Being close neighbours of the Scandinavian countries has been a godsend for Estonia in its integration with the global economy. Trade with Finland and Sweden accounts for easily two-thirds of all export and import, and the two newer EU members provide Estonia much knowledge and expertise in restructuring of industries and integration into the EU.

Investments from the two countries also play a vital role in the dynamic restructuring of the Estonian economy, which went from stagnancy to becoming the so-called "Baltic Tiger," with one of the strongest GDP growth rates on the continent for most of the past five years.

The presence is nearly universal. Sector after sector has experienced large-scale investments from the two Nordic EU members, ranging from heavy industry to energy, from textiles to banking. The involvement is so far-reaching and cross-sector that Estonian officials often joke that the country has become the backyard of Finland and Sweden—much to the annoyance of Estonia's southern Baltic neighbours.

Such investments have gone into large companies and small enterprises alike, including start-ups. They have been an overwhelming factor in the development of the Estonian economy. There are drawbacks to this, however.

Locking others out

One common perception is that the dominance of Finland and Sweden in Estonia's economy is so great that it is keeping other investors out. As companies from both countries have gone into the Estonian economy with such vigour and complete coverage of all facets of the economy, there seems to be little left that is not touched by Nordic capital.

The three major banks are all majority controlled by Nordic counterparts, with two of them facing complete takeover (see the next section for more details). Insurance, high-tech manufacturing, textiles, meat processing—you name it—has Nordic capital or control. If we add Norway to the list, then we can also count dominance in the media (overwhelming in print, significant in electronic) and hospitality services.

Looking at the big investing countries and their relatively small presence compared with that of the Nordic countries, it is clear that there is a feeling of regional priority. Germany, looking to their own vicinities for investment opportunities, has all but given the Baltic countries to the Nordic ones. The investment interest (not to mention political interest) has been minimal for some infrastructure (gas) companies. Germany has not behaved as if it wants to be a player in the Baltics, which has sadly contributed to the apathy felt by Berlin politicians.

The Americans have not been very active investors, either, showing interest in large deals only. And even such large deals—for example, the sale of the country's main power plants to the US company NRG Energy—have gone against the Nordic grain. The two EU-member countries, both wanting a stake in Estonia's energy sector, issued a veiled threat against Tallinn on an EU criterion. It was argued that the selection process in the privatisation deal was not compliant with EU norms.

Though Estonia is not yet an EU member, the threat obviously had some effect and caused massive delays in the issue. Even the project of building an energy connection from Finland to Estonia was delayed, as the interest of the previously eager Nordic companies dimmed following the NRG deal. Such is the picture of favouritism towards the Nordics, due very much to EU membership considerations.

However, France represents a refreshing counter-trend, having become a new player in the Baltics in the past year or two. French companies are now waiting in the wings to challenge their Nordic competitors in smaller privatisation deals. As talks with Nordic partners become problematic in many cases, the French have been moving in to grab the deal. This has somewhat shaken the Nordic perception that they have a free reign in Estonia. Instead of the outside challenge coming from Germany as expected, France is the unlikely challenger.

French companies recently took over companies providing heating, transportation and, most importantly, television and radio broadcasting in Tallinn. The latter came about after a managerial spat caused a Swedish company to pull out of the privatisation of the Tallinn Broadcast Centre. French company Télédiffusion de France moved straight in and has demonstrated that French companies are in Estonia to stay.

With other privatisation deals going with French bidders—such as Tallinn's water utility—this could prove to be a lesson for Nordic companies that in the new EU, there are no strict rules for regional adhesion and that everything is up for grabs—even in one's own backyard.

Total buyout, wholesale change

One uncomfortable trend that comes with the large influx of Nordic investment is the effect of total buyouts on the Estonian economy. The total buyouts of large Estonian companies, especially successful ones, has fuelled fears of a sell-out of Estonia, as well as concerns that Estonia cannot stand on its own in the global, or even European, economy. In a way, the more successful an Estonian company is, the more likely it is to lose its identity.

Estonian no more?

The banking sector is the best example of such a situation. Estonia's largest bank and one of the country's most successful homegrown enterprises, Hansapank, was sold to Sweden's FöreningsSparbanken (known as Swedbank) in 1998. The founders of the bank, including Hannes Tamjärv and (now Tallinn mayor) Jüri MÄ‚µis all left the management of the bank that they founded less than a decade ago on a hunch.

Swedbank's control of Hansapank never became total, since Swedbank's own position on the Swedish market is not that strong. Using the Hansabank name (de-Estonianising the Estonian Hansapank), the group took over banks in Latvia and made Hansabanka one of the market's biggest players. Though this looks like an Estonian buyout on the Latvian market, in essence it was Swedbank's plan for the Baltic Sea region.

There are also plans to buy Lithuania's largest state-owned bank, Taupomasis Bankas, but that remains in limbo due to local politics. The suggestion that the headquarters of the Hansabank group should move to Riga because "it is not an Estonian bank anymore" is bound to alarm those that see Hansapank as one of entrepreneurial Estonia's biggest accomplishments. It is true that it is no longer an Estonian bank, not in ownership, nor—now—in spirit.

The second largest bank, Ühispank, was also taken over by a Swedish bank in 1998—Skandinaviska Enskilda Banken (SEB). SEB, one of Sweden's stronger banks, started picking up shares in banks in each of the Baltic countries, to a point where they had majority control of Estonia's Ühispank and Latvia's Unibanka (Latvia's Saules Banka is owned by Ühispank), and a large stake in Lithuania's Vilniaus Bankas, by the start of this year.

In the middle of this year, however, the company began an ambitious expansion programme by announcing they want to fully purchase all three banks they control in the Baltics. They offered an attractive price in Estonia and less-so attractive ones in Latvia and Lithuania (which were later upped to close out the remaining holdouts) and, as of now, control easily over 95 per cent of Ühispank shares.

Will blue-chip Ühispank get    pulled from the Bourse?

The situation became more dramatic as SEB sought to de-list Ühispank from the Tallinn Bourse. Ühispank has been one of the blue-chip stocks on the Tallinn Bourse since its inception, and de-listing it would be a heavy blow to a market that is already suffering from low liquidity. Nordic take-over parents have tried such things in the past, attempting to de-list Rakvere Lihakombinaat (Meat Packing Plant); though the attempt failed, the liquidity is so low that the point becomes academic.

The de-listing bid by Norway's Linstow of Reval Hotelligrupp, which controls many of Estonia's top hotels, did indeed succeed. If this trend continues, the liquidity problem of the Tallinn Bourse will grow to a point that it will render it useless. Such regional strategy by Nordic companies could jeopardise the future of the Estonian securities market.

This trend continued as the Finnish insurance consortium Sampo-Leonia bought out a majority stake in the third largest bank, Optiva Pank, and applied to change its name to Sampo Pank. The group is also trying to de-list the bank's shares from the bourse, but has so far failed because it does not control enough of the remaining shares owned by holdouts.

Are these total buyouts and de-listing strategies in the long-term interest of Estonia? Yes, perhaps it is a sign that Estonia's economy and its local companies are strong and solid enough for it to be attractive for its richer northern neighbours. However, what does that do to the country's fledgling securities sector? It is already plagued by low liquidity and lack of interest, and if blue-chip stocks are being de-listed from the bourse, what will be left in the end? Does that serve the interest of SEB or any of the other Nordic giants that see Estonia as a future EU ally? It is clearly against the long-term interests of Estonia, both financially and psychologically.

A second wave is needed

Estonia needs a second wave of the same entrepreneurial ingenuity and ideas that gave them an advantage in the early part of the 1990s. Strong companies with new ideas in the newly integrated EU economy—and the "new economy"—must stake out their place as impact players, but not lose their identity.

CV-Online... fear    of being Estonian?

It is a shame that one of the largest and most successful of these companies, the now pan-European CV-Online Internet job database, does little to make itself known as an Estonian company.

Viisnurk... Estonia's "Nokia" in waiting?

Successful companies like The Red Dot Company (soon to be the new corporate name of Microlink) in computers and IT, and Viisnurk in woodwork and skis, should lead the group in carving out a niche for Estonian companies in the world—and show the world it can stand on its own two feet.

President Lennart Meri has challenged Estonia to come up with it's own "Nokia" to take the country into the global economy as a player. The idea is that if Finland can turn a small backward company into one of the biggest players in the international telecommunications industry within two decades, Estonia can do the same with some ingenuity and entrepreneurship of its own. Let us just hope that once Estonia's own "Nokia" starts to make an impact, its larger Nordic neighbours won't practice the same tactics and eat it up.

Mel Huang, 18 November 2000

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