Cablegate: 2008 Investment Climate Statement - Estonia


DE RUEHTL #0026/01 0141317
R 141317Z JAN 08





E.O. 12958: N/A

REF: 07 STATE 158802
1. (U) The following is the 2008 Investment Climate
Statement for Estonia, keyed to questions in reftel.
2. (U) A.l. Openness to Foreign Investment

Since joining the EU in 2004, the Estonian government
has sought to maintain liberal policies in order to
attract investments that could produce exports. All
foreign investors are treated on an equal footing with
local investors. While the GOE's focus in the mid-
1990s was to attract actively foreign direct
investment (FDI) into Estonia, at present it is
prioritizing the finding of new export markets for
Estonian goods and services.

Estonia's government does not screen foreign
investments. It does, however, establish requirements
for certain sectors. These requirements are not
intended to restrict foreign ownership but rather to
regulate it and establish clear ownership
responsibilities. Licenses are required for a foreign
investor to become involved in the following sectors:
mining, energy, gas and water supply, railroad and
transport, waterways, ports, dams and other water-
related structures and telecommunications and
communication networks. The Estonian Central Bank
issues licenses for foreign interests seeking to
invest in or establish a bank. Government review and
licensing have proven to be routine and non-

Estonia's openness to foreign direct investment
extended to its 1993-2001 privatization program, which
is now complete. Only a small number of enterprises -
- the country's main port, the power plants, the
postal system, and the national lottery -- remain
state-owned. In January 2007, the government also
repurchased the 66 percent of shares of the Estonian
Railway which had been in the hands of private
investors since 2001, claiming the need to maintain
control of this key part of Estonia's national

During the last decade, Estonia has been one of the
leading countries in Central and Eastern Europe in
terms of inward investment per capita. Companies
partly or wholly owned by foreigners account for one-
third of Estonian GDP and over 50 percent of the
country's exports. By the end of Q2 2007, the
cumulative stock of FDI amounted to USD 14.02 billion.
About 30 percent of FDI has been invested in financial
intermediation and about the same amount in real
estate, renting and business activities.
Manufacturing is in third place with 16 percent of
total FDI. Wholesale and retail trade has attracted
13 percent of the foreign direct investment stock.

Some general facts concerning foreign direct
investment inflows into Estonia include:

- In 1995-1996, the majority of foreign direct
investment was privatization-related;
- There is a trend towards cross-border acquisitions;
- Greenfield investments are increasingly rare;
- From its 10-11 percent GDP growth rates of 2005-06,
Estonia is slowing to an estimated 7.3 percent in 2007
and less than 5 percent in 2008.

A.2. Conversion and Transfer Policies

Estonia has been under a currency board arrangement
since 1992. Initially pegged to the German mark, the
Estonian kroon (EEK) has been fixed to the euro at EEK
15.65 since January 1999. Estonia joined the Exchange
Rate Mechanism (ERM) II in June, 2004.

The Estonian currency has no restrictions on its
transfer or conversion. Similarly, there are no
restrictions, limitations or delays involved in
converting or transferring funds associated with an
investment (including remittances of investment
capital, earnings, loan repayments, or lease payments)
into other currencies at market rates. There is no
limit on dividend distributions as long as they
correspond to a company's official earnings records.
If a foreign company ceases to operate in Estonia, all
its assets may be repatriated without restriction.
These policies are all long-standing; there is no
indication that they will be altered in the future.
Foreign exchange is readily available for any purpose.

A.3. Expropriation and Compensation

Private property rights are observed in Estonia.
There have been no known cases of expropriation or
nationalization since the country regained its
independence in 1991.

A.4. Dispute Settlement

Investment disputes concerning U.S. or other foreign
investors and Estonia are rare. Estonia's judiciary is
independent and insulated from government influence.
Property rights and contracts are enforced by the

Estonia's commercial law has proven extremely
effective and is often cited as one of the components
of Estonia's successful economic reforms. The
Commercial Code, as a part of the overall commercial
law, is consistently applied. The Obligation Law,
enacted in 2002, is the basis for all commercial
agreements. A Bankruptcy Act was adopted in 2004. The
full text of these laws can be found from: Estonia has been a member
of the International Center for the Settlement of
Investment Disputes (ICSID) since 1992, and a member
of the New York Convention of 1958 on the Recognition
and Enforcement of Foreign Arbitral Awards since 1993.

Recognition of court rulings of EU Member States is
regulated by EU legislation.

The Arbitration Court of the Estonian Chamber of
Commerce and Industry is a permanent arbitration court
which settles disputes arising from contractual and
other civil law relationships, including foreign trade
and other international economic relations.

A.5. Performance Requirements/Incentives

A fundamental principle of Estonia's economic policy
is equal treatment of foreign and domestic capital.
No special investment incentives are available to
foreign investors, nor is any favored treatment
accorded them. Similarly, there are no specific
performance requirements for foreign investments that
differ from those required of domestic investments.

Estonia continues to refine its immigration policies
and practices. U.S. citizens are exempt from the
quota regulating the number of immigration and
residence permits issued, as are citizens of the EU
and Switzerland.

Estonia's has a long-standing system of low, simple,
flat-rate taxes, in particular, a 21 percent income
tax which is set to be reduced one percent per year
until it reaches 18 percent in 2011. To encourage
companies to expand their business, all reinvested
profits are exempted from corporate income tax.
However, any redistributed profits, such as dividends,
are taxed at 21 percent in 2008. This tax strategy
was designed to promote business and accelerate
economic growth by making additional funds available
for investment. During accession talks, the EU gave
Estonia a transition period of seven years (the end of
2008) by which time this tax policy will have to be
brought into accordance with EU tax directives
governing parent-daughter subsidiary relationships.

Generally, the government does not impose 'offset'
requirements on major procurements.
A.6. Right to Private Ownership and Establishment

Private ownership and entrepreneurship are respected
in Estonia. In most fields of business, participation
by foreign companies or individuals is unrestricted.
As provided for by the Law on Foreign Investments,
foreign investors have the same rights and obligations
as Estonian citizens. Foreign investors may purchase
buildings and land for production purposes and
establish, buy, and fully own companies.

Government approval is required for foreign investment
and participation in only a handful of sectors (see
section A.1).

Competitive equality is the official standard applied
to private enterprises in competition with public
enterprises. Private companies do not face
discrimination in relation to state-owned companies.
A.7. Protection of Property Rights

Secured interests in property are recognized and
enforced. Mortgages are quite common for both
residential and commercial property and leasing as a
means of financing is widespread and efficient.

The legal system protects and facilitates acquisition
and disposition of all property rights, including
land, buildings, and mortgages. The long and
complicated process of property restitution (begun
when the Principles of Ownership Reform Act came into
force June 20, 1991) is almost complete, including the
area of non-residential real properties.

The Estonian legal system adequately protects property
rights, including intellectual property, patents,
copyrights, trademarks, trade secrets and industrial
design. Estonia adheres to the Berne Convention, WIPO
and TRIPS, the Rome Convention and the Geneva
Convention on the Protection of the Rights of
Producers. Estonian legislation fully complies with
EU directives granting protection to authors,
performing artists, record producers, and broadcasting
organizations. In 2002, Estonia withdrew its
reservation on Article 12 of the Rome Convention, thus
extending equal treatment to domestic and foreign
phonogram producers. (Note: However, because the U.S.
is not a member of the Rome convention, equal
treatment is not extended to U.S. phonogram producers
under this agreement. End Note.)
A.8. Transparency of the Regulatory System

The Government has set out transparent policies and
effective laws to foster competition and establish
"clear rules of the game." However, due to the small
size of Estonia's commercial community, instances of
favoritism are not uncommon despite regulations and
procedures designed to limit them.

Tax, labor, health and safety laws and policies have
been crafted to encourage investment. They appear to
have been successful, given the relatively high level
of foreign direct investment per capita.

All proposed laws and regulations are published for
public comments on the website:
There are also websites and where the public can comment on
draft laws and propose changes to the government

Estonia's bureaucratic procedures are generally far
more streamlined and transparent than those of other
countries in the region.

International institutions and organizations give
Estonia's economic policies high marks. The U.S.-
based Wall Street Journal/Heritage Foundation's 2007
Index of Economic Freedom ranked Estonia 12th in the
world. The index is a composite of scores in monetary
policy, banking and finance, black markets, wages and
prices. Estonia scores highly on this scale for
investment freedom, fiscal freedom, financial freedom,
property rights, business freedom, and monetary

A.9. Efficient Capital Markets and Portfolio

Estonia's financial sector is modern and efficient.
Government and Central Bank policies facilitate the
free flow of financial resources, thereby supporting
the flow of resources in the product and factor
markets. Credit is allocated on market terms and
foreign investors are able to obtain credit on the
local market. The private sector has access to an
expanding range of credit instruments similar in
variety to those offered by banks in Estonia's Nordic
neighbors Finland and Sweden.

Legal, regulatory, and accounting systems are
transparent and consistent with international norms.

The Security Market Law complies with EU requirements
and enables EU securities brokerage firms to deal in
the market without establishing a local subsidiary.
In 2002, the Helsinki Stock Exchange (Finland) bought
a controlling interest in the Tallinn Stock Exchange,
merging the two entities and making the smaller
Estonian market more accessible to foreign investors.

Estonia's banking system has consolidated rapidly.
Total assets of the commercial banks are approximately
USD 27 billion at the end of 2007. Nine regional
banks control the market. Four representative offices
of foreign banks had been established by December
2007. More info:

The Scandinavian-owned Estonian banking system is
modern and efficient, encompassing 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, accounting, and
legal services. Estonia has a highly advanced
Internet banking system: more than 80 per cent of
residents make their everyday transactions via
Internet banking.

The Central Bank and the government hold no shares in
the banking sector.

In 2001 the Estonian government created a consolidated
Financial Supervisory Authority (FSA) under the
auspices of the Central Bank. The Authority is an
agency with autonomous competence and a separate
budget. The FSA conducts financial supervision on
behalf of the state and is independent in the conduct
of financial supervision. The Authority was
established to enhance the stability, reliability,
transparency, and efficiency of the financial sector,
to reduce system risks, and to prevent the use of the
financial sector for criminal purposes.

A.10. Political violence

Politically motivated damage to projects or
installations is extremely rare. However, in April
2007, following the government's decision to relocate
a Soviet-era statue from downtown Tallinn to a nearby
cemetery, there were two days of rioting and looting
of shops in Tallinn. A subsequent Russian Federation
boycott of Estonian goods, and disruption of rail and
truck transit into Estonia had a negative impact on
some local companies. For a few days in early May,
cyber criminals targeted Estonian banks and government
websites with massive denial-of-service (DOS) attacks,
which cost several million Euros in estimated lost
revenues. The industrial sector most impacted was
transit. By year's end, the Port of Tallinn announced
that its cargo volumes for 2007 were down 13 percent
from the previous year. The government has estimated
the overall economic loss to Estonia of Russian
restrictions of trade during May-December as between
one-half and one percent of GDP.
A.11. a. Corruption

Estonia has laws, regulations, and penalties to combat
corruption and, while corruption is not unknown, it
has generally not been a major problem faced by
foreign investors. However, foreign companies have
found it difficult to become part of the local
commercial community because many Estonian executives
have known one another since childhood and often help
one another out in ways that make it difficult for
outsiders to compete effectively.

Both offering and taking bribes are criminal offenses
which can bring imprisonment of up to five years.
While payments that exceed the services rendered are
not unknown, and conflict of interest is not a well-
understood issue, surveys of American and other non-
Estonian businesses have shown the issues of
corruption and/or protection rackets are not a major
concern for these companies.

In 2004, the government of former Prime Minister Juhan
Parts, who ran on an anti-corruption platform in 2003,
instituted the "Honest State" program, which included
specific policies to reduce the risk of corruption in
government. These included auditing local governments
(widely seen as the greatest source of corruption in
Estonia), requiring public servants to file electronic
declarations of their economic interests, setting up a
National Ethics Council, increasing the number of
specialized investigators and prosecutors who focus on
corruption, and setting up an anonymous hotline for
people to report corruption cases.

The Security Police Board has shown its capacity to
deal with corruption offences and criminal misconduct,
leading to the conviction of several high-ranking
state officials. Estonia co-operates in fighting
corruption at the international level and is a member
of GRECO (Group of States Against Corruption).

Estonia began as a full participant in the OECD
Working Group on Bribery in International Business
Transactions (the Working Group) in June 2004, and
deposited its instruments of accession on November 23,
2004. The Convention entered into force in Estonia on
January 22, 2005.

In 2007, Transparency International ranked Estonia 28th
out of 179 countries on its Corruption Perceptions

A.12. Bilateral Investment Agreements

Estonia has investment promotion and protection
agreements with the Belgium-Luxembourg Economic Union,
China, Czech Republic, Denmark, Finland, Great Britain
and Northern Ireland Greece, Israel, Italy, Latvia,
Lithuania, Netherlands, Norway, Poland, Spain, Sweden,
Switzerland, Turkey, Ukraine, UK and the United
States. A Bilateral Taxation Treaty with the U.S.
came into force on January 1, 2000.

A.13. OPIC and Other Investment Insurance Programs

Estonia is a member of the Multilateral Investment
Guarantee Agency.

Estonia joined the Exchange Rate Mechanism II on June
28, 2004. The Estonian kroon is fixed against the euro
at 1 EUR = 15.6466 EEK.

A.14. Labor

Estonia has a very small population - only 1.4 million
people. The Estonian labor force is highly skilled
and well educated. There are 14 universities, 19
higher education colleges and 114 technical secondary
institutions, all combining to produce graduates with
adequate technical skills, and fluent in English,
Russian, German and other languages. Over 17 percent
of the population has received post-secondary
education; this number is growing rapidly.

The average monthly Estonian salary at the end of 2007
was USD 950. Annual economic growth above ten percent
in recent years, rising inflation, and free movement
of labor to other EU countries have driven up salaries
in most sectors. Average gross wage growth in 2006 was
16.2 percent, and the increase for 2007 is expected to
be approximately 20 percent.

The influence of trade unions, which tend to take a
cooperative approach to industrial relations, is
increasing. Estonia adheres to ILO Conventions
protecting workers' rights.

With an aging population and a negative birth rate,
Estonia, like many other countries of Central and
Eastern Europe, faces serious demographic challenges
affecting its long term supply of labor. Improving
labor efficiency is a key focus for Estonia in the
short-to-mid term. It is becoming increasingly hard
to find a pool of blue collar workers to start up
small or medium-sized manufacturing enterprises that
requiring significant manpower.

A.15. Foreign Trade Zones/Free Ports

According to the Customs Act, free zones can be
established on the customs territory by order of the
government. Goods in a free zone are considered as
being outside the customs territory, for the purposes
of import and export duties. As a rule, customs
procedures are not applied to goods in a free zone.
In free zones, VAT and excise duties (as well as
possible fees for customs services) do not have to be
paid on goods brought in for later re-export.

In Estonia, there are free zones at the Muuga port
(near Tallinn), the Sillamae port (northeast Estonia),
and in Valga (southern Estonia). All free zones are
open for FDI.

The main supervisory authority responsible for
monitoring the movement of goods in or out of free
zones is the Estonian Tax and Customs Board (governed
by the Ministry of Finance). There are ID requirements
for companies and individuals using the zone. The
U.S. Department of Homeland Security (Coast Guard) has
inspected Estonia's ports and determined that the
Republic of Estonia has substantially implemented the
International Ship and Port Facility Security (ISPS)
Code at all facilities visited.

A.16. Foreign Direct Investment Statistics

By the end of Q2 2007, the cumulative stock of foreign
direct investment amounted to USD 14 billion. 29.8
percent of FDI has been invested in financial
intermediation. This sector is followed by real estate
renting and business activities (29.5), and
manufacturing (15.7).

In 2006, the inflow of FDI was approximately USD 1.7
billion, or 10 percent of GDP.

Scandinavian countries are the largest foreign direct
investors in Estonia. Sweden has 40 percent of the
total, followed by Finland with 25 percent, and the
Netherlands with 5 percent. The United States accounts
for 1.7 percent of foreign direct investment stock.
(10th overall)

For the value of FDI (position, stock, and flows in
recent years by the commodity group, as well as
country of origin) please go to: tatistika
/maksebilanss/statistika/statistika.html?objI d=292616

The ten selected largest FDI companies in Estonia in
terms of total investment:

1. Galvex
Country of origin: Luxembourg
Sector of operation: steel galvanizing

2. Hansapank
Country of origin: Sweden, Finland, UK, Austria,
Switzerland, Luxembourg
Sector of operation: banking

3. Estonian Telecom
Country of origin: Sweden/USA/Netherlands
Sector of operation: telecommunication

4. Sampo Bank
Country of origin: Finland
Sector of operation: banking

5. Eurodek Tallinn
Country of origin: Switzerland
Sector of operation: transportation

6. SEB Eesti Uhispank
Country of origin: Sweden
Sector of operation: banking

7. GHI Group/Atlantic Veneer Corporation
Country of origin: USA
Sector of operation: production of veneer

8. Pro Kapital Group
Country of origin: Italy/Ireland
Sector of operation: real estate

9. Kunda Nordic Cement AS
Country of origin: Finland, IPC
Sector of operation: cement production

10. HK Ruokatalo OY
Country of origin: Finland
Sector of operation: food industry


© Scoop Media

World Headlines


Werewolf: Gordon Campbell On North Korea, Neo-Nazism, And Milo

With a bit of luck the planet won’t be devastated by nuclear war in the next few days. US President Donald Trump will have begun to fixate on some other way to gratify his self-esteem – maybe by invading Venezuela or starting a war with Iran. More>>

Victory Declared: New Stabilisation Funding From NZ As Mosul Is Retaken

New Zealand has congratulated the Iraqi government on the successful liberation of Mosul from ISIS after a long and hard-fought campaign. More>>

Gordon Campbell: On The Current US Moves Against North Korea

If Martians visited early last week, they’d probably be scratching their heads as to why North Korea was being treated as a potential trigger for global conflict... More>>


Gordon Campbell: On The Lessons From Corbyn’s Campaign

Leaving partisan politics aside – and ignoring Jeremy Corbyn’s sensational election campaign for a moment – it has to be said that Britain is now really up shit creek... More>>


Another US Court: Fourth Circuit Rules Muslim Ban Discriminatory

ACLU: Step by step, point by point, the court laid out what has been clear from the start: The president promised to ban Muslims from the United States, and his executive orders are an attempt to do just that. More>>