Estonia, Baltic states stand to suffer most from Russia sanctions

Disclaimer: all opinions in this column reflect the views of the author(s), not of PLC.
Alexander Nevsky Cathedral in Tallinn, Estonia [Photo: Shutterstock]
Alexander Nevsky Cathedral in Tallinn, Estonia. [Shutterstock]

In contrast to neighbouring Ukraine, strong governance makes Estonia less vulnerable to internal challenges to stability. Yet, potential economic sanctions on Russia could have a profound impact on the Baltic state too, writes Jan Hofmeyr.

Jan Hofmeyr heads the Policy and Analysis Unit of the Cape Town-based Institute for Justice and Reconciliation.

The Baltic state of Estonia is one of the more inconspicuous members of the international community.

Its small geographic size makes the former Soviet republic difficult to plot on a map for those outside its immediate neighbourhood; its GDP of US$ 23 billion (ranked 102 in the world) hardly makes it an economic force; and since it and other Baltic states spectacularly regained their independence from Soviet Russia in 1991, it remained a fairly unobtrusive player in global politics.

Yet, in recent months, eyes turned to Estonia (and neighbouring Lithuania and Latvia), as the crisis in Ukraine stirred up fears about the possibility of a resurgent Russia of Vladimir Putin seeking to assert itself once again over the former republics. Under the pretext of protecting the Russian minority in the Eastern Ukrainian region of Crimea, Russia has offered military and financial support to independence-seeking rebels, following the toppling of the Moscow-friendly President Viktor Yanukovych after he pulled out of an association deal with the European Union in November 2013. Estonia too has a substantial ethnic Russian minority who claims to be the victims of discrimination.

Given Estonia’s NATO membership, however, a move by Moscow on Estonia similar to that on Eastern Ukraine is less likely. Article 5 of the NATO Treaty stipulates that an attack on one or more member states constitutes an attack against all member states, and such a move has the potential to plunge Europe in a protracted and bloody crisis. One would, therefore, assume that similar interventions would be regarded as too high a price to pay by the Kremlin, not least because of the potentially massive revenue losses it stands to incur if it should enter into a conflict with one of the largest consumers of its state controlled energy giant, Gazprom’s natural gas products.               

Instead of direct confrontation, a more subtle approach could be to destabilise the Baltic state’s system of governance by fomenting internal dissent (as it has accused the United States of doing in the case of Ukraine) by mobilising the ethnic Russian minority. Yet, unlike Ukraine, which has been plagued with weak administration and high levels of corruption throughout successive administrations, Estonia might prove to be a much harder nut to crack. Its institutions of governance are far more trusted and hence capable of absorbing and dealing with social tensions.  

In Transparency International’s 2013 Global Corruption Perceptions Index, which ranks countries from least to most corrupt, Estonia is ranked 28th, compared to the Ukraine’s 144th. The World Economic Forum’s Global Competitiveness Report ranks Estonia on 32th place overall, while the Ukraine is located much further down on 84th place out of a total of 144 countries. Ranked 137th for the quality of institutions, Ukraine proved itself particularly vulnerable to internal contestation of the quality of its governance.

In the most recent Sustainable Governance Indicators (SGI) study by the Bertelsmann Stiftung, which was released earlier this year, Estonia not only emerged as the best performing former Soviet republic, but also as one of the study’s top performers overall. This is no mean feat, considering that its achievement places it in the company of countries with longer traditions of democratic and market development. In terms of SGI’s Policy Performance Index, which captures the quality of economic-, social- and environmental policies, Estonia finds itself in the 7th spot, and is only outperformed by the established Western democracies of Sweden, Norway, Finland, Denmark, Switzerland and Germany.

These results underscore just how remarkable Estonia’s transformation from an autocracy with a centrally-controlled economy to a democracy with a market-based democracy has been. The SGI study ascribes this to the country’s strong and resilient economy. But it also makes special mention of Estonia’s high-performing education system which is ranked top of all 41 OECD and European Union countries in the assessment.

Impact of economic sanctions on Russia

The Estonian economy is, however, in need of revitalisation. The robust growth that the SGI 2014 has highlighted as one of the country’s foundational strengths has floundered in recent years. While it managed to maintain average growth rates in excess of 7% between 2002 and 2007, the economy contracted in 2008 and 2009. Although Estonia returned to positive growth in subsequent years, GDP has slumped again to 4% in 2012 and 0.8% in 2013. Economists predict 3.6% growth for 2014.

With demand levels remaining relatively low amongst its major trading partners in Europe, it appears as if Estonia’s subdued growth may be due to cyclical factors. Much will, however, also depend on how the situation in Eastern Ukraine evolves. Should the international community follow the recent example of the US and tighten economic sanctions against Russia, which also happens to be Estonia’s largest export destination, the Baltic country might feel a more profound impact on its economy.

The country’s newly elected prime minister, Taavi Roivas, seems to be taking the long view on this. Quoted recently by Reuters, Roivas suggested that the economic discomfort might be worth bearing to secure a favourable political outcome.

As the situation in the Eastern Ukraine continued to escalate this week in the wake of the Malaysian Airlines disaster, Talinn and its Baltic partners may be wondering how long they will still be able to take the pain.



Martin444's picture

I am from Estonia and I know that for us it is most important that we can keep our successful and democratic young nation outside of Moscow's influence and so even if it would have any impact on our economy, then it would not matter for us.

Moreover, actually according to wikipedia, Russia is only our 3rd largest export partner(12.7%) and only the 7th largest import partner(4.1%) so I doubt it would have any impact on us, because we are firmly established in the EU markets and don't really focus on the Russian trade much at all.

Also, the reason why the Baltic States and Poland right now are so well-developed is that we focused on becoming successful and democratic western nations immediately after becoming free and independent, but what happened with Ukraine is that they fell under Moscow's influence and now finally they want to break free, but it is quite the long way for them to go now.

Jay's picture

What, Estonia is the size of a pimple on an elephant's butt with a population to match?

Jay's picture

According to the dated 12.01.2012, the Estonian economic miracle is based on EU aid.Who would have thought otherwise?

From 2004 until 2010, Estonia received over 3 billion euros from the EU. During the period, it itself contributed only 924 million euros to the EU budget in various payments. That works out to 497 euros per every citizen of Estonia. Hey, I too would like to get on that ship.

Hannes Rumm, head of the European Commission in Estonia, estimates Estonia should receive between 4.5 billion and 5 billion euros from the EU budget between 2014 and 2020.

Now let me go research Poland.

Martin444's picture

Did you even read what the article was about Jay?

And yes Estonia is getting investments from the EU for which we are very grateful for, but if one day we would become net contributors then we would be more than happy to do so, other than greedy people like you, that only care for themselves!

Jay's picture

You can't base foreign policy on dreams and wishes Martin, indulging in romantic fantasies of what might "one day" materialize is childish.

With an $80,000 debt for every man, woman, and child and growing at a rate of $8000. a day, I don't think greedy is the proper description. Yes, I read the article and think it's time for everyone in Europe to be responsible for their actions, starting with your own defense!