Experts point to sure winners on the stock exchange

The Baltic Times, TALLINN
By Kairi Kurm
Jan 25, 2001

According to the international financial services company Merrill Lynch, only six of the world’s top 38 stock market indexes posted gains in 2000. And the Latvian and Estonian stock markets would have won second and third place on the list if they had been big enough to compete.

The index of the Riga Stock Exchange posted the largest rise in the Baltics last year, gaining 59 percent. The Tallinn Stock Exchange went up by 10 percent, while the National Stock Exchange of Vilnius dropped by 13 percent.

“Although external imbalances produced an economic slowdown and deterioration in 1998 and 1999, the widely feared scenario of recession failed to materialize,” said Veikko Maripuu, head of research at the investment bank Suprema.

Estonia’s growth was mainly driven by external improvement, while Latvia relies on the fastest growing domestic demand. Lithuania’s general economic improvement was clearly accomplished by the services sector.

“Based on these forces,” said Maripuu, “I have both short- and long-term confidence in Estonian and Latvian economic development, while Lithuania should be able to show persistent long-term progress.”

According to Maripuu, the Estonian market with its fundamental and market liquidity terms offers the best opportunities for portfolio investors in the Baltic countries.

“The Latvian economic situation is at least stable and should lead to better representation on our list, although the market clearly fails to have the appropriate depth and liquidity to meet the above criteria.

“Lithuania is the toughest solution, as it is the only Baltic country not improving at the required speed,” said Maripuu.
What to buy next

In 2001, analysts from Suprema and Uhispank Markets have great expectations for the shares of such companies as Hansapank, Eesti Telekom and Lietuvos Telekomas.

“There is only one bank left on the market, Hansapank, that is becoming less of an Estonian bank. It is becoming international and its expansion is what makes it the winner of the year,” said Maripuu.

Sven Kunsing, head of research at Uhispank Markets, also recommends buying Hansapank shares. He believes that the expansion into Latvia and Lithuania should have a positive effect on the share price, while positive results from Lithuania will affect the price in the year 2002 or 2003.

“For less adventurous investors, Hansapank will be the best choice, although it might not repeat last year’s 40 percent rise,” said Kunsing.

As the economic growth is also affecting the construction sector, Maripuu sees good growth opportunities in Merko. Merko, in a similar way to Hansapank, is expanding into Latvia and Lithuania. The declining Lithuanian market should turn into a stable rise this year.

Maripuu said that Estonian and Lithuanian telecom companies have great prospects if the world gets over the tensions that lie in this sector and starts looking at the companies’ fundamental values. If the mobile communications sector does not improve in 2001, the prospects of the telecom sector in general may fail to improve at all.

Eesti Telekom should achieve additional value through its rapidly growing Internet usage and value-added services as well as the acquisition of data and media-related businesses. However, prospects for the short-term share price performance are somewhat affected by competitors’ prices on fixed-line services starting from 2001.

Kunsing also considers the Estonian and Lithuanian telecom companies a good choice for the coming year. He said that Eesti Telekom is more attractive because the Estonian market is more active and unlike Lietuvos Telekomas it is dealing with a fast growing mobile network besides the fixed lines.

Eesti Telekom fell from its all- time high of 156 kroons ($9.4), that it gained in March 2000, by 45 percent, while Lietuvos Telekomas lost about a third of its value after its Initial Public Offering, which took place in June.

Maripuu recommends investing in such companies as the safety belt manufacturer Norma and the leading wood processing company Viisnurk.

Besides Hansapank and the telecom companies, Kunsing has great expectations for such Tallinn Stock Exchange main list companies as Norma, Merko and Kaubamaja, because they are the potential candidates for new acquisition offers.
Last year’s winners and losers

Both Maripuu from Suprema and Kunsing from Uhispank agree that all three Baltic banks (Eesti Uhispank, Unibanka and Vilniaus Bankas), all of which have been taken over by Skandinaviska Enskilda Banken, were the winners of last year.

Kunsing said that although they were not the biggest winners in terms of share price growth, they described the opportunities hidden in the Baltic countries that local investors could not see. At the same time, Uhispank’s financial results were not as high as expected last year.

According to Kunsing, analysts also underestimated the value of Reval Hotel Group, which received a 74 kroon takeover bid, although Uhispank’s analysts suggested 50 kroons as a target price. Thanks to the acquisition the price increased by 114.5 percent last year.

The other big winners from last year were Tallinna Kaubamaja (+72 percent), Viisnurk (+129 percent), Merko (+120 percent) and Baltika (+116 percent), said Kunsing. Although Hansapank increased just 40 percent, it was a Գuper’ good result with regard to its size. Hansapank was the most traded share on the Tallinn Stock Exchange, with its 2.1 billion kroon turnover. In Maripuu’s opinion, the Tallinn Stock Exchange itself was the biggest loser in 2000. He said that the function of a market that lost seven companies last year is questionable. He called for clarification in the market before new stocks get on the list.

“At the same time it is unclear where the future of the Estonian market might be. Is it Tallinn, Helsinki, Stockholm or the virtual space?” asked Maripuu.


Buses to replace trains

The Baltic Times, TALLINN
By Kairi Kurm
Jan 18, 2001

The Estonian Ministry of Transport and Communications and the railway company Edelaraudtee agreed Jan. 15 that Edelaraudtee would continue passenger transport on Tallinn-Narva, Tallinn-Tartu and on four smaller unprofitable lines until March 3.After that buses would replace railway lines to southern, southeastern and northeastern regions of Estonia.

According to Urmas Kukk, deputy minister at the Ministry of Transport and Communications, the problem has been caused by the small amount of state subsidies the government decided to give Edelaraudtee, which is not sufficient for the railway operator.

Urmas Glase, an Edelaraudtee representative, said that according to last year’s traffic statistics 140 million kroons ($8.5 million) would be a sufficient amount for the year 2001.

The ministry in its turn expects Edelaraudtee to keep all the railway lines functioning till the end of the year within the limits of this year’s budget, which is 60 million kroons.

Glase said that the ministry is not willing to share its budget with Edelaraudtee.

Edelaraudtee has decided to finish passenger transport on the Tallinn-Tartu, Tallinn-Valga, Valga-Piusa, Tartu-Orava, Tartu-Jogeva and Tartu-Valga lines on March 3 and continue on the Tallinn-Viljandi and Tallinn-Parnu lines only.

According to Glase, none of the lines is profitable. Only 20 percent to 30 percent of the revenues of the railway operator come from ticket sales, said Glase. He said that Edelaraudtee had not done any calculations onhow many engine drivers should be dismissed.

The government’s decision to end passenger rail traffic in south- east Estonia, and Tartu and Narva will, according to ETA, mean a loss of jobs for 70 engine drivers. A total of 200 railway workers will become redundant when the lines shut down.

The Estonian engine drivers trade unions have decided to hold a one-hour warning strike on Jan. 30 over planned cuts of railway service, which would result in a loss of jobs for them. As a result of the walkout seven Edelaraudtee trains will be halted.

The state has paid Edelaraudtee 25 million kroons for keeping up railway traffic on the above-mentioned lines for two months up to March. The rest of the 60 million-kroon budget will be spent on the reconstruction of roads in southern Estonia and development of bus routes. According to Kukk, 172 kilometers of roads have to be repaired.

“Most of the southern roads are covered with gravel, which is not satisfactory considering the density of traffic there,” said Kukk.

“The subsidy to bus companies is small, but bus tickets are more expensive than railway tickets,” said Kukk. He said that the four small lines operating in the region have about 2,000 daily passengers.

Negotiations between the ministry and the railway operator aren’t over yet, said Glase.


Estonians free to divert money offshore

The Baltic Times, TALLINN
By Kairi Kurm
Jan 18, 2001

Although a lot of changes have been made to the Estonian income tax law, pumping profits into offshore companies to avoid taxes is still very simple for Estonian companies. According to specialists, every third Estonian company is dealing with offshore business, a problem that is also widespread in Latvia.

According to Enn Heinsoo, director at Suntiger Five International (SFI) Estonia, offshore companies are most popular among medium-sized companies. SFI is an international company that sells offshore companies.

He said that offshore business is most common among Estonian trade and shipping companies.

The Estonian Tax Board refused to comment on the matter, citing a lack of information and unwillingness to expose confidential information.

Estonia’s Tax Board, unlike the ones in Lithuania and Latvia, distinguishes territories with three kinds of taxation systems. There is a “white list” of 28 countries, which belong to the European Union or have signed a double taxation agreement with Estonia. There is also a “black list”, which is twice as long and contains countries with a low or no income tax. The Estonian Tax Board taxes all transactions with these countries with a 26 percent income tax.

Between these two categories there is the “gray list”, where businesses have to prove to the tax board that money has not been sent to an offshore company and the company pays at least a 17 percent income tax to the local government.

In Lithuania and Latvia it is much simpler. Countries that are not blacklisted are automatically considered to be clean and there are no misunderstandings in terms of taxation. Lithuania’s and Latvia’s black lists are almost as long as Estonia’s.

In the case of “gray” companies it is the task of the Estonian Tax Board to find out whether the Estonian company is pumping money out through the tax-free region or not. In many Western countries the tax board commands businesses to prove their innocence.

If an Estonian company buys a service, lends money, buys shares or receives revenue from a company located in the so-called “black” country, it is required to pay 26 percent income tax to the Estonian. These financial arrangements are the most common ways of money laundering, said Heinsoo.

SFI is not dealing with “black list” countries directly but is using double schemes through “white” countries that are difficult for the tax board to track. The prices of offshore companies range from $750 to $4,000.

According to Heinsoo, Estonian businesses cannot register offshore companies as easily as they did before the new income tax law came into force in January 2000.

“In the past it was very easy to buy an offshore company in the Bahamas and buy non-existent market research for $6,000 from it,” said Heinsoo. “Many companies, on the other hand, ‘lent’ big sums of money to Bahamas companies, which went bankrupt a little later.

“It does not work that primitively today. The tax board has taken fierce steps to stop it. The schemes have become more complicated and it is difficult for companies to deal with it on their own.”

The most common way of hiding money is buying shares from a tax-free company, because the cost of the shares is fictitious and could be anything from $1,000 to $150,000, said Heinsoo.

Sometimes an Estonian company is really buying a service from a “black” country and it is very difficult to prove, said Heinsoo.

If a computer salesman is buying computer components from Hong Kong and has to make a prepayment, then he has to pay taxes for both countries. Heinsoo said that it is possible to get the paid taxes back but the law does not make it easy.

Heinsoo also regrets that Switzerland is on the “black list” because investors buying shares of Swiss banks or pharmaceuticals have to pay an additional 35 percent income tax.

“And for the Estonian pension funds it is very difficult to cooperate with international funds, because most invest in successful funds that are registered in low-tax regions,” Heinsoo added.


Disparities in the legislation of the Baltics

The Baltic Times, TALLINN
By Kairi Kurm
Jan 11, 2001

Although the three Baltic states had very similar legislation at the
end of the Soviet period, during the first eight years of
independence legislation developed in very different directions in
each country. But in recent years a new trend has developed, which
will eventually bring the legislation of the Baltic States closer to
each other thanks to the European Union.The harmonization should help foreign investors.

Aku Sorainen, head of the pan-Baltic Sorainen Law Offices, said that
although the Baltic States do not offer any special grants to foreign
investors besides some tax allowances in Lithuania, it is still very
attractive to invest in these countries.

“The economy of these countries is so liberal that it does not create
any obstacles to investment,” said Sorainen. “The taxes are
reasonable and there aren’t many bureaucratic limitations. Foreign
investors usually do not expect any special benefits, but expect to
be treated equally with local companies.”

However, he said that to some extent Estonian legislation is more
favorable for local companies than it is for foreign investors.

According to the new Estonian income tax law, foreign companies have
to pay taxes in Estonia on dividends they receive from an Estonian
company. This is not the case for Estonian companies who receive
dividends from another Estonian company.

Operation in the region is easy because all three countries have
signed mutual tax conventions preventing double taxation. All three
countries have also concluded tax conventions with most Western
European countries and the United States.

He said that if the company is in the growth stage it would be
profitable to establish a subsidiary in Estonia, where profits and
re-investing are tax-exempt. Many foreign companies have shown
interest in investing the profits of their international business in
Estonia, but the income tax law is still too new and its future too
unclear for any radical decisions, said Sorainen.

The development of legislation in Latvia has also been very
promising. One of the milestones is the new commercial code, which is
entering into force soon. This development has lead some foreign and
Baltic companies to transfer the head office of their Baltic
operations from Tallinn to Riga.

Sorainen said that the Baltic States have not yet acceded to any
multilateral treaties on recognition and enforcement of court
judgments, except a trilateral one concluded between themselves and a
bilateral one with very few countries. Without these conventions
foreign judgments cannot be enforced in the Baltic States and vice