Since the collapse of the Soviet Union in 1991, the three newly
independent Baltic countries have made progress in creating viable
democracies and free market economies. Although distinct from each
other in many respects, the Baltic countries have been affected in
similar ways by historical, legal and economic developments.
These countries have all completed their transitions to market
economies. Their entry into the EU is the ultimate step in this
process, and will signify their abandonment of all remaining
socialist legal and economic structures.
During the first few years of transition, with the collapse of
existing industrial and trading structures, economic growth was
negative in all three countries. But over the past 10 years, the
average growth rate in the Baltic region has not only been higher
than other transition economies in eastern Europe, but also higher
than the average growth rate in the EU. Analysts expect that the
Baltic countries will maintain their high GNP growth figures at
least for the next few years.
But the Baltic countries are not without problems. The general
economic level in each of these countries remains far below the
level in EU countries. The average wage level in each country is
still much lower than elsewhere in Western Europe. Unemployment is
low but the percentage of employed is considerably lower than,
for example, in Finland. Unofficial business activity, where tax
laws and other laws are not followed, still seems to exist more
commonly than, for example, in the Nordic countries. This relates
partly to the transition, which has also led to serious social
problems. By Nordic standards, the illegal and legally questionable
business activities in the Baltic region remain an issue of
The Baltic countries, particularly Estonia, have actively
promoted foreign investment in order to facilitate their
transformation from post-Soviet republics to members of the EU.
Their legal reforms have removed market entry barriers and
discrimination that could inhibit foreign investment. Foreigners
are now free to buy real estate or companies in the Baltic region.
In general, legal entities in the EU countries have a right to buy
companies and real estate in the Baltic states, and are treated
equally under the laws in these countries. Some limitations remain
relating to foreign ownership of land for agricultural or forestry
purposes. The legal and the economic frameworks have been
harmonized with western standards.
This harmonization represents an achievement for the Baltic
states. Because basic legal concepts such as private ownership and
private corporations were not recognized in the former Soviet
Union, the Baltic countries, upon achieving independence, were
compelled to draft up a completely new set of civil and corporate
These laws were partly based on pre-Soviet laws in force during
the period of independence before 1940. Western civil laws and EU
legislation affected the law reforms.
The Baltic countries have entered into the necessary
international treaties to secure a proper framework for
investments. Latvia has concluded agreements on mutual promotion
and protection of investments with 36 countries, including the EU
states and the US, and agreements regarding double taxation and
non-payment of taxes with 25 countries including the US, the UK,
Germany, France, The Netherlands, Finland, Sweden, Norway, and
Denmark. Estonia and Lithuania have entered into similar treaties.
Furthermore, the Baltic states have all concluded free trade
agreements with the EU in 1993.
The Baltic countries are also parties to international
conventions on the recognition of arbitration awards.
Privatizing state-owned property is the most complex element of
the transition to a market economy. It involves distributing
national wealth and production capacity ownership from the state to
individuals, local companies and foreign investors.
In Estonia, privatization of state-owned property, including
enterprises of different sizes and real estate, has been extensive.
In fact, the Estonian Privatization Agency has been closed since
November 2001. Today private persons own most real estate in
Estonia. In Estonia, the German Treuhand international tender model
was used when privatizing medium and large enterprises. In contrast
to auctions with a focus on the highest fiscal return for the
national treasury, the use of the Treuhand method permitted
consideration of other interests, such as social and environmental,
besides just the price. This method aimed at long-term benefits
such as future growth and attracting foreign investment. Even parts
of the railways were privatized when Eesti Randtee was sold to a
consortium of foreign and local investors. Only a few large
enterprises are still owned by the state: Eesti Pölekivi oil and
shale mines, Eesti Energia electricity networks, the Port of
Tallinn and Narva Power Plants.
In Latvia, the newly independent state's governments have been
in favour of privatization. Privatization vouchers issued to
Latvians were used widely, and foreign investors were also offered
the opportunity to purchase 153 Latvian companies in four
international tenders. As in Estonia, most of the large companies
in Latvia have been privatized. The Latvian government, however,
has not yet decided whether to continue with privatizing the ports,
airport, postal services and the national railway company. In the
energy industry, after political debate, it was decided to retain
state ownership of the Latenergo public energy company and this
decision was confirmed by special legislation.
Privatization has also been conducted in Lithuania to a large
extent. The first privatization laws were established already in
1991. Under the current legislation, methods of privatization are
public sale of shares, public auction, public tender, direct
negotiations, transfer of control of state or municipally
controlled enterprises, and lease with a right to purchase. In
certain circumstances a combination of these methods is
The monetary policy applied by the national Central Banks in the
Baltic countries has also been successful. There has been no wide
fluctuation in their exchange rates against main currencies, and
all three countries have had a relatively low inflation rate. In
Estonia, the consolidation of banks has already taken place and six
banks operate in this market. They are to a large extent owned by
foreign banks. The Latvian market still has 23 banks but the
shareholders of the larger banks are Nordic and German banking and
financial institutions. Capital repatriation or foreign
shareholdings in the banking industry are not significantly
limited. Legislation for the financial markets follows EU rules,
for example, relating to money laundering.
The incorporation of acquis communautaire has been
essential in the transformation process. The Baltic countries have
concluded association agreements with the EU and have carried out
market protection measures in accordance with western standards.
The Latvian competition law was drafted in accordance with EU
competition rules on January 1 1998 and in slightly modified form
as of January 1 2002. Similar reforms have taken place in Estonia
and Lithuania. The telecommunication industry has also been
liberalized, even though the Latvian government and TeliaSonera
have been engaged in a dispute relating to monopoly rights
initially granted until 2013.
Public procurement laws are also in force. In Latvia, the Public
Procurement Office has been active in public tenders. In the areas
of state aid and public procurement, all directives are transposed,
so discrimination against companies from other EU states is not
Tax policies are also designed to promote business activity and
attract capital and investment. For example, the Estonian income
tax rate for individuals and corporate capital gains is 26%.
Additionally, Estonia has a peculiar but investment-promoting
corporate tax regime where earnings are principally taxed only when
distributed. From January 1 2002, Latvian corporate income tax was
reduced from a flat rate of 25% to 22%. The tendency will continue
- for 2003 the rate is 19% and it will be 15% in 2004. Latvian
personal income tax rate is 25%. The Lithuanian corporate tax rate
is 15% (or 13% in certain circumstances). Personal income tax rates
are 15% or 33% depending on the nature of income. The employment
income rate is 33%.
The legal framework is not only based on statutory laws and
regulations but also on the judicial system. Hence, judicial
enforcement authorities play a central role. This causes
complications because many judges in the Baltic countries were
educated during the Soviet period and may also have started their
careers during that time.
The Soviet era represented a break in the long-standing legal
tradition in the Baltic countries. As a comparison, Finland has
applied fundamentally the same civil law since 1734 even though
Finland was once a part of Sweden and later became part of Russia.
In the Baltic countries, court decisions from the Soviet period,
which lasted for more than 50 years, are not useful or reliable as
legal precedents, leading to uncertainty in their legal
In order to attain the needed expertise, parties in the Baltic
Countries overwhelmingly choose arbitration. In business disputes,
arbitration is even more common in the Baltic countries than, for
example, in Finland. But the other side of the coin is the lack of
an appeal possibility. This feature of arbitration, combined with
the general lack of legal tradition, increases the risk for
unpleasant surprises. For example, Latvian first instance court
decisions might be unjustified, but a party is still able to seek
correction of a judgment in the appeal courts. Using the courts may
be time consuming but the system does work.
As noted, the Baltic countries are still struggling to control
unofficial, illegal, questionably legitimate and black economy
activities. They do not occupy admirable positions in international
corruption rankings, though they are increasingly taking stronger
measures to fight and prevent corruption. With EU membership on the
horizon, these countries have a particular incentive to fight
corruption and have set up local anticorruption agencies to fulfil
EU requirements. During the negotiations for EU membership, one
requirement imposed on Latvia, for example, is to improve its
What is the impact of entry into the EU by the Baltic countries?
They are already stable areas for investment but will certainly
become even more reliable regarding future development in the
society. This could increase foreign investment. Rumours about
increased foreign activity in the real estate sector after the
referendums are already circulating. If the countries join the euro
zone the currency exchange risk would disappear.
In Finland, accession to the EU did not signify such a drastic
change as some might have predicted. Today, when the country has
been a member for almost nine years, the general perception in
business is that the influence of the EU has been positive and that
the worst fears have not been realized. For Finland, agriculture
was the main concern and it is also an issue for the Baltic states.
Since EU legislation has already largely been adopted, no radical
changes are expected in the legislation of the Baltic
What are the biggest challenges and opportunities for the Baltic
countries? During the past transition period, the main trading
partners, particularly for Estonia and Latvia, have been EU and
Scandinavian countries instead of the former Soviet block.
Membership should no longer make a substantial difference to
trade because free trade agreements have been in force for quite a
long time. Certain tariffs (for example, on food products) with
non-EU countries will arise as a result of the membership.
Because of their location and year-round open ports, Baltic
countries could form a trading link between Russia and EU
countries. However, at the moment the political tension,
particularly between Latvia and Estonia on one hand and Russia on
the other, complicates this.
When Finland joined the EU in 1995 the structural funds
available were on average (for 1995 - 1999) €277 million a
The corresponding figures for the Baltic states are on average
(for 2004 - 2006): Estonia €113 million, Lithuania €274 million and
Latvia €192 million. In relation to the GNP the Baltic countries
could receive on average eight times the amount Finland got from
the structural funds alone.
For the Baltic states, the EU has also committed the same level
of funding with cohesion funds. Finland did not get any cohesion
fund support. The purpose of structural and cohesion funds is to
diminish differences in development level and economic
circumstances between regions and member states and thus promote
cohesion in the EU. Cohesion funds are only available for member
states with a GNP below 90% of EU average.
The availability of EU funds (totalling €3 billion during 2004 -
2006 for the Baltic countries) could have a significant impact on
the economies, as the amounts are substantial in relation to the
GNP of these countries. This is clearly different from the
accession of Finland and Sweden.
These countries will have prospects and opportunities as a
result of their accession, especially if they are able to receive
potential EU funding efficiently.
Mika Salonen is an attorney working in Helsinki and Riga. He has
been a partner since 1997 and is responsible for the Baltic
operations of Borenius & Kemppinen. Salonen has wide experience
as a business lawyer in the areas of M&A, capital markets,
finance, corporate restructuring, contract law, as well as IT and
entertainment law. Salonen received his Master of Laws degree in
1989 and was admitted to the Bar in 1994. He also completed an LLM
degree within the European Community Business Law programme at the
University of Amsterdam in 1992.
Liepa, Skopina / BORENIUS
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T +371 7201 800
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Mika Salonen (mobile): +358 400 812 648