TRAVEL & TOURISM: ESTONIA'S HIDDEN ECONOMIC

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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.

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

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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.


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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