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Country Commercial Guides
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CHAPTER VII. INVESTMENT CLIMATE
OPENNESS TO FOREIGN INVESTMENT
Estonia's government maintains a highly favorable attitude toward foreign direct investment. Foreign investment in Estonia is governed by the law on foreign investments, enacted in 1991 shortly after re-gaining independence. The law's intent is to affirm the liberal treatment of foreign investments in Estonia and to provide potential investors with detailed information on investing in Estonia. The government has sought to maintain liberal policies and establish free trade agreements in order to attract investments that could produce exports directed to the European union, the developing markets of central and Eastern Europe and the newly independent states of the former Soviet Union.
In 1998 Estonia commenced discussions aimed at accession to the European Union, having been invited as one of the first group of Central and Eastern European countries to start talks. In its efforts to harmonize with the EU, Estonia is adjusting its laws and regulations in line with EU practices.
Estonia's government does not screen foreign investments. It does, however, establish requirements for certain sectors. These are not intended to restrict foreign ownership but only to regulate it and clearly establish ownership responsibilities. Licenses are required for a foreign investor to become involved in: 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 has extended to its nearly complete privatization program. As of mid-1999, only a handful of state-owned enterprises, mainly the railroad and enterprises in energy have yet to be privatized by the national government. Additional enterprises owned by municipalities and local governments have yet to be privatized but they are few in number and account for only a small percent of economic activity. All of the remaining infrastructure enterprises slated for privatization are being vigorously pursued by foreign investors.
Estonia has mutual investment promotion and protection agreements with the United States, Denmark, Finland, Sweden, France, Norway, Netherlands, Germany, Switzerland, Poland, China, Israel, Great Britain and Austria.
In 1994, the Estonian investment agency (EIA) was established. This is a publicly funded agency under the administration of the ministry of economic affairs. The EIA aims to develop the Estonian economy by promoting foreign direct investment.
Conversion and Transfer Policies
The Estonian currency is a free currency with no restrictions on its transfer or conversion. Thus, 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 a freely usable currency and at a legal market clearing rate. There is no limit on dividend distributions, as long as they correspond to a company's official earnings records. If a foreign company ceases operating in Estonia, all of its assets may be repatriated without restriction. These policies have been fixed for many years and there is no indication that they will be altered in any way. Foreign exchange is readily available for any purpose.
Expropriation and Compensation
Private property rights are observed in Estonia. There have been no cases of expropriation or nationalization since the country regained its independence in 1991.
There are no outstanding investment disputes involving the government.
Dispute Settlement
Disputes concerning investments have not been a problem since Estonia regained independence in 1991. In 1999, one outstanding dispute involving a U.S. investor and the central bank is pending, having been submitted to courts in both Estonia and the U.S. there has been no pattern of investments becoming mired in disputes.
Estonia has been forced in a few years to create a legal system from the remnants of the soviet legal system, a task which, even with extensive foreign assistance, remains a work in progress. Drafting and implementing legislation, training and retraining court officials and law enforcement personnel has proven difficult. The Estonian government commits substantial resources to this effort but acknowledges that much remains undone.
Despite the problems, Estonia's judiciary is independent and insulated from government influence. Property rights and contracts are enforced by the courts although in increasingly infrequent instances judicial decisions in these and other matters can be arbitrary and indifferent to the law.
Estonia commercial code is consistently applied, although with the growth of commercial activity, the need is recognized to refine and revise the code. Concerning bankruptcy, Estonia's law has proven extremely effective. It is often cited as one of the key factors that has contributed to Estonia's successful economic reforms. Assets of bankrupt enterprises are liquidated and distributed among the creditors.
Performance Requirements/Incentives
Estonia has made a fundamental premise of its economic policy that foreign and domestic capitals are treated identically. To do otherwise would introduce distortions into the market. As a result, no special investment incentives are available to foreign investors, nor is any favored treatment accorded them. Similarly, there are no specific performance requirements identified with foreign investment that differ from domestic investments.
Estonia continues to refine its immigration policies and practices. An effort to bring its immigration laws in conformity with those of Western Europe and the Nordic countries has created some difficulties particularly for U.S. citizens in obtaining residency and work permits. The problems are recognized by the government, and steps are being taken to address them both legislatively and procedurally. However, Estonia's still weak bureaucracies have more work to do in balancing their intention to control the country's borders with being open to foreign investors and workers. Legislation pending in the parliament is expected to be passed by the end of 1999 which should in large measure lessen the problem for u.s. citizens.
Estonia imposes no tariffs on imports. However, a uniform value added tax is levied on imports. In cases where these are re-exported directly or used in products that are exported, the tax can be refunded. Excises taxes are also levied on a limited range of goods including motor vehicles, boats and various luxury goods. Estonia's economy is one of the most open in the world with respect to access to the market for imports.
Right to Private Ownership and Establishment
Private ownership and entrepreneurship are respected in Estonia. In most fields of business activity, 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 and legal entities. Foreign investors may purchase buildings and land for production purposes and fully own, establish and buy companies.
Only a handful of sectors of the economy require approval from government bodies for foreign investment and participation. These include banking, mining, telecommunications and the like.
Competitive equality is the official standard applied to private enterprises in competition with public enterprises. Private companies do not face discrimination.
Protection of Property Rights
Secured interests in property, both chattel and real, is 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, such as land, buildings and mortgages. Estonian governments pledged to restitute property to the owners from the pre-soviet occupation. This has been a long, complicated process that remains uncompleted, especially for non-residential real properties.
The Estonian legal system protects property rights, including intellectual property. Estonia adheres to the Bern Convention, WIPO and TRIPS. The country has not yet joined the Rome convention, which protects the rights of producers. However, membership in that pact is one of the preconditions for becoming a full EU member. A law amending the copyright law and criminal code was adopted in 1998. It complies with the EU directives granting protection to authors, performing artists, record producers, and broadcasting organizations.
Transparency of the Regulatory System
The government has set out transparent policies and effective laws to foster competition and to establish "clear rules of the game." With Estonia's commercial community as small as it is, instances of favoritism are not uncommon despite regulations and procedures that are designed to limit it.
Given the legacy of over 50 years of occupation and the challenges of creating a civil society and modern bureaucracy in a short time, vestiges of the former system remain, especially at the lower levels of the bureaucracy. Despite the policy commitment to eradicate unnecessary procedures and regulations, the practical challenges of doing so are daunting. The government recognizes the need and is working to that end although it is also recognizes that many of the practices are deeply rooted and will only change slowly. Nevertheless, Estonia's reforms have permeated the bureaucracy to the point where many procedures are far more streamlined and transparent than other countries in the region.
Tax, labor health and safety laws and policies have been crafted to encourage investment. And while there is much room for improvement, the level of foreign direct investment per capita suggests that Estonia has been successful in crafting a legal framework that attracts rather than discourages foreign investment.
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 and thereby support the flow of resources in the product and factor markets. Credit is allocated on market terms and foreign investors are able to get credit on the local market although they often look elsewhere as they frequently can find better terms elsewhere. 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.
Legal, regulatory and accounting systems are transparent and consistent with international norms.
Estonia's small stock exchange has been self-regulating. Government regulation has rested on a legal foundation that is out-dated and does not take into consideration the range of investment instruments and practices characterizing a modern equity market. At present, the government, central bank and stock exchange are developing a regulatory environment that combines regulation of banking, investments, and insurance under a single authority.
Estonia's banking system has consolidated far faster than many other countries in the region. There are only five commercial banks operating and one branch of a foreign bank. The two largest banks, which have over 80 percent of the market, both have substantial investments from leading Swedish banks. Estonia's commercial banking system is regarded as sound and well regulated.
An increasing number of Estonian firms have been purchased by foreign interests. The small size and openness of the Estonian economy have resulted in many locally owned enterprises recognizing that they can only be competitive regionally and internationally by bringing in foreign capital and management expertise.
Political Violence
Estonia has not experienced any politically motivated damage to projects or installations.
Corruption
Estonia has laws, regulations and penalties to combat corruption and it has generally not been a problem faced by foreign investors. Instead, foreign companies have often found it difficult to insinuate themselves into the local commercial community where many Estonian executives know one another 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. What tends to be more common than bribes are arrangements and payments that exceed the services rendered. Surveys of American and other non-Estonian businesses have shown that issues of corruption are not a concern for these companies, nor are protection rackets.
BILATERAL INVESTMENT AGREEMENTS
Estonia has concluded bilateral investment agreements with: Holland, Switzerland, Germany, China, Israel, Great Britain, Austria, the USA, Turkey, the Czech Republic, Ukraine, Lithuania, Latvia, Belgium, Luxembourg, Italy, Greece and Spain.
A bilateral taxation treaty with the u.s. was signed in January 1998. It has been ratified by the Estonian parliament and is pending ratification by the u.s. senate and completion of other formalities.
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
Estonia is the member of the multilateral investment guarantee agency.
In September 1998 OPIC announced that it is expanding its support of U.S. investments in the Baltic States. Helping to mobilize American private capital to support regional growth in the Baltic States is considered a priority for the Overseas Private Investment Corporation.
LABOR
Estonian labor force is highly skilled and well educated. There are 10 universities, 25 higher education colleges and 114 technical secondary institutions, producing graduates with adequate managerial and technical skills and fluent in English, Russian, German and other languages. Over 14 percent of the population has received post-secondary education and this number is growing rapidly.
Despite of high skills, the average Estonian salary in 1997 was $257 a month ($322 a month in the manufacturing sector) - a fraction of the rate elsewhere in Scandinavia or in Germany.
The effective rate of unemployment is around 10 percent, ensuring that a pool of available staff is present, many with high level of technical skills. Trade unions have a limited influence and take a co-operative approach to industrial relations. Industrial disputes are extremely rare.
With a negative population growth and a population that is aging, Estonia, like many other countries of central and Eastern Europe faces serious demographic challenges that affect labor supply. While unemployment is relatively low, many labor practices are inefficient. Improving efficiency is a key focus for Estonia's efforts in the near- and mid-term to increase productivity of its work force.
FOREIGN TRADE ZONES/FREE PORTS
There is no free port in Estonia. However, there are eighty public bonded warehouses and eighteen private bonded warehouses. The free storage areas, which are run either by municipal or private corporations, are available to all companies, both domestic and foreign-owned. In addition to these warehouses there are four foreign trade zones. Warehousing and assembly are allowed in these areas, with the permission obtained through the customs board.
FOREIGN DIRECT INVESTMENT STATISTICS
Foreign direct investment has continued to grow every year since Estonia regained independence, despite forecasts that it would drop off sharply as the privatization process ended. Predictions for 1999 are that it should exceed 1998. The two remaining large-scale infrastructure privatizations--the power generation plants and the main freight railroad--are both expected to involve large foreign investments.
A pattern that prevails among foreign investors has been for them to acquire control of a local plant or factory with a relatively small investment, then invest in capital goods to upgrade existing production. Should that prove successful, the investor then brings in a more substantial investment.
Large greenfield projects have been limited to certain sectors, particularly related to forest products and wood processing, aimed at producing goods for Nordic and western European markets.
Nearly 60% of foreign direct investment in Estonia comes from Finland and Sweden, with the U.S. coming in as a distant third with 6%. Investments from Denmark, Norway Liechtenstein and the U.K. each account for another 4% of foreign direct investment. The major fields of activity include: manufacturing; trade and repairs; financial intermediation; transport and communication; and real estate.
Estonia's largest foreign investors are:
Estonian Telecom -- Sweden/Finland, telecommunications operation;
Estonian Mobile Telephone -- Sweden/Finland, mobile telephones;
Toleram Group -- Singapore, investments, mainly textiles and paper products;
Estonian Shipping Company -- Norway/U.S., sea transport;
Kunda Nordic Cement -- Finland, cement production
E.O.S. -- U.S., oil terminals;
Radiolinja -- Finland, mobile telecommunication;
Eesti Statoil -- Norway, fuel sales
Ritabell AS -- Luxemburg, mobile telecommunication;
Neste AS -- Finland, petroleum products.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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