With the introduction of new technologies, Estonia has become an economic climber in the Baltic States.
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POPULATION STATISTICS |
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Location: Eastern Europe |
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Neighbors: Finland, Russia, Latvia |
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Capital city: Tallinn |
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Population (2022): 1,321,833 |
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Official language: Estonian (almost 25% of citizens ethnic Russians) |
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GDP per capita (2021): $27,280 |
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GDP growth (2021): 8.3% |
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Inflation (2021): 4.7% |
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Unemployment rate 2021 (est): 6.2% |
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Currency: Euro |
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Investment Promotion Agency: The Estonian Investment Agency |
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Available investment incentives: Grants and financial incentives make no distinction between foreign and domestic investors. Tax breaks for larger investments. Undistributed profits, retained or reinvested, are tax free |
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Ease of Doing Business Rank (2020): 18 |
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Rank in Corruption Perceptions Index (2021): 13 |
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Political Risk: small economy. Sensitive to external shocks. Economy and society badly affected by Russia’s invasion of Ukraine. Relatively stable pro-EU coalition government. |
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Security Risk: Proximity to Russia is a destabilizing factor for Estonia’s national security. NATO membership is an important tool in the national security arsenal. |
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ADVANTAGES |
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Highly digitised, tax progressive and modernizing Baltic state within the EU |
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Educated, skilled workforce |
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Large pool of IT talent |
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Low-cost country for tech startups |
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DISADVANTAGE |
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Small, open economy that is highly vulnerable to external factors such as B. Economic downturns and rising commodity prices |
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Proximity to Russia can discourage foreign direct investment and foreign capital projects |
Estonia is fast becoming the star of the digital economy in the European Union (EU). Its pioneering approach to growth through innovation positions the minnow-sized Baltic state among world leaders in core next-generation technologies such as cybersecurity, 6G, artificial intelligence, blockchain and cryptocurrencies.
The country is poised to become the first country to fully adopt Web3 technology, which is widely heralded as the future of the Internet. The blockchain-based web ecosystem includes cryptocurrencies, non-fungible tokens, and a decentralized autonomous organization while promoting decentralized finance and the token-backed economy.
Estonia’s meteoric rise as the most international of the Baltic economies has been remarkably rapid. Until August 20, 1991, when it regained full independence from the Soviet Union, Estonia existed since the end of World War II as the Estonian Soviet Socialist Republic, an agricultural and largely disadvantaged Baltic coastal area of the Soviet Empire.
Supported by more affluent Nordic neighbors led by Finland and Sweden, young Estonia underwent a long and hard post-independence transformation to modernize key areas of its economy. Leading Nordic companies, including Ericsson and Nokia, helped build state-of-the-art communications infrastructure in Estonia through technology partnerships with state and private organizations.
After independence, Estonia’s primary goal was to shed the stigma of its Soviet-era past. Estonia became a full member of an expanding EU in 2004, the same year it strengthened national security by joining the North Atlantic Treaty Organization (NATO).
Cyberattacks launched by Russia remain a pervasive threat to Estonia, especially as security tensions in the region mount. Estonia’s ability to counter such threats is enhanced through the NATO Cooperative Cyber Defense Center of Excellence (CCDCOE). The Tallinn-based CCDCOE is a cybersecurity center that provides cyber defense expertise to member states.
The Russian invasion of Ukraine, which has destabilized the wider North and Baltic Sea regions, poses a serious risk to Estonia’s future economic growth, especially against the backdrop of rising inflation and an economy still recovering from Covid-19.
Although the war has heightened tensions between the Baltic capitals and Moscow, it has not yet dampened foreign investor interest in Estonia, according to the Estonian Investment Agency (EIA), also known as Invest in Estonia, the country’s investment promotion agency.
“In real terms, the number of investment requests we are currently receiving is as high as it was before the war began,” says Joonas Vänto, director of EIA. “We see a consistently high level of interest from overseas.”
The upswing in Estonia’s technology, food and pharmaceutical sectors is reflected in its GDP, which has increased from US$5.7 billion in 2000 to US$36.3 billion in 2021, according to the World Bank. Venture capital invested in Estonian start-ups amounted to €2.6 billion between 2015 and 2021, according to the EIA, the highest number in the Central and Eastern European region. In January 2022 alone, over 820 million euros were invested in Estonian startups.
EASIER AND LOWER TAXES
In addition to the country’s progressive digital society, the simplified tax system for companies and employees attracts international investors. No corporate income tax is levied on profits retained and reinvested in Estonia by companies resident in Estonia or permanently incorporated by foreign owners. The tax on distributed profits is 20% but is reduced to 14% when dividends are paid to legal entities.
Estonia continues to be a magnet for investments from leading Nordic companies. Since 2021, Nordea Bank and smart tech groups Solita and Ensto Building Systems have invested in capital projects to expand operations in Estonia.
The country’s quest to become a key European hub for financial sector players developing pioneering financial solutions lies behind an initiative by Finantsinspektsioon, the country’s financial regulator (FSA), to create an innovation hub.
The Innovation Center will provide the FSA with an interactive channel to help banks and fintechs navigate the regulatory framework when developing product and service solutions for the financial market, notes Mari-Liis Kukk, Head of Innovation at the FSA. “The rapid technological development has a significant impact on the financial sector and the business models, services, products and applications used in it,” says Kukk.
Estonia’s ambitious ambitions in e-finance are underscored by new laws introduced by the Ministry of Finance that will set operational and regulatory requirements for the fintech sector. The bill includes provisions to cover crowdfunding platforms and platforms that offer opportunities to invest in crypto assets. In addition, all virtual currency service providers licensed by the FSA are encouraged to apply for activity licenses.
“We have seen strong growth in Estonia’s fintech sector as more and more foreign companies start operations here. We see growth in innovative services as new money-raising solutions emerge,” Keit Pentus-Rosimannus, Estonia’s finance minister, said at a financial markets session in the Estonian national parliament on June 8.
But, she added, “the activities of these service providers are either unregulated or minimally regulated. That needs to change.”
Estonia’s image as the cleanest of the Baltic financial centers was seriously tarnished in 2017-2018 by the revelations of the so-called Danske Bank Estonia scandal. Estonian authorities found that over $205 billion in suspicious money transactions, much of which originated from Russia, had passed through accounts at the now-closed Danish bank. The scandal led to a steady tightening of Estonia’s anti-money laundering laws. Most recently, a law tightened in March 2022 will deal with more complex financial instruments and innovations such as cryptocurrencies that increase the risk of money laundering.
“Estonia cannot and must not tolerate financial crime. Money laundering prevention is a political priority for us,” says Pentus-Rosimannus.
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