Dr. Til Assmann
CEO of Osemund Management (Bremen) and Osemund Baltic (Tallinn)
The Niche, Pride and Success, or How Estonia Finds its Place on the World Market
Since regaining independence in 1991, the Estonian economy has managed to find its place in European and global financial structures at a dizzying pace. Membership in the European Union since 2004 was one of the first significant milestones, which resulted in very positive economic development until 2007 –development which finally was rather overheated. In 2008, the Baltic bubble of an inflated real estate economy with private consumption often powered by credit started to go flat. After becoming overheated, which coincided with the global economic and financial crisis, the Estonian economy and its structure have been undergoing a purge since 2008/09. After the clear-cut transition from a planned economy to a market economy in 1991, one is confronted with the question – how to best position 45 000 enterprises in order to survive in the global economy and, with any luck, even have an influence on it?
Taken to the extreme, one could say “No-one needs Estonia – Estonian needs everything”. However, those who are acquainted with small and proud Estonia, the way that the author of this piece has had the pleasure of knowing the country since 1994, will soon discover that they think and act differently there: “The world needs Estonia – Estonia needs the world”. This is nothing but shorthand for a life of niche economy. Not only from a competitive edge based on lower wages, but above all from highly specialised niches that are the basis for successful symbiotic relationships. By following a policy of niches in the areas of IT, biotech, or specialised mechanical engineering, which is embedded in the international chain of production, Estonia can stand its ground as a speedboat in the midst of the super tankers of the world economy and also find justification for its existence. This is complemented by an attitude not too frequent in a world wide comparison– “only the strongest enterprises will survive” – which reflects the straightforward mentality of the Estonians. The world, and moreover Europe, needs this slender speedboat.
In addition to the areas mentioned, there are the natural factors of location, i.e. the geographical advantage of the Port of Tallinn for the stream of goods both to and from the East. If one would realise the opportunities for transit logistics to the same extent that they were by the determined Shipping Company Tallink, which developed into the largest ferry company on the Baltic, then the prospects of the Estonian transport sector would be rosy. The only obstacle could be Estonian haughtiness, wanting to have nothing to do with the Russian neighbour. However, this would be an excellent opportunity for a niche – not too many European locations can offer centuries of expertise, a developed infrastructure, and direct access to Russia. One has to keep hoping that Estonia takes this chance and puts the historical – albeit often negative – experiences to good use: Estonia as the service-providing speedboat for the super tankers the EU and Russia.
Estonia has a strict budgetary policy. One can only dispense with what one earns. The limited size dictates that one can never service large debts. This coupled with a liberal economic policy raises Estonia’s tension over possibly joining the euro zone. This could happen in 2011, counting for the next milestone on the road of Estonian economic development. However, saving alone will not do if one wants to restart the stuttering speedboat Estonia. Only increased income through higher productivity will create a secure basis for the country in the long run. The adoption of the euro will improve upon the already good investing conditions. This will allow for quite a few more niches of the global economy to develop. Both sides should take this chance – Estonia itself by continuing with its seminal policy of niches, and the international clients and investors through making use of them. The present situation speaks for – not against – action. Now!
Energy connections
Eight Baltic Sea states signed a Memorandum of Understanding on the Baltic Energy Market Interconnection Plan on 17 June. The Swedish presidency gives high priority to the integration of energy markets in the Baltic Sea region; the need for interconnected energy networks in the region was also emphasised in an analysis by the EC. The Baltic Sea states see the plan as an opportunity to enhance security of supply through a higher diversification of routes and sources. The EU’s Energy Commissioner Andris Piebalgs said the Baltic states have lived in energy isolation and the situation calls for urgent changes. (La Tribune avec EurActiv, 23.6)
Estonia is about to make major decisions on its energy policy. Oil shale is the foundation of Estonia’s energy production, but it will not last forever and it does not match the targets of climate policy today. Estonia’s own nuclear power plant would require a higher industrial potential and long term purchase agreements with major clients. It is highly advisable for the Baltic states to see eye to eye on energy matters. (Kauppalehti, 17.2)
The Finnish transmission system operator Fingrid is rushing to build the new cable Estlink2 from Finland to Estonia. According to Fingrid’s CEO, Jukka Ruusunen, the cable could be completed already in 2014. The construction, however, requires amendments to the Estonian Energy Market Act and to the regulation of the current Estlink1 cable. The real question here is about opening up the Baltic energy market to competition. Baltic energy connections with EU neighbours must be strengthened, as shutting down the Ignalina nuclear power plant would leave them at the mercy of electricity import from Russia. The ailing Baltic economies are reluctant to open their markets, as this would cause the currently low prices to catch up with Nordic levels. Ruusunen hopes the pressure from the EC forces the Baltic states into action. (Talouselämä, 21.8)
Estonia is looking for opportunities to pull out of its economic quagmire, whereas new sectors might just prove to be that lifeline. One of the more high-profile of these is alternative energy, specifically wind power and the use of biofuels. These areas are seeing massive growth in Estonia thanks to the EU target of generating 20% from renewable sources by the year 2020. The rise of wind farms is an especially hot topic, as Estonia’s location – the windy Baltic coastline – is particularly favourable.
According to the estimation of the Estonian Wind Power Association (EWPA), an even bigger impact on Estonia’s economy could come from acting as a hardware sub-supplier to the global wind energy sector. It’s a new thing-- currently there are six local companies supplying different components for Danish wind turbine manufacturer Vestas, for example. If Estonia can solidify its niche in supplying hardware for the world’s growing wind energy market, the benefits to the country’s economy could be substantial.
But it’s not just wind that’s filling the sails of Estonia's green energy ship. In May, a Finnish company called Fortum opened an EEK 1.2 billion combined heat and power plant in Tartu that runs mainly on peat and wood chips. The plant is the first of its kind in Estonia. Fortum Tartu’s chairman said it is still impossible to estimate just how much the plant would help the economy, but there would be benefits as the plant exports to Latvia, too. Fortum Tartu is planning to open the same type of facility in Pärnu by the end of 2010. (Business New Europe, 17.7)
Wind energy - growing market in Estonia.
© DelfiPressifoto
The Baltic states are an energy island in the EU. Apart from the energy cable linking Estonia and Finland, there is no other connection with western grids. All gas, oil and power pipelines run east. However, this situation is about to change. Lithuania and Poland have agreed to connect their energy systems; Lithuania, Latvia and Sweden concluded an agreement on a sub-sea cable, and owing to the second cable linking Estonia and Finland, the capacity of Estlink should triple. But none of these projects will be ready before 2015. (Frankfurter Rundschau, 30.12)
Evaluating the impact of Nord stream gas pipeline
Poland will not grant political backing for Nord Stream to build the gas pipeline, even after Angela Merkel expressly asked for it. “The pipeline, instead of improving Europe’s energy security, will make us even more dependent on Russian gas,” said Mikolaj Dowgielewicz, Poland’s Minister for European Affairs. This quashes Merkel’s efforts to use the Russian-Ukrainian gas stand-off as a pro-argument for the pipeline. Poland, like other nations of Eastern Europe, only supports the Nabucco pipeline because then the European gas supply would not depend on Moscow. The EU institutions are inclined to back Eastern Europe’s approach. Sweden will not grant political support to Nord Stream either. “The final conclusion on whether the Nord Stream gas pipeline can pass through the Swedish economic zone depends on the environmental impact assessment,” said the Swedish Environment Minister Andreas Carlgren. Sweden will adhere strictly to the national and international legislation. (FTD, 30.1)
The Estonian Academy of Sciences disagrees with the newly published environmental impact assessment of the Nord Stream gas pipeline, according to which the impact on the Baltic Sea would be insignificant. The Academy calls on the Estonian government to create its own committee of experts to look into the matter. The Academy of Sciences stresses that Estonia’s opinion should be considered, since due to winds and sea currents the potential environmental accidents at sea would exert the greatest impact on the Estonian coastal waters. Several Estonian scientists worry about the poisons on the seabed dumped during the war. Much of the toxic substance information is still classified. (Turun Sanomat, 12.3)
The Nord Stream gas pipeline has influence over living environment in the Baltic Sea.
© DelfiPressifoto
Estonia ratcheted up its opposition to the planned Gazprom gas pipeline, saying the potential risks had been sidelined. Tallinn said that assessors failed to properly take into account the risk that the pipeline could break up, claiming they used incomplete or obsolete data on seabed geology, seismic activity and the threat posed by shipping, while failing to demonstrate why an undersea route was better than a land pipeline. Estonia banned Nord Stream surveys in its waters in September 2007. (Trading Markets, 9.6)
Estonia has made every effort to oppose the Russia-Germany gas pipeline project. The Estonian view does not carry much weight in the eyes of major players, but it’s supported either completely or to some extent by Latvia, Lithuania, Poland, Denmark and Sweden. Some Estonian scientists complained that by banning the studies in its waters, Estonia will have no say in the matter later on. The majority of both politicians and people, however, found any studies most unnecessary, as the construction of the gas pipeline in Estonian waters will certainly not be permitted. History has taught Estonians to be sceptical when it comes to the relationship between Russia and Germany. If it’s bad, small countries in between will be caught in the middle. During peaceful times they will simply be ignored. (Kaleva, 28.6)
The Finnish government has seen the gas pipeline project as merely an environmental issue, while other Baltic Sea states are pointing at security risks. There are so many political and economic powers linked to the pipeline that the strategic meaning of the Baltic Sea will inevitably gain in importance. It has been feared that Russia would use energy as a foreign policy tool. The Baltic nations and Poland have been most critical of the gas project. (Kauppalehti, 3.7)
For Russia, energy is a means of regaining its position as an empire, says Arkady Moshes from the Finnish Institute of International Affairs. The gas pipeline from Russia to Germany could also run over land. It might be a cheaper and more environmentally friendly solution. But the land route would pass through the Baltic states, Poland and Belarus – countries with which Russia has several historical and political bones to pick. (HS, 6.9)
The rhetoric Poland and the Baltic states use in their campaign against Nord Stream’s project is mostly political. Due to complicated relations with Russia, the activities and the mere existence of Gazprom is seen as a threat to national security. They go so far as to deny the EU’s obvious interest in the project by claiming that Nord Stream would increase the EU’s dependency on Russian gas. It has an economic aspect to it. By criticising the sea cable they want to put the across-the-land project Amber back on the agenda. As a consequence, Poland and the Baltic states would gain more geopolitical weight. The Baltic Sea is allegedly not suitable for laying a gas pipeline, but let’s not forget that projects for Danish-Polish, German-Danish-Swedish and Estonian-Finnish gas pipelines are also being drafted. (Независимая газета, 2.11)
Now all it takes is pipes and a tiny permit from Finland – and the construction of the Baltic Sea gas pipeline can finally begin after almost five years of planning. For some time it seemed the permit-granting process would derail the entire project. The protests by Poland and the Baltics were fundamental. What’s more, the gas pipeline is a link between Germany and Russia, leaving out Poland and the Baltic three. Estonia refused to grant any permits for activities in its coastal waters. As a result, Nord Stream shifted the route from Estonian waters to the Finnish economic zone. According to the current plan the construction works will commence mid May 2010, with the last obstacle – herrings that spawn in the Bay of Greifswald in spring time – out of the way. (SZ, 29.12)
Stark choices in Estonian economy
The Baltic states are facing a serious economic crisis. Thanks to national currencies pegged to the euro, Estonia, Latvia and Lithuania enjoy credit options from international banks, although it has caused a significant rise in inflation. The Baltics should avoid devaluation of the currencies at any cost for the sake of a balanced state budget. Rather, it takes more export and less import to reach a balanced budget. Estonia, having the most liberal market, counts on growth in the export of services and domestic deflation for getting out of the recession. (Le Monde, 1.1)
The people of the three Baltic countries feel as if they are on a see-saw. No more than two years ago they enjoyed the fastest economic growth in the EU and were treated as role models for reformers. Now they are on the way down. All three governments have cut spending and increased taxes. Yet the three countries should not be viewed as one. Latvia is an example of political instability and social upheaval. Estonia is coping much better with the crisis for many reasons. During the good times Estonia stocked up reserves; they also trust their government and other institutions to curb the crisis more than the EU average; a liberal coalition is in power and the politicians see the hardship as an opportunity, not a tragedy. (Hospodarske noviny, 11.2)
It would be unjust to regard the 2004 EU newcomers as a single group. Such a faulty sweeping statement was made by the rating agency Moody’s, when it warned the investors of a deep and long recession in Eastern Europe. The old EU members have held back their helping hand, because some of the newcomers themselves are partly to blame for their predicament. Take the Baltic states, who chose to use the swift economic growth to reach a Western European standard of living. But the old EU members shall not forget the new ones: it’s a moral as well as economic obligation of the West to help. Once the economic depression becomes a social and political crisis, its impact will cross borders and paralyse the EU’s ability to function. (HS, 16.3)
Estonia is in its worst economic predicament since the country gained independence and the downturn isn’t over, said the OECD report. To help the economy recover, Estonia’s government needs to shift its economy toward export. This is going to be hard, considering the high inflation and the country’s currency pegged to the euro. Wages and prices may have to come down, because high revenues from a booming economy were spent instead of saving. Getting the economy back on track will have to happen through fiscal policy and flexibility. (WSJ, 21.4)
Estonia is in a deeper crisis than most of the EU member states. It all started when domestic demand plummeted, and Estonia’s openness to outside factors is likely to prolong the crisis. The dominant question in the first OECD report on Estonia is how the state could get back on track again as soon as possible. Paris economists estimate that the key lies in rapid budgetary policy reforms. Estonia is little criticised on the micro level in the report. Estonian market is amongst the most open and competitive ones on the planet. (NZZ, 22.4)
In comparison to other Baltic capitals Tallinn is incredibly calm. “We have seen fast growth over the last couple of years. The present fall is also very sudden. It is not easy for the population to grasp what is happening,” political scientist Anu Toots explains. “Industrial output suffers the most. Businesses lay off workforce. The government cuts spending and reforms the labour law, preferring flexibility to job security,” adds French economic analyst Laurent Charpin. “Nevertheless there are next to no protests. The government is committed and the people silent.” A ticket to the euro zone is both an economic and political goal the population is awaiting for phlegmatically. (Le Progrès, 27.7)
Estonia’s GDP fell 16.6% in the second quarter, but the country still enjoys the best outlook in the Baltics to exit the recession. The Baltic region needs good news. Standard & Poor’s lowered the rating on Estonia and Latvia this week while the Lithuanian rating is being reviewed. Nevertheless, of the three Baltic states, Estonia has the most promising outlook. According to the analysts of Danske Bank, the crisis has hit the bottom and the Estonian economy will be able to recover faster than the other Baltic States. (WSJ, 13.8)
Estonia’s euro peg is anything but free-market. It stoked the boom by enticing people to borrow cheap at euro zone rates and is now prolonging the bust. A shock awaits this winter. Most governments would try to cushion the blow. Estonia is instead pushing through yet another austerity package in order to be able to join the euro. The government could spend more. The national debt is just 5% of GDP. It chooses not to do so. It takes admirable discipline. Estonians will be a shining example to us all if they pull it off – and hold their society together. (Daily Telegraph, 20.9)
The Estonian economy is shrinking, unemployment is rising, many have incurred considerable debt. But there is no sign of strikes or protests. A strict budgetary discipline and keeping the economy on track for the adoption of the euro are the top priorities for the cabinet. Besides having a relatively stable economy, Estonia runs rather stable politics. During the four years Estonian Prime Minister Andrus Ansip has been in office, Latvia has seen three prime ministers. Ansip is now heading a minority cabinet but the dreaded government crisis has been avoided. If anything good has come from the recession, it is the rapidly declining inflation rate. (Deutschlandradio, 6.10)
Estonia on the way to euro zone
The collapse of Eastern European economies could spell doom for the whole of the European Union. Therefore it is especially vital for the Baltics and Bulgaria to adopt the euro immediately. However, none of these countries will meet the Maastricht treaty’s criteria any time soon, making euro adoption impossible. The Baltic states are tiny, so letting them adopt the euro ought not to set an unwelcome precedent for others nor should it damage confidence in the single currency. Yet the European Central Bank and the European Commission firmly oppose this form of “euroisation”. (The Economist, 26.2)
A conventional response to a deep economic crisis might be devaluation. But the Baltics’ currency pegs to the euro are a matter of national pride. Moreover, most private borrowing is in euros, so devaluation would mean beggary for many. Instead, the response has been wage cuts meant to regain competitiveness. All three countries want to adopt the euro as soon as possible, though not by bending the rules: the whole point is to gain credibility, not to enter the club “on a stretcher”, as one official puts it. Having soft-pedalled reform after joining the EU, the Baltics now show some progress in implementing them - inflation and current-account deficits are falling. But some reforms such as simplifying local government in Estonia are still on hold. In politics, the Estonia’s cabinet looks the most solid at the moment. (Economist, 8.4)
Estonia’s plans to join the euro in 2011 were surprisingly endorsed by the IMF.
© DelfiPressifoto
Throughout its independence, Estonia has lived beyond its means. Even during the current crisis exports have not once exceeded imports in any month. The trade balance deficit has been financed in two ways, as 250 billion kroons have been borrowed from mostly Swedish banks, while real estate and companies have been sold to foreign investors. Now the banks have noticed that loan losses have started to increase. Estonians believe that the solution to the situation would be the euro, as the transition to the euro would stop talk of devaluation and restore trust in the eyes of the banks and investors. For Estonia to adopt the euro in the next few years, a miracle is required. The question also arises whether the euro would be as much use as people think. In its own way, Estonia already has the euro, as the Estonian kroon is pegged to the euro at a fixed rate and the loans of the Estonians are in euros. (Kaleva, 7.6)
Edmond Alphandéry, former French Minister for the Economy and current president of the largest private insurance company CNP Assurances, supports the entry of the Baltic states to the euro zone. Alphandéry recommends “promoting the entrance of the Baltic states to the euro zone” in order to offer them stability and financial solidarity in the current period of crisis. The members of the euro zone have in turn avoided the topic, being afraid of destabilising the euro zone. (Forex.fr, 26.6)
The Baltic states are suffering deep recessions in their quest to reach the safe haven of the euro zone. Estonia, Latvia and Lithuania, despite facing double-digit falls in GDP, are striving to limit their budget deficits with a view to adopting the euro as soon as possible. Rather than pursuing devaluation, they are cutting wages to restore competitiveness and hoping that the euro will repair investor confidence. None of them, however, looks likely to meet the conventional benchmarks for euro zone entry soon. As a result, unilateral euro-adoption or devaluation are strong possibilities. (The Economist, 3.7)
Europe is anxious that the Baltic currencies will be devaluated, although it could help the countries. Despite the region’s small size, the economic crisis in the Baltics cannot be treated as of little concern to the rest of Europe. Bank failures or plunging national currencies could threaten the fragile prospect of recovery for the whole continent. (FT, 4.8)
Christoph Rosenberg, the IMF regional representative for Estonia, announced that as a result of the current and earlier efforts of the Estonian government, accession to the euro is close at hand. The rating agency Moody’s is still doubtful whether Estonia can fulfil the necessary criteria. (Dagens Nyheter, 27.10)
Estonia’s plans to join the euro in 2011 were surprisingly endorsed by the IMF. The news upset Latvia and Lithuania, as the Baltic three are all in a similar situation. For the past year the focus has been on averting disaster, but it now looks as if Estonia, by the middle of 2010, will have met all the criteria for joining the euro. Inflation is low, government debt is negligible, and next year’s budget sets a deficit of 2.95%. That is thanks, the IMF says, to Estonia’s thrifty habits in public finances. The government has cut spending hard and early. Projects financed by the European Union have acted as an important economic stimulus. For safety’s sake, the IMF still wants Estonia to raise and broaden taxes. (Economist, 30.10)
Latvia and Lithuania’s bleak economic prospects are likely to derail their euro-zone entries in the near term, whereas neighbouring Estonia still has a chance of adopting the currency in 2011, Nordea Bank estimates. The Baltic countries all strive to adopt the euro as soon as possible, but the global financial crisis and deep domestic economic declines coupled with excessive budget deficits are threatening to dash their hopes. Supported by surpluses collected during the boom years and with inflation and public debt in check, Estonia is closest to fulfilling the Maastricht criteria for euro adoption. The only remaining obstacle is the budget deficit, which after severe public spending cutbacks is hovering around the required limit. (WSJ, 17.11)
In the coming weeks, many Central and Eastern European parliaments will sign off on their annual budgets. This is going to be an uphill battle. Recent economic figures suggest that the Baltic economies have now bottomed out. But the end of the recession does not necessarily mark the beginning of a recovery. Being outside the “euro wall” that still divides Europe leaves the Baltic states more susceptible to the economic fallout of the crisis; euro zone membership, however, would bring stability. It is alarming that our allies in the EU have to endure this global economic-financial turmoil alone. It is a shame that existing international assistance efforts are not EU-led but spearheaded by the IMF. (WSJ, 19.11)
Estonia could secure approval in June 2010 to adopt the euro in 2011, the EU’s top monetary policy official confirmed. “For 2011 there is one possible candidate to adopt the euro: Estonia,” said Joaquin Almunia. “This country has made good progress towards fulfilling the criteria. If everything goes well, we could in June 2010 give the green light for the 17th member of the euro zone.” Jean-Claude Juncker, who chairs regular meetings of euro zone finance ministers, has earlier voiced doubt over whether Estonia would reach its goal of euro entry in 2011. (Forbes, 23.11)
Estonia is a test case for the willingness of the euro zone, and especially Germany, to continue to expand. If they are serious about wanting to expand monetary stability and prosperity into Eastern Europe, they should agree to admit Estonia to their single currency area in 2011. Privately, some Western European officials and central bankers say the euro area has enough problems without taking in new members. “What’s the hurry? Let them wait a bit longer till their economies have really converged with ours,” said a central banker speaking on condition of anonymity. Eastern Europe complains that the economic criteria for the euro zone have been applied more stringently to their countries. So Estonia is making an effort to have an impeccable case to present. Some economists say that along with Estonia the EU should admit Latvia and Lithuania, which otherwise must face a few more years of sharp austerity before they can hope to qualify. Zsolt Darvas, a fellow at Bruegel research institute, argued that the euro criteria should be re-interpreted to admit the three Baltic states immediately. “When everyone is aware that a rule has deficiencies, it needs to be modified.” But given the determination of the European authorities to avoid creating any precedent for larger newcomers, Estonia is likely to join on its own. (NYT, 15.12)
Hopes are high in the Baltic states that the worst of the crisis is over and the region will start to recover in the next twelve months. Estonia does have reason for optimism. If all goes to plan, 2010 will be the year it gets approval to swap its kroon currency for the euro in 2011. (Monsters and Critics, 24.12)
Transit gateway Tallinn
Estonia’s relationship with Russia in the field of transport and logistics has not been too cordial, mostly due to statements made by politicians. The latter weaken the ties but do not sever them permanently. Common interests – rising transport flows and cutting costs – are the incentive for all the parties to help one another. The CEO of OÜ Muuga ST, Sergei Artjomov: “The recession is the ultimate test for us. Port of Muuga is prepared and offers new ways to service transit. The speed and quality of services has increased.” (Гудок, 13.3)
Port of Muuga offers new ways to service transit.
© Tallinna Sadam
In the last week of March an Estonian logistics delegation visited China and met with Chinese freight forwarders. A breakthrough was made, as a result of which thousands of Chinese containers will start passing through the Muuga container terminal in the next few months. Among the companies offering a transit chain from China straight to Moscow were Eesti Raudtee (Estonian Railway), Transiidikeskus, the port of Sillamäe, the Estonian Logistics and Freight Forwarding Association representing the Moscow Customs Terminal, and several forwarding enterprises. (Cargonews Asia, 24.4)
The CEO of Cicero Capital, a financial advisory company specialising in Central and Eastern Europe, says a potentially high-yield area to be developed in Estonia is logistics. Though the Port of Tallinn has seen its role as an export point for Russian crude oil fading in recent years, it will reinvent itself as a major gateway for container traffic from China. The Muuga container facility – the only one of its kind in the region – should be complete in less than two years, and will become an overland route to the EU via Kazakhstan and Russia. Estonia has potential to be an important EU-China gateway. (Business New Europe, 17.7)
The Port of Tallinn is in search of a strategic partner. Now they are eyeing Kazakhstan. Investments are made to extend the container transport terminals. Estonians consider Kazakhstan and the transit of its raw materials (oil products, grain, metals, chemical products) as one of the best and most promising partners. The Baltics already operate as a major gateway for Kazakhstan’s import. However, it remains uncertain whether the Estonians’ proposal is economically viable. Kazakhstan’s private operators have multiple ports to choose from, making it impracticable to place all the bets on just one. (Гудок, 13.9)
Swedish banks in Estonia
The current economic crisis echoes the one banks in Sweden faced in the 1990s, but the history gives bankers confidence they can pull off the feat again in the Baltic countries. Anders Borg, the Swedish Finance Minister, said that the Swedes have a strong feeling of responsibility to help the Baltic states as they are new democracies and in the same economic region. Desire to avoid a new East-West divide is driving the Swedish banks to support the Baltic states. (NYT, 12.3)
Sweden, the holder of the EU rotating presidency, is facing a long list of tasks to be discussed and decided, but for Sweden the most important issue is to prevent the total collapse of the Baltic economies. The Swedish state and banks feel a special responsibility for the economic crisis in the Baltic states, as the reason for the crisis is the flaccid loan policy of the Swedish banks. The activities of the banks were not guided by normal business ethics, but by an uncontrollable need for maximum profits. Sweden as the holder of the EU presidency is looking after the whole of the EU, but the Nordic countries should put together a joint plan in order to save the economies of the Baltic states. If the Nordic countries together show solidarity towards the Baltic states, these states should in turn honour the Nordic labour market practices. (Kaleva, 6.7)
Swedbank said the rate of impaired loans, chiefly resulting from property loans, in the Baltics slowed in the third quarter. It is suggested that Baltic banking may be “close to the bottom”. The gloomiest scenario has not transpired in Estonia and the country has performed better than expected. (WSJ, 21.10)
Johnny Åkerholm, CEO of the Nordic Investment Bank, says: “Because of the international economic crisis, not enough attention has been paid to applying structural changes both in the Baltic countries and in Finland.” Åkerholm says that the principal problem of the Baltic states is the small production sector. On top of this, the advantages of these countries have shrunk considerably over the past few years. After regaining independence, the Baltic states quickly transitioned to a market economy. They regulated their legislation and they had an advantageous level of costs, so they were attractive as an investment opportunity for Nordic companies. “The advantages that they have preserved are an educated labour force and an ability to adapt quickly.” Åkerholm urges the Baltic states to contribute to increasing their relative advantages; he also encourages them to divert their energies into building a common market, in order to form a larger and more attractive region. (Kauppalehti, 4.11)
Bo Kragh, vice president of Svenska Handelsbanken and the godfather of the Estonian kroon, stresses the importance of Estonia's 1992 monetary reform as a part of the country's independence. Bo Kragh does not see any political or economic reason to give up the national currency, but believes only that the exchange rate could be free. The Baltic states are forced to solemnly obey the Maastricht criteria, while many of the EU member states use extensive accounting tricks in order to appear to fulfil these criteria. (Эксперт, 2.11)
Tallinn-Helsinki – by train
Jussi Pajunen, Mayor of Helsinki, has not lost hope of a railway tunnel between Helsinki and Tallinn. The EU Interreg programme refused to finance a feasibility study for the tunnel. Are the cities going to do the research work on their own or apply for financing using other EU channels? The Helsinki-Tallinn railway link is part of the Rail Baltica project, and missing out on the funding would be a disappointment for Helsinki. (HS, 21.1)
Finland is looking for the means to build a railway tunnel from Helsinki to Tallinn. The Estonian national railway company Eesti Raudtee does not want to contribute major investments to the project, as it doubts the possible volume of goods transport between Finland and Western Europe. Gennady Bessanov, secretary general of the Coordinating Council on Transsiberian Transportation, announced that Russian investors may participate in the project to some extent. At the same time, Dmitri Abzalov, a leading expert with the Centre for Russia’s Political Conjuncture, finds that the project is unthinkable without the EU support regime and financing. The mayor of Helsinki says that Finland will be able to find the means independently. (Гудок, 3.2)
What would life be without dreams and visions? The capitals of Estonia and Finland have for many years been discussing the construction of a tunnel between the two cities. The biggest drawback of the tunnel is that it is meant for goods transit, not passengers. At the same time passenger transport through the tunnel would be more feasible, as up to 12 000 people every week use the ferry transport between the cities. (Die Presse, 6.3)
A difficult year for Tallink
The nine-month management report of Tallink indicates a loss of almost 40 million Euros. The financial loss for the whole year will most likely be smaller, once the results of the summer months are added, but nothing is indicating that the shipping company will get out of its difficult situation in the near future. Tallink is suffering because of the economic crisis just like other shipping companies. The competition is tough and the volume of goods carried and prices have dropped. Keijo Mehtonen, the CEO of Tallink Silja, says that the market for goods transport may pick up next year at the earliest. According to Mehtonen, a new cost-cutting programme will be drawn up in the autumn and ships will be sold or rented. The faith of investors in Tallink has collapsed, and the value of the company shares has fallen by more than 80% in two years. (TS, 22.7)
The Tallink Group ships made a record of passengers on the Baltic Sea.
© Tallinna Sadam
The economic crisis arrived at the right time for Tallink. The ticket sales of Tallink, suffering major losses and struggling under a heavy burden of debt, have grown to a record point during the recession. In June the Tallink Group ships carried 1 054 087 passengers, which is a record on the Baltic Sea. The negative side of the recession is that passengers still spend less money on board the ships. The volume of goods carried has also fallen. Tallink predicts that the financial year will end with a major loss. (Talouselämä, 7.8)
Tallink, the flagship of the Estonian economy, is sailing with a major cargo of debt, and can only be saved by the mercy of the banks. The story of Tallink is like the economic history of Estonia since it regained its independence. When Estonia joined the EU in 2004, the dramatic expansion of the shipping company began. The company renewed its fleet and used a loan to buy an even bigger shipping company, Silja Line, and also Superfast, which operates on the German lines. With its new ships and lower costs, Tallink had grabbed market share from its two competitors, Silja Line and Viking Line. The company, which completed its last financial year with a loss, cannot pay the instalments of its huge loans. The difficulties of Tallink are culminating at a time when the worst is over for the economy, and the company will come out of the crisis thriving. (TS, 17.12)
Estonia’s emission caps in the European Court of Justice
The European Court of Justice overturned a European Commission decision to impose stricter limits on carbon emissions from Poland and Estonia from 2008-2012. The Commission said in 2007 that the emission levels set by Poland and Estonia were too high, and sought to reduce them by 26.7% and 47.8%, respectively. However, the Court of First Instance said that the Commission exceeded its powers. Barbara Helfferich, the Commission’s spokeswoman on environmental issues, said “The Commission is extremely disappointed by the judgment. We are studying it carefully, with a view to a possible appeal of the decision.” She added that it was still too early to assess what impact the ruling will have on the Emissions Trading System in Europe. Analysts and carbon-market participants, meanwhile, expressed concerns about the potential implications of the ruling. (WSJ, 24.9)
The Europe-wide carbon trading market suffered a severe blow yesterday when the European Court of Justice issued a ruling that will weaken carbon prices and undermine efforts by the European Commission to curb carbon emissions further. In a landmark decision, the European Court of First Instance ruled in favour of an appeal by Poland and Estonia for the right to be more generous in granting carbon emission allowances. The court said that the Commission had no right to impose a lower cap on the emissions of Estonia and Poland when it rejected the national allocation plans. The ruling is a victory for Central and Eastern European states that fought against the Commission’s attempts to cut carbon emission quotas. (The Times, 24.9)
Last month, Poland and Estonia successfully appealed a Commission decision to tighten their emission caps and won, paving the way for similar decisions on the caps of Hungary, Bulgaria, Czech Republic, Latvia, Lithuania and Romania. The decision prompted speculation that the Emissions Trading System would be flooded with new EU carbon allowances as countries won the right to emit more. But the decision means that any new caps would have to be reset using the best available and most recent emissions data, which shows that emissions have dropped across the EU because of the economic downturn. (Business Green, 7.10)
Positive outlook
Estonia should be a prime focus for emerging market investors for 2009, according to the Oxford Sustainable Group. The strong, stable government and nimble economic structure mean Estonia is better placed to bounce faster than its Central and Eastern Europe counterparts. The country also offers an attractive opportunity to UK investors. Its low prices and low wages give it a strong economic competitiveness within the EU block. Brits say Estonia is the most investible European country as it has no debt and therefore expects a stronger GDP growth than its peers as we come out of the recession. The advanced IT sector and renewable energy represent key investment areas for UK investors. (Investment Week, 13.7)
There are serious plans to turn Tallinn into a financial services centre. It’s not as crazy as it sounds. James Oates, CEO of Cicero Capital, a financial advisory company specialising in Central and Eastern Europe, explained that Tallinn will not be made a new London or Tokyo or Wall Street-- the idea is to put the country’s high-tech, low-bureaucracy climate to work in specific niches like private banking. Legislation should also be amended, which Oates estimates could happen in a year or so. The impact on the economy could be enormous. (Business New Europe, 17.7)
President Ilves presenting the award to VKG Oil Ltd at the Entrepreneurship award gala night.
© EAS
Estonia’s response to the economic crisis has been indicative of how extraordinarily flexible, efficient and non-restrictive its economy is. These traits endear the small, nimble country to foreign investors. Not only is its workforce skilled, Estonia is known for innovative technologies in biotechnology, ITC and software design. Estonia is noted for the development of Skype and carrying out human genome research. Adding to that is the population’s high proficiency in languages and an entrepreneurial spirit. (fDi Magazine, 1.10)
