Estonia offers wide investment opportunities

The Baltic Times, TALLINN
Mar 25, 1999
Interviews by Kairi Kurm

Weighing investment opportunities in Estonia? Kairi Kurm enlists three investment specialists to offer their advice.

Maris Lauri, analyst at Hansapank:

It is difficult to say what sectors are most promising since sectors depend on the general economic stage. Why have investors invested a lot in light industry and other Western-oriented exporting companies? It is because our labor is relatively cheap and we are closer to market. In Southeast Asia, labor is cheap but transportation to Europe is expensive.

Wood processing and other related activities like furniture production, for example, are [good] due to the local wood, the Russian market and a big number of companies. The problem about the wood processing sector is a crisis on the world market and declining prices, which means that this sector is not as profitable as it was a year ago.

A lot has been invested in the electronics enterprises. Machines and equipment are making a bigger share in exports, about 25 percent to 30 percent. The banking sector, which is one of the most advanced among Central and Eastern European countries, has attracted a lot of investments, especially from Scandinavia.

As an intermediate point between the West and Russia, Estonia has a fast developing transport sector. Although it has already got a lot of foreign investments, a lot is still needed and expected.

Investments are done for different purposes, some are long run and others are short run. Some invest in disadvantageous companies, as they expect a market for them in the future.

The food industry was a promising sector a year ago but is now out of the game as Russians have lost their purchasing power. Some other have also suffered.
Agu Remmelg, director of the Estonian Investment Agency:

We can approach this question from different standpoints. Which economic sector has the biggest potential, which markets are easily accessible, or when do costs play the most important role in an investment decision?

Wood processing is the best choice, as Estonia has its own wood resources and its sawmill industry is well developed.

The other attractive sector is electronics, engineering and the tool industry. Also, the plastics industry, which is related to electronics, and includes the production of plastic parts for mobile phones. Big industrial groups like Electrolux, Ericsson and Nokia are quite close to Estonia and offer perfect contracting opportunities.

In terms of services, transport, transit and logistics are very good due to the country’s good geographical position. More emphasis should be placed on value added logistics. We can for example bring big quantities of products to Estonia and then start packing them according to the specific needs of each country. Distribution of goods can effectively be made not only between East and West but also between North and South.

In the future I see that telecommunications sector has to be developed since the concession agreement with Estonian Telekom ends at the beginning of the century. Info-technology has good potential. Estonians are big Internet users and well-educated in this field.
Marek Lepamets, analyst at Uhispank:

There are many sectors in Estonia that need to be developed. Our labor is cheap, and thus light industry is doing well. Finnish labor unions are getting more nervous about that and one day we may have a situation where unions demand an increase of the wages of the Estonian subcontractors.

More emphasis should be put on high technology industries to make Estonia a more developed country that is able to produce something of its own and prevent well-educated engineers from going abroad.

Wood is one of the biggest resources, and thus wood processing has big potential. Not only wood cutting and pulpwood, but also wood processing with increasing surplus value.


Estonian unemployment rate soars

The Baltic Times,  TALLINN
Mar 18, 1999
By Kairi Kurm

 The unemployment rate in Estonia has grown rapidly over the past few months and exceeds last year’s rate by one-fourth.  The number of people looking for work through state employment offices in February was 41,300, an increase of 6 percent over January and up 25 percent from February 1998.

Meelis Paavel, governor of the Jogeva province, said the main reasons behind the increase of unemployment are the decline of the Russian market and the increasing efficiency of agricultural companies.

According to the Estonian Labor Market Department, job-seekers made up 4.8 percent of the total number of the country’s residents between 16 and pension age.

Research carried by the Statistics Department in the second half of 1998 showed that the unemployment rate is much higher, almost 10 percent. Ludmila Smirnova, a specialist at State Labor Market Board, said only half of job-seekers usually register at the employment offices.

Not every jobless person can get benefits from the state, they have to meet certain criteria to receive training or a half-year benefit. Only 26,800 out of 41,300 people registered with state unemployment offices receive a 400 kroon ($28) unemployment check.

Some specialists claim only one-third of the registered job seekers really want to find a job, most are actually interested in training. There are also a number of people, who take seasonal jobs and rely on unemployment benefits between the seasons.

The unemployment rate was the highest in the northeastern Ida-Viru region, where it stood at 8.6 percent of the working-age population. On the western island of Saaremaa, the rate was 7.2 percent and in the Valgamaa County in south Estonia, it stood at 6.8 percent.

The unemployment rate was the lowest in the northern Laane-Viru county (2.5 percent).

Saaremaa and Tallinn also accounted for the largest increase in unemployment compared to last year. Unemployment increased by 50 percent on the island, and by 38 percent in the country’s capital.

Smirnova said about two-thirds of the job-seekers in Tallinn are Russian speakers, but in Ida-Virumaa, where the share of Russian speakers is the largest in the country, the problem is tied to closed industries and language troubles.

Women made up 57.8 percent of registered job seekers but according to the statistics department, the men’s share is bigger. This is probably because men are too proud to ask for help.

The labor market board divides unemployed people in three age categories: older than 50; 25-49; younger than 25. The first and last groups each make up about 18 percent of the total number of job-seekers.

About 43 percent of the job-seekers have a secondary education, 28 percent have a basic education, 22 percent have acquired professional secondary education and only 8 percent have a higher education. Most of the job-seekers are not willing to take odd jobs, especially in public places.

In some cases, the state supports companies that employ people in the so-called risk group, such as the handicapped, mothers with young children, former prisoners, youngsters and elderly people who have less than 70 days left before retirement.

The state also supports opening a new business with 10,000 kroons.


Every fifth skier wears Estonian skis

The Baltic Times, TALLINN
Mar 11, 1999
By Kairi Kurm

Not every Estonian knows that the wood processor Viisnurk produces every fifth pair of cross-country skis in the world.  Viisnurk, which in Estonian means ‘pentagon,’ has been producing skis since 1964 and has been doing comparatively well taking into account that ski sales have decreased during the last few years due to bad weather.

World ski sales have decreased almost five times since the beginning of the 1990s, and now amount to about 1 million pairs a year. Viisnurk is the second largest producer after Austria’s Fischer and produces about 200,000 skis annually.

Viisnurk’s sales decreased by 23 percent last year following the world pattern, but the company managed to keep the same market share. It claims 20 percent of the ski market in Europe and the same share in the United States.

“We have preserved our market share,” said Andrus Aljas, Viisnurk financial director.

Local top skiers like Kristina Smigun and Andrus Veerpalu, however, prefer Fischer’s skis because Viisnurk does not produce top class skis and special ski products. The Estonian company produces mainly traditional skis which sell well and are also cheaper.

Viisnurk’s skis were popular among top skiers during the Soviet times, when the company managed to sell 1 million pairs of skis per year to Russia. After independence, the company realized that the Eastern market was not available any more and turned to the West.

In 1991, it sold only 3 percent of skis to the West, but today this figure has reached 85 percent. Today, the share of skis to the Russian market is only 4 percent, and they are supplied only after payments are made.

“It was not easy to go to the West. It took a lot of time before we were accepted in the West and our sales increased. We had to sell [our products] at a low price at the beginning,” Aljas said. “We achieved the competitive level thanks to our Western partners, with whom we are still cooperating.”

Viisnurk does not produce skis under one trademark only. Skis carrying the local trademark Visu make only 10 percent of the total sales, and the company sells only about 10,000 pairs in Estonia.

The Estonian company also makes skis for other producers under the Karhu, Peltonen, Rossignoli and Atomic trademarks.

“Production has decreased in Europe. Our production environment is cheaper and other producers use our services. They make the top class skis themselves, as these require more technical secrets,” said Aljas.

Aljas predicted the company’s production will be more effective after it receives an ISO 9001 certificate this year. This will not only help to sell the skis but also cut costs and arrange production, he said.

The production of skis makes only one-third of the company’s sales. Viisnurk is also producing soft board and furniture. Last year they started producing hockey sticks.

The company is planning to put more emphasis on the quality rather than the quantity and will start producing more expensive skis in the future.

Aljas believes that the decreasing sales of skis have already reached the world’s minimum level and thus predicts the same turnover for ski production in 1999, which is 70.3 million kroons ($5.2 million).

The company’s stock has been noted on the secondary list of the Tallinn Stock Exchange since June 1997. The small number of freely traded shares on the stock exchange makes the shares very unattractive for speculating investors. The share price decreased by 30 percent in 1998 to 18 kroons, while the stock exchange index TALSE decreased by almost 66 percent. The book value ofa Viisnurk share, which presently costs about 22 kroons on the exchange, was about 18.85 kroons at the end of last year.

The company’s net turnover reached 202 million kroons and the net profit was 17.6 million kroons in 1998.


Uhispank pulls the plug on TV station

The Baltic Times, TALLINN
Mar 04, 1999
By Kairi Kurm

At one time, two Estonian couples led a luxurious life: They drove nice cars and managed one of the country’s popular TV stations.

But now, Uhispank wants back the loans that made this life possible.

One of three private Estonian TV stations, TV1 might change hands in a couple of weeks now that Uhispank is trying to regain money loaned to the Sonajalg families.

Uhispank is offering TV1 for 90 million kroons ($6.43 million) to any company that brings the money to the bank first, said Uhispank Vice President Janek Maggi.

Finland’s MTV3, Norway’s Kinnevik and a U.S. company have already expressed interest in acquiring the TV station.

The two Sonajalg families, made a fortune in the early years of the Tallinn Stock Exchange. In 1996, they bought a bankrupt TV station – Tipp TV – and invested 50 million kroons in it, half of which they received from an American financial partner.

They succeeded in taking over the most popular serial, “Home & Away”, from the Estonian state TV and hired professional anchors.

To keep the business running, the Sonajalgs borrowed more than 100 million kroons from banks, offering stakes in TV1 as a guarantee. When the time came to pay, Uhispank took over TV1 with the company’s debts.

The bank also wants to receive the rest of the Sonajalgs’ personal 23 million kroon debt. The bank already took their Lexus and may take some more of their personal property.

But the Sonajalg families claim that the bank had planned to take over the TV company from the very beginning.

“The loan contracts were finished against the law, and the bank has made several steps to push us away from TV1,” Oleg Sonajalg told Aripaev.

No matter how upset are the Sonajalgs, Uhispank just wants to get its money back. The bank has recently sold a couple companies to clean its loan portfolio from bad loans.

“Our aim is to receive the bank’s money back as fast as possible,” said Maggi. “They want to get back the shares of TV1, but they do not want to pay their loans back. They can still get the shares of TV1 for the price of its debts. They claim that they have found an investor but we have not seen them,” said Maggi.

The Sonajalg families had taken out too many loans which they were unable to pay back because they could not predict such a negative turn in the overall situation, Maggi said. TV1 has incurred losses every month.


Provisioning pulls down Hansapank’s bottom line

The Baltic Times, TALLINN
Mar 04, 1999
By Kairi Kurm

Despite Estonia’s economical difficulties, Hansapank’s size almost doubled through the merger with Hoiupank and its liquidity rose thanks to a Scandinavian investor.

The overall 1998 results are not cheerful, though, since most Estonian banks finished the year in the red.

The Estonian banking sector’s consolidated loss, excluding the results of the closed banks, amounted to 600 million kroons ($14.2 million). The Latvian banking sector’s loss may amount to 800 million kroons last year, reports Hansapank.

Hansapank Group ended last year with a loss of 60.5 million kroons which is a disappointing result compared to a net profit of 446.1 million kroons for 1997.

Hansapank CEO Indrek Neivelt, however, said the loss is not considerable compared to the bank’s assets and the general situation on the financial markets.

According to the predictions made by Hansa Investments, an investment firm partially owned by Hansapank, the bank may end this year with a 650 million kroon profit.

Hansapank’s financial director, Erkki Raasuke, said the predictions of the investment company fell within correct limits, but he did not reveal the bank’s predictions.

Hansapank is not making public its forecast and budget for 1999, but using it for internal decisions only, he said.

Last year, the Hansa Capital leasing company was Hansapank’s most profitable subsidiary, while Hansabank – Latvija brought the biggest losses.

Hansa Capital earned a 151.3 million kroon profit in 1998. Hansabank-Latvia’s loss, which largely arose from the unification and the quality of assets of Hoiupank’s Zemes Banka, amounted to 77.5 million kroons.

Hoiupank’s former insurance company Eesti Kindlustus, which Hansapank Group had been trying to sell to a Finnish company, was not doing well either.

Two insurance subsidiaries, Hansapank Kindlustus together with Eesti Kindlustus, ended the year with a 51.1 million kroon loss. Together they control about 60 percent of the Estonian insurance market.

Loan and guarantee provisions of 594.3 million kroons, almost nine times higher than in 1997 largely decreased the profits of Estonian banks for 1998.

Substantial provisions made in 1998 went to fix the banking sector’s 1997 mistake. When banks were doing well in 1997, they set aside insufficient provisions.

Neivelt said the bank has achieved a very good level of provisioning by today.

Hansapank is also writing off 17.1 million kroons worth of goodwill monthly, which arose from a merger with Hoiupank. The total goodwill amounting to 821 million kroons will be written off in four years.

The consolidated assets of Hansapank Group, the biggest banking group in the Baltics, stood at 27.7 billion kroons at the end of 1998. The assets increased by 13.3 billion kroons during the year, about 9.8 billion kroons of which came from the merger with Hoiupank.

The bank wrote off a total of 252.1 million kroons in bad loans. A year before, the corresponding figure was only 20.2 million and according to Neivelt, the bank is still hoping to recover some of the money written off in 1998.

Hansapank Group’s total capital adequacy by the end of 1998 was 18.8 percent. The bank’s capital adequacy was 19.1 percent. According to Raasuke, Hansapank has never before been as strong in terms of capital as presently. Last year the bank was almost at the minimum 10 percent level required by the Bank of Estonia.

Hansapank will release a summary of its audited economic results on March 10. Present results can be observed in more detail on the Tallinn Stock Exchange homepage.