TRAVEL & TOURISM: ESTONIA'S HIDDEN ECONOMIC

UNCLAS SECTION 01 OF 03 TALLINN 000010 DEPARTMENT FOR EEB/CBA AND EUR/NB HELSINKI FOR SCO MCCLEARY COMMERCE FOR ITA LEAH MARKOWITZ SIPDIS E.O. 12958: N/A TAGS: PGOV EFIN ECON EINV EN SUBJECT: TRAVEL & TOURISM: ESTONIA'S HIDDEN ECONOMIC DRIVER ¶1. (U) SUMMARY: The travel and tourism industry in Estonia accounts for an estimated one-fifth of GDP, and is increasingly important as the economy moves away from its old manufacturing base. In-bound and out-bound tourism from Finland, Sweden, Russia and elsewhere is thriving, and the cruise ship business still anticipates growth. It is too early to tell how hard the tourism industry will be hit in 2009 by the ongoing global downturn. The hotel industry lobbied successfully to reduce a proposed hotel VAT tax hike, and local travel and tourism companies recently formed a Discover America committee to promote U.S. travel destinations - an MSP priority for post. The Government of Estonia will spend USD 33 million over the next five years to develop special Estonian attractions, and a newly finished renovation of the Tallinn airport has doubled passenger capacity. END SUMMARY TRAVEL & TOURISM: AN ESTONIAN ECONOMIC MULTIPLIER ¶2. (U) The travel and tourism (T&T) industry in Estonia represents a vital one-fifth of the country's economy, and one that is often overlooked amid the drama of the transit sector's ties to Russia. The importance of T&T is growing as Estonia steadily moves from a low-wage, manufacturing-based economy to one based on higher-wage services. According to data from the World Travel & Tourism Council (WTTC),travel and tourism are expected to generate 20.4 percent of Estonian GDP in 2008 and account for 17 percent of employment. Direct contributions to GDP (3.1 percent) come from the traditional T&T providers such as airlines, hotels, car rental companies. Indirect contributions (17.3 percent) come from fuel and catering companies, laundry services, financial services, retail, entertainment, and others. ¶3. (U) Despite extensive growth during the last few years, Estonia's tourism sector is still small, in real terms, by international standards. Nonetheless, Estonia has become a key destination in the Baltic Sea region. Tourism accounts for 11.4 percent of total exports of Estonian goods and services. Roughly two- thirds of foreign visitors arrive in Estonia by ship, with the route between Tallinn and Helsinki being the most important. Daily ferry service also connects Tallinn and Stockholm. �00A; WELCOME TO ESTONIA: INBOUND TOURISM ¶4. (U) According to the 2008 Travel & Tourism Competitiveness Report, Estonia is the 26th most conducive environment for developing the travel and tourism industry among 130 countries. Estonia achieved best scores for tourism infrastructure, health & hygiene, and safety & security. Scores were low for human, cultural and natural resources in travel and tourism, and air transport infrastructure. The air transportation score may soon improve, as the Tallinn airport has now completed a major expansion, related to Estonia joining the EU Schengen travel zone in December 2007. This expansion created 14 new gates, separate arrival lounges for Schengen and non- Schengen passengers, 10 new check-in desks, a new restaurant, and several cafes. Passenger traffic capacity is now twice what it was before. ¶5. (U) According to the Estonian Statistics Board, Estonia received 1.9 million foreign overnight tourists in 2007. The first eight months of 2008 showed a 5.2 percent increase over the same period in ¶2007. Estonia has 984 total accommodation establishments with 46,000 beds. The main growth markets for hotels and other accommodations were Finland, Russia, Latvia, Lithuania and Germany. ¶6. (U) In 2008, the Port of Tallinn received just over 300 ship calls, about 7 percent more than last year. Cruise ship passengers (375,000) were up by 28 percent, and the Port of Tallinn claims the Baltic Sea is the third most popular global cruise destination after the Caribbean and the Mediterranean, and the fastest growing. The Port of Tallinn is very competitive with other Baltic Sea ports, mostly due to the Old Town center's easily accessible sights. In passenger numbers, it is actually ahead of both TALLINN 00000010 002 OF 003 Helsinki and Stockholm, and the Port expects at a 10 percent increase in cruise passengers for 2009. One in five cruise tourists is American, but nearly as many people are coming from the United Kingdom, followed by Germany and Spain. KEY MARKETS: FINLAND AND RUSSIA ¶7. (U) As Q4 2008 Estonian tourism statistics are not complete, it is still hard to estimate the impact of the global economic crisis on the T&T sector in Estonia. Over 50 percent of overnight foreign tourists come from Finland, so that economy will be the most important for Estonia. Early indications point to a decline in Finnish travel here, but the industry hopes this will be off-set by holiday bargain-hunting in Tallinn shops offering cheaper prices than those in Helsinki. Another key market to follow is Russia. Visitors from Russia declined in 2007 due to political tensions stemming from the April Bronze Soldier incident. However, Estonia's joining the EU Schengen area in December 2007 facilitated tourism from Russia, as it opened Estonian borders to all those Russian travelers who already had a visa to other Schengen countries. The first eight months of 2008 saw a 44 percent increase in tourists from Russia over 2007. ¶8. (U) Russian tourists are also important for leveling out the Estonian T&T business cycle. High season lasts from May to October, followed by a winter slowdown. For some years already, Estonia has marketed itself to Russia as the place to celebrate Christmas and New Year's Eve. Many Russians celebrate Christmas in December, as well as during the ten-day holiday period from New Year's Eve to Russian Orthodox Christmas on January 7. It is very important to attract as many Russians as possible for this three week period, without whom this would be the slowest time of the year. As with Finland, it is still too early to tell the impact of the global economic downturn on tourism from Russia. GOE: GIVING WITH ONE HAND, TAKING WITH THE OTHER ¶9. (U) In August 2008, Estonian Minister of Economic Affairs Juhan Parts signed decrees giving a total of USD 33 million to support development of tourism products and sites through 2013. This support is targeted at the development of major tourism products capable of gaining international interest, such as theme or interest parks, or tourist attractions based on national customs and traditions. The aim of this subsidy is to raise the international competitiveness of Estonia as a travel destination through the development of innovative tourism products. ¶10. (U) However - to help balance the 2009 state budget the GOE proposed to increase the value-added tax (VAT) on accommodation services from 5 to 18 percent, drawing strong criticism from the hotel industry. The chairman of the Estonian Hotel and Restaurant Association, Feliks Magus, told us that this kind of change in an already difficult economic situation would decrease Estonia's attractiveness as a tourist destination, and could bankrupt many hotels. At the same time, he said, rivals such as Latvia, Lithuania, Finland, Sweden and Norway still have lower tax rates on accommodation. Industry lobbying paid off, and on November 19 Parliament approved a lower VAT increase on hotels to only 9 percent, effective January 1, 2009. DISCOVER AMERICA, AND THE OUTBOUND MARKET ¶11. (U) According to Statistics Estonia, half of all Estonian residents made at least one overnight trip abroad in 2007. Finland is the top destination, but other popular ones include Egypt, Spain, Turkey, Greece and Italy. The United States is still a relatively new market for Estonian tourists. The main obstacle to rapid market growth to date have been a lack of direct or charter flights and the perception that it is difficult to get a U.S. visa. The latter was solved when Estonia joined the Visa Waiver Program (VWP) November 17, 2008. TALLINN 00000010 003 OF 003 ¶12. (U) In June 2008, after significant encouragement from the Ambassador and the Embassy, the American Chamber of Commerce in Estonia established the first- ever Discover America (DA) committee in the Baltics. The primary function of this committee is to promote U.S. travel destinations through marketing activities and events. This was a Mission Strategic Plan (MSP) priority, and the DA committee is working on a U.S. T&T industry promotion event in Tallinn for early ¶2009. PHILLIPS