Rapid structural changes in industry

Since Estonia regained its independence in 1991 and the Estonian kroon was introduced as the national currency in 1992, extensive changes have taken place in the structure of Estonian industry. In the changing economic and political situation, both established businesses and businesses which had only just been created were forced, in order to survive, to abandon the internal market of the Soviet Union and the Soviet centrally-planned economy, to adopt market economy rules and to consider demand within Estonia and opportunities for export to the West. The 1998 economic crisis in Russia contributed to the pressure forcing Estonian producers towards highly competitive Western markets. In order to save the debt-ridden economy, the Russian government extended the fluctuation margin for the exchange rate of the rouble in relation to the US dollar and, as conditions favourable to inflation existed, the value of the rouble rapidly decreased by one-third.

In 1989, almost 97 per cent of Estonia’s trade relations were conducted with various Soviet republics, whereas in 1993 the Commonwealth of Independent States (CIS), which succeeded the Soviet Union, accounted for only 30 per cent of Estonia’s exports and 22 per cent of Estonia’s imports, of which Russia, in turn, accounted for two-thirds. Estonian producers have always been attracted to the huge markets of the former Soviet area; at the same time, they are still waiting for Russia to abolish the high customs barriers, the so-called 'double customs duties'.

Russia established the double customs duties on Estonian goods in the mid-1990s. This was made possible by the fact that the two countries had failed to enter into a co-operation agreement covering trade and the economy. Russia rejected the agreement because the Russian government disapproved of the Estonian government’s decision to deny Estonian citizenship to Russians living in Estonia unless they possessed Estonian language skills. Russia also objected to Estonia’s intention to join NATO and the fact that the assets of the Orthodox Church in Estonia were no longer controlled by the Moscow Orthodox Church. The establishment of double customs duties hit several branches of Estonian industry hard, especially the food industry whose products had customarily been exported to Russia. In addition to the trade agreement, Russia had been delaying signing a boundary agreement with Estonia as well.

After Estonia regained independence, industrial production decreased significantly. As Estonia had been a part of the former Soviet Union, the structure and, in particular, the production volumes of Estonian industry were based on the needs of the internal market of the Soviet Union and logistical decisions were made accordingly. Production volumes in Estonian agriculture had reached high levels thanks to the huge market of the Soviet Union. This market had not yet been saturated due to huge demand in the big cities in Russia, the Ukraine and other Soviet republics, and the relatively low production volumes there.

Industrial production constituted 34.3 per cent of Estonia’s gross domestic product (GDP) in 1991; for 1993 and 1994, the figures were 23.8 per cent and 18.7 per cent respectively. Today, industrial production still constitutes 18 per cent of the GDP.

In the course of industrial restructuring in Estonia after independence was restored, a large number of businesses which used technically obsolete equipment or had lost their sources of raw material or their markets were closed. This resulted in bankruptcies and an increase in unemployment. In the course of the transformation or reorganisation of numerous production plants, large enterprises were divided into smaller businesses more focussed on a specific area, staff numbers were reduced and, instead of using their own auxiliary departments or installations, businesses began to purchase support services from other enterprises under conditions of market competition.

In the early and mid-1990s, branches of industry with relatively fast turnover cycles which required little investment, such as the clothing (or sewing) industry and the furniture industry, developed more rapidly. Foreign investment in Estonia was, at that point, insignificant and local businessmen had little money. The privatisation of property that the Soviet Union had nationalised was quite complicated, and ownership reform was rather time-consuming. In more capital-intensive industries, such as the engineering, building materials and chemical industries, progress was ensured for enterprises backed by solid foreign investors, as these enterprises also had better access to export markets. In 1995, production from manufacturing industries accounted for 43.5 per cent of exports. This share has been gradually increasing and in 2002 the figure was 57.5 per cent.

Soviet industrial complexes were huge. In addition to comprising various different product groups, they included numerous auxiliary divisions, such as construction crews, departments of energy, transport, etc., existing solely to provide support services to a particular enterprise. Big plants even administered residential areas with their blocks of flats, cultural centres, summer houses and nursery schools for staff, even organising catering and holidays for their employees.

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