Besides repairing and building ships, these companies produce various types of steel constructions.
Metal processing companies The biggest event in 2002 was the US$205 million investment of International Steel into its Estonian galvanization plant Galvex. This is the largest industrial investment in Estonia to date. The plant will supply galvanized steel to primarily construction and automotive industries all around the world. Its capacity is estimated to reach at least 1,500,000 tons per year. Rannila Profiil is another metal processing company which produces large metal structures, mainly for roofs. Its turnover in 2001 was N36 million. AS Tarkon (owned by Swedish HallbergSekrom), with a turnover of N10 million, is an example of a fastgrowing metal processing company. Other major metal processing companies are Viljandi Metal Factory, which produces larger metal constructions, Kitman (metal furniture) and Tartu Instrument (stainless steel components for boats and yachts, hinges, latches and loops for motor vehicles). Some examples of special tool producers are Pioneer, Dvigatel, Sumar, Viro Tools, ENKO and Tooling Factory.
Machine-building companies One of the largest of these is Balti ES whose history dates back to the 1940s when it developed nuclear and hospital high tech products. The company has some 850 employees and a turnover of N11 million in 2001. Its activities include blank-forming, cutting, welding, thermal treatment, coating of components and assembly. Another is Tallinn Machine Factory, producing steel casting and heat exchangers and having a turnover of N9 million. Other producers are Paide Machine Factory (metal fabrications for machinery (medium and large), shafts, chain-wheels, cog-wheels, turnover N3 million); Kolmeks (pumps, parts for electric motors); Tarberaud (antennae); Tamsalu EPT (agricultural and forestry equipment) and Estre (agricultural and forestry equipment).
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Table 4.2.1 Foreign investors Investor
Country
Company
International Steel Industries A.P. Moller Group Autoliv Hallbergs-Sekrom Fabriks AB Glamox Elekter Rautaruuki
Bermuda Denmark Sweden Sweden Norway
Galvex Loksa Shipyard Norma Tarkon Glamox Harju
Finland
Rannila Profiil
The Federation of the Estonian Engineering Industry The Federation of the Estonian Engineering Industry is a federation of employers consisting of more than 80 member enterprises with over 9,000 employees. The main objective of the FEEI is to create the necessary conditions to promote productivity, encourage co-operation and integration, develop foreign contacts and trade, organize industrial fairs and assist companies in their marketing activities. Mustamäe tee 4 Tallinn, 10621 Estonia Telephone +372 611 5893 Fax +372 656 6640 Email
[email protected] Website www.etc.ee/engineering
Opportunities in the Estonian engineering and metalworking industry Estonia has attracted engineering and metalworking companies from countries such as the USA, UK, Sweden, Finland, Germany, Switzerland and Denmark, involved in a wide range of operations such as tooling, metal construction, ship and apparatus building, fine-mechanical devices and machining of precision metal parts for instruments. The well-trained and flexible Estonian workforce is very efficient in the fast implementation of modern technology and production techniques. The experience acquired from co-operating with foreign partners and the excellent price/quality ratio make the industry increasingly attractive to new entrants.
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This opens up business opportunities such as: • Increased utilization of the available production capacities of Estonian companies. This often also implies the access to a network of factories in Latvia and Russia, especially in the St. Petersburg area; • Investment into a new production base in Estonia serving Scandinavian and Western European companies; • Penetration of the markets of Russia and other CIS countries together with Estonian partner companies.
For additional information on investment opportunities please contact: Mr Stefan Andersson Project Manager Estonian Investment Agency Email
[email protected] Website www.investinestonia.com
4.3
IT and Telecommunications Estonian Investment Agency Shaping the information society Estonia is a small economy with only limited natural resources. The country’s success depends heavily on its people, and an ability to take advantage of information and information technology. As a young, innovative and fast-developing country, Estonia saw its future success in information technology. In 1991, when Estonia regained its independence, the country inherited an outdated telephone system. Today, 12 years later, Estonia boasts one of the most modern telecommunication networks and a higher rate of computer literacy than many Western European countries. Targeted governmental policies and the readiness of people to adopt new technologies are taking Estonia to the leading edge of information technology. At the beginning of 2003 The World Economic Forum ranked Estonia 24th among the most developed information societies in the world.
Getting connected Massive investments have been made in modernizing the Estonian telecommunications network. Fibre optic cables and direct undersea connections to Sweden and Finland guarantee first-class national and international communications. In fact, as early as 1992 the Nordic telecommunications giants Telia and Sonera were involved as strategic partners in the national telecommunications company Estonian Telecom. This early move has brought worldclass know how and substantial financial strength into building up a modern and efficient telecommunications network.
IT and Telecommunications
137
Three mobile communication networks cover the whole country, offering a wide range of wireless communication applications and ensuring highly competitive prices for customers. The results of these investments can already be seen today – Estonia tops the list of Internet users, as well as the total number of computers per 10,000 inhabitants, in Central and Eastern Europe. Connection rates to the Internet are even higher than in some Western European countries. Rising living standards and a fierce competition among ISPs keeps the numbers of users increasing at a breathtaking pace. Finland
2,206
Denmark
1,225
Sweden
895
Estonia
632
Norway
601
UK
403
Germany
319
216
France
144
Poland Latvia
122
Lithuania
102
26
Russia 0
500
1,000
1,500
2,000
2,500
Figure 4.3.1 Internet connected hosts per 10,000 inhabitants, July 2002 Source: RIPE
Supportive government policies With its policies and innovative initiatives, the Estonian government is helping companies make the information technology sector one of the fastest growing in the country. To foster growth, the Estonian government has set up a series of initiatives, including the innovative Tiger Leap programme. This is a national information society project that ensures that every Estonian school is wired to the Internet. Also, Public Internet Access Points have been created all over the country in order to
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Key Sectors of Trade and Investment
make the Internet available to every Estonian. To keep the growth going the government is helping to boost the number of computer programmers and IT specialists through the establishment of an IT College in September 2000. Since 2001 a working e-Tax Board means that income tax statements can be filled out via the Internet. In 2001, the public and private sector initiated the Look@World project. The aim of this project is to increase the number of Internet users in Estonia to over 90 per cent of the population. Beyond general infrastructure policies, the government is also working to ensure that the legal environment is up to scratch. The new law on the legal status of digital signatures will continue to revolutionize the way business is transacted in the country. The government is also looking at its own operations, with an eye to making the process of government more transparent. In one of its latest moves, the government has introduced an Internet-based electronic document management system that will not only dramatically reduce the use of paper, but will also speed up the circulation of documents between various governmental institutions.
Estonia – the leader in modern telecommunication services Estonia’s telecommunication infrastructure is modern and has been almost entirely digitalized over recent years. The involvement of foreign-owned companies in the sector has facilitated the major investment needed to update the infrastructure and introduce new services. In 2001, the Estonian telecommunication sector was fully liberalized. Local commercial banks have significantly benefited from the new opportunities in information technology. Modern banking systems and widespread Internet usage have placed Estonian banks in the forefront of the world’s electronic and Internet banking services. Today 43 per cent of Estonians use Internet banking – a figure that is on a par with Scandinavia. More than 80 per cent of the business customers of market leader Hansapank carry out their transactions electronically. Less than 20 per cent of all money transfers are still made the old fashioned way, over the bank counter. Even e-commerce has benefited as e-commerce companies and local banks have teamed up to provide payment systems for goods and services purchased online by using direct transfers – without the insecurity of credit card transactions. Due to the close proximity of the Nordic countries – the world leaders in many of the new wireless telecommunication technologies
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139
– Estonia has become a country where mobile phones are not only manufactured but are also very widely used. Today about 60 per cent of the population uses GSM services offered by three operators. Estonian mobile operators were among the first in the world to introduce WAP services to their customers.
The fast developing IT industry Today around 450 IT companies operate in Estonia. A number of these companies are subsidiaries of international firms, active in adding value locally and offering training and system integration services. The areas of competence of Estonian local engineers include, for example, banking software systems, accounting software and encryption solutions. Many Estonian start-ups have developed their own IT products and are successfully marketing them to both local and export markets. Due to the strong expertise in new telecommunication technologies, Estonian IT companies have established close links with Nordic telecommunication leaders in developing innovative software solutions to new technologies. The booming IT industry in the Nordic area, with its advanced demand and strong cluster of companies, has become one of the main drivers of growth in the Estonian IT industry. Early introduction of e-commerce solutions by Estonian companies is another example of advanced applications accepted by the society. The widespread use of the Internet, combined with early demand for the new type of shopping opportunities, have led to the Finland
831.3
Sweden
792.0
UK
754.8
Norway
751.4
Denmark
719.5
Germany
651.7
Estonia
541.6
Latvia
279.4
Poland
258.6
Lithuania
253.2
Russia
52.5 0
100
200
300
400
500
600
700
800
900
1000
Figure 4.3.2 Mobile phone subscribers per 1,000 inhabitants, 2001 Source: World Competitiveness Yearbook 2002, ITU database
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Key Sectors of Trade and Investment
emergence of many e-commerce service providers. Therefore, it is no surprise that these young companies have already attracted strong attention from international equity investors.
Excellent growth opportunities Rising exports IT exports from Estonia are expanding rapidly. Government support measures and the overall fast development of the sector will, according to estimates, increase exports roughly ten-fold over the next 10 years. This will be achieved through increasing co-operation with Western, especially Scandinavian, IT companies, as well as the opportunity of selling know how to the vast neighbouring market of Russia. The huge demand for software specialists all over the world forces many Western IT companies and R&D institutions to look in new locations for additional capacity. They do not have to go far – geographical proximity and a similar business culture place Estonia among the first choices for companies looking for outsourcing and investment opportunities. Estonia is the home of Microlink, the largest information technology company in the Baltic Sates. The company started by assembling personal computers in the early 1990s and has grown to a diversified IT solutions company that offers a broad range of solutions from hardware to Internet services and e-commerce to its customers in Estonia, Latvia and Lithuania.
Outsourcing and investments opportunities The rapid development of the Estonian IT industry offers excellent opportunities for outsourcing as well as investment by international companies. To benefit from local expertise, many foreign companies have invested in Estonian software houses and started to use Estonia as their base for servicing neighbouring markets. Others have outsourced work to Estonian companies for the development of their software products by Estonian specialists.
Highly skilled labour Two universities, a number of polytechnics and many training companies provide basic and specialized education in information
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technology. With the foundation of the IT College, the number of graduates in the sector has increased further. Higher than average incomes and ever-growing demand in the sector is attracting increasing numbers of young people. Good knowledge of foreign languages – mainly English, Russian and Finnish – is another strong advantage for the Estonian workforce.
Low costs Estonia continues to be a competitive location for IT and telecomrelated activities. Operating costs, including labour costs, are considerably lower than in Western European countries. The average monthly income of a software professional hovers around US$1,500 – four times less than in the United States and three times less than in Western Europe. At the same time the availability of know how will guarantee the best quality and added value to the service provided.
A great test market for new products As a small country with a well-educated population that is willing to adopt new technologies very quickly, Estonia represents an excellent test market for new technologies. The availability of modern infrastructure and low-price services is an advantage. Strong early demand in the society will secure a local market for new products or services developed in Estonia.
Good location Estonia is located in the Nordic region, which is the world leader in the use and manufacture of new information technology products. Estonian IT companies are more and more integrated into the supply chains of their Scandinavian counterparts – thus getting leading edge know how and project management expertise. An investment in this fast-growing and demanding market will contribute to the success and future competitiveness of any IT company. For company profiles visit www.export.ee/IT
4.4
Chemical Industry Estonian Investment Agency The chemical industry, particularly the branches engaged in oil shale processing1 and fertilizer manufacturing, has been one of the most significant industrial sectors in Estonia for some time.
Production The chemical industry’s output, at N196.6 million, accounted for 6.6 per cent of total manufacturing output in 2000 and an increase of 17.5 per cent on 1999, but is still lower than the figures for 1997 and 1998 (see Table 4.4.1). Table 4.4.1 Volume of the main products of the chemical industry (thousand tons) 1999
2000
Main producers
Ammonia Synthetic resins Mineral fertilizers Benzene Toluene Formalin Sulphates Paints and varnishes
145.5 20.3 41.4 14.4 4.4 14.3 10.2 14.7
127.5 27.1 37.5 13.6 4.6 21.3 10.5 16.9
Nitrofert Ltd
Detergents Shale oil (for sale)
0.8 112.0
Viru Keemia Grupp Ltd Viru Keemia Grupp Ltd Viru Keemia Grupp Ltd Kemivesi Ltd ES Sadolin Ltd, Baltic Color Ltd 0.678 Orto Ltd, Flora Liit Ltd 122.9 Viru Keemia Grupp Ltd
Source: Statistical Office of Estonia
1 Estonian oil shale (kukersite) is a local raw material. Annual excavation is around 11.7 million tons per year. Approximately 80 per cent of this is used for electricity production and 20 per cent for production of shale oil.
Chemical Industry
143
Sub-sectors
N Million
The main sub-sectors are chemical products (74.4 per cent production share in 2000) and rubber and plastic products (25.5 per cent). In 2000 the output of chemicals and chemical products grew by 29 per cent on 1999. During the same period, however, the production of rubber and plastic goods fell by 6.9 per cent. The output of these branches of the industry in 2000 was £146.4 million and £50.2 million respectively (see Figure 4.4.1). 240 210 180 150 120 90 60 30 0 1994
1995
1996
Chemicals and chemical products
1997
1998
1999
2000
Rubber and plastic products
Figure 4.4.1 Chemical industry production Source: Statistical Office of Estonia
Exports The chemical industry is very export-orientated, with 73.9 per cent of chemicals and chemical products exported in 2000, compared with 64.1 per cent in 1999. In rubber and plastic manufacture these figures were slightly lower: 46.7 per cent in 2000 and 43.3 per cent in 1999. The growth in the proportion of exports is indicative of the growth in foreign demand. The production of chemicals and chemical products has one of the highest shares of export sales in the manufacturing industry, well above the industry average of 53.9 per cent (2000). The chemical sector as a whole constitutes 11 per cent of total manufacturing exports. Most of the chemical industry’s export consists of consumer chemical products; the share taken by rubber and plastic is smaller. The main exports are: • Dyes; • Paints and varnishes;
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Key Sectors of Trade and Investment
• Plastics and plastic articles; • (inorganic chemicals): ammonia; • (organic chemicals): benzene. The main export markets are Latvia and Lithuania, the EU and CIS.
Human resources The restructuring processes that have taken place in the chemical industry and the increase in production efficiency in the 1990s has had a negative impact on the employment figures of the industry. The number of employees has decreased from 7,040 in 1997 to 4,653 in the first quarter of 2001. The average monthly gross wages in the first quarter of 2001 was N382.7, 1.24 times the average manufacturing salary of N307. In the manufacture of rubber and plastic products, the average salary in the same period was lower: N319, but still 1.04 times above the manufacturing average. Specialists in chemical technology are trained at Tallinn Technical University and Tartu University. Employees training is organized by the Federation of Chemical Industry as well as by companies themselves. EU specialists are used as teachers. Despite increasing labour costs in Estonia, the salaries of workers are still modest when compared to the corresponding figures in Western Europe.
Foreign direct investment The chemical industry in Estonia has a very high foreign direct investment (FDI) penetration rate (see Figure 4.4.2). The total amount of FDI in manufacturing by the end of 2000 was EEK9.55 billion. The stock of FDI in the chemical industry ranked fourth in Estonian manufacturing, after food processing and the wood and textiles industry.
Development of productivity There has been a considerable growth of productivity in the chemical industry, partly due to the fall in employment numbers in this sector. The level of productivity in this sector is high compared to other branches of manufacturing in Estonia.
Chemical Industry
145
Share in production
Share in exports
Share in FDI 0
1
2
3
4
Chemical products
5 %
6
7
8
9
10
Rubber and plastic products
Figure 4.4.2 Share of the chemical industry in manufacturing (2000) (%) Source: Statistical Office of Estonia
Labour productivity (production per employee in constant prices) in the manufacturing of chemicals and chemical products in the second quarter of 2002 was 40 per cent higher than in manufacturing as a whole (N14,121 and N8,754 per employee). In rubber and plastic production the figure was N8,100 per employee in the same quarter (see Figure 4.4.3). 175 150 125 100
110.6
116.5
1997
1998
146.8
150.2
156.2
1999
2000
2001
90.8
75 50 25 0 1996
Figure 4.4.3 Productivity dynamics in the manufacture of chemicals and chemical products, 1st quarters (1995=100) Source: Statistical Office of Estonia
Favourable investment climate The main reasons to invest in the chemical industry in Estonia are: • Well-trained chemical engineers;
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Key Sectors of Trade and Investment
• Relatively low production costs (including relatively cheap skilled labour); • Opportunity to cover the Baltic, Russian and/or European markets; • No income tax on reinvested proceeds.
Foreign capital involvement Foreign companies with subsidiaries in Estonia include Dynamit Nobel, Algol, Sadolin, Bang & Bonsomer, Velsicol, Kemira, Benckiser and Procter & Gamble. Examples of foreign investments in the Estonian chemical industry are: • Dynamit Nobel, investment in Orica Eesti OÜ (explosives); • Gaz-Oil AS from Russia invested in Nitrofert Ltd; • Nycomed Systems from Scandinavia invested EEK2.2 million in Nycomed Sefa (pharmaceuticals); • Roshill Investments from Ireland invested in Tallinna Farmaatsiatehas (pharmaceuticals); • Velsicol Chemical Corporation from the USA invested EEK21 million in Velsicol Eesti.
Raw materials Raw materials for the chemical industry are mainly imported, with the exception of oil shale. The Estonian oil shale industry is located in Ida-Virumaa County in the north-eastern part of the republic. Production of shale oil began in the county in 1921 when the first retorting trials took place. Shortly afterwards the new industry began to produce shale oil with an output capacity of about 33 tons per day in Kohtla Jarve. It is estimated that about 170 million tons of oil shale have been converted into shale oil since 1921, with the most significant annual output being 550,000 tons in 1968. Since 1990 the production of shale oil has decreased to about 300,000 tons per year.
Main producers The production of the chemical industry is concentrated in major companies such as Viru Keemia Grupp Ltd (about 1,500 employeese), Nitrofert Ltd, Silmet Ltd and Dynamit Nobel Ltd.
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147
In oil-shale chemistry, the main player is Viru Keemia Grupp Ltd. The main producers of consumer chemical products are Orto Ltd, Flora Kommerts Ltd and Tartu Flora Ltd. The major manufacturers of paints and varnishes are Sadolin Eesti Ltd and Baltic Color Ltd. The main producer of plastics and plastic products is Estiko Plaster Ltd. A significant enterprise producing explosives is Orica Eesti Ltd.
The future Due to extensive scientific research in the field and the relatively high quality of oil-shale deposits, the industrial sector will be of interest to potential foreign investors. The Baltic oil shale has unique qualities and yields shale oil for the manufacturing of chemicals that cannot be produced from petrol, coal or other sources.
Further information The Federation of the Estonian Chemical Industry Ministry of Economic Affairs and Communications Statistical Office of Estonia Institute of Chemistry at Tallinn Technical University
www.keemia.ee/eng www.mkm.ee/eng www.stat.ee http://argus.chemnet.ee/indexe. html
Companies Viru Keemia Grupp Ltd Flora Liit Ltd ES Sadolin Ltd Estiko Plastar Ltd Orto Ltd Silmet Ltd
www.vkgrupp.ee/uk/index.html www.tartuflora.ee/eng/index.htm www.varvimaailm.ee www.plastar.ee/eng/index.php www.orto.ee/english.php3 www.silmetgroup.com
4.5
Food-processing Industry Estonian Investment Agency Overview Over the last 10–12 years the Estonian food-processing industry has been transformed from a large-scale production system supplying the whole Soviet Union with selected products, to a modernized and efficient industry having to meet all EU requirements. Western European companies play a central part in this transformation, adding direct investment and know how to the industry. The food-processing industry has traditionally been the largest industrial sector in Estonia. The output of the food-processing industry in 2000 amounted to N0.56 billion, constituting 25.1 per cent of Estonia’s industrial output (excluding energy and mining) and 13 per cent of exports; 27 per cent of all the food-processing industry’s output is exported. The EU is increasing in importance as an export market for Estonian products and by the first quarter of 2001 it had achieved a 29 per cent share of the industry’s total exports. Between 1998 and 2000 the food-processing industry’s annual output decreased, as did its share of the output value of the whole processing industry. Unlike other European countries, the Estonian food-processing industry has had to compete on a completely open domestic market, which has meant facing competition from exportsubsidized products from the European Union. In the first quarter of 2001 the output of the food-processing industry increased by 14 per cent in current prices compared to the same period in 2000. A number of factors are now working in the favour of the Estonian food-processing industry. The European market is gradually opening up for Estonian producers as they adapt to EU hygiene requirements and as the EU increases its import quotas for Estonian products. This is the main reason why Estonian food exports increased by 74 per cent in the first quarter of 2001, compared with 2000. Also,
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149
direct investment aid (SAPARD) from the EU has enhanced the industry’s opportunities. Finally there is reason to expect that the conditions for trade with Russia will improve and enable increasing exports for the Estonian food-processing industry in that direction. Figure 4.5.1 illustrates the rapid fall of the food-processing industry’s production value in the early 1990s. 250 200 Food Total Meat Milk Fish
150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 4.5.1 Production value development prices indexed to 1992 level Source: Statistical Office of Estonia
The production value of industry sub-sectors is shown in Figure 4.5.2. Others 58
Meat 89
Beverages 121
Milk 153 Bakery 51 Fish 83
Figure 4.5.2 Production value of the industry’s sub-sectors in 2000 (N¼ million) Source: Statistical Office of Estonia
The most important export articles of the Estonian food-processing industry are fish and fish products (44 per cent of the industry’s
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Key Sectors of Trade and Investment
exports in 2000), milk products (29 per cent), beverages (11 per cent) and meat products (8 per cent). The main markets for Estonian food products are: Holland (fish, milk products), Ukraine (fish), Latvia, Russia, Switzerland and Germany. Sectoral export volumes are illustrated in Figure 4.5.3. Others 13
Meat 12
Beverages 17
Milk 44
Fish 67
Figure 4.5.3 Estonian food exports in 2000 (Nmillion) Source: Statistical Office of Estonia
Human resources The food-processing industry employed 16,051 (full time and equivalent) people in 2000. This was 17.3 per cent of the labour force engaged in the industrial sector and 3.9 per cent of the economically active population. The average monthly gross salary in the food-processing industry in 2000 was N310, slightly higher than the average salary in the industrial sector of N303. Specialists in food-processing technology are trained at Tallinn Technical University, Estonian Agricultural University and in numerous vocational schools. In some areas the Estonian higher educational system does not meet the needs of the industry, and therefore the training of employees is often the responsibility of the companies themselves. This sometimes also means people being trained abroad.
Raw materials The production volumes of the Estonian food-processing industry currently exceed the production of agricultural raw materials in Estonia. Therefore there is a need to import some raw materials. As
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151
Table 4.5.1 Employees and salaries of the food-processing industry sub-sectors in 2000 Average number of employees
Sector Meat Fish Dairy Bakery Beverages Grain etc Other Total
Average monthly salary, 2000 (N)
1,809 4,697 3,121 2,728 1,863 132 1,701 16,051
343 247 326 271 494 370 310
Source: Statistical Office of Estonia
regards local raw materials, the bargaining power of the processors in the 1990s kept the prices low, allowing the food-processing industry to enjoy rather high profit margins. Now, however, a shortage in the supply of some raw materials and an increasing co-operation between agricultural producers have driven up prices. Since the Estonian agricultural economy is open for international trade, price increases are also a consequence of what has happened on world markets. Table 4.5.2 shows the dramatic increase of raw material prices in recent years. Table 4.5.2 Raw material prices
Milk Beef Pork Rye Wheat
N/kg N/kg N/kg N/t N/t
Sept 1999
Sept 2000
Sept 2001
0.12 1.02 1.27 81 88
0.17 1.15 1.65 91 101
0.20 1.54 1.74 105 114
Source: The Estonian Institute of Economic Research
Due to the seasonal nature of agricultural production, the purchase prices of raw materials fluctuate by about 10 per cent throughout the year. The biggest cost item for the food-processing industry is raw materials, constituting over 60 per cent of total production costs. Another large cost item is labour, making up some 14 per cent of total production costs.
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Key Sectors of Trade and Investment
Since there are, in most cases, no tight links between the primary producers of agricultural products and the food-processing industry, there is considerable flexibility in prices and sales patterns. However in the meat-processing industry there are signs that the industry is trying to gain better control of primary production. This development has been caused by the rapid rise of raw material prices in recent years.
Distribution and product security On the retail level there is currently rapid development with the old structures of marketplace trading being replaced by modern department stores. This happens as foreign retail-chains are being established in Estonia. In order to sell food products on the domestic market, the products must comply with the terms prescribed by the Food Act, the Public Health Act, the Consumer Protection Act, the Packaging Act, the General Hygiene Rules and some regulations of the Minister of Agriculture. Since Estonia is harmonizing with the EU, so also are all food product rules and regulations. Laws are available in English on the website of the Estonian Translation and Legislative Support Service at www.legaltext.ee/ endefault. htm. The Food Act prescribes the implementation of self-control systems for food producers (HACCP). Several producers have implemented this system. Table 4.5.3 shows Estonian food-processing companies who have implemented ISO 900* quality systems and been rewarded with quality certificates. Table 4.5.3 Companies holding ISO quality certificates Company
Activity
Date of issue
Liviko Tallinn Dairy Plant Rehu Eesti Ltd. Tapila Ltd, Laeva Dairy TALLEGG Feed Factory AS Onistar AS Werol Tehased Saku Õlletehas AS
Alcoholic beverages Dairy products Feed supplements Dairy products Feed production Alcoholic beverages Vegetable oils and expellers Beer, soft beverages and mineral water products.
04.12.1997 30.06.1998 14.12.1998 15.09.1999 06.10.1999 24.08.2000 09.10.2000 17.11.2000
Source: Estonian Association for Quality
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153
Industry associations The Association of the Estonian Food Industry is an umbrella organization uniting professional associations and companies involved in food processing. The Association, besides representing its members, manages the standardization of food products and technologies, prepares its members for integration into the EU and co-ordinates communications with the relevant bodies of the EU. The Food Association also organizes the annual competition for the best Estonian food product. The major sub-sectors of the foodprocessing industry also have their own industry associations.
Trends on the Estonian food market During the 1990s, the food-processing industry suffered substantial setbacks in exports to eastern markets. Factors affecting food exports to Russia were double tariffs and economic and political instability. With Russia’s expected accession to the WTO, trade with Russia is expected to recover. Also, Estonia’s efforts to integrate into the European Union are important and the EU market, by increasing quotas, is already opening up to Estonian food products. These two huge markets of the EU and Russia will be the main outlets for increasing exports of the industry. On the home market, the future will bring qualitative (increasing value-added products) rather than quantitative increases. The food-processing industry may continue to face a shortage of local raw materials for some time, resulting in production costs remaining high. However the higher prices have already been an incentive for farmers to invest and this is likely to result in an increased production of raw materials over the next few years. Another industry trend is the constant restructuring of the industry. Several foreign companies have contributed investments and thereby helped to speed up the modernization of the industry. As the pressure to adapt to EU standards increases there will also be a clear reduction in the number of active food-processing companies as economies of scale become increasingly important and consumers require higher product quality.
Foreign investments A number of companies have invested in the Estonian foodprocessing sector; a few are listed in Table 4.5.4.
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Key Sectors of Trade and Investment
Table 4.5.4 Companies investing in the sector Foreign investor
Estonian company Activity
Carlsberg Breweries/Hartwall (Denmark/Finland) Gustav Paulig AB (Sweden) HK Ruokatalo OY (Finland)
Saku Brewery
Procordia Food AB (Sweden/Norway) Valio OY (Finland) CloettaFazer (Sweden/Finland) Vaasan&Vaasan/Cerealia (Finland/Sweden) Unilever (the Netherlands)
Beers & soft drinks Spices, coffee Meat/poultry production
Paulig Baltic AS Rakvere Lihakombinaat, Tallegg Põltsamaa Felix AS Valio Eesti Fazer Eesti Leibur
Vegetable preserves Milk products Bakery Bakery
Põlva Piim
Milk products
Source: EIA
Investment opportunities Western European companies have, through takeovers, already entered most sectors of the Estonian food-processing industry. However there is still room for new players who will be able to benefit both from the increasing export markets and from the increasing quality demands of domestic customers. There is also a number of quality companies with very professional management but with insufficient resources to invest and modernize rapidly. Since the need for investments will continue to be high for the next few years, circumstances will favour financially strong companies which are able to modernize the existing companies to become fully-fledged EU players. After some tough years in the late 1990s it is now clear that the profitability of the industry is rising and it is a good time for experienced western European entrepreneurs to use their knowledge and experience to develop Estonian investments.
Main reasons to invest in the food-processing industry in Estonia: • Low production costs; • A stable and developing economy; • Liberal trade;
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155
• Low taxes and zero-tax on reinvested profits; • Local raw materials • Geographical hub of Scandinavia-Russia-Continental Europe.
The dairy industry Volumes The dairy industry has, over the last few years, seen an upswing due to improving conditions on the EU market. At the same time Estonia’s export quotas for this market are increasing substantially. From 1 July 2001 the annual quotas for Estonian exports to the EU amount to 12,000 tonnes of milk powder, 3,900 tonnes of butter and 2,600 tonnes of cheese. However, compared with the numbers a few years ago when exports to Russia flourished, there is still some ground to regain. Total exports of milk products in 2000 accounted for N50 million, only half of the 1997 figure. It is also notable that the number of dairy cows decreased by 57 per cent between 1993 and 2000 and also that the number of employees in the industry has been decreasing since 1998, despite rising production volumes. The production value of the dairy sector in 2000 (see Figure 4.5.4) amounted to N156 million, 28 per cent of the total foodprocessing industry. The main products of the dairy industry are milk, milk powder, kephire, sour cream, cream, yoghurt, cheese, ice cream and curds. 250 200 150 100 50
0
1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 4.5.4 Production value of the dairy industry (Nmillion)
Total export value of milk products in 2000 was N50 million. In the first quarter of 2001 exports of milk products increased 2.1 times compared with the same period in 2000. The most important markets in Q1 2001 were Holland (46 per cent), Russia, Algeria, Lithuania and Latvia (7 per cent each).
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Key Sectors of Trade and Investment
Export volumes are essentially determined by the quotas granted by the European Union. There is therefore potential for further increases in the export volumes as the quotas increase year by year.
Prices Estonian milk prices have risen along with rising prices on the world markets. From a bottom level of N0.09 in 1998, prices paid to farmers per litre of milk had risen to over N0.20 in early 2001. Retail prices of milk products in Estonian stores were as follows in September 2001: butter N2.88/kg and milk (2.5 per cent fat content) N0.50/kg (Konjunktuurinstituut).
Companies The dairy sector has undergone a substantial restructuring and this process is likely to continue for some time yet. Several of the major dairy companies in Estonia are now foreign-owned, such as Valio Eesti, Lacto, Põlva Piim, Võru Juust and Rakvere Piim. Among other major players it is notable that Meierei has become a (temporary) holding of Estonia’s major bank Hansabank. Market shares on the domestic market between dairies differ considerably between products (see Figure 4.5.5). Others 10% Valio 33%
Meierei 28%
Tallinna Piimatööstus 29%
Figure 4.5.5 Market shares: consumer milk Source: Äripäev 18/8/2000
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157
The market for dairy products is extremely competitive, which forces the producers to invest heavily in product development. The product lines of domestic producers have constantly been supplemented and modernized while the need to adapt to EU standards has encouraged the dairies to invest heavily. Since 2001 the milkprocessing companies have enjoyed investment aid from the SAPARD programme for Estonia. The companies manufacturing dairy products employ 19.4 per cent of the people engaged in food production and their wages are slightly higher than the industry’s average. Specialists are trained at the University of Agriculture and Tartu Vocational School, but also on the spot by the employer. Generally farmers and the dairies are independent of each other but in a few cases the farmers also own the dairy, eg Saaremaa Liha-ja Piimatööstus.
The meat-processing industry Volumes The meat-processing industry’s total production amounted to N88.4 million in 2000, 16 per cent of the food sector. Exports in 2000 amounted to N16.3 million, an increase of 45 per cent on 1999 and about 18 per cent of total meat production. In the first quarter of 2001 exports rose by 31 per cent compared with the same period in 2000. Pork is the most important export product, followed by poultry. The main markets for exports are Latvia (60 per cent) and Lithuania (30 per cent). No company had been approved for export to the European Union by October 2001. The meat-processing industry employs about 1,800 people, with an average monthly salary of about N350, higher than the foodprocessing industry average. During the last decade there has been a sharp fall in the production of domestic livestock for processing and so local meat output does not cover the needs of the industry. The shortage is covered by imports.
Prices Due to a lack of supply of domestic livestock and rising prices on the world markets, prices for all types of meat have increased sharply over the last few years. Pork prices have even risen above the Finnish price level (source: Lihaliit).
158
Key Sectors of Trade and Investment 150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 4.5.6 Production value of the meat industry (Nmillion)
Companies The Estonian meat industry consists of some 200 companies, however most of these are very small scale. In connection with the increased pressure to adapt to EU standards it is likely that the number of companies will start to fall quite quickly. By far the largest company today is Rakvere Lihakombinaat, which in 2000 had a turnover of N57.0 million (including its Latvian holding). Other major players are Valga Lihatööstus, Tallegg (poultry), Wõro Kommerts and Saaremaa Liha-ja Piimatööstus. In August 2001 Rakvere Lihakombinaat together with Swedish LRF bought a majority holding in Tallegg. By October 2001 no company had received approval for exports to the European Union and therefore the EU quotas for meat exports have not yet been used. The meat-processing sector needs investments, mainly in the areas of production and hygiene, in order to adapt to EU requirements. Since 2001 meat-processing companies have been eligible for investment aid from the SAPARD programme for Estonia. The main players in the meat industry are shown in Table 4.5.5. Table 4.5.5 Major players in the meat industry Company
Market share (2000)
Rakvere LK Wõro Kommerts Tallegg* Valga Meat Factory Saaremaa Meat Factory
34% 15% 12% 12% 10%
*owned by Rakvere LK/LRF Source: BNS 2001.05–08
Food-processing Industry
159
The fish-processing industry 150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 4.5.7 Production value of the fish industry (Nmillion)
Volumes In 2000, total fish product production amounted to N86 million, an increase of 7 per cent on 1999 but 35 per cent below the peak-year of 1997. Excluding canned fish products, production amounted to 25,000 tonnes (0.2 per cent up on 1999). The production of canned products amounted to 127 million cans (+15 per cent). In the first quarter of 2001 export of fish and fish products increased by 80 per cent compared to Q1 2000. The fish-processing industry was growing rapidly in 1997 and at the beginning of 1998 but then suffered from the economic decline and difficulties on eastern export markets. Over a number of years the ratio of exports to total sales of the industry has been steady at around 80 per cent The main export articles are fresh and frozen fish, fish fillet and canned fish products. More than 50 per cent of production consists of sardines and sprats. Important export markets are the Ukraine (16 per cent in Q1 2001), Holland (10 per cent), Russia (8 per cent), Switzerland and Germany (7 per cent each). The amount of raw material available to the industry depends on catches and is based on quotas. The capacity of the Estonian fishing fleet exceeds its quotas. The main cost articles in the fishery sector are raw materials (60 per cent) and labour (23 per cent). The salaries in the fishery sector are lower than the monthly average of the food-processing industry at approximately N268. As exports are very important in the fish-processing industry, setbacks on eastern markets have considerably affected fisheries. However, EU veterinary inspectors have positively assessed Estonian fishery companies and 24 companies fulfil the requirements for exports to the EU.
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Key Sectors of Trade and Investment
Companies There were 135 registered companies in Estonia by mid-2000 working with the processing of fish products; however only around 40 were actively operating. Those who do not yet fulfil EU requirements will have to have done so by November 2002. Major players are shown in Table 4.5.6. Table 4.5.6 Main players (Nmillion) Company
Turnover (2000)
Maseko Viru Fishery Japs Ltd. Läätsa Fishery Dagotar Paljassaare Fishery
24.0 9.5 7.7 6.5 6.5 5.7
Source: Äripäev, 31/10/01 (Food Industry TOP)
Fishery companies need investment in product development and in improving the quality and efficiency of production. Since 2001, fishprocessing companies have been entitled to investment aid from the SAPARD programme for Estonia.
Investment opportunities For additional information on investment opportunities in the Estonian food processing industry please contact: Mr Stefan Andersson Estonian Investment Agency Email
[email protected]
4.6
Wood-processing Industry Estonian Investment Agency Overview Estonia’s wood processing industry – like other industrial sectors – underwent a rapid restructuring process in the early 1990s. The recovery has been sound and in 2001 its share in the processing industry was 32 per cent. In the first quarter of 2002 the sales of wood processing and furniture production companies totalled EEK3,660.3 million, accounting for 5.5 per cent of the net sales of all Estonian enterprises. Wood processing companies are located all over Estonia. Larger concentrations may be found near bigger centres such as Tallinn, Tartu, Pärnu and Rakvere. The industry’s products are competitive in developed countries, mainly thanks to their reasonable price-quality ratio. This means that the prices of Estonian companies are lower than those of Western European enterprises but the quality is higher than that offered by Polish and other Baltic manufacturers. Most companies apply cost-based pricing. According to the Statistical Office, in the first quarter of 2002 wood processing companies numbered 1,352, accounting for 4.6 per cent of all Estonian enterprises; 78 per cent of wood processing companies employed under 20 people and only 3 per cent had more than 100 employees. Most wood processing companies see the Estonian market as highly competitive. For furniture and wooden building manufacturers the market is saturated and new entrants have few possibilities for competing with existing players: the scarcity of raw materials is one reason for this. It is probable that in the near future the Estonian wood market will experience changes due to the sale of AS Sylvester to Stora Enso group. The impact of the transaction on
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Key Sectors of Trade and Investment
Table 4.6.1 Manufacturing of wood and paper products, 2001 Sawn material, thousand m3 Glued veneer, thousand m3 Hardboard, million m3 Chipboard, thousand m3 Glued wood, thousand m3 Furniture in selling prices, EEKmillion Matches, tons Paper, thousand tons Paper products in selling prices (including notebooks), EEKmillion Cardboard, tons
1,118.8 29.4 18.0 189.8 83.2 2,080.5 1,262.4 53.3 186.8 491.0
Source: Statistical Office of Estonia
the Estonian forestry and wood processing industries is as yet hard to assess.
Raw material All industries import processed and unprocessed wood. Although wood processing companies purchase most raw and other materials from Estonia, much raw material is also imported. Companies mostly import unprocessed and sawn wood, plywood and building components.
Imports of wood products in 2001 According to the Estonian Statistical Office, the import volume of wood products was EEK1,705 million in 2001 (see Figure 4.6.1 for breakdown). The main import markets are Russia, Finland and Latvia.
Human resources According to the Statistical Office, in the first quarter of 2002 the wood processing sector employed 28,600 people, ie 7.5 per cent of the working population. Personnel expenses for the first quarter of
Wood-processing industry
Building components 11%
163
Other wood products 3%
Wooden containers 4%
Unprocessed wood 24%
Puitliiprid 1%
Plywood 15%
Hardboard 8% Chipboard 7% Profiled Veneer wood 2% 2%
Sawn wood 23%
Figure 4.6.1 Wood-processing industry imports , 2001 Source: Statistical Office of Estonia
2002 totalled EEK531.3 million, or 41 per cent of all costs, with wages accounting for approximately 75 per cent of this. In the first quarter of 2002, the average wage in the wood processing sector was N296.
Industry associations Estonian wood processing companies are members of various professional associations and organizations. However, there is no organization that unites them all. The largest and most influential organization is Estonian Forest Industries Association, which mainly encompasses wood purchasing companies and sawmills. It has 55 members and has launched a wood information programme aimed at identifying possibilities for the use of wood and increasing wood consumption. Many wood processing companies are also members of the Estonian Chamber of Commerce and Industry and there is active co-operation with the Enterprise Estonia Trade Promotion Agency.
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Key Sectors of Trade and Investment
Foreign investment The Estonian wood processing industry has been in receipt of foreign investment for around 10 years. In 2002 the largest investment in the wood processing sector was the establishment of the aspen pulp plant in Kunda (the investment amounts to c. EEK1.3 billion and will create about 70 new jobs). The plant will be launched in spring 2004. Table 4.6.2 Larger foreign investments in the wood sector Foreign investor (country)
Company name
Field of business
Horizon Pulp and Paper AS Balti Spoon AS
Pulp, paper and other paper products Furniture industry materials Furniture
Sweden
Sawn wood Windows and balcony doors Sawn wood Furniture, sawn wood
Finland Finland Iceland Denmark
Valga Gomab Mööbel AS Finnforest AS Fenestra AS Natural AS Flexa Eesti AS
Singapore, Hong Kong USA
Sources: Estonian Investment Agency, media
As a result of the purchase-sales transaction in progress, several successful Estonian sawmills will soon be transferred under foreign capital. Companies with foreign involvement identified development and improved technical competence as positive elements.
Export According to customs statistics and the Statistical Office, in the first half of 2002 wood processing exports totalled EEK2,126 million (the figure includes exports of unprocessed wood and firewood), a figure equal to 67.4 per cent of total sales. Export of wood products amounted to EEK7,648 million in 2001. See Figure 4.6.2 for a breakdown of exports. Figure 4.6.2 shows that the main export articles were sawn timber, unprocessed wood and wooden construction components.
Wood-processing industry Other wood products Firewood Building 5% 7% components 9% Wooden containers 4% Plywood 4% Hardboard 3% Chipboard 5%
165
Unprocessed wood 24%
Profiled wood 4% Veneer 3% Sawn wood 32%
Figure 4.6.2 Exports of wood products in 2001. Source: Statistical Office of Estonia
The main export markets were Germany, Great Britain, Finland, France, Sweden and Denmark. Rising markets are Finland, Ireland and Denmark. After a decline, the importance of Great Britain and Germany is now increasing.
Sub-sectors Sawmilling Over the past decade, the market for sawn material has undergone rapid development and is now well established. Both large players and small-scale enterprises providing niche-products are on the market. The competitive advantage of large sawmills is their size, name, reliability, efficiency and price. The advantage of smaller producers is their flexibility and niche production not available to large players. In addition, they can also more easily adapt to producing different items. According to the Estonian Statistical Office, the total volume of sawn wood export in 2001 was EEK2,434 million. In 2001, sawmills exported around 72 per cent of their production.
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Key Sectors of Trade and Investment
Builders’ joinery and prefabricated buildings The construction joinery and prefabricated buildings sub-sector is one of the fastest growing segments within manufacturing. Recent developments in the sawmilling industry and an increase in drying facilities have created a good base for future development. With exports having tripled in recent years, 60 per cent of production is currently exported – mainly to Germany, the UK and Scandinavia.
Log house producers Over the last decade, several log house producers have emerged. Fewer than 10 companies were engaged in this area 10 years ago but now there are over 80 companies with total annual sales amounting to approximately EEK600 million. A couple of larger producers have reached sales of c. EEK60 million per year. Products range from manufactured round and milled square log houses and hand-made log houses to pre-fabricated wooden frame-houses and module houses. The companies are not concentrated in any specific region but the general trend is that those with the largest sales figures and higher number of employees operate in the Tallinn and Tartu regions. Exports represent around 85–90 per cent of the total sales in this sub-sector. Log houses are exported to c. 30 states with Germany being the principal target market. These companies expect that the domestic market for log houses will be better organized in the future. Today the competition is intense: companies fight both for raw material and clients by lowering their prices. The emerging export markets are France, Italy and Spain and there is a significant trend towards Asian markets, especially Japan.
Furniture manufacturers There are many furniture manufacturers in Estonia, from sole proprietorships to large manufacturers with more than 1,000 employees. In the first quarter of 2002 furniture manufacturers numbered 460. Four fifths of these employed less than 20 people. In the first quarter of 2002 the sector’s total net sales amounted to EEK1,220 million. The furniture industry accounts for approximately 6 per cent of all Estonian exports. In the case of large manufacturers, the share of exports in total sales can differ significantly. According to the
Wood-processing industry
167
Statistical Office, furniture exports in 2001 totalled EEK2,494 million. The main export markets were Finland and Germany, followed by Denmark, Sweden, Norway and Great Britain.
Manufacturers of construction supplies Manufacturers of construction supplies who use wood as a raw material can be broadly divided into window and door manufacturers and manufacturers of building materials. The largest Estonian chipboard and hardboard manufacturers are based in Pärnumaa (Pärnu county) and Eastern Virumaa (East Viru county), while window and door manufacturers can be found in all counties. Companies tend to be located in the vicinity of large towns. Window and door manufacturing is largely based in the capital. Some window and door manufacturers focus on the domestic market and export 10–20 per cent of their products while others export two thirds of their products. Their main export markets are Germany, Sweden, Russia, Japan and Ireland. According to the Estonian Statistical Office the total export of construction supplies was EEK726.3 million in 2001. The largest export countries were Denmark, Finland, Sweden and Germany. The domestic market is saturated and companies can only grow significantly by increasing their exports. Window and door producers can increase their export potential by selling to log house producers who export most of their products. It can be assumed that smaller manufacturers will remain focused on the domestic market while larger ones will increase their exports. Risks will be hedged by extending the product range. Contact KPMG Estonia for matters relating to the survey of the Estonian wood processing industry: KPMG Estonia AS Management Consulting Department Ahtri 10a 10151 Tallinn Phone: +372 626 8700 Fax: +372 6676 888 Email:
[email protected]
4.7
Transport and Logistics Estonian Investment Agency Transport and logistics play a vital role in the Estonian economy. The country’s favourable geographic location, along with its welldeveloped infrastructure, offers excellent opportunities for all transport and logistics related activities. Estonia has become a transit centre between the east and west as well as the north and south. Its location is ideal for the creation of efficient transportation links and distribution chains of goods and services for companies in Europe and in other parts of the world. Approximately 7 per cent of the country’s workforce is employed in transportation and road management, and over recent years the share of transportation and telecommunications in economic activity has steadily increased and currently constitutes over 10.5 per cent of the GDP. Railway transport dominates the cargo sector, carrying 80 per cent of all carried goods, domestic and international. Road transport prevails in the passenger sector, accounting for 69 per cent of all transported passengers. Sea 2% Road 18%
Rail 80%
Figure 4.7.1 Structure of cargo transport by cargo volume, 2001 Source: Statistical Office of Estonia
Transport and Logistics
169
The Estonian transportation and logistics sector is comprised of a successful combination of transportation services, transit trade, distribution centres and value-added logistics. Transit services constitute a profitable form of export for the nation, and their future success ranks highly among the priorities of Estonia’s economic policy. The structure of the cargo sector has changed significantly in the last ten years. The turnover of sea transportation has decreased more than seven times since 1992, due to the active privatization process. The volume of goods carried by road and rail has increased 3.2 and 2.3 times respectively. 35,000
34,637 30,497
30,000 25,000 20,000
16,344
16,180
2000
2001
15,000 10,000 5,000 0 1998
1999
Figure 4.7.2 Total cargo turnover (million ton-kilometres) 1998–2001 Source: Statistical Office of Estonia
Sea transportation With its location in the Baltic Sea Region, Estonia has captured an increasing share of the rapidly growing trade through the Baltic Sea. Its three major cargo ports – Tallinn, Pärnu and Kunda – offer easy navigational access, deep waters, and good ice conditions. Estonian ports overall provide excellent opportunities for valueadded logistics services and can serve as distribution centres for the Baltic Sea Region. The Port of Tallinn is the biggest cargo and passenger port in Estonia. It holds a leading position in the handling of cargo flows between Russia, as well as other CIS countries and Western Europe. Table 4.7.1 Cargo throughput, million tons (2001) Port
Cargo throughput
Depth (metres)
Tallinn port Pärnu port Kunda port
32.3 1.6 1.71
max 17.4 6–7 max 9.5
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Key Sectors of Trade and Investment
The ever-growing traffic through the ports accurately reflects the increasing activity in the Baltic Sea Region. Cargo traffic through Tallinn port has doubled since 1997: in 2002 it handled over 37.9 million tons of cargo and about six million passengers. This relatively high passenger activity creates ample expansion opportunities in the passenger transportation sector. Transit volume comprises 78 per cent of the total cargo turnover. Estonia’s sea transportation system is connected to other European ports. There are daily ferry links from Tallinn to Helsinki and Stockholm, as well as frequent cargo ferries to Antwerpen, Copenhagen, Hamburg, Kiel, Harwich and others. 300 250
229.3
247.4
201.5
210.7
10.6%
12.6%
12.8%
13.1%
1998
1999
2000
2001
200 150 100 50 0 Market volume
Market share of Port of Tallinn
Figure 4.7.3 Cargo market volume in the Baltic Sea Region (million tons) Source: Port of Tallinn
Muuga Free Zone The Port of Muuga Free Zone is intended to increase the competitiveness of the transit sector in Estonia by granting more flexible customs procedures for companies offering transit and distribution services. The Port of Muuga in the free zone regime is especially attractive to high value container distribution operators. Simplified customs paper handling, easy transfer of ownership rights and value-adding operations allowed in the zone are designed to foster the development of distribution centres. Continuous investment into new infrastructure provides additional expansion opportunities in Muuga Port, which is one of the deepest and most modern ports in the Baltic Sea Region. Construction of the second phase of the container terminal will enlarge the annual handling capacity to 250,000 TEU. Modern cargo handling facilities
Transport and Logistics
171
and value-added logistics will enhance the current available capacity and further increase the quality of service.
Road transport The density of Estonia’s road network is comparable to that of the Nordic countries. Its total density and length provide ideal conditions for the use and further development of road transport. Major routes connect Estonia with Russia (St. Petersburg region and Moscow) in the east and with Latvia in the south. The Via Baltica connects Central and Northern Europe with the Baltics. Domestic transport is primarily dominated by road transport. The road transport trend is also projected on an international level since the international car transit volume and the number of companies operating internationally have increased remarkably in recent years. By May 2002, 1,326 Estonian companies had obtained a licence for international road transport. This opens up vast opportunities for the establishing of partnerships with local transportation companies and further facilitates the transportation of goods.
Railway transport The shortest transportation route from Russia to Western Europe and North America is through the Baltic States. Estonian railways handle 41 per cent of the export-import transit and 95 per cent of 70 60 50 40
32.3
33.5
28.4
31.6
31.2
1999
2000
2001
23.4
29.9
29.6
1998
30 20 10 0 Local
International
Figure 4.7.4 Cargo traffic on Estonian railways (million tons) 1998–2001 Source: Statistical Office of Estonia
172
Key Sectors of Trade and Investment
all transit cargo. Most of the traffic is handled by AS Estonian Railways. In order to provide efficient transportation of goods, shuttle trains for containers operate on the Tallinn-St Petersburg-MoscowTallinn route. Estonia’s railway system is directly connected to the Russian railway systems and to the systems of other CIS countries. Estonian’s railway system connects with countries in the Far East via the Trans-Siberian line, further underlining Estonia’s position as a transit centre.
Air transport Tallinn International Airport is the largest airport in the Baltic States both in terms of passengers and cargo volume, providing services to a number of international carriers flying to 18 destinations. A newly renovated passenger terminal will increase the airport’s capacity and quality of service. The objective of this project was to bring the terminal to the level required by international civil aviation standards, including the capability to handle 1.4 million passengers per year, further strengthening its position as a hub for air traffic destinations to the Baltics and the CIS. A road feeder service connects Tallinn with the Helsinki and Stockholm airports on a daily basis, guaranteeing fast and high quality service.
Estonia – prime location for logistics operations Estonia’s great location on the crossroads between East and West is attracting an increasing number of foreign companies to locate their operations in the country. Massive investment is flowing into transportation and communications and foreign investment has substantially risen in the recent years, currently constituting 20 per cent of the total FDI stock in Estonia. Low transit costs, highly skilled labour and good communication links are additional advantages, offering favourable conditions in every sub-sector of the industry. Another advantage is its position in the same distribution area as Helsinki. The considerable growth potential implied by all these favourable conditions makes the Estonian transport and logistics sector an investment opportunity no international company can afford to ignore.
4.8
Construction Industry Estonian Investment Agency Overview
EEK Million
The construction industry has grown successfully over recent years. It is an important branch of the Estonian economy contributing about 6 per cent to the total GDP. Construction works conducted in Estonia were valued at EEK15.3 billion and construction activities in foreign countries at EEK1.4 billion in 2001. The construction price index increased two-fold between 1994 and 2002 (the index value in 1994 was 100 and 220.4 in 2002). The growth in the construction sector in current prices over recent years is shown in Table 4.8.1. 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1998
1999
Construction in Estonia
2000
2001
2002 III Qtr’s
Construction abroad
Figure 4.8.1 Construction activities 1998–2002 Source: Statistical Office of Estonia
Structure In 2000, 10 per cent of total construction activities involved the construction of residential buildings, around the same proportion as in the previous three years, while the share of civil engineering
174
Key Sectors of Trade and Investment
grew and of non-residential buildings fell. Compared to 1999, civil engineering increased by one third. There was an increase in the construction of communication and electricity lines, construction for sewerage and waste treatment, roads and streets. Residential buildings 9%
Civil engineering 38%
Non-residential buildings 53%
Figure 4.8.2 Construction production by type, 2000 Source: Statistical Office of Estonia
Construction of residential buildings mainly takes place in Tallinn and its neighbourhood, and also in Tartu and Pärnu. The share of those three cities in the turnover of the market of residential buildings is as high as 70–80 per cent.
Exports Construction work abroad has constituted about 9 per cent of total turnover in recent years. Estonian companies carry out construction works outside the Estonian border mainly in Russia, Ukraine, Latvia and Lithuania. The factors working for Estonian construction companies in these markets are quality (compared to local firms) and price (compared to Western competitors). There are many business risks associated with operating in the Russian market and companies are very careful when accepting contracts in Russia. There is limited export to Western markets, since acquiring work permits in the destination country has presented difficulties to Estonian companies.
Construction Industry
175
Human resources The construction industry employs about 39,000 people, approximately 88 per cent of whom are directly engaged in construction work. Employees in the construction industry comprise 7 per cent of the economically active population. In 2001 the average monthly gross wage in construction was EEK5,582 (N357), which is slightly lower than the average in Estonia but which represents an increase of 27 per cent rise compared with 2000. Construction engineers are trained at Tallinn Technical University (specialities include construction engineering, environmental engineering and transport engineering) and at Estonian Agricultural University (rural construction engineering). Construction specialists are trained in 18 different vocational schools.
Materials Many construction materials are produced in Estonia. Decoration materials, sanitation etc are mainly imported. The availability of building materials is satisfactory since producers have developed their own distribution channels. Major construction firms have direct contacts with the manufacturers of materials. This arrangement allows builders to control the cost and quality of the materials. There is, of course, a variety of different importers and wholesalers of construction materials.
Costs In 2001 the construction price index rose by 5.7 per cent compared with the 2000 average (see Figure 4.8.3). 250 191.6
200
195.4
200.3 211.8
220.4
2001
2002
150 100
100
50 0 1994
1998
1999
2000
Figure 4.8.3 Construction price index Source: Statistical Office of Estonia
176
Key Sectors of Trade and Investment
Research and development While there has been little investment in construction research and development, there is a good base for research in the Construction Faculty of Tallinn Technical University.
Standardization National standards in construction activities have been in development since 1991. Four of the ten technical committees of the National Standards Board are directly involved with the standardization of construction materials and construction activities. National construction standards are based on Finnish and other northern countries’ standards. EU directives and principles have also been considered. Members of the Estonian Association of Construction Entrepreneurs with ISO 900* quality certificates are shown in Table 4.8.1. Table 4.8.1 Holders of ISO 900* quality certificates Company
Standard
Amhold Ltd Aspi Ltd Clik Ltd Eesti Ehitus Ltd Estconde-E Ltd Eston Ehitus Ltd Facio Ehituse Ltd FKSM Ltd Harju Ehitus Ltd Lemminkäinen Eesti Ltd Merko Ehitus Ltd Maru Ehitus Ltd Parmeron Ltd Rand & Tuulberg Ltd Ratex Ltd Remet Ltd Skanska EMV Ltd Talter Ltd Teede REV-2 TSM Projektijuhtimise Ltd Uus Ehitus RC Ltd Via Pont Ltd
ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO ISO
9001:2000 9001:2000 9001 9001; ISO 14001 9001 9001:2000 9001:2000 9001; ISO 14001 9001:2000 9001 9001; ISO 14001 9001:2000 9001:2000 9001:2000 9001:2000 9001; ISO 14001 9001:2000; ISO 14001 9001:2000 9001:2000; ISO 14001 9001:2000 9001:2000 9001:2000; ISO 14001
Source: Estonian Association of Construction Entrepreneurs
Construction Industry
177
Legislation The new Building Act came into force on 1 January 2003 and as a result construction companies no longer need to obtain construction licences. However, in order to be active in the construction market the company must be registered in the State Register (http://register.mkm.ee/erinregister). Selected legislative acts are also available in English. For more information visit the Estonian Translation and Legislative Support Centre website: www.legaltext.ee/endefault.htm.
Industry Association Members of the Estonian Association of Construction Entrepreneurs (EACE) contribute 56 per cent to construction turnover. EACE includes all major players in the Estonian construction market. The Association participates in the legislative process and compilation of standards and regulations, provides legal help in preparing documentation, organizes training courses, participates in the work of licensing committee etc.
Foreign capital The most influential construction firms in Estonia based on foreign capital are the Finnish Rakennus OY Lemminkäinen and Skanska Oy, both involved in general construction, and the German railway engineering company Koehne Bauunternehmung GmbH.
Main players The biggest construction firms by turnover are shown in Table 4.8.2.
Investment opportunities The involvement of foreign capital in Estonian construction industry is still relatively modest, nevertheless the industry shows excellent potential. Larger companies have successfully penetrated the civil engineering market, but need additional financing for the development of new technologies and/or new markets.
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Key Sectors of Trade and Investment
Table 4.8.2 Biggest construction firms (turnover and profit in million EEK) Company Merko Ehitus Ltd Cueks Ltd Skanska EMV Ltd FKSM Ltd EE Grupp Ltd Estconde-E Ltd Teede REV-2 Ltd Koger & Partnerid Ltd
Turnover (2001) 1,359.0 819.0 718.8 700.0 649.0 406.0 301.6 300.5
Profit (2001) 88.3 20.0 20.5 15.7 37.8 42.0 9.1 5.0
Source: Äripäev, Top 100
The main reasons to invest in the Estonian construction industry are: • • • • • • •
Low production costs (labour, energy etc); Stable and developing economy; No income tax on reinvested profits; Skilled labour; Opportunity to cover Baltic, Russian and/or European markets; Locally available, relatively inexpensive construction materials; European and international standards implemented.
4.9
Construction Materials Estonian Investment Agency Overview Supporting a strong and competitive construction industry, Estonia has a well developed industry manufacturing construction materials. The total sales of the members of the Association of Construction Material Producers of Estonia (ACMPE) was EEK2.9 billion in 2002. The growth of the construction industry has led to the growth of the construction materials industry. The turnover of the construction materials industry was 30 per cent higher in 2002 than in 2001. The ACMPE estimates that in 2003 production will grow by 5–10 per cent. 2,940
3,000
EEK Million
2,500
2,255
2,102
2,000 1,500 1,000
602
635
884
500 0 2000 Sales
2001
2002
Exports
Figure 4.9.1 Sales and export of construction materials Source: Association of Construction Material Producers of Estonia
The construction industry has experienced rapid growth in the turnover of construction activities. This has fuelled the growth of construction material manufacturing.
180
Key Sectors of Trade and Investment
Structure A wide range of construction materials is produced in Estonia, mainly cement and reinforced concrete details, bricks, roofing sheets, wall claddings, wallpaper, colours and varnishes. A summary of Estonian construction materials manufacture in 2000 is shown in Table 4.9.1. Table 4.9.1 Production of Estonian construction materials manufacturers, 2000 Quantity Cement (tons) Wall materials (million conventional bricks) of which building bricks Roofing slates (m2) Lime (tons) Plywood (m3) Concrete and mortar (m3) Colours and varnishes (tons) Wallpaper (m2)
329,100 134.1 16.9 377,000 21,200 18,400 308,900 13,100 1,000,000
Source: Statistical Office of Estonia
Exports About 30 per cent of all construction materials produced in Estonia are exported. Due to the specific qualities of most construction materials (as a rule massive, large and heavy), the export is mainly directed towards its nearest neighbours – Latvia, Lithuania and Finland, and to an extent Russia. The main export products are cement, plywood, roofing slates, bricks, colours and varnishes. The biggest exporter in 2002 was Krimelte Ltd, which produces various joint sealants. In 2002 95 per cent of its production was exported, mainly to the Russian, Turkish, Spanish, Latvian, Lithuanian and Ukrainian markets. Wiekor, which produces roofing slates, also exports 85 per cent of its production. Other significant exporters are Saajos Balti, KMT Fassaadimeistrid, Nordkalk, Fenestra, Rannila Profiil, Viking Window and Wienerberger.
Market trends The Association of Construction Material Producers of Estonia notes that the most stable growth is in the production of roofing
Construction Materials
181
materials. The producers ESCO, Lafarge Tekkin and Wiekor have managed to maintain stable growth for last five to six years. Estonian producers cover all general production materials but there are areas where new players would be welcome, for example in soft roofing materials and window glass. More decoration materials could be produced locally.
Human resources About 5,500 people are engaged in manufacturing construction materials in Estonia. This is 6.8 per cent of the labour force employed in the manufacturing industry and 0.9 per cent of the economically active population. Despite increasing labour costs in Estonia, workers’ salaries are still modest compared to Western Europe. Engineers of material technology study at Tallinn Technical University and also partly at Estonian Agricultural University. Vocational education in material technology is available at Tallinn Technical School. Although there should not be a shortage of educated people on the labour market, employers also need to train workers in the plant (operating machinery, basic safety procedures etc).
Raw materials, costs Most of the producers of construction materials use domestic raw materials. In case of more resource-consuming production, the plant is usually situated near the source of the resources. There are large resources of sand, clay, limestone and dolomite in Estonia. The government has imposed taxes on the use of these resources. Some manufacturers also have to pay charges for polluting the environment (air, water, soil). Producers of colours and varnishes, but also of all kinds of stuffing mixtures are required to pay package excise tax, imposed to promote the recycling of packages. The increase of resource and pollution tax and the implementation of package excise will increase the costs of construction materials somewhat. The impact should not be that significant, since natural resources and the costs of products purchased comprise only 35 per cent of the industry’s total costs. Other important cost items are outsourced services (20.6 per cent) and labour costs (18.9 per cent).
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Key Sectors of Trade and Investment
Standardization The Estonian Standards Board has drawn up a few original Estonian Standards, but the majority of construction material standards have been adopted from international and European standards. Producers usually follow the standards of the main export countries. Finnish, Swedish and Russian standards are widely used. Table 4.9.2 Producers holding the ISO 900* quality certificate Company Vivacolor
Standard Activity
ISO ISO OPTIROC ISO ISO ES Sadolin ISO MAKROFLEX ISO Parok ISO Malmerk ISO Fenestra ISO Pipelife ISO Viking Window ISO
9001 14001 9001 14001 9001 9001 9002 9002 9001 4427 9001
Production of colours Colours and varnishes Clay bricks Paints and alkyds Construction sealants Insulation products Doors and windows Production of windows Production of plastic pipes Production of windows
Date of issue 04.05.1994 01.07.1998 19.02.2002 14.01.2001 11.06.1999 03.08.1999 05.12.2000 05.07.1999 01.02.2000 04.2000
Source: Estonian Association for Quality
Research and development There is a good base for research and development activities in Tallinn Technical University. Research is funded by the state budget, grants from funds or contracts with companies.
Industry association The Association of Construction Material Producers of Estonia comprises 47 companies. The association represents the producers in government structures, organizes training, participates in certification committees of construction materials etc.
Foreign investment A number of foreign companies who have invested in the construction materials industry in Estonia are shown in Table 4.9.3:
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183
Table 4.9.3 Companies investing in the Estonian construction materials industry Company
Investor
Country
Kunda Nordic Tsement AS E-Betoonelement AS
Heidelberg Group Addtek International OY, Euroc Beton AB Tikkurila OY Akzo Nobel Coatings OY Fenestra OY Rannila Steel OY Pipelife M-Plast OY
Germany Finland, Sweden Finland Finland Finland Finland Finland
Vivacolor AS ES Sadolin AS Fenestra AS Rannila Profiil AS Pipelife Eesti AS
Source: EIA, Äripäev TOP 100, Commercial register
Table 4.9.4 Major players among construction material producers (EEK million): Company
Turnover (2002)
Rannila Profiil Kunda Nordic Tsement Glaskek Optiroc Rudus Eesti E-Betoonelement Krimelte Malmerk Saku Metall Pipelife Eesti Tartu Maja Betoontooted Fenestra
650 455 327 304 260 227 200 185 140 123 120 112
Source: Association of Construction Material Producers of Estonia
Thirty businesses with 50 employees or more are engaged in the manufacture of construction materials. The main reasons to invest in the construction materials industry in Estonia are: • • • • •
Low production costs (labour energy etc); Local, relatively inexpensive raw materials; Well-developed construction industry; Stable and growing economy; Solid base for research activities;
184
• • • •
Key Sectors of Trade and Investment
Well-educated engineering staff; No income tax on reinvested profits; Opportunity to cover Baltic, Russian and/or European markets; European and international standards implemented.
Investment opportunities For additional information on investment opportunities please contact Ms Anu Varvik:
[email protected] For detailed information contact: Statistical Office of Estonia Endla 15, 15174 Tallinn Tel: +372 6 259 202 Fax: +372 6 259 370 Email:
[email protected] Website www.stat.ee Ministry of Enviroment Toompuiestee 24, 15172 Tallinn Tel: +372 6 26 28 00 Fax: +372 6 26 28 01 Email:
[email protected] Website www.envir.ee Ministry of Economic Affairs Harju 11, 15072 Tallinn Department of Industry Mr. Oleg Epner (Head of Department) Tel: +372 6 256 385 Fax: +372 6 313 660 Email:
[email protected] Website www.mkm.ee Estonian Association of Construction Entrepreneurs Rävala 8 (C-206), 10143 Tallinn Tel: +372 6 41 00 71 Fax: +372 6 60 46 88 Email:
[email protected] Estonian Association of Architectural and Consulting Engineering Companies Rävala 8 (A-214), 10143 Tallinn Tel: +372 6 60 47 95 Fax +372 6 60 47 95 Email:
[email protected] KPMG Estonia Ahtri 10 A, 10151 Tallinn Tel: +372 62 68 700 Fax +372 62 68 777 Email:
[email protected] Website www.ee.kpmg.net
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185
If you are interested in locating in Estonia contact: Estonian Investment Agency Roosikrantsi 11, 10119 Tallinn Tel: +372 6 279 420 Fax: + 372 6 279 427 Email:
[email protected] Website: www.investinestonia.com The Estonian Investment Agency (EIA) is a governmental body set up to develop the Estonian economy by promoting foreign direct investment in the country.
4.10
Electronics Industry Estonian Investment Agency Overview
EEK millions (current prices)
The Estonian electronics industry has a tradition going back for years. In 1907 a telephone factory was established in the university town of Tartu, where 13,000 telephones were produced during World War I. Today the expanding economy, fuelled by notable inflows of foreign direct investment, has been driving the growth of the electronics industry in Estonia. The industry is now one of the fastest developing areas in Estonia’s economy. Many multinational enterprises active in this field have already taken advantage of the attractive production and investment environment in Estonia. A constant shift of foreign electronic companies from labour intensive production to more complex and higher value-added operations is further contributing to the rising competitiveness of the Estonian electronics industry. 3,000 2,700 2,400 2,100 1,800 1,500 1,200 900 600 300 0
2,628 2,207
2,350
1,659 1,131 808 549
1994
1995
1996
1997
1998
1999
2000
Figure 4.10.1 Industrial production of the electronics industry Source: Statistical Office of Estonia
Currently, 9,000 skilled people are employed in this sector. The number of employees in the industry has changed little in recent
Electronics Industry
187
years when compared with the remarkable increase in its output: the industrial production of the electronics industry grew almost five-fold between 1994 and 2000 (see Figure 4.10.1). The growth rates have been in double figures every year since 1994 (with the exception of 1999). The electronics industry in Estonia consists of about 300 companies. The biggest company in the sector, Elcoteq, employs 2,500 people. Most other enterprises are small and medium sized businesses employing less than 50 people. They account for more than half of the industry’s total turnover. Large enterprises with more than 300 employees account for almost one third of total turnover. The share of the electronics industry in the total production of Estonia’s manufacturing industry has grown significantly over recent years – from 3.4 per cent in 1994 to 7.6 per cent in 2000. This growth is expected to continue in the future. Table 4.10.1 Share of electronics industry in the total production of the manufacturing industry (%)
Computers and office machinery Electrical machinery and apparatus Telecommunication equipment Medical, precision and optical instruments Electronic industry total
1994
1996
1998
2000
0.3 1.9 0.4 0.9 3.4
0.5 1.9 1.2 0.8 4.4
1.0 1.6 1.4 1.9 5.9
0.7 2.1 2.3 2.5 7.6
Source: Statistical Office of Estonia
The main export and import markets for the Estonian electronic industry are: • import markets: Finland, Germany, Taiwan, Sweden • export markets: Finland, Sweden. The main export products are circuit boards and computers.
The structure of the electronics industry The largest sub-sector of the Estonian electronics industry is the manufacture of medical, optical and other precision instruments, which accounts for 33 per cent of total output. Radio, television and communication equipment constitute 31 per cent of the total, followed
188
Key Sectors of Trade and Investment
by electrical machinery and equipment (27 per cent). The assembly of computers and office equipment makes up 9 per cent of total output. Computers and office machinery 9%
Medical, precision and optical instruments 33%
Electrical machinery and apparatus 27%
Telecommunication equipment 31%
Figure 4.10.2 The structure of the Estonian electronics industry, 2000 Source: Statistical Office of Estonia
Over the years the share of medical, precision and optical instruments and telecommunications equipment in the total output of the electronics industry has grown. At the same time the share
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Medical, precision and optical instruments Telecommunication equipment Electrical machinery and apparatus Computers and office machinery
1994 1995 1996 1997 1998 1999 2000
Figure 4.10.3 Changes in the structure of the Estonian electronics industry Source: Statistical Office of Estonia
Electronics Industry
189
taken by electrical machinery has fallen and the share of computer and office machinery has remained relatively static.
Capturing new markets Local Estonian companies have been successful in entering the markets of other Baltic States and Scandinavia. The electronics industry has been undergoing a phase of growth, driven by increasing demand in both foreign and domestic markets. Estonian computer assembly companies have been successful in taking advantage of the strong domestic and international demand for computers. A network of resellers in the Baltic States and increasing sales to Scandinavia have made it the fastest growing sub-sector of the electronics industry. A number of start-up companies developing and producing high-tech products such as lasers, signalling and measurement equipment have also emerged. Their success in the domestic and foreign markets has been based on very competitive prices of their products, combined with high quality and speed in meeting orders.
An attractive industry for foreign companies Foreign companies have contributed considerably to the expansion of the electronics industry. The know how and technology of foreign companies and the cost-effective and skilled Estonian labour force have been a winning combination, making them the fastest growing companies within the industry. Greenfield investments have proved popular with foreign investors, ensuring a modern and high quality production environment. ISO certification is increasingly becoming the standard in the industry. Table 4.10.2 Average monthly gross wages in the electronics industry, II quarter 2001 (N) Electrical machinery and apparatus Telecommunication equipment Medical, precision and optical instruments
453 290 375
Source: Statistical Office of Estonia
To a large extent, companies with foreign ownership are subcontractors catering to Scandinavian multinationals as well as to electronics
190
Key Sectors of Trade and Investment
companies all over the world. Elcoteq, JOT Automation, Scanditron, Fabec, Amphenol and Stoneridge Electronics are names that can speak for themselves.
Investment opportunities Excellent investment opportunities exist in all sub-sectors of the industry. Hourly wages just a fraction of those in Western Europe combine with an excellent business environment and simple, business-friendly legislation. Strong Scandinavian multinational companies are a short flight away (one hour to Stockholm, half an hour to Helsinki). Many of these have already found their perfect location in Estonia. Companies supplying the automotive, electronics and telecommunications industries have moved their production in Estonia and enjoy the benefits of short delivery times and competitive costs. The presence of young, educated and active managers, modern production facilities and infrastructure and success in neighbouring markets are just some of the advantages Estonia has to offer. Areas of particular interest include: • Assembly of PCB products and cables for North European markets; • Office machinery assembly services; • Value-added logistics and customization of electronics equipment; • R&D activities.
Elcoteq – the biggest EMS company in Europe The biggest EMS company in Estonia and in the whole of Europe is Elcoteq (www.elcoteq.com ). Elcoteq is a leading European electronics manufacturing services (EMS) company providing engineering and manufacturing services, supply chain management and after sales services to international high tech companies. Two of Elcoteq’s largest plants (in terms of number of employees) are situated in Estonia, in Tallinn. The number of their employees in Estonia amounted to 2,364 in October 2001, while the total number of their employees is over 9,000. Elcoteq’s main activities in Estonia are listed in Table 4.10.3. Elcoteq’s customer list includes the following companies: Nokia, Ericsson, ADC, Allgon, ABB, Danfoss, Kone, Vaisala, Viterra and Andrew Corporation.
Electronics Industry
191
A significant part of Elcoteq’s high and medium volume production is located in Estonia: three quarters of the company’s capacity are located in Estonia, Hungary, Mexico and China – countries that are highly competitive with respect to market proximity, good availability of skilled labour and favourable general cost levels. Table 4.10.3 Elcoteq’s plants in Estonia Plant
Services
Certificates
Area (m2)
Tallinn 1, Estonia
Box build, subassembly, engineering services
ISO 9002, ISO 4001
24,700
Tallinn 2, Estonia
Subassemblies for communications network products
ISO 9002, ISO 14001
6,300
Source: Elcoteq
JOT Eesti OÜ – the Developer of Technology 2000 and Top Investor 2000 in Estonia OÜ JOT Eesti is an Estonian company (a subsidiary of the Finnish JOT Automation OY – www.jot.fi) that designs, manufactures, sells and services production automation equipment for the electronics, telecom, car electronics and electronics manufacturing subcontractor industries. Its turnover in 2000 reached 38 MEUR (growth of 52.6 per cent) and the company currently has 165 employees. Its exports in 2000 totalled 36 MEUR (growth of 54.3 per cent) and the proportion of finished products in export was 95 per cent. Last year the ‘Top Investor 2000’ award was given to JOT Eesti by the Estonian Investment Agency for the substantial foreign investment (EEK47.7 million) it made in 2000, for its growth in export and turnover and for the large proportion of research and development activities in its turnover. In addition to this, the ‘Developer of Technology 2000’ award was given to JOT Eesti by Estonian Technology Agency for the high technological level of its products, the market potential, the speed of elaborating new products, the attractiveness of the target market and good position in the competition. JOT Eesti expenses for research and development in 2000 was EEK87 million, ie 15 per cent of turnover.
Tondi Electronics Wecan cables
Tradex Tarkon
Stoneridge Electronics
RD Electronic
Harju Elekter Incap Eesti JOT Estonia
Fabec Elektroonika
subcontracting
Amphenol (formerly Microlink Elektroonika) Clifton
instruments, man-machine interface products, electronic control units, sensors customer designed electronic products mechanical engineering, assembly services, cable harnesses hearing aids cable assembly
power electronics, development and production of GaAs semiconductor devices thermo-regulators, power supply units, remote control devices, bus information panels, detectors, battery assemblies, employees switchboards, cable harnesses assembly of PCB production automation equipment for the electronics, telecom, car, electronics and electronics manufacturing subcontractor industries PCB, transformer, charger devices
Activity
Name
300 250
35 600
150
80
500 50 165
65
No of employees
Table 4.10.4 A selection of companies active in Estonia’s electronics industry
FIN
SWE
USA
FIN FIN FIN
SWE
www.amphenol.com
USA
www.tondi.ee www.wecan.fi
www.tarkon.ee
www.power-controls. no/rde www.stoneridge.com
www.harjuelekter.ee www.incap.ee www.jot.fi
www.fabec.ee
[email protected]
Website
Country of origin of foreign investor
192 Key Sectors of Trade and Investment
Electronics Industry
193
The Federation of the Estonian Engineering Industry The Federation of the Estonian Engineering Industry (FEEI) is a federation of employers consisting of more than 80 member enterprises with over 9,000 employees. It represents engineering, metalworking, instrument companies and the electronics industry. The main objective of the FEEI is to create the necessary conditions to promote productivity, encourage co-operation, develop foreign contacts and trade, organize industrial fairs and assist companies in their marketing activities. Mustamäe tee 4 Tallinn, 10621 Estonia Telephone +372 611 5893 Fax +372 656 6640 Email
[email protected] Website www.etc.ee/engineering
Testimonials of some foreign investors active in the Estonian electronics industry Estonia is a business friendly state with liberal tax and trade policy, where both well-developed infrastructure and competitive skilled labour are available. The attractiveness of investments here is also enhanced by lower production costs than in the European Union. Pekka Törmikoski, President, JOT Eesti OÜ The combination of factors convinced us that Estonia is an excellent spot to start production and enter the Baltic Sea Region, EU and Russian/Ukrainian markets. Quality is very high, and we have found people in Estonia extremely well motivated. Ilmar Petersen, Vice-President, Elcoteq Europe
4.11
Tourism in Estonia Piret Kallas and Ene Palmiste, Managers, Market Research Unit, Enterprise Estonia/Estonian Tourist Board 1,000 800 600
600
662
711
741
767
533 436
400
330
200 0 –200
–88
–108
–145
–176
–239
–274
–400 1995
1996
1997
1998
Revenue from inbound tourism
1999
2000
–283 2001
–320 2002
Expenditure on outbound tourism
Figure 4.11.1 Tourism services in Estonia’s balance of payments, 1995–2002 (Nmillion) Source: Bank of Estonia
Brief historical overview The history of Estonian tourism divides into four periods: pre World War I; the independence period between the world wars; the Soviet period; and the independence period since August 1991. With the discovery of the therapeutic value of the sea mud off the west coast of Estonia in 1825, health resorts mushroomed in the 19th century in Haapsalu and Pärnu, in the northern Narva-
Tourism in Estonia
195
Jõesuu, and the island of Saaremaa. The resorts became immensely popular with the Russian aristocracy and the Baltic Germans. From 1917 onwards the Russian market suffered, so between the two world wars Estonia mainly attracted tourists from neighbouring Finland, Sweden and Latvia. In Estonia, the economic value of and benefits from co-operation with tourism development have always been recognized at national and regional levels. While in the 19th century city governments bore the bulk of tourism promotion, from 1930 onwards government and business collaborated in a public-private partnership: the Estonian Foundation for Tourism Development. The latter represented Estonia at trade shows abroad, promoted incoming tourism and distributed marketing materials in up to nine languages. In 1937, Estonia attracted as many as 99,000 foreign visitors, with Latvia the main market. The Estonian Tourism Union promoted domestic tourism. In 1940, all tourism organizations and sea links to Sweden and Finland were closed by the Soviet regime. Both organized and private travel within the Soviet Union were promoted to serve as the motor of the Soviet ideology but the whole country was closed to foreign tourism. Restrictions were only eased in the mid-1950s. The reopening of the sea link between Helsinki and Tallinn in 1965 further boosted incoming tourism. From the mid-1960s, Tallinn was one of the five most visited destinations for foreigners in the Soviet Union. Cruise tourism also became popular in the mid-1960s with up to 20 ships arriving annually at the port of Tallinn. Inbound tourism to Estonia was subject to restrictions, however. Foreign tourists were only allowed to stay overnight in Tallinn and visit a few other towns on day trips, they were watched on tours by a government official, and could only stay in the few ‘Intourist’ hotels that only had 214 beds in 1965. The addition of the 829-bed Viru Hotel in 1972 opened Estonia up to more foreign visitors. The 1980s Olympic regatta hosted by Tallinn triggered large-scale infrastructure upgrades and the addition of two more large landmark hotels, Hotel Olympia and Pirita Hotel, boosted tourism even more. In 1989, air and sea links between Tallinn and Stockholm were restored and outbound travel for Estonians was significantly eased. Visitor arrivals skyrocketed from a mere 10,000 visitors in 1965 and 175,000 in 1985 to as many as 1.3 million visitors in 1993. Thanks to the hotels network and the ‘Intourist’ agency, tourism in Estonia never lost its supply of educated and experienced professionals, which spurred the start-up of many private tourism businesses once the country regained its independence.
196
Key Sectors of Trade and Investment
The economic value of inbound tourism International visitor arrivals to Estonia have soared significantly to 3.25 million in 2002. The number of overnight visitors among all foreign arrivals has increased from 530,000 in 1995 to 1.36 million in 2002 (ie from 25 per cent to 42 per cent of all visitors). In 2002, Estonia’s revenue from inbound tourism amounted to N773 million – 13 per cent of Estonia’s total exports and 37 per cent of total services exports. A quarter of this revenue was earned by Estonian shipping companies and Estonian Air, the national airline. The remaining 75 per cent was spent by foreign visitors travelling in Estonia. In 1997, CHL Consulting Group estimated as much as 16 per cent of all Estonian employment to be directly and indirectly linked with the tourism industry.
Development of tourism in Estonia The Estonian Tourist Board was founded in 1990, and since 2001 has been part of Enterprise Estonia, the largest foundation to support the development of businesses in Estonia. Today, the Estonian Tourist Board is well connected to world tourism – it belongs to a number of international tourism organizations such as the European Travel Commission (ETC), European Union of Tourist 3.50 3.18
3.00
3.31
3.23
3.25
1.91
1.89
1.32
1.36
2.91 2.50
2.62 2.43
2.00 1.50
2.10
2.23
2.08
1.58 1.22
1.00 0.50 0.00
2.09
1.89
1.77
0.53 1995
0.73
0.67
1996
1997
All foreign visitors
0.95
0.83
1998
1999
Same-day visitors
2000
2001
2002
Overnight visitors
Figure 4.11.2 Foreign visitors to Estonia, 1995–2002 (millions) Sources: Estonian Border Guard, Estonian Tourist Board
Tourism in Estonia
197
Officers (EUTO), and the Baltic Sea Tourism Commission (BTC). The local governments of Tallinn and Pärnu belong to the European Federation of Conference Towns (EFCT). The Estonian National Tourism Development Plan, approved by the Estonian Parliament for 2002–2005, gives priority to five target markets: Finland, Sweden, Russia, Germany and the UK. In 2002, Enterprise Estonia appointed foreign representatives to promote tourism alongside trade and investment in each of these markets. Furthermore, in 2002 a cohesive brand identity in the framework of the Brand Estonia project (including the Welcome to Estonia campaign and logo) was adopted for marketing Destination Estonia throughout all marketing channels. The National Tourism Development Plan further highlights the development of four priority products in Estonian tourism: conference tourism, historical and cultural heritage tourism, nature tourism and national parks and activity holidays. Table 4.11.1 International visitor arrivals in Estonia, 1996–2002 Citizenship Finland Sweden Denmark Norway Germany UK Italy France Netherlands Spain Latvia Russia Lithuania Ukraine Poland Czech Rep. Hungary USA Canada Japan Total Overnight visitors Day trip visitors
1996
1999
1,689,416 74,921 12,244 12,195 38,084 18,582 8,381 8,487 8,382 3,631 230,000 142,000 72,597 7,685 10,902 3,394 2,803 45,925 6,243 4,228 2,434,621 665,000 1,769,621
1,912,157 132,818 15,933 20,091 48,124 35,417 17,181 10,579 7,748 9,362 437,000 299,100 80,330 13,376 12,746 6,743 4,787 58,248 4,438 7,594 3,180,530 950,000 2,230,530
2002 1,824,72 134,232 16,694 36,025 85,850 59,324 21,103 14,852 11,916 17,358 401,536 281,041 129,493 15,810 29,250 10,965 7,928 70,958 6,974 8,765 3,253,012 1,360,000 1,893,012
Sources: Estonian Border Guard, Estonian Tourist Board Note: Russian arrivals in 1998–2000 include a number of Estonian residents with Russian passports.
198
Key Sectors of Trade and Investment
Major source markets Since 1992, Estonia’s Nordic neighbour Finland has been the main generating market for tourism. However, as the supply and quality of tourist facilities and attractions have improved and awareness of Estonia as a tourist destination has increased, more visitors from other Scandinavian countries, Western Europe and North America have discovered Estonia. Accordingly, the percentage of Finns among foreign visitors was down from 72 per cent in 1995 to 56 per cent in 2002. Latvians account for 12 per cent of all foreign visitors to Estonia, Russians 9 per cent and Swedes and Lithuanians equally for 4 per cent. The fastest-growing source markets between 2000 and 2002 were Germany, Norway and the UK, primarily due to the growing number of overnight trips.
Characteristics of visits to Estonia Of all overnight trips, holidays account for 44 per cent, business trips 25 per cent and visiting friends and relatives 16 per cent. While holidays make up only 26 per cent of all overnight visits to Estonia in the winter, this more than doubles to 56 per cent in the summer. Among the day trippers, just over a third come for holiday and just under a third for shopping. Business travel accounts for 14 per cent of all day trips and transit for 13 per cent. As many as 40 per cent of overnight visitors buy a package and 12 per cent book some of their travel with travel agents. However, 50 per cent of all foreign visitors to Estonia do not book with a travel agent.
Means of transport Tallinn, the capital of Estonia, has always been both the centre and main attraction to tourism to Estonia. The 12th century Tallinn Old Town is listed in the UNESCO World Heritage and has always served as the logistics centre and hub for tourist access to the rest of Estonia. By sea or air, 73 per cent of foreign visitors arrive in Estonia via Tallinn. 2.1 million visitors (64 per cent) arrived in Estonia by passenger ships and 28 per cent by road (via Russia or Latvia). Just 5 per cent (161,000) of visitors arrived by air and 4 per cent (118,000) by cruise ships. Only 1 per cent of tourists came by rail, mainly from Russia.
Tourism in Estonia
199
Estonia is very well connected to both Finland and Sweden, via Tallinn. As many as 27 sea jets and five passenger ferries depart from Helsinki to Tallinn every day. In addition to two passenger ferries connecting Tallinn with Stockholm on a daily basis, a brand new 2,500 passenger ferry will add capacity on the StockolmTallinn line from April 2004.
Accommodation Around 70 per cent of foreign overnight visitors stay at accommodation establishments: the majority of the remaining 30 per cent stay with friends or relatives. There are over 600 certified accommodation establishments in Estonia, of which 88 are hotels and 13 spa hotels. Combined, hotels and spas can sleep around 19,000, with 6,900 beds in Tallinn, 3,000 in Pärnu, 2,700 in the island of Saaremaa and some 1,000 in Tartu. In 2001, as many as 985,000 foreign tourists spent 1.9 million overnight stays at accommodation establishments and health spas of Estonia. Around 70 per cent of foreign visitors stayed in Tallinn, 12 per cent in the ‘Summer Capital’ of Pärnu, 4 per cent in Estonia’s largest island of Saaremaa, another 4 per cent in Tartu and 3 per cent in Haapsalu. While western Estonia is the second most popular region among foreign tourists, North and South Estonia are more oriented to domestic tourism. The accommodation establishments in these regions derive around half of their income from domestic tourism. In 2001, 344,000 foreign tourists spent 626,000 overnights at the accommodation establishments and health spas of Estonia.
Health spas In Estonia, spas attract 8 per cent of all foreign tourists in paid accommodation, but account for almost a quarter (24 per cent) of all foreign tourist overnight stays (an average spa stay is 6 nights). The number of foreign tourists at spas has grown from 12,000 in 1994 to 76,000 in 2001. Around 60 per cent of all foreign spa tourists, predominantly the Finnish, stay in Pärnu. In 2002, the Estonian spa became even more attractive with large-scale upgrades in the spa infrastructure and capacity in Pärnu and Viimsi near Tallinn. The spas have accordingly intensified their marketing efforts and continue to earn high grades from
200
Key Sectors of Trade and Investment
2.50
2.00
2.00
1.45
1.50
0.52
0.50
1.71
1.50
1.48 1.34
1.25
1.17
1.00 0.93 0.50
1.96
0.61 0.33
0.99 0.83
1.04
0.93
0.69 0.33
0.29
0.44
0.41
0.46
0.00 1995
1996
Total
1997
1998
1999
Foreign tourists
2000
2001
2002
Domestic tourists
Figure 4.11.3 Overnight stays at Estonian accommodation establishments, 1995–2002 Source: Statistical Office of Estonia Note: Health spas excluded. 2002 figures are preliminary
700 600 500 400 145 300
105
193
345
244
261
284
184
180
166
154
1999
2000
465
200 100
240
270
226
110
0 1994
1995
1996
Foreign tourists
1997
1998
2001
Domestic tourists
Figure 4.11.4 Overnight stays at Estonian health spas, 1994–2001 (thousands) Source: Estonian Statistical Office
Tourism in Estonia
201
their customers. This allows them to expect more repeat customers as well as new customers from Sweden, Germany and Russia, and to hope for continued strong growth for Estonian spa tourism in the years to come.
Cruise traffic Tallinn has become one of the most visited cruise ports in Europe. The number of cruise passengers arriving in Tallinn has more than doubled from 53,000 in 1996 to over 120,000 in 2002. In 2002, 165 cruise ships run by 37 operators arrived in Tallinn, among them well-known brands such as Royal Caribbean, Radisson Seven Seas, Norwegian Cruise Line, Holland America Line, Orient Lines and Costa Cruises. The largest ship to enter the port of Tallinn in 2002 was Celebrity Cruises ‘Constellation’ (294 metres). The record number of cruise passengers to pass Tallinn port in a single day is 5,900. The cruise season in Tallinn Bay begins in May and ends in September. While most cruise ships arrive from or leave for St Petersburg, the USA leads the way in terms of arrivals (35 per cent). Great Britain and Germany both contribute around a fifth of all cruise passengers. In 2003, Tallinn expects an even greater upswing in cruise traffic to 235 entries with over 200,000 passengers, and has been upgrading the port infrastructure to receive vessels up to 300 metres in length as early as 2004. The fact that Tallinn was chosen to host the annual meeting of Cruise Europe, the cruise ports organization, in May 2003 reflects the growing importance of Tallinn as a leading cruise port in Europe.
Conference tourism In the past few years, Estonia has grown in popularity as a destination for meeting and corporate incentive travel and several studies indicate solid growth potential. According to the Estonian Statistical Office, almost 27,000 foreign and 29,000 domestic meeting tourists were accommodated at Estonian hotels in 2002. Estonian hotels and conference centres meet strict international standards for conference infrastructure and customer service quality. Around 60 per cent of all meetings held in Estonia take place in Tallinn where the largest conference centre, Saku Suurhall, best known for housing the Eurovision Song Contest in
202
Key Sectors of Trade and Investment
May 2002, can seat up to 6,000. The largest conference hotels in Tallinn are Radisson SAS (350 seats) and Reval Hotel Olümpia (390 seats). In October 2003, Hotel Viru will open its new conference wing for 440 delegates. The university town Tartu is already renowned in international academic circles for its small but exquisite hotels such as London (100 seats) and Barclay (80 seats). On the other hand, the resort town of Pärnu is popular with conference organizers wishing to combine business with relaxation at one of Pärnu’s popular spas. A good place to host an event in Pärnu is the Conference and Spa Hotel Strand (500 seats). An image study recently conducted in the five target markets of Estonia as an investment and tourism destination highlighted a number of issues underscoring Estonia’s competitiveness in the international meetings market – the westernized way in which Estonians conduct business, their openness to international trade, good command of English and proven ability to handle high-profile international events. The Estonian Convention Bureau, the first point of contact in Estonia for foreign conference and events organizers, is currently in the start-up phase and is scheduled to open for business in 2003.
Environmentally friendly tourism A number of distinctions for environmentally friendly tourism businesses, or eco-labels, are used in Estonia. In 2002, the Blue Flag was awarded to three beaches and three small harbours. The Estonian Ecotourism Association promotes collaboration for the development of ecotourism in Estonia between businesses, organizations and individuals. In partnership with the Estonian Tourist Board, it launched EHE (Estonia – the Natural Way), a voluntary system of eco-labelling for Estonian tourism products. In 2001, an environmental management system – the Green Key of Denmark – was adopted for use in Estonia. The Green Key ecolabel is awarded to accommodation establishments that operate in an environmentally sound manner. By May 2003, as many as 10 hotels in Estonia have received the Green Key label. It is not just the marketing value of the label that motivates businesses to carry the Green Key, but the real money saved from more efficient use of water, electricity, heating and waste management.
Tourism in Estonia
203
Most popular regions and tourist attractions The 2002 foreign visitor survey by the Estonian Tourist Board revealed that as many as 87 per cent of the respondents visited Tallinn during their trip to Estonia. The capital was the main destination for 64 per cent of the respondents, mainly for the western and northern European visitors (77 per cent of Finns, 65 per cent of Swedes, 86 per cent of British and 60 per cent of Germans) and less so for the Russian and Latvian visitors of whom just a third come to Estonia to visit Tallinn. In the past few years, city breaks to Tallinn have become extremely popular among Nordic and British tourists. In fact, the Financial Times recently included Tallinn in its list of Ten Ultimate City Destinations worldwide, for its new stylish hotels, restaurants and lively nightlife. According to the foreign visitor survey, two thirds of overnight visitors visited sights in Estonia on their own, a quarter visited museums or exhibitions, a fifth participated in cultural events, one tenth participated in organized tours, and 8 per cent went for some active hobby or sport. About every third visitor from Western Europe participated in cultural events and more than 40 per cent visited exhibitions. Here it should be remembered that on average only 20 per cent of western European visitors come to Estonia on package tours, therefore they are quite active in seeking out information on local cultural life on their own. Of all tourists, it is mainly Latvians who spend their holiday in Estonia on outdoor activities and sports. By comparison, the British and Scandinavians are rather more city tourism orientated, while Germans and Russians prefer to visit areas of natural beauty or go hiking. They also tend to take more time to travel around in Estonia than visitors from other countries. The top ten tourist attractions in Estonia (by number of visitors) are: • Old Town of Tallinn; • Resort town of Pärnu in West Estonia; • University town of Tartu in southern Estonia (second largest town in Estonia); • Resort town of Haapsalu in western Estonia; • Lahemaa National Park in northern Estonia with the manors of Palmse and Sagadi; • The Lake of Kaali in the island of Saaremaa in West Estonia (world-famous meteorite crater);
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Key Sectors of Trade and Investment
• Town of Otepää with Lake Pühajärve (a small resort town in southern Estonia and the main ski resort for domestic tourists); • Pühtitsa Russian Orthodox Convent at Kuremäe in northeastern Estonia (the only Russian Orthodox Convent in Estonia); • The Fortress of Narva (there are two fortresses facing each other across the river on the Estonian-Russian border in the town of Narva); • Taevaskoja (picturesque sandstone rocks that form the banks of Ahja River in South Estonia).
Part Five Appendices
Appendix 1
Business Risk Assessment Coface Estonia Rating: A4 Assets • More advanced than other Baltic states in terms of convergence with EU; • Strong export capacity to EU has followed moves to strengthen foreign trade with Nordic countries; • A successful transition to a market economy has allowed the country to establish a strong foothold in the growing service sector.
Weaknesses • Volatile growth because of the country’s small size and open economy; • Vast current account deficit weakens external financial position; • Low household savings; • High unemployment; • High dependency for energy on Russia.
Risk assessment The downturn in Estonia’s main export markets (Nordic countries) and in the electronics and telecommunications sectors slowed growth. The economy has nevertheless weathered the slowdown
208
Appendices
thanks to strong domestic demand, which should continue to drive growth pending a gradual recovery in Europe. The main thrust of reform continues to be gradual harmonization of the country’s economy with that of the European Union. The present currency board system obliges the government to pursue a tight fiscal policy, which should not undergo significant alteration in the run-up to the parliamentary elections. Economic growth, however, has been accompanied by a deteriorating external account. In spite of the maintenance of a satisfactory services account surplus (transit trade, tourism), the current account deficit has widened significantly due to rising imports and declining exports of machinery and equipment. Foreign direct investment covers a large part of the country’s external financing needs, but is showing signs of slowing as the local market saturates.
MIG analysis Introduction The resignation of Prime Minister Mart Laar in January 2002 marked the end of Estonia’s longest serving post-Soviet government. The transition to a new coalition has been relatively smooth, and political consensus on achieving EU membership has held firm. The Estonian economy is expected to continue its strong performance this year, with growth of around 4.5 per cent. The budget deficit is growing but mild. FDI has fallen from a record EEK9 million (US$600 million) to around EEK8 million (US$530 million) this year, but the lure of Estonia remains strong. Fourth Quarter 2002 Grey Area Dynamics™: 36.5 (Europe and FSU GAD Rating: 60.87) Fighting index: Low Crime levels: Medium Bureaucracy: Low to Medium Cultural integration: Medium Religious extremism: Low
Appendix 1
209
Table A1.1 Econometric data Change from 1999 previous year (%)
2000
2001
2002
2003 2004 (forecast) (forecast)
GDP (real)
–0.6
7.1
5.0
5.6
5.0
5.5
Industrial output (real) Gross fixed capital formation (real) Consumer prices (yearly average) Unemployment (yearly average) Budget balance (% of GDP)
–3.4
14.5
7.8
8.0
7.2
6.9
–14.8
13.3
9.1
16.0
3.0
5.5
3.3
4.0
5.8
3.6
3.3
4.4
12.3
13.7
12.7
10.3
10.0
9.3
–4.6
–0.7
0.4
1.1
–0.3
–0.4
2,364
3,601
3,750
3,547
3,784
3,994
3,137
4,442
4,630
3,694
3,784
3,994
–231 –4.7
–326 –5.8
–376 –6.1
–851 –12.5
–767 –10.4
–639 –7.9
205 2,864
358 3,232
377 3,707
199 4,346
383 4,474
415 4,601
58.7
58.0
60.1
64.0
60.7
56.7
2.6
2.2
1.9
1.8
1.7
1.5
15.65
15.65
15.65
15.65
15.65
15.65
14.67
16.93
17.46
16.54
14.43
13.64
In Nmillion Merchandise exports Merchandise imports Current account Current account (% of GDP) FDI (inflow, net) Gross foreign debt (end of period) Gross foreign debt (% of GDP) Import cover (in months) Average exchange rate: EEK/N Average exchange rate: EEK/US$
Sources: IMF, WIIW, NBRM, Bank Austria Creditanstalt Economics Department
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Appendices
Practice Corruption and bribery These are relatively minor problems relative to Estonia’s Baltic neighbours. The country rated a creditable 29th in Transparency International’s 2002 corruption perceptions index. There is no comprehensive anti-corruption strategy, and the clout of enforcement bodies is limited, but progress is being made. Improving salaries and transparency, backed by IT initiatives such as the display of public officials’ salaries online, are helping adequately to contain the problem.
Regulation and judiciary Again Estonia is ahead of its Baltic peers. Judicial administration and independence is improving, and judicial training has been upgraded. Court backlogs exist but they are less severe than elsewhere. Adequate legal frameworks are generally in place.
Organized crime Estonia’s single greatest Grey Area Dynamic™. Record seizures of illegal drugs and a near doubling of drug related crime point to a growing narcotics trade; the country is now a target as well as a transit mechanism. Estonian criminal groups also trade in arms, mostly from Russia to former communist states. State military officers are known to be involved. Co-ordination with Russian criminal groups is often close.
EU enlargement Estonia is set to join the EU in 2004, following the likely conclusion of negotiations this year. Russia’s increasingly close relations with the US have eased the tensions associated with NATO accession, also due in 2004.
Essentials Scandinavian investors are most prominent in Estonia. The most prominent projects due in the next year include the Kunda pulp plant to be erected in Kunda at US$100 million (EEK1.5 billion)
Appendix 1
211
and the EEK400 million Linstow shopping centre. Both are based on Norwegian capital. A survey of economic freedom by The Heritage Foundation and The Wall Street Journal ranked Estonia sixth, on a par with Denmark and the United States. The criteria include government interference in the economy, trade and fiscal policy, foreign investments, banking and finance, proprietary rights and the black market. Estonia’s legal framework is generally in line with EU demands, and its enforcement capacity is developing quicker than many of its fellow candidates for membership in 2004.
Concerns Tensions between the majority Estonian population and the significant minority (30 per cent) Russian population continue. Progress has been made on integration – for example, language requirements for candidates in parliamentary and local elections have been removed. However, Russian sources continue to express concern over the position of expatriates, and significant ground level tensions remain. Around 260,000 of the country’s residents are denied citizenship. A porous border with Russia facilitates trans-border criminal activity, and there is little sign of improvement. Border posts are poorly manned and maintained, particularly on the Narva river. Two Russian criminals who later killed in Estonia, Yuriy Ustimenko and Dmitriy Medvedev, swam across the border secretly last autumn. This summer, middlemen trafficking in Kurdish refugees rowed to Estonia unnoticed five times, also across the Narva.
Appendix 2
Useful Contacts in Estonia Government Office of the President of Estonia Weizenbergi 39 15050 Tallinn Tel: +372 631 6202 Fax: +372 631 6250 Email:
[email protected] Ministry of Education and Research Munga 18 50088 Tartu Tel: +372 7350 222 Fax: +372 7350 250 Email:
[email protected] Ministry of Justice Tõnismägi 5a 15191 Tallinn Tel: +372 620 8100 Fax: +372 620 8109 Email:
[email protected] Ministry of Defence Sakala 1 15094 Tallinn Tel: +372 640 6012 Fax: +372 640 6001 Email:
[email protected] Ministry of the Environment Toompuiestee 24 15172 Tallinn Tel: +372 626 2800 Fax: +372 626 2801 Email:
[email protected]
Appendix 2
Ministry of Culture Suur-Karja 23 15076 Tallinn Tel: +372 628 2222 Fax: +372 628 2200 Email:
[email protected] Ministry of Economic Affairs and Communications Harju 11 15072 Tallinn Tel: +372 625 6342 Fax: +372 631 3660 Email:
[email protected] Ministry of Agriculture Lai 39/41 15056 Tallinn Tel: +372 625 6101 Fax: +372 625 6200 Email:
[email protected] Ministry of Finance Suur-Ameerika 1 15006 Tallinn Tel: +372 611 3558 Fax: +372 696 6810 Email:
[email protected] Ministry of Internal Affairs Pikk 61 15065 Tallinn Tel: +372 612 5001 Fax: +372 612 5087 Email:
[email protected] Ministry of Social Affairs Gonsiori 29 15027 Tallinn Tel: +372 626 9700 Fax: +372 699 2209 Email:
[email protected]
213
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Appendices
Ministry of Foreign Affairs Islandi Väljak 1 15049 Tallinn Tel: +372 631 7000 Fax: +372 631 7099 Email:
[email protected] Citizenship and Migration Board Endla 13 15179 Tallinn Tel: +372 612 6979 Fax: +372 631 3744 Email:
[email protected] Estonian Competition Board Kohtu 8 15184 Tallinn Tel: +372 611 3942 Fax: +372 611 3943 Email:
[email protected] Estonian Land Board Mustamäe tee 51 10602 Tallinn Tel: +372 665 0600 Fax: +372 665 0604 Email:
[email protected] Estonian National Tax Board Endla 8 15176 Tallinn Tel: +372 693 4600 Fax: +372 693 4611 Email:
[email protected] Estonian Patent Office Toompuiestee 7 15041 Tallinn Tel: +372 627 7900 Fax: +372 645 1342 Email:
[email protected]
Appendix 2
Estonian Customs Board Lõkke 5 15175 Tallinn Tel: +372 696 7722 Fax: +372 696 7727 Email:
[email protected] Bank of Estonia Estonia bld. 13 15095 Tallinn Estonia Tel: +372 668 0719, 668 0900, 668 0951, 668 0953 Fax: +372 668 0954 Email:
[email protected] Website: www.ee/epbe Statistical Office of Estonia Endla 15 15174 Tallinn Tel: +372 6259 300 Fax: +372 6259 370 Email:
[email protected]
County Governments Harju County Government Roosikrantsi 12 15077 Tallinn Tel: +372 611 8701 Fax: +372 611 8602 Email:
[email protected] Hiiu County Government Leigri Väljak 5 92401 Kärdla Tel: +372 4631 129 Fax: +372 4631 089 Email:
[email protected] Ida-Viru County Government Keskväljaku 1 41594 Jõhvi Tel: +372 3321 201 Fax: +372 3321 240 Email:
[email protected]
215
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Appendices
Jarva County Government Rüütli 25 72713 Paide Tel: +372 3859 601 Fax: +372 3850 519 Email:
[email protected] Jogeva County Government Suur 3 48306 Jõgeva Tel: +372 7766 333 Fax: +372 7766 334 Email:
[email protected] Laane County Government Lahe 8 90503 Haapsalu Tel: +372 4725 600 Fax: +372 4725 601 Email:
[email protected] Laane Viru County Government Kreutzwaldi 5 44314 Rakvere Tel: +372 3258 001 Fax: +372 3258 003 Email:
[email protected] Parnu County Government Akadeemia 2 80088 Pärnu Tel: +372 4479 733 Fax: +372 4479 735 Email:
[email protected] Polva County Government Kesk 20 63308 Põlva Tel: +372 7994 232 Fax: +372 7994 232 Email:
[email protected]
Appendix 2
Rapla County Government Tallinna mnt 14 79513 Rapla Tel: +372 4855 951 Fax: +372 4855 672 Email:
[email protected] Saare County Government Lossi 1 93816 Kuressaare Tel: +372 4520 501 Fax: +372 4520 503 Email:
[email protected] Tartu County Government Riia mnt 15 51010 Tartu Tel: +372 7305 200 Fax: +372 7305 201 Email:
[email protected] Valga County Government Kesk 12 68203 Valga Tel: +372 7666 111 Fax: +372 7666 157 Email:
[email protected] Viljandi County Government Vabaduse plats 2 71020 Viljandi Tel: +372 4330 400 Fax: +372 4330 404 Email:
[email protected] Voru County Government Jüri 12 65620 Võru Tel: +372 7868 301 Fax: +372 7868 302 Email:
[email protected]
217
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Appendices
Organizations Estonian Chamber of Commerce and Industry Toom-Kooli 17 10130 Tallinn Tel: +372 6460244 Fax: +372 6460245 Estonian Trade Council 10621 Liimi 1–503 Tallinn Tel: +372 656 3299, 656 2711 Fax: +372 656 3923 Email:
[email protected] Estonian Trade Promotion Agency Roosikrantsi 11 10119 Tallinn Tel: +372 627 9440 Fax: +372 627 9427 Email:
[email protected] Website: www.export.ee Enterprise Estonia Roosikrantsi 11 10119 Tallinn Tel: +372 627 9400 Fax: +372 627 9427 Email:
[email protected] Estonian Employers Confederation Kiriku 6 10130 Tallinn Tel: +372 699 9301 Fax: +372 699 9310 Email:
[email protected]
Overseas organizations in Estonia International Business Council of Estonia Roosikrantsi 11 10119 Tallinn
Appendix 2
American Chamber of Commerce Estonia Tallinn Business Center Harju 6 – 234A 10130 Tallinn Tel: +372 631 0522 Fax: +372 631 0521 Email:
[email protected] Website: www.acce.ee British Estonian Chamber of Commerce Suur-Karja 21 10148 Tallinn Tel: +372 640 5872 Fax: +372 640 5873 Email:
[email protected] Swedish Trade Council in Estonia Pikk 28 15055 Tallinn Tel: +372 640 5670 Fax: +372 640 5696
[email protected]
Estonian embassies Austria Wohllebengasse 9/13 1040 Vienna Austria Tel: +43 1 50 377 61 Fax: +43 1 50 377 61 20 Email:
[email protected] Belgium av. Isidore Gerard 1 B-1160 Bruxelles-Auderghem Belgium Tel: +32 2 779 07 55 Fax: +32 2 770 71 93 Email:
[email protected]
219
220
Appendices
Canada 260 Dalhousie Street Suite 210 Ottawa Ontario K1N 7E4 Canada (contd) Tel: +1 613 789 42 22 Fax: +1 613 789 95 55 Email:
[email protected] Website: www.estemb.ca China Kempinski hotel Beijing Lufthansa Center Office Building: C-617 / C-618 No. 50, Liangmaqiao Road Chaoyang District Beijing 100016 Tel: +8610 64 63 79 13 Tel: +86 10 64 65 33 88 Fax: +86 10 64 63 79 08 Email:
[email protected] Czech Republic Na Kampe 1 118 00 Prague Czech Republic Tel: +420 257 011 180 Fax: +420 257 011 181 Email:
[email protected] Denmark Aurehøjvej 19 DK-2900 Hellerup-København / Copenhagen Denmark Tel: +45 39 46 30 70 Fax: +45 39 46 30 76 Email:
[email protected] Website: www.estemb.dk
Appendix 2
Finland Itäinen Puistotie 10 00140 Helsinki Finland Tel: +358 9 622 02 60 Fax: +358 9 622 02 610 Email:
[email protected] Website: www.estemb.fi France 46, rue Pierre Charron 75008 Paris France Tel: +33 1 5662 22 00 Fax: +33 1 4952 05 65 Email:
[email protected] Website: www.est-emb.fr Germany Hildebrandstrasse 5 10785 Berlin Germany Tel: +4930 254 606 00 Fax: +4930 254 606 01 Email:
[email protected] Website: www.estemb.de Hungary Lendvay u. 12 fszt. 3 Budapest VI Hungary Tel: +361 354 25 70 Fax +361 354 25 71 Email:
[email protected] Ireland Riversdale House St. Ann’s Ailesbury Rd Dublin 4 Ireland Tel: +353 1 269 15 52 Fax: +353 1 219 67 31 Email:
[email protected]
221
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Appendices
Italy Viale Liegi 28, int.5 00198 Rome Italy Tel: +39 06 844 07 51 Fax: +39 06 844 07 51 19 Email:
[email protected] Website: www.estemb.it Japan 2–6-15 Jingu-mae Shibuya-ku Tokyo 150–0001 Japan Tel: +813 541 27 281 Fax: +813 541 27 282 Email:
[email protected] Latvia Skolas 13 Riga LV 1010 Latvia Tel: +371 78 12 020 Fax: +371 78 12 029 Email:
[email protected] Website: http://estemb.lv Lithuania Mickeviciaus 4A LT 2004, Vilnius Lithuania Tel: +370 5 278 02 00 Fax: +370 5 278 02 01 Email:
[email protected] The Netherlands Parkstraat 15 2514 JD The Hague The Netherlands Tel: +31 70 34 56 252 Fax: +31 70 42 79 243 Email:
[email protected]
Appendix 2
Poland Karwinska 1 02–639 Warsaw Poland Tel: +48 22 646 4480, 646 4483 Fax: +48 22 646 4481 Email:
[email protected] Website: www.estemb.pl Portugal Rua Camilo Castelo Branco 34–4 1050–045 Lisbon Portugal Tel: +351 21 319 41 50 Fax: +351 21 319 41 55 Email:
[email protected] Russia Maly Kislovski 5 103 009 Moscow Russian Federation Tel: +7 095 290 50 13 Tel: +7 095 737 36 40 Fax: +7 095 737 36 46 Email:
[email protected] Website: www.estemb.ru Spain Calle Claudio Coello 91 – 1D 28006 Madrid Spain Tel: +34 91 426 16 71 Fax: +34 91 426 16 72 Email:
[email protected] Website: www.estemb.es Sweden Tyrgatan 3, Box 26076 10041 Stockholm Sweden Tel: +46 8 5451 22 80 Fax: +46 8 5451 22 99
223
224
Appendices
Consular Department Tel: +46 8 5451 22 82 Fax: +46 8 5451 22 98 Email:
[email protected] Website: www.estemb.se United Kingdom 16 Hyde Park Gate London SW7 5DG United Kingdom Tel: +44 20 7589 34 28 Fax: +44 20 7589 34 30 Email:
[email protected] Website: www.estonia.gov.uk United States 1730 M Street, Suite 503, NW Washington DC 20036 USA Tel: +1 202 588 0101 Fax: +1 202 588 0108 Email:
[email protected] Website: www.estemb.org
Appendix 3
Contributor Contact Details Bank of Estonia Estonia Bld. 13 15095 Tallinn Estonia Tel: +372 668 0719 Fax: +372 668 0836 Email:
[email protected] Web: www.bankofestonia.info Deloitte & Touche Biskapa gate 2 Riga LV–1050 Latvia Tel: +371 781 4160 Fax: +371 722 3007 Enterprise Estonia Roosikrantsi 11 10119 Tallinn Estonia Tel: +372 627 9400 Fax: +372 627 9427 Web:
[email protected] Estonian Chamber of Commerce & Industry Estonian Tourism Board Roosikrantsi 11 10119 Tallinn Tel: +372 6279 774 GSM +372 5013 709 Contact: Ms Ene Palmiste Email:
[email protected]
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Appendices
Hedman Osborne Clarke Tallinn World Trade Centre Fifth Floor Narva mnt. 11D Tallinn Estonia 10151 Tel: +372 611 6950 Fax: +372 611 6951 Email:
[email protected] Web: www.hedman-attorney.com Tenon Techlocate Sherlock House 73 Baker Street, London W1U 6RD Contact: Douglas Clark, Director, Tel: +44 (0) 20 8968 5668 Mobile: 07816 660494 Email:
[email protected] Web: www.techlocate.com Urmas Varblane Head of the Institute of Marketing and Management Faculty of Economics and Business Administration University of Tartu Estonia 51009 Narva Rd. 4–212 Tel: +372 7 376 361 Fax: +372 7 376 312 Email:
[email protected] Tallin Technical University Faculty of Economics and Business Administration 101 Kopli Street Tallinn 11712 Estonia Tel: +372 6203945 Fax: +372 6203946 Contact: Alari Purju Email:
[email protected]
Index References in italic indicate figures or tables accommodation for tourists 199, 200 accountancy 106–09 concerns 109 practice 107–08 structure 106–07 Accountancy Act 106–07 ACMPE see Association of Construction Material Producers of Estonia administrative divisions 54 agricultural land, restrictions on ownership 67–68 air transport 172, 198–99 Aliens Act 73 annual reports 108 arbitration 89 articles of association 61 Association Agreement 76 Association of Construction Material Producers of Estonia (ACMPE) 179, 180, 182 Association of the Estonian Food Industry 153 Attestation Act 90 attestation of foreign documents 90–91 attractions, tourist 203–04 audit 109 Authorized Public Accountant Act 106 Balti ES 133 Baltic Free Trade Agreement 18 Baltic Ship Repairers 132 Bank of Estonia (Eesti Pank) 103, 105 banking 7, 14–15, 33, 95–100, 96,97 assets and liabilities 97–98 Internet 5, 7, 38 profitability and risks 98–100, 99 bond market 100
book-keeping, taxation requirements 115 Brand Estonia project 197 branches of companies 60 registration 63–64 taxation 116 builders’ joinery sector 166 Building Act 177 building materials manufacturers 167 business organization, forms of 56–60, 110–11 branches 60 limited companies 57–60 partnerships 57 sole proprietorship 56–57 cargo transport 168–72, 168, 169, 170, 171 charitable donations, taxation of 113 chemical industry 142–47, 142 development of productivity 144–45, 145 main producers 146–47 sub-sectors 143, 143 circuit courts 88 cities 10 see also Tallinn; Tartu city courts 87 Commercial Register 61–65 access to data 64–65 branch registrations 63–64 company registrations 61–63 commodity groups, foreign trade by 42–44, 44, 45 communications 7–8 companies, limited 57–60 registration 61–63 competition, growth of 28–30, 29, 30 competitiveness, engineering and metalworking 127
228
Index
Competition Act 83–86 competition law 83–86 agreements 83–84 enforcement and sanctions 86 merger control 84–85 computer and office equipment sector 188, 188 ‘concerted practices’ 83–84 conference tourism 201–02 Constitution 51–52 early versions 50–51 environmental requirements 122 construction, environmental requirements 122–23 Construction and Planning Act 123 construction industry 173–78, 173 costs 175, 175 investment opportunities 177–78 main firms 177, 178 standardization 176, 176 structure 173–74, 174 construction materials industry 179–85, 179, 180 foreign investment 182–85, 183 main firms 183 standardization 182, 182 construction supplies manufacturers 167 contracts of employment 71–72 copyright 78 Copyright Act 78, 79 county courts 87 courts 52, 87–88 credit ratings, international 6, 23–24, 23, 24 cross-border acquisitions 34 cruise traffic 201 currency 7, 11, 12, 103 custom tariffs 115–16 dairy industry 155–57, 155, 156 data access, Commercial Register 64–65 depreciation 112 dispute resolution 87–89 arbitration 89 courts 87–88 distribution of profits 111 district courts 88 ‘dominant positions’ 84 door manufacturers 167
double taxation avoidance treaties 92 EACE (Estonian Association of Construction Entrepreneurs) 177 ECA (Estonian Competition Board) 84–85, 86 ECCI (Estonian Chamber of Commerce and Industry) 89 eco-labelling 202 e-commerce 139–40 economic performance 12–19 financial sector 14–15 foreign direct investments 15–16 foreign trade 16–18 growing stability 22–24, 23 industries 13–14 labour market 18 education 11 EEK see kroon Eesti Energia 119 Eesti Gas 120–21 Eesti Pank (Bank of Estonia) 103 Eesti Polevkivi 119 E-Estonia 3, 4–5 e-Government 4, 38 Elcoteq 187, 190–91, 191 Electric Safety Act 120 electrical machinery and equipment sector 188, 188 electricity industry 14, 120 electronics industry 186–93, 186, 187 foreign investment 189–90, 189 main companies 190–91, 191, 192 structure 187–89, 188 testimonials 193 employers’ contributions, taxation 115 employment contracts 71–72 employment law 71–74 foreigners 72–74 EMU ( Economic and Monetary Union) 104 energy sector 14, 119–25 electricity 120 environmental legislation 121–25 oil and gas 120–21 engineering industry 126–35, 126 companies 132–33, 134 exports 130, 130, 131
Index sectors 128, 128–29 Enterprise Estonia 197 environmental conventions 122 environmental impact assessment 123 Environmental Impact Assessment and Environmental Auditing Act 123 Environmental Inspectorate 122 environmental legislation 121–25 environmental permits 124 environmentally friendly tourism 202 Estonian Association of Construction Entrepreneurs (EACE) 177 Estonian Chamber of Commerce and Industry (ECCI) 89 Estonian Competition Board (ECA) 84–85, 86 Estonian Energy Ltd 119 Estonian Forest Industries Association 163 Estonian National Tourism Development Plan 197 Estonian Shipping Company 33 Estonian Standards Board 182 Estonian Telecom 33, 136 EU accession 5–6, 18–19, 20–31 access to new markets 24–25 economic and political stability 22–24, 23, 24 foreign investors 20, 21 foreign trade 40–41 future investment 37–39 income level convergence 21–22, 22 legal harmonization 54–55 market efficiency 28–30, 29, 30 structural change 25–28, 26, 27 EU Innovation Centre 38 European Union, trade with 17 excise tax 116 expenses, taxation of 111, 112–13 exports see foreign trade FDI see foreign direct investment Federation of the Estonian Engineering Industry (FEEI) 134, 193 Financial Supervision Authority (FSA) 104–05
229
financial sector 14–15, 95–105, 96, 97, 99 monetary policy 103–04 recent regulatory adjustments 104–05 financial support, EU 25–28, 26, 27 Finland foreign trade share 17, 36 tourists from 13–14, 198 first-time investors, investment attractions 35 fish-processing industry 159–60, 159, 160 FIT Biotech plc 34 Food Act 152 food-processing industry 148–60, 149, 150, 151, 152 dairy industry 155–57, 155, 156 fish-processing industry 159–60 food-processing industry 153–55, 154 foreign investments and opportunities 153–55, 154 meat-processing industry 157–58, 158 raw materials 150–52, 151 foreign bank involvement 96 foreign direct investment (FDI) 15–16, 32–39, 54 attractions 35–36 chemical industry 144, 146 construction industry 177–78 construction materials industry 182–85, 183 electronics sector 189–90, 189, 193 food-processing industry 153–55, 154 future 37–39 motivating factors 20, 21 phases 32–35, 34, 35 weaknesses 36–37 wood-processing industry 164, 164 foreign trade 8–9, 16–18, 40–45, 40 chemical industry 143–44 commodity groups 42–44, 44, 45 construction industry 174 construction materials industry 180 engineering and metalworking
230
Index
sector 130, 130, 131 food-processing industry 149–50, 150 liberalization policy 24–25 telecommunications 140 trading partners 41–42, 42, 43 2002 41 wood-processing industry 162, 163, 164–65, 165 foreign workers 72–74 forest land, restrictions on ownership 67–68 FSA see Financial Supervision Authority furniture manufacturers 166–67 Galvex 34, 133 gas industry 120–21 GDP 6 general partnerships 57 geography 3, 9–10 government 11 Green Key eco-labelling 202 Guarantee Fund Act 105 Hansabank 33 health spas 199, 200 hours of work 72 human resources see labour market ID cards 5 imports see foreign trade incentives, taxation 112 income level convergence 21–22, 22 Industrial Design Protection Act 80–82 industrial designs 80–82 industries overview 13–14 information technology see Internet use; IT; telecommunications insurance 102 integrated circuits, layout-designs 82 intellectual property 75–82 copyright 78 industrial designs 80–82 layout-designs of integrated circuits 82 patents 78–79 trademarks 76–78 utility models 79–80
interest, taxation of 112 international ratings 6, 23–24, 23, 24, 97, 97 International Steel 133 Internet use 5, 8, 137, 137 banking 5, 7, 38 investment attraction 36 inventions 78–80 investment see foreign direct investment investment climate 9 investment funds 102 investment incentives, taxation 112 investment promotion and protection agreements 91 ISO quality certification 152, 152, 176, 176, 182, 182 IT (information technology) 136–41 see also Internet use; telecommunications JOT Eesti
191
kroon (EEK) 7, 37, 103–04 Kunda port, cargo transport 169 Kuzbassrazugol 34
169,
labour market 8, 18 chemical industry 144 construction industry 175 construction materials industry 181 cost differences 28–29, 29, 30, 141 employment law 71–74 engineering and metal working 127–28 food-processing industry 150 telecommunications 140–41 wood-processing industry 162–63 Labour Market Board 73 land ownership see property law land reform 50–51, 68–70 land tax 116 languages 3, 10 Larvik Cell 34 layout-designs of integrated circuits 82 legal framework 49–55 EU harmonization 54–55 historical background 49–51
Index modern political and legal order 51–54 notaries 53 life insurance 102 limited companies 57–60 registration 61–63 limited partnerships 57 local taxes 116 log house producers 166 logistics see transport Loksa Shipyard 132, 133 Look@World project 4 machine building sector 128, 130 companies 133 management boards 58–59 manufacturing industries 13 market trends, construction materials industry 180–81 materials construction 175 construction materials industry 181 chemical industry 146 food-processing industry 150–51, 151 maternity rights 72 meat-processing industry 157–58, 158 medical, optical and precision instruments sector 187, 188 memoranda of association 61, 62 merger controls 84–85 metal processing sector 128, 129 companies 133 metalworking industry 126–35, 126 companies 132–33, 134 exports 130, 130, 131 sectors 128, 128–29 Migration Board 73–74 milk products 155–57, 155, 156 mobile phone industry 138–39, 139 monetary policy 103–04 monetary system 7, 11, 12 Most Favoured Nation Treatment Customs Duty Act 40 motor insurance 102 Muuga Free Zone 170–71 Muuga port 7
231
National Standards Board of Estonia 132 National Tourism Development Plan 197 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 89 non-resident entities, taxation 110–11, 116 Norma 129 notaries 53, 90 NRG 119 oil industry 120–21 oil shale processing 14, 119, 142 overtime 72 Parliament 52 Parnu port, cargo transport 169, 169 partnerships 57 Patent Co-operation Treaty 79, 80 patents 78–79 Pats, Konstantin 51 pension reform 102 personnel costs, taxation of 112 political situation 49–50, 52–53 pollution charge 125 Pollution Prevention and Control Act 124 population 10, 36 prefabricated buildings industry 166 pregnant workers 72 prices construction industry 175, 175 construction materials industry 181 food-processing industry 156, 157 private limited companies 57–58, 59–60 registration 61–63 privatization 14, 32–33, 70 energy sector 119 property law 66–70 land reform 68–70 restrictions on sale 66–68 property taxes 116 provision for bad debts, taxation of 113
232
Index
public limited companies registration 61–63
57, 58–59
quality standards see ISO quality certification radio, television and communication equipment sector 187, 188 railway transport 171–72, 171, 198 Rannila Profiil 133 ratings, international 6, 23–24, 23, 24, 97, 97 raw materials chemical industry 146 food-processing industry 150–51, 151 construction materials industry 181 re-investors, investment attractions 35–36 religion 11 renewable energy 121 rent control arrangements 69–70 research and development 37 construction industry 176 construction materials industry 182 engineering and metalworking sector 131–32 taxation of expenses 112 residence permits 72–74 resident entities, taxation 110–11 risk ratings 6, 23–24, 23, 24, 97, 97 road transport 171, 198 roofing materials 180–81 sawmilling 165 sea transportation 169–70, 198–99 securities market 100–01, 101 service industry 13 shipbuilding companies 132–33 sole proprietorships 56–57 Soviet occupation 51 stamp duty 116 standardization construction industry 176, 176 construction materials industry 182 engineering and metalworking 132 State Patent Office 75, 79
stock market 100–01, 101 structural change 25–28, 26, 27 subcontracting 128 supervisory boards 58 Supreme Court 52, 87, 88 Sustainable Development Act 122 Sylvester 34 Talinn 3, 49 stock exchange 100–01, 101 tourism 199, 201, 203 transport 169, 169 Tartu 38 Tartu, University of 20, 21, 38 Tartu Biotechnology Park 38 Tartu Science Park Foundation 38 taxation 7, 110–16 concerns 116 e-Tax Board 138 EU concerns 55 practice 111–16 structure 110–11 telecommunications 8, 136–41, 137 government policies 137–38 growth opportunities 140–41 investment attraction 36, 38–39 termination of employment contracts 71–72 Tiger Leap programme 5, 137–38 Tiger of the Baltic Sea 3 tourism 13–14, 194–204, 194 accommodation 199, 200 development 196–97, 196, 197 economic value 196 historical overview 194–95 types 199–204, 200 trade see foreign trade trademarks 76–78 Trademarks Act 76–77, 78 trading partners 41–42, 42, 43 transit trade 13 transport 7, 168–72, 171 cargo 168–70, 168, 169, 170 companies 132 tourists’ use 198–99 types 171–72 transport vehicles and parts sector 128, 128–29 treaties, international 91–92 unemployment insurance system
18
Index unfair competition 86 Union Bank of Estonia 33 utility models 79–80 VAT system 7, 115 visitor arrivals 196, 197 websites, government 4–5 window manufacturers 167
233
withholding taxes 113–14 wood-processing industry 161–67, 162 foreign trade 162, 163, 164–65, 165 manufacturers 167 sub-sectors 165–67 work permits 72–74 World Trade Organization (WTO) 40
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