2009 INVESTMENT CLIMATE STATEMENT - ESTONIA

UNCLAS TALLINN 000018

SIPDIS

DEPARTMENT FOR EB/IFD/OIA, EUR/NB
DEPARTMENT PLEASE PASS USTR FOR JKALLMER AND OPIC
FOR O'SULLIVAN
TREASURY FOR DO/JMACLAUGHLIN
USDOC FOR ITA/JKOZLOWICKI and MARKOWITZ
HELSINKI FOR SCO BRIAN MCCLEARY

E.O. 12958: N/A

TAGS: ECON EFIN ELAB ETRD KTDB EINV OPIC
USTR, PGOV, EN
SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT - ESTONIA

REF: 08 STATE 00123907

1. (U) The following is the 2009 Investment Climate
Statement for Estonia, keyed to questions in reftel.

2. (U) A.l. Openness to Foreign Investment

Since joining the EU in 2004, the Estonian
government has sought to maintain liberal policies
in order to attract investments that could produce
exports. Foreign investors are treated on an equal
footing with local investors. While the GOE's focus
in the mid-1990s was to attract actively foreign
direct investment (FDI) into Estonia, at present it
is prioritizing the finding of new export markets
for Estonian goods and services. Creating favorable
conditions for FDI and openness to foreign trade has
been the foundation of Estonia's economic strategy.

Estonia's government does not screen foreign
investments. It does, however, establish
requirements for certain sectors. These
requirements are not intended to restrict foreign
ownership but rather to regulate it and establish
clear ownership responsibilities. Licenses are
required for a foreign investor to become involved
in the following sectors: mining, energy, gas and
water supply, railroad and transport, waterways,
ports, dams and other water-related structures and
telecommunications and communication networks. The
Estonian Central Bank issues licenses for foreign
interests seeking to invest in or establish a bank.
Government review and licensing have proven to be
routine and non-discriminatory.

Estonia's openness to foreign direct investment
extended to its 1993-2001 privatization program,
which is now complete. Only a small number of
enterprises -- the country's main port, the power
plants, the postal system, and the national lottery
-- remain state-owned. In January 2007, the
government also repurchased the 66 percent of shares
of the Estonian Railway which had been in the hands
of private investors since 2001, claiming the need
to maintain control of this key part of Estonia's
national infrastructure.

During the last decade, Estonia has been one of the
leading countries in Central and Eastern Europe in
terms of inward investment per capita. Companies
partly or wholly owned by foreigners account for
one-third of Estonian GDP and over 50 percent of the
country's exports. Some general facts concerning
foreign direct investment inflows into Estonia
include:

- In 1995-1996, the majority of foreign direct
investment was privatization-related;
- There is a trend towards cross-border
acquisitions;
- Greenfield investments are increasingly rare;

A.2. Conversion and Transfer Policies

Estonia has been under a currency board arrangement
since 1992. Initially pegged to the German mark,
the Estonian kroon (EEK) has been fixed to the euro
at EEK 15.65 since January 1999. Estonia joined the
Exchange Rate Mechanism (ERM) II in June, 2004.

The Estonian currency has no restrictions on its
transfer or conversion. Similarly, there are no
restrictions, limitations or delays involved in
converting or transferring funds associated with an
investment (including remittances of investment
capital, earnings, loan repayments, or lease
payments) into other currencies at market rates.
There is no limit on dividend distributions as long
as they correspond to a company's official earnings
records. If a foreign company ceases to operate in
Estonia, all its assets may be repatriated without
restriction. These policies are all long-standing;
there is no indication that they will be altered in
the future. Foreign exchange is readily available
for any purpose.

A.3. Expropriation and Compensation

Private property rights are observed in Estonia.
The government has the right to expropriate in the
case of public interests related to boarder guard,
public ports and airports, public streets and roads,
supply to public water catchments, etc.
Compensation is offered based on market value. Post
is not aware of any expropriation cases involving
discrimination against foreign owners.

A.4. Dispute Settlement

Investment disputes concerning U.S. or other foreign
investors and Estonia are rare. Estonia's judiciary
is independent and insulated from government
influence. Property rights and contracts are
enforced by the courts.

Estonia's commercial law has proven extremely
effective and is often cited as one of the
components of Estonia's successful economic reforms.
The Commercial Code, as a part of the overall
commercial law, is consistently applied. The
Obligation Law, enacted in 2002, is the basis for
all commercial agreements. A Bankruptcy Act was
adopted in 2004. The full text of these laws can be
found from: http://www.legaltext.ee/en/ Estonia has
been a member of the International Center for the
Settlement of Investment Disputes (ICSID) since
1992, and a member of the New York Convention of
1958 on the Recognition and Enforcement of Foreign
Arbitral Awards since 1993.

Recognition of court rulings of EU Member States is
regulated by EU legislation.

The Arbitration Court of the Estonian Chamber of
Commerce and Industry is a permanent arbitration
court which settles disputes arising from
contractual and other civil law relationships,
including foreign trade and other international
economic relations.

A.5. Performance Requirements/Incentives

A fundamental principle of Estonia's economic policy
is equal treatment of foreign and domestic capital.
No special investment incentives are available to
foreign investors, nor is any favored treatment
accorded them. Similarly, there are no specific
performance requirements for foreign investments
that differ from those required of domestic
investments.

Estonia continues to refine its immigration policies
and practices. U.S. citizens are exempt from the
quota regulating the number of immigration and
residence permits issued, as are citizens of the EU
and Switzerland.

Estonia's has a long-standing system of low, simple,
flat-rate taxes, in particular, a 21 percent income
tax which is set to be reduced one percent per year
until it reaches 18 percent in 2012. To encourage
companies to expand their business, all reinvested
profits are exempted from corporate income tax.
However, any redistributed profits, such as
dividends, are taxed at 21 percent in 2009. This
tax strategy was designed to promote business and
accelerate economic growth by making additional
funds available for investment. During accession
talks, the EU gave Estonia a transition period of
seven years (the end of 2008) by which time this tax
policy will have to be brought into accordance with
EU tax directives governing parent-daughter
subsidiary relationships. Starting in January 2009,
undistributed corporate profits will remain tax-
exempt and the tax base for corporations will
generally remain the same, except that liquidation
proceeds, share buy-backs and capital reductions
will become subject to tax at the level of Estonian
company, just as dividends are taxed. (Previously,
such items were taxable at the level of the
shareholder.)

Generally, the government does not impose 'offset'
requirements on major procurements. There are no
government imposed conditions to invest.

A.6. Right to Private Ownership and Establishment

Private ownership and entrepreneurship are respected
in Estonia. In most fields of business,
participation by foreign companies or individuals is
unrestricted. As provided for by the Law on Foreign
Investments, foreign investors have the same rights
and obligations as Estonian citizens. Foreign
investors may purchase buildings and land for
production purposes and establish, buy, and fully
own companies.

Government approval is required for foreign
investment and participation in only a handful of
sectors (see section A.1).

Competitive equality is the official standard
applied to private enterprises in competition with
public enterprises. Private companies do not face
discrimination in relation to state-owned companies.

Estonia made amendments to the Regulation on Rules
of Takeover Bids taking into the consideration
Directive 2004/25/EC of the European Parliament and
new amendments came into force February 8, 2008.
A.7. Protection of Property Rights

Secured interests in property are recognized and
enforced. Mortgages are quite common for both
residential and commercial property and leasing as a
means of financing is widespread and efficient.

The legal system protects and facilitates
acquisition and disposition of all property rights,
including land, buildings, and mortgages. The long
and complicated process of property restitution
(begun when the Principles of Ownership Reform Act
came into force June 20, 1991) is almost complete,
including the area of non-residential real
properties.

The Estonian legal system adequately protects
property rights, including intellectual property,
patents, copyrights, trademarks, trade secrets and
industrial design. Estonia adheres to the Berne
Convention, WIPO and TRIPS, the Rome Convention and
the Geneva Convention on the Protection of the
Rights of Producers. Estonian legislation fully
complies with EU directives granting protection to
authors, performing artists, record producers, and
broadcasting organizations.
A.8. Transparency of the Regulatory System

The Government has set out transparent policies and
effective laws to foster competition and establish
"clear rules of the game." However, due to the
small size of Estonia's commercial community,
instances of favoritism are not uncommon despite
regulations and procedures designed to limit them.

Tax, labor, health and safety laws and policies have
been crafted to encourage investment. They appear
to have been successful, given the relatively high
level of foreign direct investment per capita.

All proposed laws and regulations are published for
public comments on the website:
http://eoigus.just.ee/
There is also website www.osale.ee where the public
can comment on draft laws and propose changes to the
government regulations.

Estonia's bureaucratic procedures are generally far
more streamlined and transparent than those of other
countries in the region.

International institutions and organizations give
Estonia's economic policies high marks. The U.S.-
based Wall Street Journal/Heritage Foundation's 2008
Index of Economic Freedom ranked Estonia 12th in the
world. The index is a composite of scores in
monetary policy, banking and finance, black markets,
wages and prices. Estonia scores highly on this
scale for investment freedom, fiscal freedom,
financial freedom, property rights, business
freedom, and monetary freedom.

A.9. Efficient Capital Markets and Portfolio
Investment

Estonia's financial sector is modern and efficient.
Government and Central Bank policies facilitate the
free flow of financial resources, thereby supporting
the flow of resources in the product and factor
markets. Credit is allocated on market terms and
foreign investors are able to obtain credit on the
local market. The private sector has access to an
expanding range of credit instruments similar in
variety to those offered by banks in Estonia's
Nordic neighbors Finland and Sweden.

Legal, regulatory, and accounting systems are
transparent and consistent with international norms.

The Security Market Law complies with EU
requirements and enables EU securities brokerage
firms to deal in the market without establishing a
local subsidiary. In 2002, the Helsinki Stock
Exchange (Finland) bought a controlling interest in
the Tallinn Stock Exchange, merging the two entities
and making the smaller Estonian market more
accessible to foreign investors.

Estonia's banking system has consolidated rapidly.
Total assets of the commercial banks are
approximately USD 31 billion at the end of 2008.
Two Swedish-owned banks (Swedbank and SEB) control
over 70 percent of the market. More info:
http://www.pangaliit.ee/eng/Info/

The Scandinavian-owned Estonian banking system is
modern and efficient, encompassing the strongest and
best-regulated banks in the region. These provide
both domestic and international services (including
Internet and telephone banking) at very competitive
rates. Both local and international firms provide a
full range of financial, insurance, accounting, and
legal services. Estonia has a highly advanced
Internet banking system: more than 80 per cent of
residents make their everyday transactions via
Internet banking.

The Central Bank and the government hold no shares
in the banking sector.

In 2001, the Estonian government created a
consolidated Financial Supervisory Authority (FSA)
under the auspices of the Central Bank. The
Authority is an agency with autonomous competence
and a separate budget. The FSA conducts financial
supervision on behalf of the state and is
independent in the conduct of financial supervision.
The Authority was established to enhance the
stability, reliability, transparency, and efficiency
of the financial sector, to reduce system risks, and
to prevent the use of the financial sector for
criminal purposes.

A.10. Political violence

Politically motivated damage to projects or
installations is extremely rare. However, in April
2007, following the government's decision to
relocate a Soviet-era statue from downtown Tallinn
to a nearby cemetery, there were two days of rioting
and looting of shops in Tallinn. A subsequent
Russian Federation boycott of Estonian goods, and
disruption of rail and truck transit into Estonia
had a negative impact on some local companies. For
a few days in early May, cyber criminals targeted
Estonian banks and government websites with massive
denial-of-service (DOS) attacks, which cost several
million Euros in estimated lost revenues. The
industrial sector most impacted was transit.
Initial data from the Port of Tallinn indicate they
handled 20 percent less volume in 2008 than in the
previous year. (The government has estimated the
overall economic loss to Estonia of Russian
restrictions on trade during May-December 2007 as
between one-half and one percent of GDP.)
A.11. a. Corruption

Estonia has laws, regulations, and penalties to
combat corruption and, while corruption is not
unknown, it has generally not been a major problem
faced by foreign investors. However, foreign
companies have found it difficult to become part of
the local commercial community because many Estonian
executives have known one another since childhood
and often help one another out in ways that make it
difficult for outsiders to compete effectively.

Both offering and taking bribes are criminal
offenses which can bring imprisonment of up to five
years. While 'payments' that exceed the services
rendered are not unknown, and 'conflict of interest'
is not a well-understood issue, surveys of American
and other non-Estonian businesses have shown the
issues of corruption and/or protection rackets are
not a major concern for these companies.

In 2004, the government of former Prime Minister
Juhan Parts, who ran on an anti-corruption platform
in 2003, instituted the 'Honest State' program,
which included specific policies to reduce the risk
of corruption in government. These included
auditing local governments (widely seen as the
greatest source of corruption in Estonia),requiring
public servants to file electronic declarations of
their economic interests, setting up a National
Ethics Council, increasing the number of specialized
investigators and prosecutors who focus on
corruption, and setting up an anonymous hotline for
people to report corruption cases.

The Security Police Board has shown its capacity to
deal with corruption offences and criminal
misconduct, leading to the conviction of several
high-ranking state officials. Estonia co-operates
in fighting corruption at the international level
and is a member of GRECO (Group of States Against
Corruption).

Estonia began as a full participant in the OECD
Working Group on Bribery in International Business
Transactions (the Working Group) in June 2004, and
deposited its instruments of accession on November
23, 2004. The Convention entered into force in
Estonia on January 22, 2005.

In 2007, Transparency International (TI) ranked
Estonia 28th out of 180 countries on its Corruption
Perceptions Index. The Estonian Ministry of Justice
invited TI to take a lead role in the drafting of
the country's new anti-corruption strategy.

A.12. Bilateral Investment Agreements

Estonia has investment promotion and protection
agreements with the Belgium-Luxembourg Economic
Union, China, Czech Republic, Denmark, Finland,
Great Britain and Northern Ireland Greece, Israel,
Italy, Latvia, Lithuania, Netherlands, Norway,
Poland, Spain, Sweden, Switzerland, Turkey, Ukraine,
UK and the United States. A Bilateral Taxation
Treaty with the U.S. came into force on January 1,

2000.

A.13. OPIC and Other Investment Insurance Programs

Estonia is a member of the Multilateral Investment
Guarantee Agency.

Estonia joined the Exchange Rate Mechanism II on
June 28, 2004. The Estonian kroon is fixed against
the euro at 1 EUR = 15.6466 EEK. The Estonian
banking and financial sector are judged generally
stable, though they have endured stresses during the
global credit crisis of 2008. Devaluation of the
local currency in next year is unlikely unless
major, unforeseen economic events occur.

A.14. Labor

Estonia has a very small population - only 1.4
million people. The Estonian labor force is highly
skilled and well educated. There are 14
universities, 19 higher education colleges and 114
technical secondary institutions, all combining to
produce graduates with adequate technical skills,
and fluent in English, Russian, German and other
languages. Over 17 percent of the population has
received post-secondary education; this number is
growing rapidly.

The average monthly Estonian salary at the end of
2008 was USD 1,100. Annual economic growth above ten
percent in recent years, rising inflation, and free
movement of labor to other EU countries have driven
up salaries in most sectors. Average gross wage
growth in 2007 was 20 percent, and the increase for
2008 is expected to be approximately 14 percent and
only around 5 percent in 2009.

The influence of trade unions, which tend to take a
cooperative approach to industrial relations, is
increasing. Estonia adheres to ILO Conventions
protecting workers' rights.

With an aging population and a negative birth rate,
Estonia, like many other countries of Central and
Eastern Europe, faces serious demographic challenges
affecting its long term supply of labor. Improving
labor efficiency is a key focus for Estonia in the
short-to-mid term. It is becoming increasingly hard
to find a pool of blue collar workers to start up
small or medium-sized manufacturing enterprises that
requiring significant manpower.

A.15. Foreign Trade Zones/Free Ports

According to the Customs Act, free zones can be
established on the customs territory by order of the
government. Goods in a free zone are considered as
being outside the customs territory, for the
purposes of import and export duties. As a rule,
customs procedures are not applied to goods in a
free zone. In free zones, VAT and excise duties (as
well as possible fees for customs services) do not
have to be paid on goods brought in for later re-
export.

In Estonia, there are free zones at the Muuga port
(near Tallinn),the Sillamae port (northeast
Estonia),and in Valga (southern Estonia). All free
zones are open for FDI.

The main supervisory authority responsible for
monitoring the movement of goods in or out of free
zones is the Estonian Tax and Customs Board
(governed by the Ministry of Finance). There are ID
requirements for companies and individuals using the
zone. The U.S. Department of Homeland Security
(Coast Guard) has inspected Estonia's ports and
determined that the Republic of Estonia has
substantially implemented the International Ship and
Port Facility Security (ISPS) Code at all facilities
visited.

A.16. Foreign Direct Investment Statistics

By the end of Q3 2008, the cumulative stock of FDI
amounted to USD 17 billion. Roughly 30 percent of
FDI has been invested into financial intermediation
and the same amount in real estate, renting and
business activities. Manufacturing is in third
place with 14 percent of total FDI. Wholesale and
retail trade has attracted 13 percent of the foreign
direct investment stock.

Scandinavian countries are the largest foreign
direct investors in Estonia. Sweden has 39 percent
of the total, followed by Finland with 25 percent,
and the Netherlands with 6 percent. The United
States accounts for 1.4 percent of foreign direct
investment stock. (10th overall)

For the value of FDI (position, stock, and flows in
recent years by the commodity group, as well as
country of origin) please go to:

http://www.eestipank.info/pub/en/dokumendid/s tatisti
ka/maksebilanss/statistika/statistika.html?ob jId=292
616

The ten selected largest FDI companies in Estonia in
terms of total investment:


1. Hansapank AS
Foreign Shareholder: Swedbank
Country of origin: Sweden
Sector of operation: banking


2. Sampo Bank
Foreign Shareholder: Danske bank
Country of origin: Denmark
Sector of operation: banking


3. Estonian Telecom
Foreign Shareholder: Baltic Tele AB
Country of origin: Sweden
Sector of operation: telecommunication


4. Eurodek Tallinn OU
Foreign Shareholder: Blanin Holding Ltd.
Country of origin: Netherlands
Sector of operation: transportation


5. SEB Pank AS
Foreign Shareholder: SEB AB
Country of origin: Sweden
Sector of operation: banking


6. Kandur AS
Foreign Shareholder: Kone Holland B.V.
Country of origin: Netherlands
Sector of operation: elevators, escalators


7. Rakvere Lihakombinaat
Foreign Shareholder: HKSCAN OYJ
Country of origin: Finland
Sector of operation: food industry


8. Kunda Nordic Cement AS
Foreign Shareholder: Heidelberg Cement AB/ CRH
Europe Holding BV
Country of origin: Sweden/Netherlands
Sector of operation: cement production


9. Eesti Merelaevandus AS
Foreign Shareholder: Tschudi Shipping Company AS
Country of origin: Norway
Sector of operation: water transport


10. Phoenix Land AS
Foreign Shareholder: EBRD/Mellon ABN Treaty
Omnibus/Tolaram Corp.Pte.Ltd.
Country of origin: UK/USA/Singapore
Sector of operation: textiles

PHILLIPS