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