When Kaja Kallas was sworn in as Estonia’s prime minister in January, she promised to restore the country’s “good reputation as a business-friendly country”. Her comment was a repudiation of the nationalistic rhetoric from the far-right EKRE Party during its years within the outgoing coalition government. 

Ms Kallas has some solid foundations to work from. One of the world’s most digitally advanced countries, Estonia’s economy shrank just 2.9% last year despite the pandemic. Unctad says FDI grew marginally to $3.16bn. Its low levels of bureaucracy are epitomised by an e-residency scheme that allows foreign entrepreneurs to establish an EU business, and its innovation ecosystem laid the foundations for ride-hailing company Bolt and fintech Wise.

Ms Kallas, however, wants to take things up a notch. She has pledged to phase out oil shale (the coal-like national resource which dominates Estonia’s energy mix), lure battery and microchip investors and improve links with western Europe. The Baltic state’s first female prime minister sat down with fDi to discuss her plans.

Q: How is Estonia minimising the economic fallout from the pandemic? 

A: Our economy is tied to our Nordic partners, and our task last year wasn’t as steep as elsewhere. That’s partly due to us not having big [lockdown] restrictions, but also because our entire economy is tied to digital services. Ninety-nine per cent of public services are online so life continued rather easily in those spheres, and a huge share of the service economy is related to IT which didn’t drop like other sectors. 

Our digital infrastructure made it easier for people to work from home. Plus, Estonians being quite introverted means the shift has perhaps been easier than elsewhere. I think people’s work behaviour has changed for good.

Q: How important is FDI from a national development perspective?

A: It’s very important. We are a country of 1.3 million people and for our entrepreneurs to do great business we need an open economy and foreign investment. We try to provide an easy and transparent business environment, and digital services mean all interactions with the state are easy. You can establish a company in 20 minutes. The state acts as a partner and we are flexible and open to discussing with foreign investors how to make the environment even better. [Regulatory] stability is also important. If you invest here, the rules won’t change the next day.

Q: Estonia has Europe’s highest number of start-ups per capita. Is there room for foreign involvement here? 

A: Of course there is room for direct investment. Establishing or bringing a business here might reduce the costs required in some other countries. And considering the new ways of working, companies can be situated in a different place to their workforce.

An example is eastern Estonia, which is currently a mining region. We are working to close the mines and invite new investments there which require the same kind of workforce. We have agreed to phase out oil shale production by 2040 so we need new jobs for the region. And considering the green transition and seed funding intended for this transition, I’m convinced we can invite investors to establish an industry there that requires the same kind of skills and might also benefit from the resources present.

Q: What types of industries are you thinking about?

A: Batteries are one example. Another one is microchips for which we are doing studies to determine what rare earth minerals we have underground. I understand the biggest resource comes from China, and considering the geopolitical situation, many countries are reluctant to tie themselves to China. So we definitely see opportunities there. 

Q: You’ve said you want to “restore Estonia’s name as good country to invest in”. What prompted this?

A: These past years have been difficult for Estonia’s internal politics. A far-right party that was in the government was very vocal against everything foreign, be it investors, people or talent. That message, that you are not welcome anymore, got through to investors. This is something I want to turn around. We are a small country and to make our life better we need foreign investors, an open economy and good relations with other countries. This is about restoring investors’ confidence that they won’t be harassed. That is a very strong word, but that is the message we heard.

Q: What changes can investors expect?

A: I intend to show that foreign investors are welcome, that we want to co-operate, that Estonia is politically stable and a good environment for business. It is important to get the message across that we respect Western values, that we speak the same language. 

Q: Why have you prioritised the construction of Rail Baltica, which will integrate the Baltic states into Europe’s rail network, and the Helsinki-Tallinn Tunnel?

A: Rail Baltica is important to have a connection with western Europe, and the progress is quite good. The Helsinki-Tallinn Tunnel is related as Finland is cut off from the European mainland. Culturally, the two countries are very close. Our languages are similar, there is intense traffic between the two as people commute, and 21% of our foreign investment comes from Finland. Of course it is a huge project and the tunnel is further into the future than Rail Baltica. But we must keep the connection to Finland in mind. In future there might be Arctic trade routes that can connect to central Europe. 

Q: What can investors expect from Estonia’s relations with its large, and at times aggressive, neighbour Russia?  

A: Yes, we have a big neighbour and historically our relations have not been that friendly. Right now we are on quite neutral terms but if we look at Russia’s activities in central Europe or some of the Eastern Neighbourhood countries, they are more aggressive. For us, it has always been very important to be in Nato, the EU and the OECD. If you are a small country it helps when you have bigger friends. Picking a fight with us means picking a fight with everyone else, and that deterrent works quite well. I want to stress that we don’t see political risk coming from that side to our foreign investors.

This article first appeared in the October/November print edition of fDi Intelligence.