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DE RUEHTL #0026/01 0141317
ZNR UUUUU ZZH
R 141317Z JAN 08
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 0435
INFO RUCPDOC/USDOC WASHDC
RUEHRA/AMEMBASSY RIGA 2958
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RUCPCIM/CIMS NTDB WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS TALLINN 000026 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EB/IFD/OIA, EUR/NB 
DEPARTMENT PLEASE PASS USTR AND OPIC 
HELSINKI FOR SCO BRIAN MCCLEARY 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB ETRD KTDB EINV OPIC USTR
PGOV, EN 
SUBJECT: 2008 INVESTMENT CLIMATE STATEMENT - ESTONIA 
 
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- 
discriminatory. 
 
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 
infrastructure. 
 
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 
courts. 
 
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: 
http://www.legaltext.ee/en/ 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: http://eoigus.just.ee/ 
There are also websites www.osale.ee and 
http://tom.riik.ee/ where the public can comment on 
draft laws and propose changes to the government 
regulations. 
 
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 
freedom. 
 
A.9. Efficient Capital Markets and Portfolio 
Investment 
 
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: http://www.pangaliit.ee/eng/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 
Index. 
 
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: 
 
http://www.eestipank.info/pub/en/dokumendid/s 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 
 
PHILLIPS