Linstow unveils biggest Baltic mall yet

The Baltic Times, TALLINN
By Kairi Kurm
Apr 25, 2002

Norway-based developer Lin-stow International is planning to build the Baltic countries’ largest shopping mall by next fall in Tallinn.

Construction will begin in August and should be completed by October 2003. The company will invest $30 million to $35 million in the 53,000-square-meter, two-level retail complex, which will include a hypermarket.

The shopping mall will be named Ulemiste Keskus after nearby Lake Ulemiste.

Petter Salomonsen, managing director of Linstow Warner SIA, said that the mall’s location near a highway and railway station, its well-planned infrastructure and the commercial design of the center will help draw an estimated 7 million customers a year.

The projected turnover is $100 million a year, he said.

Neighboring shopping centers say they do not fear the competition. Liisi Jauha, managing director of the nearby Finnish hypermarket Sikupilli Prisma, said the new mall would make the entire area more attractive to shoppers.

Andrus Laurits of Pro Kapital Eesti, another real estate developer, is planning to open a shopping center in the area.

“There’s a lack of good quality shopping areas, so I see no danger here,” he said.

Despite the rapid development of retail space in Tallinn in recent years, Linstow Warner’s Salomonsen said there was room for growth.

“I’ve heard the expression ‘don’t we have enough retail?’ since 1965,” he said. “We’re trying to get 6 percent of the Tallinn retail market and we don’t think it is complicated.”

There is currently 140 square meters of shopping area per 1,000 Tallinn residents. Riga has 40 square meters per resident.

The respective figure for Oslo is 640 square meters, he said.

Construction of the Ulemiste mall will be coordinated by Finland’s NCC, which will employee up to 300 workers for the project.

Architects include Einar Aakeroy of Norway’s Arkitekt-kontoret Aakeroy, Moe & Bowe AS and Juri Rass from Estonia’s EA Reng.

The Norwegian-owned retailer RIMI will be the complex’s largest tenant.

Negotiations are also under way with other potential tenants from Estonia, Sweden, Finland, Den-mark, Norway and Latvia. Linstow hopes to have 60 percent of the tenants signed before construction begins.

Linstow Warner is also the largest investor, developer and operator of shopping centers in the Baltic countries, with total investments in the region exceeding $ 70 million. The company is currently operating 50,000 square meters of retail area in Riga and plans to expand to almost 200,000 square meters in the Baltic countries in the coming years.

The company also owns the Reval Hotel Group, one of the largest hotel chains in the Baltics.


EU accession to have little effect on food prices

The Baltic Times, TALLINN
By Kairi Kurm
Apr 25, 2002

According to a survey carried out by professor Urmas Varblane of Tartu University, accession to the European Union would bring no rise in food prices, because the purchasing power of Estonians is low and the competition is tough. The only exception is sugar, the cost of which will more than double due to the elimination of export subsidies.

“Prices of groceries fall during a slump and rise during fast economic growth irrespective of whether Estonia accedes or doesn’t to the EU,” said Varblane. “Estonian consumers’ purchasing power is the main force defining the possibility of a rise in the price of groceries.”

Last year Estonia’s GDP increased by 5.4 percent and food prices by 7.1 percent. By comparison, GDP dropped 0.7 percent in 1999 and food prices decreased by 2.2 percent.

At present, the average income of Estonians is 40 percent of the average income of EU residents, and Estonians spend one-third of their income on food. In the EU for example an average 19 percent and in the U.S.A. 13 percent is spent on food. The respective figure is 60 percent in Romania.

A factor leading to a rise in food prices is the gradual scrapping of export subsidies of the EU in the pre-accession period. Direct support, production quotas and investment needs also influence prices. The survey shows that the Estonian bakery and dairy industries have completed the necessary investments, but meat production requires at least 496 million kroons ($28 million) and the fish industry another 100 million kroons to meet EU requirements, all of which will reflect in the prices.

Application of the EU’s common external customs after accession might have a small impact on prices as well since EU member and candidate countries have already become Estonia’s main import partners. In the case of some products, imports from third countries will become more expensive on the application of external customs, but in most cases the more expensive imports will be balanced by increased domestic production.

“In terms of dairy and meat products, for example, more expensive imports will cause no hike in retail prices, as the volume of imports is small in comparison with domestic production, and the more expensive imported products will be replaced by domestic goods,” said Varblane.

Demand for local margarine will increase as imported margarine becomes more expensive.

Sugar is the only product, the price of which will rise steeply on accession to the EU, because the union’s export subsidy will disappear after accession and customs duties are imposed on sugar imported from outside the EU. As a result the price of sugar may increase from 4.3 kroons per kilogram to 10 kroons per kilogram.

“The price of sugar is the most serious problem where the Estonian government should consider different options of reaction,” said Varblane.

According to him producers would have to take into account Estonian consumers’ low demand in setting their prices.

Ants Promann, chairman of the board at the bakery Leibur, believes that EU accession would cause a rise in prices of bakery products and candy, but the influence would not be dramatic. The price hike in the Baltic countries in his words would rather be led by the development of the country’s economy, inflation, salaries and market, and people’s purchasing power.

“Competition precludes the inclusion of all cost growth in the price formation,” said Promann. “We have to work more seriously on cutting the costs of production and improving our efficiency.”

From 1994 to 2001 the prices of bakery products increased about threefold and will continue increasing until they reach the EU price level, he said.

“Currently our prices are very competitive compared to those in the EU and the sales of some of the products there would be quite realistic. But since freshness is the most important criterion for bakery products, their transport to far away countries is not possible.”

According to Promann bakery products in Estonia are more expensive than in Latvia and Lithuania. Rye bread for example costs 16.7 kroons per kilogram in Estonia, while in Latvia it is 14.9 kroons a kilo and in Lithuania 12.8 kroons. White bread costs 20.1 kroons a kilo in Estonia, 16.3 kroons in Latvia and 13.14 kroons in Lithuania.

Exporters worry about EU bid

The Baltic Times, TALLINN
By Kairi Kurm
Apr 18, 2002

Estonian exporters have tempered expectations about the growth of exports to the European Union after Estonia’s accession, according to a recent survey.

Russia, some of them say, may be more lucrative.

According to a survey recently released by the Estonian Trade Promotion Agency, 23 percent of companies polled predict an increase in exports when Estonia joins the EU. Half believe EU membership will do little to change exports and 6 percent predict a decrease after joining.

Lea Kroonmann, director of the agency, said she was surprised that 18 percent of the 340 exporters polled had no idea what impact EU accession would have on their exports.

Several company officials told The Baltic Times that they thought their exports would decrease because of what they called restrictive EU regulations and Estonia’s lack of name recognition.

Reigo Tonsberg, manager of the small chemical producer ER Chemicals, said that Estonia should negotiate better conditions with the EU and not let the chemical industry here disappear due to high taxes.

EU guidelines could put his company out of business, he added.

“Officials are translating EU legislation without examining the real world,” said Tonsberg. “It is a political marathon.”

Siiri Tamm, manager of the furniture factory Harviker, said Estonian furniture is currently priced close to foreign competitors and it would be difficult for small- and medium-sized companies to increase costs and still compete. European and American firms have already looked to countries like Indonesia, China and Malaysia, which are major export producers with low labor costs.

“Our advantages are flexibility and a location near the EU border,” she added.

Janek Kalvi, marketing director at the distillery Liviko, predicts an increase in exports to the EU market, but admits that it will take years for it to have a significant impact.

“As we move toward the EU there is a presumption that there will be more exports there,” he said. “We have to work hard before we get inside there. It’s like moving from an elementary school to a university and we’ll have to start with subcontracting instead of original production.”

Between 1998 and 2000 only 44 percent of the respondents, mostly larger enterprises, presented new product lines, according to the survey. Companies spent an average of 161,000 kroons ($9,470) per year on research and development. Metal and food producers were the most innovative, while wood processors focused the least on research and development among exporters.

Kalvi said he was more optimistic about the large Russian market, which is recovering.

“In the EU we have to prove ourselves for years,” Kalvi said. “Estonian products have a good image in Russia.”

According to Tonsberg from ER Chemicals, export opportunities to Russia exist but are hindered by tariff arrangements and double taxation.

Companies cited Estonia’s customs regulations and tough competition abroad as the two main obstacles for Estonian exports. Other deterrents include the lack of a qualified work force and risks related to new product development.

“Estonia is an unknown producer country, ” said Kalvi. “It is difficult to get any information on foreign markets. This scares the small- and medium-sized Estonian producers.”

According to the survey, more than half of Estonia’s companies that export have no detailed strategy on how they will deal with EU accession.

There are currently 250 companies in Estonia that have been awarded ISO production certificates. Most of them are foreign-owned.

About 43 percent of Estonian exporters polled list low prices as their main advantage when approaching markets abroad. About a third named product quality as their strongest selling point.

“However about two-thirds of Estonian companies do not use any quality control systems,” said Kroonmann.

Estonians look to crack U.S. market

The Baltic Times, TALLINN
By Kairi Kurm
Apr 18, 2002

Estonia’s exports to the United States increased 45 percent and imports were up 5 percent in 2001, according to statistics released this month. But Estonian exporters are still trying to figure out ways to break into the world’s biggest market.

Estonian and American trade officials offered some advice during a seminar hosted by the Estonian Trade Council on April 11.

Estonian businesses should market themselves as the most viable front door to Russia and the Commonwealth of Independent States and the most viable back door into the European Union.

“From an American perspective your strategic location is one of your strongest marketing advantages,” said Karen Pilmanis, senior trade counselor at the U.S. Embassy in Tallinn.

The United States is tough for small countries to deal with, she said, because most U.S. companies are interested in trading in large volumes.

“Form more partnerships with American companies,” Pilmanis advised.

“Target small- and medium-sized enterprises because they are more appropriate in scale and size to your needs and markets. Use local representatives for the bigger U.S. firms.”

One point stressed by everyone at the seminar was to ensure contracts are air-tight and insurance coverage is in place when dealing with often lawsuit-happy Ame-rican firms.

Endel Palla, chairman of the board at the electrical equipment factory Harju Elekter, said that a U.S. company that was going out of business was once forced to buy all of their supplies due to a well-prepared contract.

It is also important to insure products when trading with U.S. firms.

“When someone’s finger for example gets stuck in the ferry door a producer company has to pay all the damages,” said Endel Palla, chairman of the board at the electrical equipment factory Harju Elekter. “These claims are usually very high and are started against the weakest or the uninsured company in the production chain.”

What scares many Estonian companies, he said, is the sheer size of orders that go to the United States

“We take huge risks covering high volumes,” said Palla. “The U.S. market is (volatile) and may drop sometimes. It is not easy to replace them with orders from Europe.”

The United States is currently the fourth-largest direct investor at $298 million, one-tenth of all foreign direct investment in the country.

Estonia posted $60 million in exports to the United States last year. U.S. imports to Estonia totaled $98 million.

Machinery and equipment accounts for much of the Estonian imports. Estonia’s textile products are the most popular goods imported by the United States.

About one-fifth of Estonia’s exports are outsourced.

Among Estonia’s largest exporters to the United States are piano producers Eesti Klaverivabrik, wood processors Technomar & Adrem and TKE Group, textile manufacturer Kreenholmi Valdus and metal processor Silmet.


Estonian Air posts profit despite industry woes

The Baltic Times, TALLINN
By Kairi Kurm
Apr 11, 2002

Last year will be remembered by the airline industry as one of the worst ever, except in Estonia.

Dozens of airlines teetered on the edge of bankruptcy as people decided to stay home in the aftermath of Sept. 11. Losses to the airline industry are estimated at $17.5 billion.

But Estonian Air, the country’s national carrier, turned a small profit, the first since the company’s founding in 1991.

Estonian Air posted a profit of 15 million kroons ($882,000) on sales of 800 million kroons in 2001. An increased number of passengers, lower fuel prices and the kroons strengthened exchange rate against the U.S. dollar helped nudge the airline into the black, according to Erki Urva, the airline’s vice president.

Urva said the company’s profitability has been the result of a long restructuring process to essentially invent an airline after the Soviet Union fell.

This year’s profit, he added, shows the process is beginning to bear fruit.

“Since the establishment of Estonian Air a lot of work had to be done to reorganize and restructure the heritage received from the former Aeroflot,” said Urva. “We had to bring the activities in accordance with the European standards, find new Western-type aircraft and create new commercial structures as well as an international sales network.”

In 1999 Estonian Air suffered a 56 million kroon loss. Last year the loss was trimmed to 10 million kroons.

Urva said he also expects a profit for 2002, although first quarter results show a 7.5 percent decline in the number of passengers. He expects the numbers to improve this summer and exceed last year’s passenger figures.

Despite a drop in air traffic after Sept. 11, the number of passengers on Estonian Air’s scheduled flights increased 2 percent last year to 272,500.

The airlines’ load factor – it’s capacity versus number of actual passengers – was 52.5 percent, compared to 49.5 percent in 2000. That enabled it to make a profit, Urva said, but was still not satisfactory. On European scheduled flights an average load factor is 50 percent to 70 percent.

Lithuania’s national airlines will not remember 2001 with any particular fondness.

The state-owned national carrier in Lithuania, Lietuvos Avialinijos, posted an unaudited loss of about 25 million litas ($6.25 million) last year.

Lithuania’s government is in the process of choosing a strategic investor to buy a 49 percent to 51 percent stake in the financially beleaguered Lietuvos Avialinijos, the oldest Baltic carrier and the only fully state-owned airline left in the three countries.

Lietuvos Avialinijos’ Kaunas-based subsidiary Lietuva also suffered ballooning losses last year, which may spell the end of the commuter carrier.

Lietuva lost 4.96 million litas last year, up considerably over the 1.48 million litas loss posted in 2000. The country’s State Property Fund and the airline’s foreign auditors have voiced doubts about the subsidiary’s viability.

Latvia’s national airline, airBaltic, carried 248,710 passengers in 2001, a 14 percent increase compared with 2000.

But that trend hasn’t continued so far this year. The airline had 32,662 passengers in the first two months of this year, a 3 percent decline compared to the same period last year.

Most of Estonian Air’s revenue ? 88 percent ? comes from scheduled passenger traffic, while 5 percent is attributed to charter flights and 3 percent to mail and cargo transportation. The remaining 4 percent of the company’s revenues last year were earned from the sale of ground handling and maintenance services at Tallinn Airport.

Currently Estonian Air operates two Boeing 737-500 and two Fokker 50 aircraft and makes 66 weekly flights from Tallinn to nine international destinations, including Copenhagen, Frankfurt, Hamburg, London, Kiev, Moscow, Riga, Stockholm and Vilnius.

The company is partly owned by Denmark’s Maersk Air (49 percent), the Estonian government (34 percent) and the investment bank Cresco Investeerimisgrupp (17 percent). The state is considering selling its remaining share.


Power rates up but not enough, says Eesti Energia

The Baltic Times, TALLINN
By Kairi Kurm
Apr 04, 2002

Estonia’s state-owned electricity monopoly Eesti Energia increased electricity prices between 20 percent and 30 percent as of April 1. But the rate hike will not be enough to save its bottom line or fund long-awaited renovations, according to the company.

Eesti Energia wanted to increase prices more to help renovate power stations and meet environmental standards, but regulators disallowed the move.

“Since the transportation of oil shale has become cheaper after the new oil shale railroad was built, we demand that these changes be taken into account in the new price list,” said Margus Kasepalu, deputy director of the Energy Market Inspectorate, the government electricity market watchdog.

The inspectorate started supervising the oil shale business in January.

Eesti Energia planned to increase the highest residential price from 0.91 kroons ($0.05) per kilowatt-hour to 1.10 kroons and include a 20 kroon monthly distribution fee. But regulators intervened, and the price hike was cut to 1.05 kroons per kwh and the monthly fee to 5 kroons.

Eesti Energia has nine different price packages that vary according to how much electricity is consumed. Most customers choose the package that offers the lowest fixed costs. But those plans also carry the highest kilowatt-hour rates.

Eesti Energia spokesman Erki Peegel said clients with electrical heating systems would suffer the most from the inspectorate’s ruling.

The average per kwh rate is still cheaper, but it has increased the most.

Peegel said that the cut in the proposed tariffs would decrease revenues by 200 million kroons.

“In our opinion the inspectorate’s ruling is economically unjustified,” said Peegel. “Legally every company is allowed to make a reasonable profit. Currently we lack this opportunity in the transmission business.”

Kasepalu said that the company would have to postpone profits in its transmission and distribution operations.

But, he added, it was necessary to earn money at the power plants, which require large investments the company thought might come from the sale of the Narva power plants to the American company NRG Energy, which was canceled earlier this year.

“They (Eesti Energia) applied for 4.7 percent profitability in transmission operations, which would have resulted in a high increase in prices,” said Kasepalu. “Considering that the whole economy is based on electric power, we can’t make such a decision in one year and bring an unprofitable company out of the red so fast.

“We need at least two to five years to gain optimal productivity, otherwise we may end up with high inflation and other problems.”

The company has operated at a loss for the last three years. Last year it posted losses of 4.56 billion kroons on a turnover of 4.56 billion kroons, which it attributed mostly to the depreciation of assets.

Maris Lauri, chief analyst at Hansabank Markets, said the rise in electricity prices might have a modest affect on inflation.

“(Consumer) prices may rise by about half a percent in April and a little bit more in the coming months, a total up to 1 percent,” she said. “I’ve analyzed the previous situations when electricity prices increased. “Producers may talk about a price hike, and some of them may actually do it, but since the competition on our market is tough, they’ll have to bring the price level down again.”

Eesti Energia complained to the inspectorate on March 26, saying that a price increase was necessary for the company to be able to finance the renovation of Narva power plants’ generating blocks, implement environmental protection programs, renovate outdated distribution grids and develop the electric power system.”To meet the requirements of existing and additional future loans, the price rise in 2003 should average 10 percent,” a company statement issued March 26 read. “The bigger the price cuts today, the bigger the necessary hike will have to be next year.”

The company says its credit rating and ability to secure loans will suffer from the lower rates.

“We hope that with these new prices we’ll still receive loans from international commercial banks,” said Peegel. “We need to borrow over 5 billion kroons in the coming three years.”

The Energy Market Inspectorate says the price plan it approved was not designed to hurt Eesti Energia.

“They’ll manage,” said Kasepalu. “We only cut the part where expenses had decreased. It won’t influence their investment plans.”

Peegel said that Eesti Energia might file a lawsuit against the inspectorate.

“We’ll decide it after we’ve received their answer to our complaint.” The inspectorate promised to respond this week.