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DE RUEHTL #0018/01 0141440
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R 141440Z JAN 09
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RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS TALLINN 000018 
 
SIPDIS 
 
DEPARTMENT FOR EB/IFD/OIA, EUR/NB 
DEPARTMENT PLEASE PASS USTR FOR JKALLMER AND OPIC 
FOR O'SULLIVAN 
TREASURY FOR DO/JMACLAUGHLIN 
USDOC FOR ITA/JKOZLOWICKI and MARKOWITZ 
HELSINKI FOR SCO BRIAN MCCLEARY 
 
E.O. 12958: N/A 
 
TAGS: ECON EFIN ELAB ETRD KTDB EINV OPIC
USTR, PGOV, EN 
SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT - ESTONIA 
 
REF: 08 STATE 00123907 
¶1.  (U) The following is the 2009 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.  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.  Creating favorable 
conditions for FDI and openness to foreign trade has 
been the foundation of Estonia's economic strategy. 
 
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.  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; 
 
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. 
The government has the right to expropriate in the 
case of public interests related to boarder guard, 
public ports and airports, public streets and roads, 
supply to public water catchments, etc. 
Compensation is offered based on market value.  Post 
is not aware of any expropriation cases involving 
discrimination against foreign owners. 
 
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 2012.  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 2009.  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. Starting in January 2009, 
undistributed corporate profits will remain tax- 
exempt and the tax base for corporations will 
generally remain the same, except that liquidation 
proceeds, share buy-backs and capital reductions 
will become subject to tax at the level of Estonian 
company, just as dividends are taxed.  (Previously, 
such items were taxable at the level of the 
shareholder.) 
 
Generally, the government does not impose 'offset' 
requirements on major procurements. There are no 
government imposed conditions to invest. 
 
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. 
 
Estonia made amendments to the Regulation on Rules 
of Takeover Bids taking into the consideration 
Directive 2004/25/EC of the European Parliament and 
new amendments came into force February 8, 2008. 
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. 
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 is also website www.osale.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 2008 
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 31 billion at the end of 2008. 
Two Swedish-owned banks (Swedbank and SEB) control 
over 70 percent of the market.  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. 
Initial data from the Port of Tallinn indicate they 
handled 20 percent less volume in 2008 than in the 
previous year.  (The government has estimated the 
overall economic loss to Estonia of Russian 
restrictions on trade during May-December 2007 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 (TI) ranked 
Estonia 28th out of 180 countries on its Corruption 
Perceptions Index.  The Estonian Ministry of Justice 
invited TI to take a lead role in the drafting of 
the country's new anti-corruption strategy. 
 
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.  The Estonian 
banking and financial sector are judged generally 
stable, though they have endured stresses during the 
global credit crisis of 2008.  Devaluation of the 
local currency in next year is unlikely unless 
major, unforeseen economic events occur. 
 
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 
2008 was USD 1,100. 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 2007 was 20 percent, and the increase for 
2008 is expected to be approximately 14 percent and 
only around 5 percent in 2009. 
 
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 Q3 2008, the cumulative stock of FDI 
amounted to USD 17 billion.  Roughly 30 percent of 
FDI has been invested into financial intermediation 
and the same amount in real estate, renting and 
business activities.  Manufacturing is in third 
place with 14 percent of total FDI.  Wholesale and 
retail trade has attracted 13 percent of the foreign 
direct investment stock. 
 
Scandinavian countries are the largest foreign 
direct investors in Estonia. Sweden has 39 percent 
of the total, followed by Finland with 25 percent, 
and the Netherlands with 6 percent. The United 
States accounts for 1.4 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 tatisti 
ka/maksebilanss/statistika/statistika.html?ob jId=292 
616 
 
The ten selected largest FDI companies in Estonia in 
terms of total investment: 
 
¶1. Hansapank AS 
Foreign Shareholder: Swedbank 
Country of origin: Sweden 
Sector of operation: banking 
 
¶2. Sampo Bank 
Foreign Shareholder: Danske bank 
Country of origin: Denmark 
Sector of operation: banking 
 
¶3. Estonian Telecom 
Foreign Shareholder: Baltic Tele AB 
Country of origin: Sweden 
Sector of operation: telecommunication 
 
¶4. Eurodek Tallinn OU 
Foreign Shareholder: Blanin Holding Ltd. 
Country of origin: Netherlands 
Sector of operation: transportation 
 
¶5. SEB Pank AS 
Foreign Shareholder: SEB AB 
Country of origin: Sweden 
Sector of operation: banking 
 
¶6. Kandur AS 
Foreign Shareholder: Kone Holland B.V. 
Country of origin: Netherlands 
Sector of operation: elevators, escalators 
 
¶7. Rakvere Lihakombinaat 
Foreign Shareholder: HKSCAN OYJ 
Country of origin: Finland 
Sector of operation: food industry 
 
¶8. Kunda Nordic Cement AS 
Foreign Shareholder: Heidelberg Cement AB/ CRH 
Europe Holding BV 
Country of origin: Sweden/Netherlands 
Sector of operation: cement production 
 
¶9. Eesti Merelaevandus AS 
Foreign Shareholder: Tschudi Shipping Company AS 
Country of origin: Norway 
Sector of operation: water transport 
 
¶10. Phoenix Land AS 
Foreign Shareholder: EBRD/Mellon ABN Treaty 
Omnibus/Tolaram Corp.Pte.Ltd. 
Country of origin: UK/USA/Singapore 
Sector of operation: textiles 
 
PHILLIPS