Capitalism Is Really Humming In Estonia...But Moscow Could Still Gum Up The Works

On the 100-km early-morning run from Helsinki, the big hydrofoil blasts through what were once some of the Soviet Union's most carefully guarded coastal waters. Passengers in the business-class cabin grab their briefcases to disembark for a day of doing deals in the booming small city of Tallinn, the capital of Estonia.

Just three years after gaining its independence, the tiny nation, with a population of only 1.5 million, has gotten a grip on soaring inflation, drawn in millions in foreign investment, and reestablished traditional trading ties with Scandinavia and Germany.

Ancient buildings in the capital's old town are being renovated into offices, restaurants, and cafes. Near a new faux-Irish pub, a year-old clothing store called Finest Fashions offers expensive Italian and French classic styles. Next door is a liquor store advertising vintage Bordeaux wine and top-drawer Kentucky sour-mash whiskey. Says Kaja Sirel, shop manager for Finest Vendors, which owns both stores: "For Estonians, quality counts."

SHUTTING DOORS. What also counts are Estonians' cultural links with their hard-working Finnish and Scandinavian neighbors to the north and west. Even though information was tightly controlled during Soviet domination, Estonia is so close to Helsinki that residents could easily watch Finnish television, keeping alive hopes of a better life. Consequently, "when the Soviet system collapsed, our businessmen reacted very fast," says Andre Kuusvek, head of the international payments department at Bank of Tallinn, one of about 40 new banks created in the past three years. Some, it might be said, reacted too fast, since 20 of those banks shut their doors last year in a shakeout.

A major factor in Estonia's economic success was its decision in 1992 to dump the Russian ruble and introduce its own currency, the kroon. The new money, pegged to the German mark at an 8-to-1 exchange rate, has held steady, retaining its value. Meanwhile, tight-money policies have helped cut annual inflation rates from 32% last year to about 4% now.

The improving economic climate has helped draw in about $60 million in foreign investment last year, with more to come in 1994. Most of the money is from Sweden, followed by Finland. Indeed, so keen is interest in Estonia that two shipping companies, Tallink and Estonia New Line, are in hot competition to provide waterborne-cargo and hydrofoil passenger links from Helsinki. Doing so circumvents time-consuming land links and customs nightmares in Russia.

Even so, says an economic analyst at a Western embassy in Tallinn, Estonia must try harder to attract investment from Germany and the U.S. because the biggest Scandinavian companies have already located there. Some pioneers from the U.S. are present. McDonald's Corp. plans restaurants, and Coca-Cola Co. has a bottling plant. Taking advantage of Estonia's forests, Atlantic Veneer Corp. in Beaufort, N.C., plans a major paint-thinner plant. Meanwhile, Eltex, an Estonian computer distributor, is doing a brisk business selling Iowa-assembled Gateway 2000 personal computers to new banks and offices. "It's a very fast-growing market," says Rain Laane, an Eltex marketer. "Sales are three times what they were last year."

Aserious threat looms from Estonia's old nemesis, however. Many Estonians want to shun Russia because of memories of 50 years of Soviet oppression. Flashpoints for Moscow are new laws discriminating against ethnic Russians, even going so far as mandating Estonian language tests as a citizenship requirement.

Such laws have raised the hackles of Russia's nationalist politicians, who have taken up the cudgels on behalf of ethnic Russians stranded around the former Soviet Union. They want to retaliate by delaying the withdrawal of 2,500 remaining Russian troops scheduled to leave at the end of August. Russia holds a trump card: It supplies virtually all of the country's energy needs.

Not all Russian ethnics, who make up about 35% of the population, worry about discrimination. Playing with his 2-year-old son, Igor Raitman says the bigger problem is money. The 25-year-old machine-tool maker's monthly rent has soared from $6 a few years ago to $40 now. Raitman only makes $80. "Young people don't have money for apartments or even for refrigerators," he says. Still, "I don't want to go back to Russia," he adds. "This is a great place to live."

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