Estonian Economy: Is the Government Painting Too Rosy a Picture?

You have a remarkably broad business portfolio: you have holdings in Tallinna Kaubamaja, Selver, Liviko and Balbiino and, on top of all that, you sell cars and work in real estate. You have a wide-ranging perspective. You're exactly the right person to tell us — how are Estonians doing right now? I think Estonians are doing in two very different ways. One definite problem is the very low level of consumer confidence and I believe one key reason for that is geopolitics. It's not talked about much, but people are stressed out because of the geopolitical situation. As a result, they're hesitant to make purchasing decisions, buy anything or invest. You can really feel that stress and this slump in consumer confidence has lasted over four years now. Every entrepreneur operating in Estonia's domestic market is keenly aware of it and the economic indicators back it up. That's one major factor. But on the other hand, politicians like to say that people in Estonia have never lived as well as they do today. In terms of wealth and many other measures, that's also true. It just depends on how you look at it. Over the past six months, have you noticed any signs that things might be looking up? The government talks about it a lot, messengers get shot for saying otherwise and there's a strong hope that things will turn upward. It's a two-sided thing: we ourselves keep hoping too, because as an entrepreneur, you have to be optimistic and believe the trend will reverse. But today is January 15 and retail figures don't show any indication that this January is better than last year. In fact, the first 15 days of this January have been weaker than the same period a year ago. In that sense, you want to believe things will improve. There's a certain fatigue from trudging along the bottom. We're constantly scraping the bottom of the pot, banging around and looking upward. I do believe this year will be better and that we'll see some growth, but I don't believe in the kind of upswing that the Bank of Estonia has been forecasting. If all goes well, there might be a small, modest uptick. What will drive that modest growth? It'll likely come from the elimination of the tax hump (everyone again has a basic exemption of €700 per month from January – ed.), which will put some extra money into people's hands and part of that will definitely enter circulation. No one knows exactly how much because most of that money will go to people with higher incomes. Many of them already have some savings. Whether that money will actually be spent or not remains to be seen. We're hoping it will, but it'll only enter circulation if consumer confidence improves and people start wanting to improve their standard of living or invest again. From what I hear from the prime minister and the government, one of the hopes behind introducing a flat tax-free income threshold is that it could boost people's confidence and get them shopping again. I don't think they'll come back to the stores. People make purchasing decisions when they feel more secure and this money won't give them that sense of security. In fact, they might even choose to save it instead — to have some kind of buffer in uncertain times. I understand the government is trying in every way to deliver and generate positive messaging and that's the right thing to do. But a lot of it is really pulled out of thin air, no longer backed up by what's happening in the real economy. So is the government lying to the public? They're not lying — the government just wants to paint a prettier picture. Consumer confidence is, to a large extent, a psychological factor. You can talk the economy down and you can talk it up, but there's a critical threshold you can't cross. If those in power keep saying everything is great, while people feel every day that it's not, then what the government says starts to feel like empty words. The government doesn't really have a solution for the root issue — the war Russia is waging in Ukraine. There's no getting around that, is there? Exactly. I believe the impact of that war weighs much more heavily on people's daily thoughts than is often acknowledged. The geopolitical situation is such that people simply don't feel secure. They're looking at geopolitics in broader terms: the old world order is over and it's never coming back. We're in a completely new world now and that affects people as well. People are always reading what the world's wealthiest and most powerful country is doing and what U.S. President Donald Trump is thinking about doing. Everyone's thinking: if Trump acts a certain way, then you can't assume that Russian President Vladimir Putin won't see that as an opportunity of his own. Of course, Putin has never really let any kind of restrictions stop him. Yes and no. He still tries to maintain a certain rhetorical stance. If Putin avoids openly [talking about] taking over other countries, Trump wants to do it quite publicly. But let's hope we never live to see those times. You're someone who definitely knows how to calculate and manage money. What's your view on Estonia's current budget deficit of 4.5 percent of GDP? Part of that is defense spending, yes, but a larger part comes from implementing the new tax-free income threshold. That's not very sustainable, is it? The state of public finances is definitely very difficult. We've been hit by two major shocks at once. The smaller shock, perhaps, was the elimination of the tax hump — a campaign promise by the Reform Party, which they followed through on. But that actually triggered the entire tax scramble. The implementation of that promise set off a chain reaction as they began looking for ways to cover the cost. Then came the big snowball — massively increasing the defense budget. No country's budget or economy can handle such abrupt changes or cover them so quickly. It will take 5 to 10 years to get public finances back in order, provided it's handled responsibly. Right now, it's a very tough situation and no set of tax hikes is going to fix it. The only hope is to get the economy moving — to generate real economic growth. But if you keep piling new taxes on the economy and on people, growth just won't happen. The situation is bleak. When we look at economic growth, it automatically leads to increased government spending. In fact, in recent years we've had decent nominal growth — it's just that inflation has been even higher and government expenditures have surged along with it. So economic growth alone won't really solve the problem. Exactly — it can't. Economic growth is one of the most powerful tools we have, but to restore fiscal order, there also has to be a clear cap on spending. Without that, the process becomes unmanageable. I'm sure the country's policymakers and the Ministry of Finance know full well that if no limits are set, the ball just keeps rolling. The interest payments on loans and bonds taken out to service the state budget are already becoming enormous — I believe they're around €400 million now or something close to that. The pace of that growth is so fast that at some point, we simply won't be able to service it in a reasonable way. And then we'll be back to the question of whether we need to raise yet another tax, which is already getting very difficult to do. At this point, it's hard to even say what tax could still be raised. In principle, you can raise any tax, can't you? Sure, but we've already gone overboard with the value-added tax. By raising VAT, we've essentially hit the most vulnerable segments of the population the hardest. With the motor vehicle tax, we've effectively wiped out 50 percent of the car market. People aren't really talking about it, but the sector has had to downsize — when half the business disappears, you can't keep operating with the same number of employees. And it's as if no one's to blame — everything's supposedly fine. I haven't heard a single politician admit that anything might have gone wrong. On the contrary, they say things have gone exactly right: the vehicle fleet is aging and there are fewer cars. It all comes down to interpretation. When it comes to the car tax, there's a widespread expectation that by 2027 it will be scrapped one way or another. Either the Reform Party will repeal it themselves to avoid heading into an election where the opposition could promise to abolish it or the next government will get rid of it after the Riigikogu elections. That anticipation is also keeping the market down, isn't it? Yes, absolutely. People are hoping that the registration fee, or at least 90 percent of it, will be eliminated. If that happens, people can manage the annual tax, but the registration fee has brought new car sales to a standstill and that's a real problem. We'll see whether the Reform Party dares to repeal it. There are some voices saying the opposite — that under no circumstances should it be repealed, that everything is fine and this is just the desperate outcry of helpless car dealers. They say, "Let's stand firm and not change a thing." There's a certain political logic to it. If you look at current polling numbers, Isamaa and the Center Party could go into the next election together and win significant support by promising to abolish the car tax. Yes, and they probably will abolish it. If they come to power, they likely won't scrap the entire motor vehicle tax because there is a certain rationale behind having such a tax. The problem is that the way it was introduced went over the top — the rates should have been much lower so that people could get used to them. It's really the registration fee that needs to go. I'm hoping common sense will prevail, though that's a rare thing in politics. Maybe the registration fee will even be repealed before then. A few words on the state budget: you say there need to be cuts. In abstract terms, cutting spending always sounds appealing to people, especially when talking about the national budget. But in reality, no one seems able to define which parts should actually be cut in a way that keeps everyone happy. What would you cut? I'm an entrepreneur, so I wouldn't want to make direct proposals about the state budget. But I do think we should at least put a cap on growth. All of us — whether in a household, a business or a country — understand that if you have a certain amount of money and no more, you need to make do with that. Even just taking a more critical look at the growth of the budget would already make a big difference. There are definitely major opportunities to do that. The biggest portions of budget growth are pensions and healthcare, right? Yes, for example, pension indexation should be paused for a while. Even the Estonian Employers' Confederation has said that freezing indexation for a year, two or even three could be a major tool. But that probably requires a politician like Mart Laar — someone with the courage to actually do it. It's easy for me to say this here, of course. Politicians would probably run out of the room at the mere suggestion. Is there anyone out there like Mart Laar — a politician willing to effectively end their political career by making such a move? I don't know. At some point, if the state budget ends up in a situation where financing it becomes too difficult, those decisions will be made — like it or not. Otherwise, the IMF will come in and make them for us. Fortunately, we're not there yet and the situation isn't that critical. But continuing down the same path won't lead to success. I think our budget problems started around 2016, during Jüri Ratas's government with Isamaa and the Social Democrats. That was the first time the budget was allowed to drift. Those past budget deficits — and I know the Reform Party has hammered this talking point — weren't even comparable to what we're dealing with now. And those claims that we should've built up reserves back then... Come on, this year's budget is €2 billion in the red — where would those reserves have come from? But honestly, I don't clearly see how we're supposed to get out of this either. Right, defense spending is where the big money is going. No one's arguing that it's unjustified, but our economy simply can't absorb it that easily. We're going to be digesting this for a long time. The amount itself is huge, but what's even more disruptive is how fast it spiked. National budgets don't usually survive such sudden jumps in spending without consequences and that's exactly what's causing the major upheaval we're seeing now. Tallinna Kaubamaja, in which you have a stake, just acquired a major Škoda dealership in Estonia and actually in the Baltics from a Danish company. Is foreign capital desperately looking for ways to exit Estonia? It's a bit of both. Fortunately, not everyone is looking to leave, but some definitely are. It's not something people talk about openly; they usually give all sorts of other reasons. But we've seen both Swedish and other foreign capital pull out. Probably the most from Sweden. The official explanations always sound perfectly polished and presentable, but behind them is a real perception of geopolitical risk. In our particular deal, we haven't seen that. The Danish company will continue as the official importer. What we acquired were the two Škoda dealerships in Tallinn. TKM Grupp AS is expanding its automotive business. Škoda is a very strong brand, among the top three [in Estonia], and we were already selling it in Latvia and Lithuania, so this was a logical next step for us. As for foreign capital, yes — except for the Finns. They're still very much present here and haven't gone anywhere. They perceive the same risks, of course, but maybe their risk tolerance is higher. The Swedes, on the other hand, seem to have more of a sense that this might not be the safest place to be. So does that mean there are some very good buying opportunities in the region right now? Yes, definitely. Right now in Estonia, it's a moment when local capital has a chance to take on larger positions. That's absolutely true — this is the moment. There are a lot of deals happening and many more being negotiated. At the same time, the Danes bought the major Baltic retailer Rimi from the Swedes and invested here, so capital is moving in both directions. Foreign investment remains very important to us — it's a crucial part of the economy. You're also active in Latvia and Lithuania. Are the general moods in those countries similar to here? When it comes to the consumer confidence index, we differ drastically from Lithuania and Latvia — in a bad way. In both countries, people feel much more confident. It's actually quite interesting; it's hard to understand why. The geopolitical situation is exactly the same, yet people there feel more secure. Everyone complains about their governments — businesspeople and citizens alike — but the indexes are stronger. Our situation is really grim and you can clearly see it in people's shopping behavior. Lithuanians are much more optimistic: both the car market and retail sales are growing there. Here, retail has been declining for the fourth year in a row. It's a very poor state of affairs. The monetary figures have gone up slightly, but that's entirely due to inflation. So you're saying that if the indexes show consumer confidence is higher in Latvia and Lithuania, then actual consumer behavior supports those numbers? Yes, absolutely — they're in clear correlation. In Estonia, when the Institute of Economic Research tried to present this analysis, people wanted to shoot the messenger and claim it was wrong — but in reality, it's accurate. In Latvia and Lithuania, people behave differently in stores and consumer confidence is higher. Both retail sales and investment by individuals and businesses are growing there. Why is that? There's no clear answer. Somehow, people in those countries have more faith in their state than we do. I doubt they trust their governments that much more — everyone complains about their government, whether it's in Finland, Sweden, Estonia or Latvia, it makes no difference. People are always critical of those in power and that's normal. But somehow, there's a stronger sense of internal trust over there. Maybe government approval ratings are somewhat higher there than in Estonia? Could be. I haven't looked into it, but that might definitely be one of the factors. Ours certainly aren't high, and yes — that's part of it too. And perhaps there hasn't been a "tax festival" on the same scale over there either? Right — students should really research that in a master's thesis. It would be worth studying the effects of the "tax festival" in retrospect: how it impacted the economy and consumer confidence. I firmly believe it's one of the key factors behind the drop in consumer confidence, creating that sense of uncertainty. Alongside geopolitics, we had this "tax festival." And the main trigger for it was, of course, the need to fund the elimination of the tax hump. That's where it all started. So we should be honest and open about why we began scrutinizing and restructuring taxes so thoroughly in the first place. Estonia continues to have the highest inflation rate in Europe and that's been the case for years. Food is a major driver of that. Why do you keep raising prices? Food prices keep rising across the board and in the end, it all lands at the retailer's doorstep. Retailers operate on incredibly low margins — margins as thin as what Estonian supermarkets work with are almost unheard of elsewhere. We're among the lowest-margin operators out there and there's virtually no other market with such intense competition. In Estonia, we have five major players in the grocery sector — that level of fragmentation and competition just doesn't exist elsewhere. Take Finland, for example. There are only two major retail organizations selling food and everyday goods: Kesko and SOK. They split the market between them. Even in Lithuania, it's basically Maxima and Rimi; same in Latvia. But a market as fragmented and fiercely competitive as Estonia's? I haven't seen another like it. The cost of inputs and producer prices for food are simply going up. Retail margins are razor-thin. But retailers are always the ones who catch the public's frustration because that's where people see and pay the prices directly. I'm not blaming you personally for raising prices — it's more about why prices in Estonia keep climbing so much more than elsewhere in Europe. What's unique about Estonia, especially if, as you say, competition here is so intense? There are several factors at play. If we look at last year, for example, our electricity prices were nearly double those in Finland — even though we bought half our electricity from Finland. Electricity is one of the key inputs across the economy, including food production. All costs have risen significantly and food producers have to recover those somehow. Add wage increases and tax hikes on top of that and we're unfortunately caught in a vicious cycle. One of the biggest missteps, in my view, that set off inflation was in August 2022 when electricity prices spiked uncontrollably. The measures taken at the time weren't adequate. That surge in electricity prices went directly into the cost of goods and kicked off the first inflationary snowball. It triggered a cascade of effects. Honestly, that's something a student could research — how electricity prices have impacted economic inputs over the past five years. Do you get the sense that price increases will finally come to an end this year? Yes, I think it's already starting to slow down and I do believe it will. That slowdown is also essential for economic growth — this kind of price inflation has to ease. I'm hopeful that it will. Speaking of energy and electricity — you've invested in the development of a nuclear power plant in Estonia. Do you really believe a nuclear plant will be built here? Yes, I'm absolutely certain — Estonia will have a nuclear power plant. When? By 2035. You're very optimistic about that. Yes, I believe it will happen. The world is shifting in a direction where, thanks to Donald Trump, the laws of nature, physics and economics are starting to matter again. The green transition as an ideological movement has had its moment and now the laws of physics and nature are making a comeback. Hopefully, the laws of economics will as well. And based on that, I believe a nuclear power plant is likely to be built. A nuclear power plant is very green. Exactly — it is green and it comes at a good price. Where do you think Finland's low energy prices come from? Their electricity costs are half of ours. Partly from Scandinavian hydropower as well. Yes, hydro and nuclear — those are the two main sources. That's where it comes from. And we badly need something like that here too. When you say that the world is changing or has already changed because of Trump, when will that shift reach Europe? It already has, in every sense. When Trump came to power, he immediately sent out letters — even here in Estonia, several organizations received notices outlining which activities they would have to cease if they wanted to continue doing business with U.S. companies. We didn't receive one ourselves, but I know of several companies that did. What did the letter say? It said certain activities with three-letter abbreviations had to be stopped. The world has changed and it's naive to think Trump's actions are short-lived or one-off events that won't have lasting consequences. The old world order isn't coming back — that's history now. Politicians and heads of state who believe otherwise are fooling both their people and themselves. The world has changed for the next 50 years or more. The European Union must also change if it doesn't want to become a museum for foreign tourists coming to see the Eiffel Tower or stroll along the Thames. If the EU wants to remain relevant in the global economy, it must adapt. It has to start following the laws of economics, nature and physics. Ideology no longer works. Actions must be rational and focused on improving the quality of life in ways people can actually feel. A new era has arrived. That also brings a range of geopolitical risks and we're likely moving into a world where might makes right. The big players can do almost whatever they want. That's very bad news for us, but it's the reality we're in now. But hasn't it always been that way? Yes and no. Under the previous world order, there were still certain international rules that most tried to follow. Civilized countries, even the big ones, generally played by those rules. But now things are a bit different. The really big powers may no longer feel the need to play by the same standards. So what should Estonia be doing differently in this new world or era? I think we need to make sure we don't fall out with our most important ally, the United States. We shouldn't be criticizing or attacking them — we need to stay aligned. In today's world order, small countries no longer have the luxury of pursuing fully independent paths. You have to choose your allies and live in step with them. Not everything your allies do will necessarily please you, but that's the reality. If you're a small country, you have to accept that the big ones set the tone. And if a big power is protecting you, sometimes you'll have to swallow things you don't like. Should we also, at a national level, start mirroring some of the Trump administration's initiatives to make our country more like the United States? We can't really become like the U.S. — the United States is the world's most powerful economy. But building strong relations with them should absolutely be our goal. The European Commission, on the other hand, hasn't exactly brought us anything beneficial. That point could certainly be debated. Well, aside from the money we've received — yes, that's true. We've gotten a lot of funding. But the bureaucracy and the level of regulation that the European Commission imposes on businesses in EU countries is unprecedented. That has to stop. It's destroying Europe's economy. It's not talked about enough, but Europe's economic competitiveness globally is very weak and it's only getting worse. And that's entirely the result of these regulations. They just keep multiplying, constantly coming up with new ways to control how businesses and individuals live and operate. This massive overregulation has to end. On the other hand, the EU is working to harmonize the very different legal systems of its member states and make the single market more unified. That's true and it's the right direction, but there's still a long way to go. For example, if I make an ice cream in California, I can sell it in Miami without any extra hassle. Not necessarily. I still can. But if I make ice cream at Balbiino on Viljandi maantee in Estonia, there's no trick in the book that lets me easily sell it in Italy. Yes, eventually I can sell it, but the red tape and costs I have to go through to get there... The single market does exist in the EU — no one can deny that, the basic framework is in place. But in practice, every country protects its own market and various barriers have been created. There's still a lot of work to be done. In recent decades, Estonia's business landscape has become increasingly stable. Companies are larger and more established and there aren't many new challengers breaking through. Everyone seems to have their market share and a decent moat around their business. From an economic standpoint, is this reduced dynamism a problem? That's just a natural stage of development. The period of rapid growth is behind us, but the economy is still dynamic and evolving. Maybe things aren't changing as fast or as disruptively as before, but companies are still merging, selling off assets or closing down. I wouldn't say everything is set in stone or that we're in some kind of stagnant pond. Sometimes it might seem that way, but in reality, it's not. If you look at Äripäev's wealthiest list — yes, it's more entertainment than economics — you'll see a few younger people who've built international businesses. But for the most part, it's still those who founded their companies in the 1990s or their heirs. That hasn't really changed much. Actually, quite a few young people have joined that list. We're a small country. I've always believed that the younger generation is definitely more capable and smarter than we are. They just haven't had the time or the opportunity yet, but they will do these things and they'll do them better than us. At some point, it will happen. Maybe we're in a bit of a generational transition right now, but I believe young people are definitely on their way up. Do you sense any change happening there? For example, how have your former peers — those you worked with in the Estonian Employers' Confederation back in the 1990s and early 2000s — handed over their businesses to the next generation? Is there a shift in mindset in how the younger generation runs those companies? That's a tough one to answer. One thing is certain: you can't assume that handing a company over to your children will automatically work out. The kids may not want it at all and that's the first thing to understand. There are plenty of examples in Estonia where the next generation simply has different interests and that has to be respected. You can't force anyone into entrepreneurship. In fact, young people today might not even be drawn to it in the same way. The mindset is different now. The idea of running or growing a business doesn't always resonate — it has to be the right fit and genuinely interesting to them. Of course, there are cases where the transition has gone well, but it's a tricky subject. You can't force someone into being happy. That makes perfect sense, but what kind of impact does it have on Estonia's business environment when heirs become investors who hire professional managers? What kind of companies are those and how is that different? It really depends on the size of the company. Many businesses are still of a size where the owner is very hands-on. A company's profitability and growth often depend heavily on the owner's personal motivation and involvement. The hired-CEO model only really starts to work once a company reaches a certain scale. Smaller businesses still rely entirely on the owner's initiative. If there's no one in the family's next generation who fits naturally into that role, then it's usually smarter to sell the company — otherwise, it risks slowly fading away. You simply can't afford to hire outside management for a business that's too small. Effective executive leadership requires a company to be large enough for the owner to step back and view it from a distance. Often, heirs of major business owners have studied and lived abroad for extended periods, so their connection to Estonia might be weaker. As investors, they may start looking beyond Estonia. Is that what's happening? Yes, absolutely — they're looking more broadly. And why shouldn't they? Why develop real estate in Estonia, for example, when you could do it in Berlin where there's a major housing shortage? That's a very strong trend in Europe right now. But this brings us to the bigger issue: capital does have a nationality. The Estonians who have lived and built their lives here are still primarily investing here. No foreigner is going to do most of the things we do here because we're Estonians. Take Oleg Gross building a spa in Viljandi. No German investor would ever come build a spa in Viljandi. That's a mission-driven investment. There are many entrepreneurs here who take on projects no one else would. So hats off to them — we shouldn't be angry at business owners. They're doing a lot of good. Speaking of real estate — you have a fairly large property portfolio, but the plan to demolish the Kaubamaja building and construct a new one has been talked about for years, if not longer. When is the construction finally going to start? Yes, it's a really exciting project — we could probably start writing a book about it by now. We've been working on it for maybe seven years already. When it will actually be completed, no one knows. One thing I will say about the previous city government — they were the first to take concrete steps to move the project forward. The current city government has also been supportive and has helped us continue progressing. The detailed plan has been relaunched — the old one was canceled and now we're working through the new one. We've held an architecture competition and selected a beautiful design. The competition was organized by the Estonian Association of Architects and the City of Tallinn was a stakeholder. Everything went smoothly, everyone approved it and the vote was unanimous. But then, when we went to apply for design conditions — can't even remember who the mayor was at that point, there have been so many — we were told, "Wait a minute." And that "wait" meant the project stalled. Apparently, we had ended up on the wrong list. At one point, the city had a list of projects they were reviewing and another list of projects they were holding back. We were on the list that wasn't being touched. When will it be finished? As soon as possible. So 2035? Hopefully sooner than that. If everything goes as well as possible, we could be talking about starting construction in about five years. Something like that. Some people have said there's already too much retail space in Tallinn. Last year, the government claimed we have too many stores per capita and that this is one of the reasons for high prices. So is there really a need for more, bigger, fancier retail space in Tallinn? That was a trick or a spin from the government aimed at shutting down the proposal to lower VAT on food. So they started blaming retailers, saying they'd built too many stores and that's the root of all problems. The government tried to shift the blame onto merchants, but that's just not true. This is a free market. If a business plan doesn't hold up, the stores will close. That's how it works. As for Tallinna Kaubamaja, building a central shopping center in the city center is absolutely justified. We've assessed it both from a business standpoint and from the perspective of the city's development. The city should be invested in keeping the center alive and vibrant, ensuring people have a reason to come there. We've seen examples where city centers become empty and desolate. I believe it should be in Tallinn's interest to see a new department store built, to bring people into the city center and keep them there — not just out in the suburbs. Are you not at all concerned that more and more people are shifting their shopping online? Not really. Online shopping is here to stay, yes — but it doesn't provide the shopping experience. And that experience is something many people value. Maybe women more than men, but men too. There's also the importance of physically touching a product — choosing the right size, for example, really matters. Then there's trust: you know who you're buying from. Online platforms can often feel vague or unreliable. But overall, would you say you're optimistic about the future for Estonia and your own businesses? Yes, definitely. An entrepreneur has to be optimistic. We're continuing to develop our businesses, working to make them more efficient and larger. We're always looking for ways to grow — our recent acquisition of two Škoda dealerships is one example of that. --