Why Estonia Could be Russia’s Next Target

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by: Nicholas Vardy

I’ve just returned from a fascinating — and sobering — weekend in Estonia.

If you’re like most Americans, you may not know that Estonia is one of the three Baltic States that until 1991 were part of the Soviet Union.

Today, the Baltic capitals of Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) are better known in Europe for the beauty of their women — and as “stag” (“bachelor”) party destinations for British men looking for a good time.

Sure enough, the English guy sitting next to me on the plane to Tallinn was wearing a penguin suit.

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I first visited Estonia in 1989 in the bad old days, when it was still part of the Soviet Union. As I remember it, even the departure times at the train station were bizarrely set an hour later than local time, just so they would match Moscow’s time.

Fast forward 25 years, and Estonia today is a full-fledged member of the European Union (EU), and it even adopted the euro as its currency in 2010. It is also a full-fledged member of the North Atlantic Treaty Organization (NATO).

Culturally, Estonians view themselves as eminently practical and hard working. With only a population of 1.3 million, scrappy Estonia punches far above its weight. Tallinn was Europe’s cultural capital in 2011. It is home to the hyper-modern Kumu art museum, Europe’s “museum of the year” in 2008. And as the original home of Skype, Estonia now boasts its own high-tech scene trying to mimic Silicon Valley’s secret sauce of high-tech success.

Since it declared its independence from the Soviet Union in 1991, Estonia has become an icon of free-market capitalism. The Heritage Foundation’s 2014 Index of Economic Freedom ranks it as the 11th freest economy in the world — one place ahead of the United States. As such, Estonia gets plenty of approving nods from the likes of Steve Forbes, who regularly praises Estonia for its flat-tax regime and free-market reforms.

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Conversely, Estonia also has attracted the wrath of economist and New York Times columnist Paul Krugman, who chided the country for its post-2008 crisis policy of austerity, leading to a “Twitter” war between Krugman and Estonia’s U.S.-educated President Toomas Hendrik Ilves. The clash inspired Latvian-born composer Eugene Birman and Estonia-based American writer Scott Diel to compose a “financial opera” — Nostra Culpa (“Our Fault”) — which premiered last spring in Tallinn.

The Russian Bear Growls

For all of its recent successes, Russia’s recent annexation of Crimea served as a stark reminder to Estonia that the geopolitical map redrawn after the collapse of the Soviet Union is hardly set in historical stone.

The mood today in Estonia is of strong resolve as the country is slowly and methodically preparing for the worst. I was told that thousands of Estonian men — both young and old — have joined a national defense league in recent weeks, prepared to defend to the death their hard-won freedom against any Russian aggression. Tallinn’s Forest cemetery, which I visited, serves as a somber reminder of the fragility of freedom in this part of the world.

As I walked by Estonia’s Presidential Palace, my host pointed out three flags flying in front: the Estonian flag, the EU flag and — rather unusually — the flag of NATO. The latter was a reminder to both Estonians and Russians that that any attempt at annexation by Russia would be met with stiff resistance.

While discounting the chance of an immediate invasion, the Estonian defense minister last week expressed his dismay that the only resistance the Ukrainian army showed against the Russians was to sing the Ukranian national anthem before laying down their arms. He wanted to put the Russians on notice that any attack on Estonia would not happen without Estonia taking its pound of flesh — measured in Russian lives lost.

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I also was told that the United States quietly has dispatched 10 F-16s and the United Kingdom eight Typhoon fighters to Estonia, signaling to Moscow that NATO is willing to go to the mat to defend the territorial integrity of its fellow members. Having sent Estonian soldiers to die on NATO missions in Afghanistan, Estonia feels it has paid its dues to NATO and the West. It now is time for NATO to return the favor.

In the meantime, the Estonian government is making plans to put the entire government “in the cloud” should its officials ever be forced to run the country virtually.

Although they make up only 26% of the population in Estonia, Russians are a strong presence in Tallinn. I stayed in a Russian-owned hotel, chock full of Russian guests, with all TV channels tuned to the Russian state-controlled media. And there are plenty of other Russian-owned businesses in Tallinn, guarded mostly by ominous-looking square-jawed characters clad in all-black garb.

Russians and Estonians seem to get along well enough on a day-to-day basis. But there is clearly no love lost between the two groups. Many Estonian monuments don’t have Russian descriptions, even as English is prominently featured. And it is English, not Russian, that is the language of choice among educated Estonians. All the young people I heard speak it surprisingly well.

Estonia: Off Investors’ Maps

In the few years after independence, Estonia and the Baltics did creep onto the maps of investors in the late 1990s. But former regional titans like Hansabank eventually were gobbled up by larger Swedish, Finnish, Norwegian rivals — all of whom view Estonia as an outpost of Scandinavia.

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You can invest in the broader region through the MSCI Emerging Markets Eastern European Index Fund (ESR) or the SPDR S&P Emerging Europe ETF (GUR). The irony is that over 50% of these funds invest in Russia itself, with Estonia and the Baltic States collectively having no discernible weighting.

Russia’s brazen annexation of Crimea reminded Estonia and the rest of the world that the Baltic States’ history and unlucky geography make the region a geopolitical powder keg.

Let’s hope Estonia’s admirable resolve — combined with NATO’s military support — can keep that powder keg from exploding.

In case you missed it, I encourage you to read my e-letter column from last week about my #1 pick in Russia, the world’s most hated stock market. I also invite you to comment in the space provided below.

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