ESTONIA: SCENESETTER FOR DEPUTY SECRETARY OF

UNCLAS TALLINN 000549

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL PGOV OVIP AMGT ASEC AFIN EN
SUBJECT: ESTONIA: SCENESETTER FOR DEPUTY SECRETARY OF
ENERGY SELL DELEGATION



1. (SBU) Summary: The last year has been a banner period
for U.S.-Estonian bilateral relations, including President
Bush's November visit to Tallinn, Foreign Minister Paet's
visit to Washington for a celebration of the 85th
anniversary of diplomatic relations, and President Ilves'
June visit to Washington. Estonians are very grateful for
U.S. support in the aftermath of their government's
decision to relocate a Soviet war memorial known as the
"Bronze Soldier" in late April. In regards to the formerly
contentious issue of membership in the Visa Waiver Program,
Estonia's recent progress and U.S. Congressional action put
the country on track to join the program possibly as soon
as next year.


2. (SBU) Three and a half years after NATO and EU
accession, Estonia remains a strong ally on all fronts. It
is deeply committed to trans-Atlantic security institutions
and pro-free market economic policy. Estonia is a
steadfast ally in the Global War on Terror (GWOT) in both
Afghanistan and Iraq, and an effective role model for
democracy in the former Soviet states and beyond. Estonia
is gradually becoming a more vocal member of the EU and is
a strong supporter of both EU and NATO enlargement. The
Estonian economy continues to boom, although inflation and
the current account deficit remain high while the labor
market is increasingly tight. Relations with Russia remain
difficult, particularly after the move of the "Bronze
Soldier" monument. Following cyber attacks on Estonia's
high-tech infrastructure in May, the GOE raised the
national security implications of the issue at NATO, within
the EU and bilaterally with its allies. End summary.


3. (SBU) This has been a big year for U.S.-Estonian
bilateral relations. President Bush came to Tallinn last
November, the first ever visit to Estonia by a sitting U.S.
President. In June, Estonian President Toomas Hendrik
Ilves met with President Bush at the White House.
Following riots, cyber attacks and deteriorating relations
with Russia in late April and early May, the United States
voiced strong public support for Estonia. (Note: The
United States strongly supported the Estonian government's
right to decide what to do with the "Bronze Soldier" and
decried Russia's failure to provide adequate security for
the Estonian embassy in Moscow. At the same time, we
called for dialogue, both between Estonia and Russia and
between ethnic Estonian and Russian residents of Estonia as
the best way to resolve difficult issues and build mutual
understanding. End Note.) In addition, the three Baltic
Foreign Ministers recently met with Secretary Rice to mark
85 years of relations with the United States. Appreciation
for U.S. non-recognition of the Soviet occupation of
Estonia remains an important source of good will towards
the United States. However, one major challenge for our
public diplomacy efforts is to engage the next generation
of Estonians to ensure that American-Estonian relations
will remain strong for the long term.

FOREIGN POLICY AND SECURITY


4. (U) GLOBAL WAR ON TERROR. Estonia is a strong
supporter of the U.S. position in the GWOT. Estonian
troops participate in NATO operations (in Afghanistan,
Kosovo, and Iraq),EU operations (the EU's Nordic Battle
Group),Operation Enduring Freedom in Iraq, and other
missions (including the UN mission in Lebanon). In
Afghanistan, Estonian troops serve as part of a UK-led
Provisional Reconstruction Team in Helmand Province, the
epicenter of Afghanistan's poppy producing region. In
Iraq, Estonian soldiers are embedded with U.S. troops in
some of the toughest counter-insurgency operations outside
of Baghdad. On June 23, 2 Estonian soldiers were killed in
Afghanistan. In 2004, 2 others were killed in Iraq.
Overall, 8.2% of Estonia's military is currently deployed
overseas, while the country is on track to meet its NATO
commitment of devoting 2% of its GDP to defense spending
(currently at 1.83%). Estonia is a vocal supporter of NATO
enlargement; GOE officials often speak out on the
importance of bringing Balkan and Eastern European
countries into NATO in order to cement democratic and free-
market reforms there.


5. (U) REGIONAL DEMOCRACY PROMOTION. Estonia plays an
active role in encouraging democratic reforms and economic
development in several former Soviet states. Estonia's
experience of transforming itself from a Soviet-occupied
country into a healthy democracy with a booming economy has
given it immense credibility in the region in promoting
democracy and transformational diplomacy. The GOE has
provided training in law enforcement, judicial reform,
freedom of the press, democracy building, economic and
market reforms, and IT to civil servants from the Balkans,
Georgia, Moldova, and the Ukraine. Georgia is of

particular importance for the GOE -- Estonian President
Ilves, Prime Minister Ansip, and Foreign Minister Urmas
Paet have all visited Tbilisi to strengthen ties between
the two countries. Former Prime Minister Mart Laar serves
as a personal advisor to Georgian President Mikheil
Saakashvili on political and economic reform.

ECONOMIC PERFORMANCE


6. (U) Estonia's economy is probably the most dynamic of
the "Baltic Tigers," and has been growing at 7-11% per year
for the past seven years. The state budget has been in
surplus since 2001, (currently 3.3% of GDP) and
unemployment is currently 5.3% and falling. The biggest
challenges facing the economy are: a labor shortage, a
growing current account deficit, and inflation (caused
primarily by rapid growth, rising energy costs and rising
wages). The national currency, the Kroon, is pegged to the
Euro. Estonia hopes to join the Euro zone by 2011. (Note:
Estonia meets all Euro criteria except for inflation. End
Note.)


7. (SBU) Since the early 1990s, consecutive Estonian
governments have backed a business- and investor-friendly
economic policy featuring a flat 22% tax on personal income
and no tax on reinvested profits. Leading sectors include
computer, software and cellular technologies, tourism and
manufacturing. The United States is the eighth largest
foreign direct investor, but U.S. direct investment
accounts for less than 2.5% of total FDI, well behind the
Swedes and Finns, who together account for more than 80% of
the total. Estonia is best known for its highly developed
IT sector and widespread use of technology in government
and daily life. Internet usage in Estonia is over 60%, and
online banking is upwards of 80% - both the highest in
Europe. Cabinet ministers work on the basis of e-
government and Estonia was the first country in the world
to offer e-voting in a nationwide election. The
development and support offices of the internet-telephone
giant Skype -- now owned by E-Bay -- are located here.


8. (U) Another central issue to the Estonian economy is
energy security. Large domestic oil shale reserves allow
Estonia to remain relatively independent of Russian energy
supplies. The proposed NordStream gas pipeline from Russia
to Germany may pass through Estonia's economic zone in the
Baltic Sea, very close to its territorial waters. GOE
officials state firmly that Estonia will closely study the
environmental and security issues related to the project.
Speaking at the Center for Strategic and International
Studies (CSIS) in late June, President Ilves said that
Germany's "failure" to consult with other EU members
regarding NordStream undermined trust and highlighted the
need for a common EU approach to energy security.

RUSSIA


9. (SBU) RUSSIAN RELATIONS. Estonia's relationship with
Russia is difficult and complicated following nearly 50
years of Soviet occupation. While the countries share
trade and investment ties, they have not been able to
conclude a border treaty. Depending on the political
climate, trucks crossing from Estonia into Russia may
encounter delays of up to several days. Estonia's decision
to relocate the "Bronze Soldier" prompted riots by ethnic
Russians in Tallinn. Following the riots, Russia put heavy
economic and diplomatic pressure on Estonia - including
refusing to disperse a mob outside the Estonian Embassy in
Moscow for several days, limiting rail and truck traffic
across the border and encouraging a boycott of Estonian
goods. At the worst point, rail traffic (oil, coal, wood
and other materials) was down by 50% - significantly
reducing Estonia's transit revenues and complicating supply
lines for Estonian companies. Rail traffic has still not
returned to normal levels.


10. (SBU) Ethnic Russians make up approximately 25 percent
of the population of Estonia. Russia has frequently
complained about GOE treatment of its Russian speaking
minority. However, until the Bronze Soldier riots,
Estonia's efforts to integrate its minority population were
viewed as a model for the region. While Estonia can still
point to significant accomplishments of its integration
strategy, the riots revealed deep fissures remain between
ethnic Russians and Estonians living in Estonia. The GOE,
which has traditionally engaged in language-based
integration programs, is working on a new strategy that
will continue with language programs, but also focus on
society building and cultural understanding among Estonians
of all ethnicities.

VISA WAIVER



11. (SBU) Securing visa-free travel to the United States
for Estonian citizens remains a priority for both the GOE
and Estonian public. Senior GOE officials regularly raise
the issue of membership in the U.S. Visa Waiver Program
(VWP) at all levels with the USG. Estonia's recent
progress toward meeting the VWP criteria, and U.S.
Congressional action, put the country on track to join
possibly as soon as 2008.

PHILLIPS