SCENESETTER FOR EUR DAS PEKALA'S VISIT TO

UNCLAS TALLINN 000888 SIPDIS SENSITIVE SIPDIS DEPARTMENT FOR EUR/NB KAYE LEE E.O. 12958: N/A TAGS: OTRA PREL EN SUBJECT: SCENESETTER FOR EUR DAS PEKALA'S VISIT TO TALLINN, OCTOBER 3-4 ¶1. (U) Welcome back to Tallinn. Your visit will bring you back to one of our most supportive allies in Europe. Your arrival comes on the heels of Toomas Hendrik Ilves' election as Estonia's next President and the beginning of the parliament's fall session. The Government has approved a bill extending the Iraq Mission Mandate through December 2007. The bill will be submitted to the Parliament for approval once the UN has extended the mandate for the Multinational Forces in Iraq. All six of Estonia's main political parties are gearing up for next spring's parliamentary elections. This charged political atmosphere will make the Iraq Mission Mandate renewal debate in Parliament a more contentious process than last year. However, as a whole, Estonia's support for U.S. positions through its promotion of democracy within the region (primarily Georgia, Moldova, Ukraine, and the Balkans) and participation in international peacekeeping operations remains strong. Estonia is very focused on President Bush's trip; the timing of your visit will provide an excellent opportunity to focus senior level attention on our priority issues. ¶2. (SBU) Your schedule includes meetings with several senior level policy-makers who engage on a wide range of topics: MFA Foreign Minister Urmas Paet, MOD Permanent Undersecretary Lauri Almann, prominent and active MPs, including Foreign Affairs Committee Chairman Enn Eesmaa, Center Party Chairman Ain Seppik, Mart Laar, and others to be confirmed. In addition, you will meet with key experts on investment climate issues including Viljar Jaamu, Chairman of the Board of Enterprise Estonia, Andrus Viirg, Advisor on foreign investments in Enterprise Estonia, Aare JQrvan, Economic Advisor to the Prime Minister, and Maria Varton, Deputy Undersecretary, Ministry of Economic Affairs and Communication. ¶3. During your visit, we recommend that you: -- Thank interlocutors for Estonia's presence in Iraq and Afghanistan and its support of U.S. objectives in NATO; express hope that Estonia will extend its mandate in Iraq another year. -- Praise Estonia's support for new democracies in the region (principally Ukraine, Georgia, Moldova, Armenia, Bosnia, and Kosovo) and encourage intensification of these efforts. -- Solicit views and insight on key regional challenges vis--vis Russia. -- Press Estonia to be active in voicing its support for strong transatlantic ties within EU and international fora. Estonia has the tendency of wanting to play the 'good European' by being silent on EU matters. -- Press Estonia to be more active in promoting its contributions in the GWOT and spreading democracy. The GOE displays a typical Nordic reticence to draw attention to itself and, therefore, loses positive PD opportunities. -- Encourage Estonia to actively facilitate and encourage U.S. investment and cooperative commercial opportunities in Estonia. -- Advocate on behalf of Raytheon in support of their bid for a Ministry of Defense $52 million tender for a short range ground based air defense system. Your Estonian interlocutors will likely want to discuss the President's visit in November and their participation in the UK-led PRT in southern Afghanistan. It is likely that they will repeat their case for visa- free travel to the United States in the context of their contributions in the GWOT. (See paras 4 and 11) Estonia: A Staunch U.S. and NATO Ally -------------- ¶4. (SBU) Estonia actively participates in the UK-led Provincial Reconstruction Team (PRT) in Helmand Province in southern Afghanistan, the epicenter of its opium production and one of the most dangerous regions due to resurgent Taliban activity. The GOE has committed itself to a two year mission mandate in Helmand and has made Afghanistan its number one foreign policy priority. This year, Estonia is increasing the number of troops it has in Afghanistan from 80 to 120 and has posted a diplomat in Helmand to assess and coordinate its development assistance project. To date, Estonia has suffered 9 casualties in Afghanistan since 2004. In Iraq, 37 Estonian soldiers serve shoulder-to-shoulder with U.S. troops outside of Baghdad. To date, the Estonians have suffered 18 casualties, including 2 killed, in Iraq since 2003, and they are involved in some of the toughest counter-insurgency missions. General Casey has consistently praised the Estonian soldiers for their skill, professionalism, and valuable contribution. ¶5. (SBU) Estonia has consistently supported U.S. positions within NATO and has voiced opposition to a European Security Defense Policy (ESDP) rivaling or duplicating NATO's role. Estonia's has made significant strides in transforming its military into an effective and experienced contributor to NATO and other international military operations. The MOD and Estonian Defense Forces (EDF) have acquired NATO-interoperable equipment and completely revised the joint command and general staff with NATO standard doctrine. Unlike many NATO allies who are cutting back on defense spending, the GOE is on track to meet its NATO commitment of devoting 2 percent of its GDP to defense (currently at 1.83 percent). Finally, Estonia has developed niche capabilities (i.e., small rapid reaction infantry unit and explosive ordinance disposal team) and actively utilizes them in NATO operations. A Regional Democratic Multiplier -------------- ¶6. (SBU) The GOE remains a staunch advocate for democracy and freedom in the region. Estonia's successful transition from communism to a thriving market democracy and its 2004 accession to the EU and NATO provide invaluable perspective and credibility on how to reform governmental institutions and the economy. In May 2006, the GOE approved a Development Cooperation Strategy which named Ukraine, Georgia, Moldova and Afghanistan as the priority partner countries through ¶2010. According to MFA, Estonia has budgeted USD 10 million per year to this strategy. The GOE provides regular technical assistance to the Ukraine, Georgia, and Moldova to assist them in their objectives to join both NATO and the EU. The GOE provides training through its Public Service Academy and School of Diplomacy for Ukrainian, Georgian, and Moldovan diplomats, civil servants, law enforcement, and customs agents. The GOE has recently expanded its assistance to include the Balkans, Armenia, and Azerbaijan. U.S. Investment Issues -------------- ¶7. (SBU) The United States is the fifth largest foreign investor in Estonia. Sweden and Finland are the largest investors, contributing about 54% and 20% respectively of Estonia's total foreign direct investment (FDI). After that it is a close race, albeit at much lower levels, between Norway (2.7%),the Netherlands (2.6%) and the U.S. (2.4%). ¶8. Estonia's small market makes it less appealing to U.S. companies than some of the larger new EU members. A shrinking labor force due to declining birth rates and emigration and rapid economic growth have combined to creat a tight labor market. This is exacerbated by the GOE's restrictive labor/immigration policy, which essentially prevents employers from bringing in significant numbers of workers from neighboring countries like Ukraine. Additionally, inflation and rising wage rates also impact Estonia's competitiveness in attracting FDI. Despite these issues, Estonia has a lot to offer U.S. investors including: strong information technology, communications and electronics sectors; a technologically advanced banking sector; no corporate income tax on re-invested profits; a highly educated workforce; and consistently high rankings for transparency and economic freedom by such groups as the Wall Street Journal. The GOE is working hard to position Estonia as the 'next Ireland' and best point of access to the EU market. ¶9. (SBU) The GOE is finally closing in on a deal for the re-purchase of Baltic Rail Services' (BRS) 66% stake in the Estonian Railway (ER). BRS stresses that the transaction is not a done deal yet, and could still fall apart if GOE rhetoric and terms are not amicable. If so, they feel any last chance for a deal will be lost, as BRS investors may then see greater potential benefit in waiting out the results of the pending arbitration. ¶10. (SBU) On the macro side, the Ministry of Finance released a forecast in August projecting real GDP growth of 9.6% this year, falling to 7.4% by 2010, and inflation falling to 3.9% next year, after a small rise in 2006. The report anticipates the 2006 unemployment rate falling to 6.8%, a rise in investment activity mainly from the EU, and growth in the manufacturing sector. Visa-Waiver -------------- ¶11. (SBU) Securing Estonia's inclusion in the Visa Waiver Program remains a priority for both the GOE and the public. Senior GOE officials regularly raise the issue with official U.S. visitors. We are cooperating closely with the GOE on a public diplomacy campaign to demystify the visa application process and reduce the number of illegal Estonian workers and overstays in the United States. We are also taking steps to simplify the application process and reduce the number of times applicants have to appear at the Embassy. These efforts have helped to improve the atmosphere significantly. The refusal rate for Estonians has declined steadily since 2003, dropping below 6% this calendar year (6.2% for FY2006). A recent validation study indicated that in 2005 the overstay rate for B visas was between 2.1 and 2.7 percent. Raytheon: Advocacy Issue -------------- ¶12. (SBU) In order to meet mandated NATO entry conditions, the Estonian Defense Forces developed a requirement for a very short range tripod mounted ground based air defense system to protect both fixed and static facilities of operational and strategic importance. The total Ministry of Defense (MOD) system requirement is for 24 firing units, 96 missiles, 2 (3-D) radars and 3 fire direction centers. In December 2005, the MOD released a tender to two competitors: the USG/Raytheon Team and the mainly French MBDA Company team. The total budget is $52 million, making it the largest military tender in Estonia's history. The USG/Raytheon team, labeled the 'Nordic Team', is comprised of the USG (missiles, trainers),Raytheon (prime contractor with launchers),the Norwegian company Kongsberg (command and control) and their Swedish contractor Ericsson (radars). The MBDA team submitted two bids, both offering their Mistral missile system. The MOD will make recommendations to the Government, which will make the final decision. We anticipate a formal announcement by the MOD sometime in October. ¶14. (SBU) The Embassy has actively cultivated a solid relationship with the MOD and adapted to their needs. To date, the Nordic Team proposal appears to enjoy a favorable position through the technical and financial phases of the evaluation. We are confident that if the decision is based on performance and price, the Nordic team will win outright. However, politics is the 'X- factor' where the French hope to make gains. Reviewing MBDA's strategy in previous competitions, it is anticipated that they will use every political resource at their disposal, including extensive French government involvement, in order to gain the necessary influence to win a favorable selection. A French MOD official met with several GOE officials and parliamentarians in September. WOS