Estonia’s tax man cometh

The Baltic Times, TALLINN
Jan 28, 1999
By Kairi Kurm

As the Estonian Parliament considers introducing a progressive income tax, Kairi Kurm hit the streets to find out what people think.

Last year, the Central Party proposed that people with a high income should pay more in taxes and submitted a bill to the Parliament to push this agenda.

Since 1993, all Estonians have to pay the same income tax of 26 percent, but the party thinks that people who earn just enough to survive should not be taxed. The minimum monthly wage of 1,200 kroons ($89.6) should be tax free.

Income up to 2,967 kroons will be taxed at 15 percent, while income up to 7,133 kroons will be taxed at 25 percent. The next break line is at 40,467 kroons. Those earning less will have to pay 29 percent income tax, and those who earn more will have to pay a 33 percent tax.

The new bill reduces the tax burden for people with average wages. Currently, they are paying 988 kroons in taxes from an average monthly wage of 4,300 kroons, but if the Central party’s proposal is supported, they will have to pay only 478 kroons.

The Center Party believes that what the budget loses in income tax revenue will come back as VAT revenue as people will have more disposable income and thus buy more products. The proposed change should also decrease the number of families who need additional support.
Andro, international safety manager:

People will start showing a smaller income and the rest will be received in envelopes. There are a lot of people who receive above 7,133 kroons and will lose with the progressive income tax. Most of the people receive between 10,000 kroons and 20,000 kroons. Poorer people will win from the proposed system. I will lose and I am against it. Young people need money to start their life. I suggest raising taxes from incomes above 20,000 kroons or 30,000 kroons.
Aleksandr, director at a trading company:

The government will not win with the progressive income tax. Those who work less earn less money. Those who work more have the right to earn more. Why should the government punish me for wanting to earn more? With this bill, the government will take two steps backward. The initiative of people to do good things is weakened if they know that income will be taken away from them.

The proportionate income tax does not influence my income, but it does influence the income of my family which is working. It seems to me that the progressive tax on income does not support business. It does not stimulate business. It is also not good to help under-supported people and thus create an increased number of unemployed.
Georg, an entrepreneur:

I support this action of dividing money on equal terms although I will have to pay more taxes. We must help those who cannot help themselves. But I do not believe that this bill will go through. The time is not right for these kinds of changes. People have to get on their feet before they are able to pay more taxes. I suggest postponing it.


Reduced prices, amazed Estonians

The Baltic Times, TALLINN
Jan 28, 1999
By Kairi Kurm

 With reduced prices advertised prominently in their windows, Tallinn department stores were brimming with eager customers this month.

“Do you know that Seppala has the highest discount rate in Tallinn. They cut off initial prices twice now,” said Mare, a mother of five children, as she rushed to the store.

But five years ago, before local stores were privatized and Western ones opened their Estonian branches, discounts were virtually unheard of.

That’s all changing now. “Discounts are a normal stage of business in Western shops. Fashion products are bought for certain seasons and we cannot sell old goods,” said Sari Sopanen, managing director at the Sokos department store.

Still, most Estonians are amazed when sales are announced. Foreigners, on the other hand, are already used to it and are usually among the first to save a few bucks on that jacket or sweater they’ve been wanting.

According to Sopanen, most of the shops hold these kinds of sales twice a year, one in winter and one in summer. “We have to get rid of the goods of the past season in order to have space for new merchandise,” said Sopanen.

The starting time of discounts depends on the weather and the number of goods left, but usually this period of discounts is planned a long time before, she said.

“We did not agree about this period with our competitors. Stockmann started a day after us but some specialty stores in the Old town started a little earlier. If you start with it first, you get the first buyers. People are buying a lot at cheap prices,” said Sopanen.

Kaubamaja started its clearing sale Jan. 21. Andrus Ossip, the store’s sales manager, says he’s reluctant to predict the end of it and has planned surprises for clients for quite a long period. Kaubamaja has traditionally held discounts at this time, roughly two weeks later than its competitors.

“After Christmas and New Year’s Eve, shopping people are not ready to dive into shopping again,” explains Ossip. “The idea of discounts is to increase sales. There are of course products that do not bring in profit, but we cannot talk about general loss. Money has to be taken away from the products that do not sell.

“Why should I buy a winter coat if winter is almost gone? But if the price is right, why not,” said Ossip.

According to Sopanen, the month of discounts does not bring in much profit for the store. Sopanen believes that the situation is the same with most of the competitors.

The manager of Seppala, which started the discount period before Christmas, refrained from commenting on losses from discounts since it’s part of the secret of a sale. Similar shops in Finland arranged the period for discounts for the Seppala shop.

“This was a good present for people, to have discounts during Christmas shopping,” said Krista Luhaste, manager at Seppala.

“It is clever to start discounts before competitors and with as big a discount as possible,” said Rita Gofman, sales manager at A&G Kaubandus, the supplier of 4You, Vero Moda and Jack&Jones.

“We cut prices of all products by 40 percent in a summer discount period in order to empty the shop before new products get in,” said Gofman.

Unlike most of its competitors A&G Kaubandus raises the prices of some of the discounted goods back to normal level. “The discount period does not bring along any profit but we will make it up on the sales of new products. Getting rid of old goods is most important for us,” said Gofman.


Uhispank changes Tallinn’s skyline

The Baltic Times, TALLINN
Jan 28, 1999
By Kairi Kurm

Tallinn will have its first skyscraper thanks to the Uhispank Group, which is setting a new architectural trend in the city.

Estonia’s second largest bank will reside in the country’s highest building, construction of which started in October 1997. Uhispank’s skyscraper, which cost the bank over 300 million kroons ($22.4 million) will be 94 meters tall and will occupy 24,350 square meters.

Jaanus Sula, Uhispank’s administration director, said the design of the 24-storey glass building with a triangle metal construction at the top resembles the design of some of Hong-Kong’s skyscrapers.

“None of the buildings in Tallinn is as modern as Uhispank’s with its superior heating, cooling and plumbing systems,” Sula said.

Raivo Puusepp, the architect, sees the whole area surrounding the building as “a city of Estonia’s first skyscrapers.”

Kalev Roosivali, manager at the Pindi Real Estate company, said he believes that it will take at least 18 years before other tall buildings are built in Tallinn.

He recalled that there was a 17 year gap between the construction of Uhispank’s headquarters and the construction of the first tall buildings, the Viru and Olympia hotels at the end of 1970s.

Some analysts say it’s not the best time to build a skyscraper because rent prices are declining due to an oversupply of office space for rent in Tallinn.

Uhispank Group will have to find tenants, since it does not need more than 70 percent of the building. Seven floors will be rented out at a cost of 300 kroons per square meter and the top two floors will accommodate a restaurant.

“Three-hundred kroons per square meter in a new building with modern technosystems, which is also very attractive due to its height, is a competitive price,” said Roosivali. “For a prestigious company based in a foreign capital renting price may be of a minor importance.”


American investors to save EVEA bank

The Baltic Times, TALLINN
Jan 28, 1999
By Kairi Kurm

The EVEA Pank management did its best to save the bank from bankruptcy by finding an international investor, but it still has to find out whether the plan worked.

The Estonian central bank started bankruptcy proceedings against EVEA last October, and the case was taken to the Tallinn City Court Jan. 21. The jury will give its final verdict on whether the bank will continue working on Feb. 5.

The bank of Estonia claimed that EVEA Pank did not meet the capital adequacy requirements and was unable to meet its obligations.

The bank could be saved by an international investor who would raise EVEA’s share capital.

On the day of the court hearing EVEA Pank reported that it had signed a cooperation memorandum with two U.S. companies, Swiss Credit & Savings Union Inc. and Morgan Nationwide Depository Inc. Under the agreement, the companies agreed to invest $5 million into the bank’s stock capital.

The new investors have to send an application to the bank of Estonia to increase EVEA Pank’s share capital.

Andrus Kuusmann, the central bank’s spokesman, said the bank of Estonia has received no formal documents from EVEA Pank’s new investors, on the basis of which they could decide about the bank’s future.

“I do not see any other possibilities but a bankruptcy,” Kuusmann said.

Margus Tilga, EVEA Pank’s board chairman, said the new investors will apply for a license even if the court declares EVEA Pank bankrupt.


Bank deal should smooth Russian trade

The Baltic Times, TALLINN
Jan 28, 1999
By Kairi Kurm

After Estonia’s Krediidipank and Moscow Bank signed an agreement that guarantees money transfers between the two countries, trading with Russia should become easier.

Krediidipank’s President Rein Otsason and Moscow Bank’s Vice President Vadim Trofimov signed the cooperation agreement Jan. 21.

Andrus Kluge, Krediidipank’s managing director, said the agreement is aimed at financing trade and guaranteeing export and import transactions of solvent clients.

“This is, first of all, necessary to our food producing companies,” said Kluge.

“In earlier times, Russian partners used to pay beforehand because Estonian sellers could not be sure they’d receive their money after the transaction. Now we guarantee that they’ll receive their money after the products have been sold in Russia,” he said.

Russian entrepreneurs are interested in importing Estonian products, mostly food and agricultural products, and exporting local products to Estonia, Trofimov said in an interview with the Eesti Paevaleht newspaper.

Kluge said the agreement does not bring along any big risks to the bank, as all risks have been protected within the cooperation agreement.

Last year the number of Krediidipank clients increased by almost 50 percent and this year Kluge expects to see the same rise, partly thanks to this cooperation agreement. Although 86 percent of the bank’s 15,000 clients are private persons, most of the deposited money belongs to corporate clients.

With 529 million kroons assets worth ($39.5 million), Krediidipank is the fifth largest of the six working banks in Estonia.

Moscow Bank, with its $800 million assets, is one of the five biggest working banks in Russia, said Kluge.


EVEA needs investor to survive

The Baltic Times,TALLINN
Jan 21, 1999
By Kairi Kurm

The future of EVEA Pank, which was declared bankrupt last October, depends on whether it finds a strategic investor before Jan. 21, the day the Tallinn City Court is slated to give its final verdict in the bankruptcy procedure started against the bank in October.

At that time, the Bank of Estonia found that EVEA Pank was undercapitalized and was unable to meet its obligations.

The central bank’s decision took EVEA Pank’s management by surprise. Most said the bank should not have been closed down.

Margus Tilga, chairman of the board of EVEA Pank, said that if a strategic investor is found before the court hearing, the bank will be saved.

“It is important to have positive equity. If the bank restarts operations, the share capital should exceed 5 million ecus, or about 78 million kroons ($5.85 million), the requirement set by the Bank of Estonia,” Tilda said. “For the time being we need 250 million kroons. This includes $9 million for increasing the owners’ equity and the rest to guarantee liquidity.”

The Tallinn City Court has already postponed the hearing from Jan. 6 until Jan. 21 because the banks’ representatives wanted to see the report on the banks’ financial situation, prepapred by court-appointed experts PricewaterhouseCoopers and KPMG Estonia.

The experts found that EVEA Pank should revise the value of its Russian debt securities maturing in 2001 and downsize it to 34.25 percent of their face value. The experts also concluded that the securities maturing in 2007, which are worth 56 million kroons, should be written off the bank’s balance.

Another bank headache is to postpone paying 227 million kroons to creditors. This sum includes 97 million kroons paid by the Estonian Deposit Protection Fund to EVEA Pank’s clients, 70 million kroons used to cover deposits of clients who agreed to postpone their claim for a year, and a 60 milllion kroon debt to the state budget.

The Deposit Protection Fund started paying out compensations a month after the bankruptcy proceedings started. Eighty-seven percent of the 20,700 clients whose deposits were compensated were private investors.

This accumulated debt does not seem to worry the bank’s management and it calmly predicts that private clients would abandon the bank.

“When the bank restarts its activities, we predict that 70 percent of the deposits are leaving. These are mostly private persons,” said Tilga. The bank has held talks with several investors and Tilga claims that there are some candidates who are ready to take a risk and join them.

“We are continuing negotiations with all of them. For an investor EVEA Pank is presently not a bank but an institution without a licence. Today’s situation is not clear for them. Until today, none of them has been capable of taking the first step because of the uncertainty of the long run strategic investment,” said Tilga.

The expected court decision on EVEA Pank will influence the fate of ERA Pank which is under a moratorium.


Eesti Telekom boosts stock market activity

The Baltic Times, TALLINN
Jan 21, 1999
By Kairi Kurm

As the shares of the Estonian telephone company Eesti Telekom go on sale in a public offering starting next week, specialists predict a major increase in the company’s share price on the secondary market.

The Estonian Transport and Communications Ministry announced Jan. 9 the initial public offering of 36 million Eesti Telekom’s shares with a face value of 10 kroons ($0.75). The offering, in which the government will part with 49 percent of its Telekom’s shares, will last from Jan. 25 until Feb. 9.

The shares will be offered to the general public and local and international institutional investors, and Estonia is already prepared for a subscription boom.

In case there are more subscriptions than there are shares offered, domestic investors will be secured half of the shares they sought to buy, but not more than 7,500 kroons worth of shares at the offered price.

The Telekom group’s 3,500 employees are guaranteed shares worth 20,000 kroons, the business newspaper Aripaev reported.

Both international and local investors will be offered the company’s shares at the same price.

The share price will be determined within the range of the minimum and the maximum bidding prices set by the Transport Ministry. The final sale price of the shares will be announced after the closing of the subscription period.

The allocation of the shares among the investors who have submitted valid offers is expected to take place on Feb. 10. In Estonia, the shares can be subscribed to at the offices of Uhispank, Hansapank, Optiva Pank and Krediidipank.

Analysts predict that Estonian investors may acquire about 10 percent of the total offering for 200 million kroons to 240 million kroons.

This may negatively influence the share price of other companies quoted on the Tallinn Stock Exchange. Specialist predict that those prices may drop as investors withdraw their money to buy Telekom’s shares.

But stock market specialists positively value the public offering as it might add activity to a stale Estonian stock market.

“The share issue should boost the market and give it a positive trend. The investors’ trust will increase to some extent. There is too much pessimism on the market,” said Henrik Igasta, investment banking director at Talinvest Suprema.

“These are the first shares that will get into the hands of real Western investors, and interest in Estonian stocks may increase and foreign investors may find more attractive stocks on the Estonian market,” said Mihkel Oim, portfolio manager at Hansapank.

The overall opinion of several analysts is that the share price will range from 65 kroons to 75 kroons and will increase on the secondary market due to oversubscription.

The stock market specialists also predict the price increase judging from the initial public offering of telecom shares abroad. They cite Sonera’s example, whose share price doubled on the secondary market after the initial public offering.

“In case of a successful issue the share price will increase by 15 percent on a secondary market. Smaller Scandinavian investors, who are not able to acquire shares from the initial public offering, will come on the secondary market. The share price has a strong potential to increase,” said Igasta.

Igasta said that Talinvest Suprema estimated Telekom’s share price within the range of 64 to 76 kroons and set the company’s value at 8.7 billion to 10. 5 billion kroons.

Oim noted that Western investment companies estimate the price of Telekom more optimistically than Uhispank or Talinvest Suprema. Credit Swiss First Boston estimated the value to about $1 billion or about 14 billion kroons, he said.

He also said that the share price will depend on various factors, among which he mentioned demand, oversubscription, the situation on the Brazilian market and the possibility of buying shares through local investors.

“This is the biggest share issue ever held in the Baltics. It is almost three to four times larger than the GDR issues of Uhispank, Unibanka and Vilniaus Bankas,” said Igasta noting that Telekom is the first listed infrastructure company in Estonia and its value may comprise over half of the total market capitalization on the stock exchange.

“Telecoms’ financial results are usually not influenced by macroeconomic results. If the global trend is pessimistic, Telekoms’s results may not be. People still use telephones,” said Igasta.

Under a new shareholders’ agreement signed in December, about 20 percent of the company’s net profit will be paid out in dividends in the future. In 1997, Estonian Telekom paid 57 million kroons in dividends, and the expected dividends for 1998 might be the same. The company’s profitability rate is about 20 percent net profit.

Although Telekom’s shareholders are guaranteed a lot of dividends, Oim believes that investors are looking for profits more from the increase of the share price than dividends.

According to an analysis made by Talinvest Suprema, Estonian Telekom’s total income in 1998 will be 2.78 billion kroons and the net profit 559 million kroons. For 1999 the respective figures should be about 3.35 billion kroons and 661 million kroons.

The companies net income has increased by 36 percent and 44 percent during the last two years, and may, according to Talinvest, annually increase by 11 percent in fixed line and by 15 percent in cellular phone business during the next four years. Telekom predicts that the company’s consolidated profit may increase by 15.2 percent a year till 2001.

International participants ABN AMRO Bank N.V., N.M. Rothschild & Sons Ltd., and Nomura International PLC will help a forthcoming initial public offering of shares in Estonian Telecom.


Estonia’s Danish cheerleader

The Baltic Times, TALLINN
Jan 21, 1999
By Kairi Kurm

At a meeting with Estonian officials, Danish Foreign Minister Niels Helveg Petersen said his country will continue to support Estonia’s and the other Baltic states’ membership in both the European Union and NATO.

“In our opinion, enlargement is vital for long-term stability in Europe and this process should be, above all, regarded from that aspect,” Petersen said, in Tallinn Jan. 14 to mark the opening of the Danish Embassy to Estonia. “Enlargement is absolutely necessary. It is our security.”

Denmark was one of the first countries to recognize Estonia’s independence in 1991. Since then, the two countries have abolished visa requirements and have expressed an interest in beefing up trade, now that Estonia has signed a free trade pact with the EU.

Denmark was also the first Nordic country to sign the Agreement on Defense and Cooperation with Estonia and has been behind attempts to build up the Baltic country’s national security system.

According to data for the first nine months of 1998, Denmark was Estonia’s eighth largest trading partner and the fourth largest investor. According to the Estonian Economic Ministry, there are 45 enterprises fully or partially owned by Danish companies operating in Estonia. The Danish Falck Group’s merger with the Estonian Security Service and Maersk Air’s investment into Estonian Air are the most widely-known examples.

Petersen met with Estonian President Lennart Meri, Prime Minister Mart Siimann and Foreign Minister Raul Malk during his visit and mainly talked about EU and NATO enlargement.

“It’s a process that must continue with energy,” he said.

The Nordic countries of Denmark, Sweden, Norway and Finland have been the Baltics’ biggest NATO and EU boosters, but Denmark’s support carries added weight: it’s the only Nordic country to be a member of both organizations. Sweden and Finland are only EU members while Norway is just a member of the NATO alliance.

During his visit to Tallinn, Petersen also said Denmark strongly supports the efforts of Estonia’s neighbors, Latvia and Lithuania, in their own EU and NATO bids.

When he wasn’t talking about the EU and NATO, Petersen took time to commemorate the opening of the Danish Embassy, housed in a three-floor modern building facing the Estonian Parliament hall on Toompea Hill.

The embassy also houses the residence of Ambassador Sven Roed Nielsen. Before moving to the new location, the embassy rented rooms in the building of the Estonian Foreign Ministry.


Mercury blesses a new Tallinn hotel

The Baltic Times, TALLINN
Jan 14, 1999
By Kairi Kurm

The doors of the new Grand Hotel Mercure Tallinn will swing open Jan. 28 to welcome its first guests.

The four star hotel, from which guests can see the tall towers of Old Tallinn, will be managed by France’s Accor company.

Accor oversees more than 2,500 hotels worldwide and this experience will help Mercure Tallinn to compete successfully with other city hotels.

“Our biggest competitors Olympia, Palace and Park Consul are very nice hotels, but we are trying to do a little better,” said Jean-Philippe Savoye, general manager of Accor’s Central and East European region.

The Accor network owns hotels in all geographical regions of the world and is also planning to establish a permanent presence in the Baltics.

“This is our first step in the Baltics, but we are planning to open a hotel in Vilnius, Kaliningrad and two in Riga,” said Savoye.

The competing hotels said they welcome the birth of a new hotel, as it makes them try harder to improve quality.

” It makes our life more interesting,” said Ene Truusa from Central.

Michael Stenner, general manager at Park Consul, agreed. “Mercure hotel is a nice place. It is good to have more international competitors in Estonia as it upgrades service. It is a very good challenge for the existing hotels,” he said.

He also noted that Mercure Tallinn could have been a five star hotel if the requirements of the Estonian Tourist Board weren’t so tough.

The new hotel named after Mercury, the Roman god of trade, was acquired by Irnesse Kapital last year and refurbished in eight months. The floor space of Mercure Tallinn was increased from 5,000 square meters to 11,500.

The 250 million kroon ($18.7 million) reconstruction was financed by Uhispank (60 percent), Luxembourg bank (25 percent) and Irnesse Kapital (15 percent). The owners believe all the outlay will be recouped in eight years.

Alain Miquel, director general of Mercure Tallinn, said the hotel hopes to achieve an occupancy rate of 50-55 percent in the first year of operation.

The hotel has 164 rooms with 328 beds on four floors. According to Ene Truusa, the sales manager at Central hotel, Mercure is the fourth largest hotel in Estonia in the number of rooms.

There are two bars, two French brasserie style restaurants, a pastry and a coffee shop, saunas, a fitness center, beauty salons and conference and entertainment facilities at the hotel. Accor’s and Volkswagen’s joint venture Europcar, Europe’s second largest car rental company, will also open its office in the same building. Six hundred square meters of the building are rented out to different offices.

The price of accommodation varies from 1300 kroons in a Standard class single room to 6200 kroons per night in the presidential suite. The price includes breakfast, morning sauna and fitness centre and are higher from April to September and on working days.

The hotel sees the business person as its main customer, but Stenner also believes that fewer businessmen visited the country during the last two years and the number of tourists is increasing instead.


Hansapank storms into Lithuania

The Baltic Times, TALLINN
Jan 14, 1999
By Kairi Kurm

After taking over Latvia, Hansapank is moving into Lithuania and is planning to start banking activities there next month.

It has already obtained permission from the Bank of Lithuania to open a Vilnius office and hopes to get the nod from the Bank of Estonia within the first quarter of 1999.

According to Agu Lauri, head of the foreign division at Hansapank, 33 million litas ($ 8.25 million), which the bank plans to invest in Lithuania initially, is enough to meet the requirements set for credit institutions in Lithuania.

Lithuanian laws require that foreign banks launching their operations on the Lithuanian market must have a share capital of at least 23 million litas ($ 5.75 million).

Hansapank has been working on the project of opening its activities in Lithuania for years, and after Swedbank’s investment this became possible.

Swedbank saw Hansapank as a starting point in the Baltics, when it bought half of Hansapank’s share capital last autumn. “Swedbank’s investment in Hansapank has certainly influenced our expansion plans. We kept our capital in reserves but now we have enough free capital,” said Lauri.

According to Lauri there are several foreign banks in Lithuania and most of those bank’s share capital belongs to foreigners. The local banks are mostly state owned.

Lauri said he believes that Hansapank’s present clients and companies based on foreign capital would be the bank’s primary clients and the local people would follow.