FINLAND AND ESTONIA - EXTRACTION POINT FOR RUSSIAN HIGH-GROWING MARKET

Historically, Estonia and Finland have been an important trade route between Western Europe and the Eastern region. For exports, this route is usually one of the several "go-betweens" in minimizing the risks when selling to a growing Russian market. Russian economy is hitting high growth rates. According to World Bank, the ease of doing business in Russia is severely hampered by significant administrative barriers especially when dealing with licences and getting credit. As a matter of fact, foreign direct investment in Russia is growing due to the high gross return rates which seem attractive to international investors and particulary because of the net advantages hidden in Russian market. Slovenian pharmaceutical company Krka is having tight subsidary ties with Russian market especially when we see the size of sales in high growing Russian pharmaceutical market [The equity analysis conducted by Erste Bank has confirmed Krka's superb organic growth with some of the profitability parameters catching up the regional competitors]. However, the credit risk reported on Russia is still highly uncertain perceived by international parameters. For example, credit information index is very low as well legal rights index and coverage rate.

Finnish and Estonian market have always been very active in supplying Russian market through shipping direct or indirect imports. This was firmly demonstrated in early 90s when Finland was hit by a severe external shock after facing a trade slump together with the downfall of the Soviet Union. Estonia was, on the other hand, trade-dependent on Russia in 1992 percent. Both, Estonia and Finland, have achieved admirable economic recovery based on supply-side economic policy, deregulation and market liberalization.

The advantages of indirect channel export are determined by the per unit costs of export. As a part of the EU, Finland and Estonia have lower tariffs and quotas in comparision with Russia. The common EU weighted average tariff rate was 1.7 percent in 2005 compared to the average weighted 8,7 percent in Russia. For example, if U.S. export company chose the indirect export channel option to Russia as a part of the entry strategy via Finland or Estonia, it could significantly mitigate the cost-push shock per unit of export. Finland and Estonia would also benefit from being positioned as a kind of trade agent between the U.S. and Russia. The import sector latter could benefit from better access to product markets exercised through neighborhood effects.