All Finnish roads lead to Tallinn: question is 's where to next?

  • 2005-06-08
  • By Ben Nimmo
TALLINN - The relationship between Finland and Estonia is unique not only in the European Union but in all of Europe. Nowhere can one find two countries 's one "new" EU, one "old" 's so closely related in terms of geography, language and culture.

For many Finno-Ugrics, the Finnish-Estonian symbiosis is a matter of survival. When it comes to international relations, this is as close as it gets.

The pattern of Finnish business in the Baltics reflects this: no matter which indicator you use, Estonia stands head and shoulders above the rest. Finnish investment in Estonia currently surmounts 1.5 billion euros, while in Lithuania it is a third of a billion, and in Latvia some 250 million euros. Finnish trade with Estonia in 2004 totaled 2.5 billion euros; with Latvia and Lithuania 's 400 million each.

Even in tourism, Estonia leads the field: Finnish tourists spent over 1.6 million nights in Estonia in 2004 and only 125,000 in Latvia.

Kinship

It is not just the quantity of business that distinguishes Finland's relations with Estonia: there is a fundamental difference in the quality of Finnish-Baltic trading relations as well. According to the Finnish Customs Service, the overwhelming bulk of exports from Finland to Latvia and Lithuania in 2004 consisted of machinery, vehicles and other manufactured items. In the other direction, Latvia chiefly sent raw materials and wood, and Lithuania's main exports were manufactured articles and clothing, which while indicating at least some value-added activity, amounted to a paltry 65 million euros. In neither country is Finnish trade a major boost to domestic production.

Now cut to Estonia. Here Finnish machinery is a major import: 45 percent of the total in 2004. However, over the same period, almost 47 percent of Estonia's exports to Finland consisted of machinery and transport equipment, and total exports were worth over 1 billion euros. Similarly, while 23 percent of Estonia's import volume consisted of "basic manufactures," 24 percent of goods exported to Finland were "manufactured articles."

It is fair to assume that the bulk of these goods is part-finished Finnish goods being completed in Estonia and then shipped back home. In the words of Mika Wilen, Tallinn representative of the international Finnish trade organization Finpro, "The dominant pattern in Finnish-Estonian trade is that hi-tech products, from machinery to electronic and telecom goods, are subcontracted to companies in Estonia and then shipped back to Finland."

And with trade, the pattern of Finnish investment in the Baltics seems to be "Estonia first." Ilze Tijone, Finpro's manager in Latvia, says, "A lot of investments come to Latvia via Estonia. The usual pattern is that Finnish companies, especially SMEs, begin operations in Estonia and then come to Latvia as well."

Her colleague in Vilnius, Jonas Cerneckis, confirms this trend. "Finns tend to move to Estonia first of all, and then they look at Latvia and Lithuania," he says.

And Wilen in Tallinn concludes, "For Finns, the real mental border is the one between Estonia and Latvia."

Change in the air?

However, EU enlargement, coupled with the Estonians' own growing sophistication, is beginning to challenge established patterns. Tijone explains: "There is a definite perception that communications have become much faster and easier since EU accession. More Finnish companies are now choosing Riga as their Baltic logistics center," she says.

"At the same time, far more Finnish tourists are now coming to Latvia, and there's much more information about Latvia and Lithuania in the Finnish press."

In Lithuania, Cerneckis says, "[Finnish] interest has been increasing steadily since 2001, and there are great opportunities here. Finnish companies that want to trade in the largest of the Baltic states, or who are interested in the eastern neighbors, are looking to Lithuania."

Meanwhile, in Estonia, Wilen says, "Estonia is now adding value. [Estonians] used to fulfill Finnish orders, now [they're] branching out. Furthermore, Estonia is already getting saturated, whereas there's a lot more room for growth in Latvia and Lithuania."

Finpro's representatives are aware of this situation. This September, the organization will hold its fourth annual seminar on business in the Baltics in Riga. As Tijone points out, "For the first time, the main focus of the seminar will be on Latvia and Lithuania."

Even the seminar's title, "Boost to business from EU funds in Latvia and Lithuania," does not mention Estonia at all. With this swing in interest, coupled with the fact that, as Wilen says, "We're starting to see a lack of skilled workers in some sectors in Tallinn," it looks as if Finnish interest should soon be swinging south.

Home from home

But will the investors indeed head further south or just branch out? "With the lack of skilled workers in Tallinn, the imperative is to start looking at Parnu, Tartu and Narva," says Wilen. "Moreover, since EU accession, Estonia has a lot to offer in the way of EU funds."

And the Finns know it. Since EU enlargement, 400 new Finnish companies have been set up in Estonia. This is in stark contrast with Lithuania. "Trade has stabilized, and there hasn't been a great numeric increase in companies since EU accession," Cerneckis says.

Tijone, in Riga, confirms the view. "The current [investment] pattern shows no dramatic change, and there's still space in Estonia for new companies," she says.

Other factors suggest that "branching out" in Estonia could be the future trend. As Wilen says, "The salary imbalance between Tallinn and the Narva area is immense." According to official statistics, monthly wages in the eastern county of Ida-Virumaa are barely 60 percent of the figure in Tallinn and almost exactly the same as the average Lithuanian monthly wage.

"The Russian-speaking environment in the Narva region makes a big barrier," admits Wilen. But he is quick to add that "we Finns don't speak Russian or the Baltic languages," so the barrier would be the same whether in Narva or Nerida.

For Finnish companies looking beyond Tallinn, the choice between Estonia's regions and its neighbors is not an obvious one.

In some sectors, particularly retail and services, Finnish business seems likely to strengthen its presence in the south: Latvia offers a central position for Baltic-wide operations, Lithuania offers the largest market of the three. And both are benefiting from increased official, media and tourist-led interest.

But in terms of production and industrial investment, the future is far less clear. "Outsourcing production to Estonia is a big part of business," says Wilen.

Relatively little outsourcing is for domestic consumption. Lithuania and Latvia can offer low-cost, highly-skilled employees, rapid access to Belarus and Ukraine and booming domestic markets; but the outlying regions of Estonia, especially Narva, can offer the same, with the added advantage being only a stone's throw from Helsinki and Tallinn-based Finnish businessmen.

All three Baltic countries can tempt the Finns with similar business benefits, but only Estonia can offer them a home away from home. Latvia and Lithuania are certain to see more Finnish business in the next few years; but it would not be surprising if a larger amount went to Estonia's regions.
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