The Baltics' Great Wall of China

By bne IntelliNews September 9, 2013

Mike Collier in Riga -

The twin towns of Valka and Valga straddling the Latvian-Estonian border are often held up as prime examples of free movement within the EU. Citizens of both towns wander across the border to do their shopping and the local fire brigades even help each other out regardless of which country a blaze happens to appear in. But according to Aigars Rungis, owner of Latvia's Valmiermuiza microbrewery, the border might be all but invisible, but a "Great Wall of China" still sits on top of it as far as small business is concerned.

"On the Latvian side our beer costs €1.50. The beer crosses one metre to the Valga side and it costs €2.80 - it doubles in price. The reason is, in selling my beer to Latvian customers it's very simple - I have an invoice and once a month I pay alcohol tax to the tax authorities. When I sell in Estonia I have to involve an import company, an import warehouse, a distributor - and as a result it's too costly for a small business. For big business it's not so bad, as you can send big trucks from one border to another. But if I want to send just a few crates, it's too costly."

The coming of the euro to Latvia in 2014, which will follow Estonia's accession to the Eurozone in 2011, is supposed to herald a new era of easy price comparisons and consumer competition. But as Rungis' experience shows, talk of the Baltic states operating as a single market remains more theory than reality. "I have just been reading something with a businessman saying the Baltic states is his home market. I like the vision - the question is, do the governments have the same vision of the Baltics as a home market? Are we competing or cooperating?" questions Rungis, who founded Valmiermuiza in 2009 and has quickly established it as a genuine premium brand - a beer that people are willing to pay a little extra for, even in a Latvian market which features 15 craft breweries against just a couple in Estonia.

"From our brewery to [the south Estonian city] Parnu is as far as it is to Riga, and from our brewery to Valka-Valga is just 50 kilometres," he points out. That places Estonia well within the north Latvian brewery's potential catchment area.

However, the lack of coordination and cooperation between tax authorities and punitive legislation for producers of such abominable vices as beer, wine and spirits has meant a different approach was required to quench the thirsts of Estonian drinkers, whose market is dominated by three mass-production brewers that produce beers lacking the refinement of Valmiermuiza's craft ales. "Estonians are beer lovers like Latvians, and they like our beer. We started in the Estonian market a year ago where our beer is in [the high-class Scandinavian department store] Stockmann and a few restaurants and bars. We started to work with restaurants and bars in Estonia because they are a bit less sensitive to price. I could not sell my beer to an Estonian supermarket, for example, because it would be too expensive. And for an Estonian crossing the border to sell in Latvia I think it would be the same," Rungis says.

"The only problem is this Great Wall of China built by the tax authorities," he complains. "I don't understand why today when the police are very strong, when there's a certain degree of trust between our governments and computerised records, you can catch terrorists but still you don't trust that if a crate of beer passes across the border, someone is avoiding tax."

Home brew

One possible solution would be for Rungis to found an Estonian-based brewery - something he is thinking about, not least because with Valmiermuiza already running at full capacity (just over 1m litres of beer in 2012) he is already unable to satisfy demand. Yet even if he did establish a brewery north of the border, more Chinese walls would emerge.

Latvia's state-owned Hipoteku bank, now a de facto development bank, would not be able to back him because it only supports projects on Latvian soil. Labour laws would be another problem. "Let's take Valka-Valga as a case study again. If a company on the Latvian side in Valka wants to hire someone from Valga for a week, it's just not worth it - the amount of paperwork if you want to do it legally is incredible. Of course, everyone does it illegally because that's the only way and as we all know alcohol is bad, so anything involving it needs even more paper. Why can't we simplify this cross-border bureaucracy? We already have examples - I can set up a company in Estonia in five minutes on the internet. In that respect, Estonia is far ahead."

Doing her best to break down such barriers is Riga-based Estonian Hele Lohmus, who despite her modest stature is an energetic dynamo of cross-border cooperation in her role heading up the Estonian-Latvian Joint Business Development Support for Increased Competitiveness (DELBI), which gives free help and advice to Estonians wanting to enter the Latvian market and vice versa. "Post-crisis, interest is picking up," she tells bne, though historically Estonian entrepreneurs have been far more interested in heading south than Latvians heading north.

"Latvian companies will often say 'Oh, Estonia is so small, why should I go there?' It's true that around Riga you have 1m people in a small area. In Estonia you have 1m spread across the whole country, so you have some extra transport and logistics issues. But then they say they want to get into Germany or England, which I think is stupid because what you need to emerge onto another market is branding, a name. It's easier to start with a neighbour. It's not Taiwan where you have to ship things a few thousand kilometres and you don't know what's happening and are in a totally different environment."

And if Latvia has its urban population as a pull factor, Estonia can offer its strong ties to Scandinavian markets in return. "We have a saying," Lohmus smiles, "every Estonian has a Finnish friend."

Yet even she admits that on crucial projects such as Rail Baltica - a planned high-speed rail link from Helsinki to Berlin via the Baltics and Poland - Baltic cooperation leaves plenty to be desired. "Every country has its own interests and they don't see the possibility to cooperate and gain something. This is bad. Sometimes this vision of the future is very short-sighted on big projects. They immediately want some profits and big benefits but this is something that should be for 50 years."

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