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Estonia – small country, big ambitions.
by Anthony Robinson*
Estonia’s New Year switch from the Kroon to the Euro looked like terrible timing.
But this jewel-like Baltic state’s fiscal conservatism, passion for e-government and close
trade and financial links with its credit-worthy Baltic neighbours have helped ensure that
the rumbling of prospective financial implosion from the Euro-zone’s “Club
Mediterranee”countries has dampened neither the Euro-enthusiasm nor the selfconfidence of the Euro’s latest entrant.
Estonia pressed on with its Euro conversion timetable despite the sickening drop in
trade and economic activity following the collapse of Lehman Brothers which induced its
Baltic state neighbours Latvia and Lithuania as well as Poland and others to quietly rollback their own Euro-entry target dates. But an equally sharp export-led rebound in recent
months has taken exports and industrial output back and beyond pre-crisis levels and the
outlook for employment and growth now looks much rosier than it did in January when
the Euro seamlessly replaced the Kroon, according to the central bank’s Peeter Luikmel.
With limited natural resources – mainly land and shale-oil deposits in the largely
ethnic-Russian populated east of the country - the young technocrats who have run
Estonia since it regained independence 20 years ago opted to maximize the opportunities
opened up by the electronic revolution and the potential for tourism and trade.
According to Prime Minister Andrus Ansip the wider benefits of this strategy,
beyond economic dynamism, are more open government and a generation of honest
taxpayers. “Some 99 per cent of bank transactions are electronic and 94 per cent of tax
returns are made electronically. Tax refunds are back in people’s accounts within 5 days
That is a great incentive.” He admits that having a small population of less than 1.4m
people makes administration easier, but so does a simple flat tax system with only one
concession - re-invested earnings are tax free until they produce income.
Ansip heads a three party coalition government which reacted to the global
slowdown by cutting government spending and raising taxes. The combination rebalanced the budget at a cost of soaring unemployment. But all the coalition parties won
re-election with an increased majority. His conclusion? “It shows that people tend to trust
governments more when they keep their budget deficits under control. We’ve always had
balanced budgets here since independence and I am grateful to Estonians for
understanding the need for higher taxes and lower real incomes. Now unemployment is
falling rapidly and we are creating lots of new jobs.”
As for joining the Euro, the Prime Minister points to the high proportion of
Estonia’s trade with EU countries and close ties with Finland. Both speak the same
Finno-Ungaric language and Helsinki is only 85kms by ferry from Tallinn. “Around 70
per cent of foreign direct investment comes from Finland and Sweden and they take 35
per cent of our exports. Before entering the Euro the Kroon maintained a constant
exchange rate with our EU partners and the central bank built up reserves of 12 per cent
of GDP. Joining the Euro simply removes any risk of exchange losses for our biggest
investors and trade partners.”
Estonia did not escape from the Soviet Union and its dysfunctional rouble in
order to join a dysfunctional Euro however and its leaders have clear views on how Euro
zone governments should operate. It is far more than a question of financial adjustment.
Finance Minister Jurgen Ligi acknowledges that the programme for Portugal is “not bad”
but argues that Greece is the biggest problem because it reflects a wider crisis of the
society and the Greek nation. The Estonian way to solve the Euro crisis has a simple
charm – members of a club should obey the rules, citizens should pay their taxes and
governments should live within their means. It’s not rocket science – but it is
understandable and it makes sense.
What is more, Estonia’s economic dynamism, openness to new ideas combined
with devotion to deeply conservative principles makes this tiny country of increasing
interest to its huge but still unpredictable neighbour Russia and other former Soviet
states.
In Soviet times the Kremlin made Estonians a minority in their own
country by exiling or exterminating the national elite and transferring Slav workers and
security forces to new homes and jobs in the Baltic States.Today the Russian speaking
minority is around 25 per cent – heavily concentrated in the capital Tallinn and in the
eastern border city of Narva and the surrounding region. A few are descendants of 18th
century dissident Orthodox “Old Believers.” and others who came to Estonia when Peter
the Great wrested control of the Baltic States from Sweden – and employed the largely
German-speaking Baltic nobility to run the expanding Russian empire. Most were postwar draftees into factories and collectivized farms - simply left stranded by the ebbing of
the Soviet tide.
As elsewhere in the Baltic states this Russian minority now has access to EU
passports and does business in Euros, which is good news for the younger and better
educated.. Tallinn’s stunning new Kumu Art Museum is currently showing a superb
exhibition of the works of Pavel Filonov. His grim portrait of Stalin haunts an exhibition
of Russian avant-garde painters who continued working, but were never exhibited, during
the terrible 1930’s.
But if you travel by tram in Tallinn your fellow travelers are far more likely to be
Russian than Estonian speakers and most unlikely to possess a passport. For these ageing
widows and retired soldiers and factory workers the new Estonia is a mystery.
While Putin’s Russia also struggles to come to terms with the modern world
Estonia, along with Kazakhstan, have become, in very different ways, the most successful
of the post-Soviet states. What they have in common is a powerful will to succeed and a
strategic vision. Estonia was the smallest and least populated province of the former
Soviet Empire, while Kazakhstan’s President Nursultan Nazarbayev rules the largest and
most richly endowed of the 15 former Soviet republics after the Russian Federation itself.
Estonia is a Scandinavian-style democracy while Nazarbayev rules his Eurasian republic
like a contemporary silk-road Khan. But the wily autocrat constantly reminds
Kazakhstan’s multi-ethnic 16m population that the richest country in Asia per capita is
not resource-rich Kazakhstan but a tiny island which lives on its wits and even has to
import sand and gravel if it wishes to expand – Singapore.
In May this year President Nazarbayev showed a similar interest in tiny Estonia as
he made his first official state visit at the head of what local officials described as “an
enormous delegation.” While the Kazakhs sought tips to modernize their administration
their Estonian hosts were impressed by the energy, shrewdness and curiosity
demonstrated by the 71 year old recently re-elected founding president. “Of course, we’re
not so sure about the internal politics” a senior official added.
Despite their obvious differences, the two former Soviet states have a surprising
amount in common, apart from a shared Soviet history, and large ethnic Russian
minorities. They also both ran for the exit 90 years ago when the Russian revolution
sparked civil war. But while all three Baltic states managed to defeat the Red Army’s
attempt to force them back into the Soviet fold, landlocked Kazakhstan’s first bid for
independence was swiftly and violently suppressed by Trotsky’s triumphant Red Army.
Victory did Trotsky little personal good. Stalin exiled him to the former Czarist military
garrison town of Almaty, then the Kazakh capital, only 200kms from the Chinese border
but 4,000 kilometres from Moscow..
Trotsky was the first of millions of exiles to be shipped east across the endless
steppe as Kazakhstan became one of Stalin’s main dumping grounds. Millions of Balts,
Poles, Volga Germans, Chechens and other undesirables were jammed into cattle trucks
and off-loaded onto the alternately freezing or searing Kazakh steppe.
Among them were the cream of the Baltic and Polish intelligentsia, arrested,
interrogated and shipped east in the brief internal between the Molotov-Ribbentrop pact,
which delivered the Baltic states into Stalin’s hands, and Hitler’s subsequent June 1941
invasion of the enlarged Soviet Union. In personal accounts of those times Baltic exiles
often record with gratitude the help they received from the Kazakh population,
themselves degraded and humiliated by forced collectivization.
In the 1980’s, as Mikhail Gorbachev sought with increasing desperation to
modernize the Soviet Union, the independence-minded Baltic states found an unexpected
ally in the east. Speaking to a group of European journalists in his sunny office with fine
views over the medieval towers of Tallinn and a modern port bustling with cruise liners
and trans-Baltic ferries, Prime Minister Ansip recalled that “the only other Soviet leader
who backed our demands for greater independence during the Union Treaty negotiations
with Gorbachev was Nazarbayev - who was clearly thinking along similar lines”.
Under Nazarbayev’s 20 year rule Kazakhstan has attracted over $120bn of
foreign investment and achieved a seven fold rise in GDP. Chinese and Western investors
are co-financing the construction of a modern highway and new rail links across the
country to connect China with Europe. New pipelines now transport oil and gas from the
oil rich Caspian to China and new mines will also fuel China’s future growth.
Nazarbayev is seeking new investors into non-oil sectors to diversify the
economy – and new outlets for the country’s rising oil, grain and mining exports to the
West.. His visit to Estonia with its modern ports, dynamic high tech industries and
administrative efficiency reflects his recognition of Estonia’s potential contribution to
Kazakhstan’s own modernization.
*Anthony Robinson is a former FT Moscow correspondent and East Europe editor