After a three-year wait, Estonia is making final preparations to join the Euro on January 1. ABTN travelled to the country's capital Tallinn to assess the impact it will have on the travel industry and the wider economy.
Estonia's profile has been raised somewhat this month following news of its acceptance into the Eurozone. Estonia, the least populated of the three Baltic States at just over 1.3 million, had hoped to join the Common Currency back in 2007 but high inflation got in the way of its ambitions.
That has all changed now thanks to three long years of economic reform, which has seen the country reach a state of low public debt and relative financial stability in a world region struggling to maintain its credit rating. This year Estonia, the most northern of the three Baltic countries (the others being Latvia and Lithuania), successfully fulfilled all the requirements currently stipulated in the Maastricht Treaty, despite the reservations felt by other member states in the wake of the troubles in Greece.
In an ex-Eastern Bloc country often overlooked by the rest of Europe, the Euro will undoubtedly raise Estonia's status above its none-Eurozone neighbours and in doing so encourage new trade and foreign investment. Production and labour costs are also low in Estonia, making it an interesting proposition for any foreign business wishing to outsource.
One thing holding Estonia back however is the relative lack of international transport links, something German airline Lufthansa is beginning to address having this year started a new daily service to Tallinn from its southern hub at Munich. Lufthansa is also set to up capacity to the Baltics by 20 per cent this summer when it schedules larger Airbus A320s and A321s to replace the existing A319s.
Matthias Hinze, Lufthansa's country manager for the Baltic States, described the make-up of passengers flying to and from Estonia as predominantly short-haul (70-80 per cent) including many from the UK, an important source market.
Hinze said: "The UK is important especially as it's an ethnic market for the Baltics - there are a lot of Baltic people working in the UK and Ireland, so we have a lot of friends and relatives visiting.
"And of course there are more and more UK companies looking for investments in Eastern Europe. With regards to Estonia, its economy is quite well prepared for foreign investment. Good training, good infrastructure and those are things British companies should look into."
Hinze argued that Estonia is far cheaper for production and services than Finland, which is just a two-hour ferry ride away across the Baltic Sea. With a similar national mentality and nearly identical language, Hinze said that anyone with a particular investment focus on Finland, and in particular Helsinki, "should also have a good look at Estonia."
Hinze highlighted some of Estonia's key sectors in which the UK already has a large presence, such as Shell and its involvement in Estonia's offshore oil fields, and Scottish & Newcastle Brewery with regards to food processing.
Indrek Pallo, UK Trade and Investment's (UKTI) regional trade manager for the Baltics, pointed out several other important links to the UK. GlaxoSmithKline (GSK) and AstraZeneca have a strong presence in Estonia - the reception room of the UK embassy is adorned with pharmaceutical products - and the country is proud of its innovations in that industry. UKTI also listed Jaguar, Lotus and United Utilities as among the "big names" it has worked with.
According to Pallo, Estonia is a particularly attractive proposition to any UK business looking to outsource IT services and wood or metal processing due to its "easy access and liberal economies". Add to this the £9.5bn of funding the EU has pledged as support for new business in the Baltics. Enterprise Estonia (EAS) also offers support to entrepreneurs in Estonia, and is the first port of call when trying to find funding.
But there are challenges that face any expat wishing to start up in business in another country. Language, protectionism, or even natural xenophobia could all get in the way, although there was no evidence of any of these in Tallinn. Paul Taylor and Michael Pilkington, two of three founding members of Unique Hotels, are expats with ties to the UK living in Estonia. Both cut their teeth with Radisson but in 2002 took the decision to set out on their own when they saw an opportunity in Estonia. Unique Hotels now has four properties in Estonia, ranging from two- to four-star, with a fifth in Lithuania. More properties are being eyed up in order to diversify further in a saturated market, making for impressive growth for a small, independent hotelier. ABTN asked them what challenges, if any, they faced.
Taylor said: "Estonia is a very transparent country with a young energetic government and also an entrepreneurial spirit. English is widely spoken, and in many ways it is easier to start business here than the UK, most applications can be done online.
"Geographically it is also an ideal base for international business, and with no profit tax if reinvested, it is very advantageous to be here. Looking back we are still surprised how easy it was and secure."
Unique hotels has enjoyed success because of its drive to diversify its property-type portfolio and spread out across the rest of the Baltics where competition is still low. But any hotelier thinking of starting up in Estonia, and specifically Tallinn, may find it difficult with the number of rooms now reaching "saturation point" according to Taylor.
He said: "We have more hotel rooms than Helsinki and we do not have the flight connections or the infrastructure, i.e. conference venues, to increase occupancies. The global economy has driven the rates down and whilst we are not seeing the growth in occupancy rates, I cannot forecast a need for extra rooms."
Taylor estimated that at one time Estonia had a hotel room pipeline of around 2,000. That has now dropped significantly to 500 rooms that he is aware of. In terms of room rates, Unique's two-star concept has been its best performer in recent times, a sign that the "market is still price-sensitive".
As for what the Euro will mean to the hospitality industry, Taylor said it would bring with it transparency, no currency exchange and a "stamp of approval" within Europe, all giving Estonia a "natural advantage" over the other Baltic States.
While those in the business of selling travel, from tour operators to conference incentive agents and airlines, will no doubt see the Euro as a way of promoting Estonia as a destination, its effect on tourism will not be as profound as a change of currency in the UK, for example. The Estonian Kroon is already pegged to the Euro, unlike the pound, which means there are no fluctuations in exchange rates to promote foreign travel. In that regard, the effect of differences in currency values between the Euro and Kroon is non-existent, and any benefits to tourism will in essence be born of monetary convenience. (The exchange rate is roughly 15 Kroons to the Euro, making for some irksome mental arithmetic.)
Estonia emerged from the shadow of Soviet rule in 1991, making it on the scheme of things a relatively young free economy. It's tiny population has allowed it to start afresh almost, and its determination to go it alone has given this nation a forward thinking attitude. The country has, for example, a 100 per cent literacy rate, which is almost unheard of even in the countries we regard as being the most civilised.
One area that Estonia unexpectedly excels at, even surpassing its larger neighbours (not least of all the UK), is its general attitude towards IT and the internet. Internet access is guaranteed by law, and there are public wifi hotspots everywhere. Its parliament is a paperless one, when it sits all votes are made by computer, and virtually all public administration is done via the internet, including its elections. Estonia was one of the first countries in the world to adopt e-voting, again advantaged by its small size which allows it to make drastic changes to its infrastructure more easily with less bureaucracy.
But while IT awareness is high among Estonia's population, on a business level the UK is "far more mature," said Robin Gurney, a UK expat hailing from Brighton and founder of Altex, Estonia's first internet marketing company.
Gurney explained the native mentality, something the UK should be aware of before thinking of starting out in Estonia.
He said: "As an expat anywhere you meet welcome and resistance. I think it's especially important here in Estonia to learn some of the language and the history so you can understand the context of their mentality and approach to business. Also you need to learn to respect their space and quiet, intelligent approach. The yankee loud and flamboyant approach won't get you far here."
Gurney outlined several areas crying out for new investment such as luxury goods for the high-end consumer and lakeside and coastal real estate outside of Tallinn (something Unique Hotels is finding success in). But in terms of online business, Gurney said a "winning idea" for a UK company would be to white label a tried and tested service on a revenue share, not license, basis.
The arrival of the Euro has met with some natural scepticism, as is to be expected, even evoking some pretty emotive language from the Estonian press. The financial plight of Greece, and similar problems faced by fiscally weak countries such as Portugal, Spain and Ireland, has threatened the very existence of the Euro. Countries wishing to join the Euro must evaluate whether it's still worth getting tied into a single currency that is no longer as stable as once thought. Similarly, those countries in the Eurozone will think twice about bringing new, potentially risky countries into the Euro, something the Maastricht Treaty was supposed to safeguard against.
But Estonia is anything but a risk, at least when compared to other EU countries. It has extremely low public debt, a fact that its citizens are very proud of. According to national figures, Estonia has enough cash reserves to pay back its national debt and still have money left over. Central government debt was slashed from EEK1,077.8m (€68m) in Q3 2008 to just EEK275m (€17.6m) the following year. This makes the country an attractive, stable proposition for foreign investors.
However Estonia is not without its problems. Unemployment has rocketed from 13.8% in 2009 to almost 20% in the first quarter of 2010, a big problem in one of the EU's least populace countries. But as Hinze pointed out above, with labour costs naturally low, high unemployment has its benefits to outside investment.
Also, Estonia was not as badly hit by the global financial crisis as its more populace neighbour Latvia, the recipient in February this year of a €7.5bn support package from the International Monetary Fund (IMF). Latvia was forced to shore up its economy following the near-collapse of Parex bank in 2007, which combined with the credit crunch and global crisis led to a steep recession.
But like it or not, Estonia is set to join the Euro come January 1, and its government (which by the way is a liberal-conservative coalition) is still extolling the same virtues of the single currency that it was before all the trouble in Europe. The main argument in favour of the Euro, is of course the opening up of new trade and business opportunities, and foreign investment. Tourism too will no doubt receive a boost, and the Euro will be seen as a status symbol within Europe and an economic "thumbs up" from Brussels. But whether it works remains to be seen, especially with the very existence of the Euro under threat and Europe's largest economies butting heads over how to sort it all out.
www.lufthansa.com www.ukinestonia.fco.gov.uk www.eas.ee www.uniquestay.com www.altex.eewww.stat.ee www.imf.org