The niche industries that could save Estonia

By bne IntelliNews July 17, 2009

Steve Roman in Tallinn -

Even compared with other countries of the crisis-racked emerging Europe, Estonia is going through tough times. While neighbouring Latvia may be grabbing the international headlines with its worst-in-Europe status, Estonia isn't faring much better, recently clocking a hair-raising 15.1% slump in first-quarter GDP as well as 10% unemployment.

With little hope of a repeat of the real estate and construction boom that fuelled much of the country's growth in 2005-06, the tiny nation is now looking for other industries that have the potential to pull it out of its economic quagmire. The good news for Estonia is that a few new sectors sprouting up here might just prove to be that lifeline.

One of the more high-profile of these is alternative energy, specifically wind power and the use of biofuels, areas that are seeing massive growth in the region thanks to the EU target of generating 20% from renewable sources by the year 2020.

The rise of wind farms is a particularly hot topic here, with government incentives like favourable feed-in tariffs and minimal bureaucracy, not to mention access to the windy Baltic coastline, pushing investors to reach for their wallets. According to statistics from the Estonian Wind Power Association (EWPA), there are a whopping 22 wind energy projects currently under development in Estonia which, provided they all reach completion, would bump the nation's wind power generating capacity from its present, paltry 78 megawatts (MW) to as much as 660 MW. However Jaan Tepp, the association's chairman, says a bigger impact on Estonia's economy could come from acting as a hardware sub-supplier for the global wind energy sector, an activity that's already underway here. "It's quite a new thing," said Tepp. "We now already have six local companies supplying different components for [Danish wind turbine manufacturer] Vestas, for example."

The EWPA is in the process of clustering together a variety of companies and institutions that could not only produce things like plastic turbine blades and electronic components, but also participate in wind energy R&D. It's that kind of cooperation that's helping Goliath Wind, a local enterprise backed by the Estonian Development Fund, venture capitalists and Tallinn Technical University, create a prototype for a new turbine that would generate electricity 15-20% cheaper than current models.

If Estonia can solidify its niche in supplying hardware for the world's growing wind energy market, the benefits to this country of 1.3m could be substantial. But it's not just wind that's filling the sails of Estonia's green energy ship. In May, a Finnish company called Fortum opened a €64m heat and power plant in Tartu that runs on biofuels and local peat, one of the first of its kind in the country. Fortum Tartu's chairman Margo Kulaots said it was impossible to estimate just how much the plant would help the economy, but there would be benefits. "Of course, it will help because the fuels are local, so it creates local jobs. Another thing is that our plant is exporting electricity to Latvia, so it also creates export," he said.

Kulaots said his company is planning to open the same type of facility in Parnu by the end of 2010, and has heard of other companies developing similar projects elsewhere in the country. No matter how far it goes, the trend will at the very least provide a boost to Estonia's biofuel production industry.

Financial hub

While Estonians in the countryside are busy generating power, those in the capital are thinking about how to generate money. Namely, there are serious plans underway to turn Tallinn into a regional financial services centre. It's not as crazy as it sounds. "There's an awful lot of people who are quite skeptical about the words 'financial centre' because they have visions of it being like Wall Street or London or Tokyo. But of course that's not what we're talking about at all," explained James Oates, CEO of Cicero Capital, a financial advisory company specialising in Central and Eastern Europe.

The idea, which is being pushed by the Tallinn City Government and has gained support across the political spectrum, is to put the advantages of the country's high-tech, low-bureaucracy regulatory climate to work in specific niches like fund management, administration services and private banking. "The way in which technology is used [in Estonia] is pretty advanced, and the combination of that, together with some changes to the government legislation that would allow a copy-paste of the Luxembourg rules, would actually make the country quite competitive in being able to provide things like trustee services," said Oates.

If those changes are made, which Oates estimates could happen in a year or so, the impact on the economy could be enormous. "I think you could easily see over a trillion euros coming into the country as an asset management business. Now the profits on that are what stay in the country. They can be significant if the markets are performing," he said.

The other potentially high-yield area to watch in Estonia, says Oates, is logistics. Though the Port of Tallinn has seen its traditional role as an export point for Russian crude fading in recent years, it's now poised to reinvent itself a major gateway for container traffic from China. A large container facility currently under construction in Muuga - the only one of its kind in the region - should be complete in less than two years, and deals are already in place to make it part of an overland route to the EU via Kazakhstan and Russia. "The Chinese are quite concerned about their slow transit times to the Western European market. It's clear that when you've got a rail link that can offer something that's twice the speed of shipping, that is something the Chinese government are very interested in," said Oates. With Kazakhstan upgrading its rail lines and Russia lacking its own viable container ports on the Baltic, Estonia's potential as an EU-China gateway becomes that much stronger.

Of course it's impossible to say whether the country's advantages in green energy, banking, logistics or a combination of these will save its faltering economy, but the Estonians' ability to adapt to the changing needs of the global market will likely determine whether they ends up winners or losers in post-crisis Europe.

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