Lake Peipsi Region Business Profile

Transcription

1 Lake Peipsi Region Business Profile English Table of contents Lake Peipsi Region Business Profile 1. Introduction p Foreword p General information p Definitions p Geography, nature, climate, environment, p.6 culture and people 2. Political-administrative background p Estonian-Russian cross-border cooperation p Estonia p Russia p Tax legislation p Lake Peipsi sub-regions p Estonian sub-regions p Russian sub-regions p Socio -economic situation of the lakeshore municipalities p Economy p Development of Estonian economy p Economic situation in the Estonian lakeside region p Development of Russian economy p Economic situation in the Russian lakeshore region p Sectors p Investment climate in the region in 2001 p Structure and development of entrepreneurship in Estoniap SMEs in Leningrad Region p Measures affecting the future development p Estonian regional policy measures p Possible impact of the Estonian administrative reform p Development plans in Russian sub-regions p Conclusions p.91 References p.94 Appendix 1 Statistical data on the Lake Peipsi region Appendix 2 Electronic database of Lake Peipsi region enterprises

2 Lake Peipsi Region Business Profile English INTRODUCTION Abstract The present report is a socio-economic survey of the Lake Peipsi Region. The Business Profile includes a review of the region, administrative, legislative and tax system summaries. The tendencies of development in the various parts of the region have been presented together with an analysis of its socio-economic, investment and entrepreneurship sit uation. The report is accompanied by two appendices, one providing a general statistical background to the Lake Peipsi Region, the other including an electronic database of the region s enterprises Foreword Lake Peipsi Region Business Profile was compiled within the framework of the Danish- Estonian-Russian project Community development and cross border cooperation in the Estonian-Russian border area that was funded by the Danish Foreign Ministry. The report compilation was coordinated by the Peipsi Center for Transboundary Cooperation in cooperation with the following public, business and NGO institutions from Denmark, Estonia and Russia: Funen and Frederiksborg Counties (Denmark); Estonian Ministry of Economic Affairs; Tartu, Jõgeva, Põlva and Ida-Viru County Governments; Pskov oblast administration, Slantsy, Kingisepp, Gdov, Pechory and Pskov raion administrations; lakeside municipalities; Peipsiveere Foundation, AS Matcom, and many others, too numerous to name here. The overall goal of the Lake Peipsi Region Business Profile was to provide a detailed description of the economic development patterns in the region, general descriptive and contact information on local development as well as development opportunities for the region. Therefore it can be seen as a background report that can be used as a data bank for shorter presentations in the future, addressing some more specific target groups. The main purpose of the Business profile is to create a common understanding of the actual situation in the region and facilitate a common framework and consensus concerning a possible future joint development strategy for the whole region and the related actions that should be taken to enhance development.

3 Lake Peipsi Region Business Profile English The Business Profile and the Electronic Database of Enterprises are targeted, first and foremost, at the following groups: Western enterprises looking for subcontractors and business partners Business people and entrepreneurs in the Lake Peipsi area looking for new cooperation partners both in their close neighbourhood and in western countries Local and regional authorities and business support structures in the Lake Peipsi area. The Lake Peipsi Region Business Profile proceeded from the understanding that 1. The Lake Peipsi Region should be seen and perceived as a regional entity with its own genuine contents, problems, opportunities and solutions; 2. The basis for the economic development of the region is the elaboration of a joint development strategy for the whole area, where neither county nor local municipality borders should determine the efficiency of the effort put into the development of the Lake Peipsi Region; 3. In the long run no state borders should remain an obstacle on our way towards unified regional thinking and actions. To compile the profile, a number of publicly available sources were used together with expert group analyses (materials of the Statistical Office of Estonia, from local and regional authorities in Estonia and Russia, Regions of the Baltic States by Nordregio, etc.). Appendix I contains diverse statistical data about the region, Appendix II is the electronic database of Estonian and Russian enterprises in the region (data about 500 enterprises). The uniqueness of the approach lies in the fact that so far the regional entities of both Estonia and Russia have solely been treated on the basis of their administrative division (4 counties, 22 local municipalities in Estonia, 2 regions/oblast and 5 raions in Russia), nothing to speak of approaching the lakeside region from a unified regional thinking and action point of view. Lake Peipsi should be seen as a shared resource, not a separating water body. How to use the report The report consists of 4 main chapters. At the end of each chapter is an executive summary, which should allow the reader to obtain a concise picture of the topic(s) presented in that chapter. The Introduction presents a brief review of the lakeside region, its nature, climate, environmental issues and demographic situation. Chapter II deals with the politicaladministrative issues (including the system of local government), outlines the overall tax system in both countries and explains the system of corporate taxes in more detail. Chapter III presents a more detailed review of the sub-regions in Estonia and Russia as well as

4 Lake Peipsi Region Business Profile English provides a closer analysis of the socio-economic situation in the lakeside municipalities. Chapter IV focuses on the economic development of both countries over the last 5 years and changes in the major sectors. It also provides an expert analysis of the investment climate, structure and development of small and medium -sized enterprises in the region. Chapter V points out several factors that might considerably influence the development of this region in the foreseeable future. The Conclusion summarises the findings, indicates the opportunities for investment and cross-border cooperation. The report and its appendices are available in English, Estonian and Russian (for the electronic form of the report and appendices, please see Peipsi CTC homepage at A more specific presentation with recommendations concerning the future development opportunities, Development Perspective for the Lake Peipsi Area ; has been drawn on the basis of the Business Profile. This document can be found in the appendix also General information Lake Peipsi (or Peipus, or Chudskoe) - the fourth largest lake in Europe forms a natural border between Estonia and Russia. The genuine settlements characteristics of Lake Peipsi are very old. Different cultures, nations and ethnic groups have lived here side by side for centuries. Fishing, agriculture, handicrafts and trading have been the traditional means of providing daily bread. On the Estonian side four counties Ida-Virumaa, Jõgevamaa, Tartumaa and Põlvamaa border the lake. 20 municipalities covering 3,600 km² with 30,800 inhabitants are in direct contact with the lake. On the Russian side, the Leningrad and Pskov Regions (oblast) border the lake. The Leningrad region includes 3 administrative entities directly related to the lake - Slantsy District, the town of Ivangorod and Kingisepp District. In the Pskov Region, local administrative entities related to the lake are Pskov District, City of Pskov, Pechory District and Gdov District. The lakeside municipalities both in Estonia and Russia are characterised by tendencies typical to peripheral areas: unfavourable demographic situation, depopulation of the region, economic recession, underdeveloped physical infrastructure. All these municipalities rank below the national average living standard. And they all see their development potential in the lake and local small and medium size entrepreneurship focusing on fishery, organic farming and tourism.

5 Lake Peipsi Region Business Profile English Definitions The Lake Peipsi region or area may be considered from a number of angles. There is no unanimous understanding of the term Lake Peipsi Region. It is made up of what in general terms are seen in Estonia as North-Eastern Estonia and South-Eastern Estonia. The Estonian Peipsi region in the present report embraces four counties - Ida-Viru, Jõgeva, Tartu and Põlva with a total area of 11,224 km 2 (1/4 of Estonian territory) and total population of 444,500 (1/4 of Estonian population). On the Russian side of Lake Peipsi, 5 districts and 2 towns (Pskov and Ivangorod) are included in this region with the total area of km 2. The total population of the Russian Lake Peipsi region is inhabitants, out of which live in towns. Zones Geographically, proceeding from human activities and the natural environment, we can divide the Peipsi Region into 3 zones: 1. Main development zone, including cities and other big settlements, developed infrastructure, dense population and developed agriculture 2. Transition or forest zone 3. Direct or narrow lakeshore zone Agricultural activities in their different forms of manifestation are present in all these zones. Great and Small The Great Peipsi Area involves the four counties in Estonia and 5 districts in Russia as mentioned above. At the same time this definition is somewhat artificial, not taking into account the everyday lake-related realities. Therefore, throughout this report the term Small Peipsi Area will also be used. By the Small Peipsi Area in Estonia we have in mind the 20 municipalities and towns bordering with the lake covering 3,600 km² with 30,800 inhabitants. On the Russian side, the Small Peipsi Area also involves municipalities directly in contact with Lake Peipsi. Thus it has no strictly defined territorial meaning but denotes more perceptual than administrative realia. Throughout the present report, both the Great and Small Peipsi Area will be used but we will try to indicate each time which area is borne in mind. Understandably, these two areas are

6 Lake Peipsi Region Business Profile English very different as the main development possibilities of the whole region lie in major cities such as Tartu, Pskov and Narva but the developments in these centres will affect the Small Peipsi Area one way or another. Peipsi watershed The Peipsi watershed (Narva-Peipsi watershed) would be the correct framework for the present report, first of all when proceeding from the environmental point of view. At the same time the notion of a watershed is more vague compared to the economic area and administrative borders. Lake Peipsi belongs to the watershed of Narva River. Of the total area of the watershed (56,225 km 2 ), the watershed of Lake Peipsi occupies 85 % or 47,814 km 2. Of the Lake Peipsi watershed, 59% is located on the territory of Pskov Oblast of Russia, 34% is on the territory of Estonia and 7% is in Latvia (A. Jaani et al., 1998) Focus of the present report In the present report we proceeded from the understanding that administratively we would deal in Estonia with two regions: North-East Estonia (or Ida-Viru County) and Eastern Estonia (Jõgeva, Tartu and Põlva Counties) and in Russia with two oblast (Leningrad, Pskov) and five districts (Slantsy, Kingisepp, Gdov, Pechory and Pskov) or with the Great Peipsi Area. The more essential point of departure in many cases is the Small Peipsi Area. So we will try throughout the report to indicate which of the two areas is being referred to. An explanation for this duality lies also in the fact that most of the available statistics is provided on the county level in Estonia and on the district level in Russia Geography, Nature, Climate, Environment, Culture and People Geography and nature Tartu and Narva on the Estonian side and Pskov and Ivangorod on the Russian side are the largest local centres related to the region in question however, it is quite obvious that the capitals of the region are Tartu and Pskov. This statement applies not only to geography, but also economy, transportation and cross-border cooperation.

7 Lake Peipsi Region Business Profile English Lake Peipsi (3555 km²) is the core of the region. Lake Peipsi in fact consists of three parts: Lake Peipsi proper, which is the biggest 2610 km 2, Lake Pskov with the area of 710 km 2 and Lake Lämmi connecting these two parts. Lake Lämmi has the territory of only 235 km 2. It is very narrow (at its narrowest point only 3 km wide) but also the deepest of the three parts (max depth 15.3 m). Of the total Lake Peipsi area, 44% belongs to Estonia and 56% to Russia (A. Jaani et al., 1998). The volume of the lake amounts to 25 km 3, which is more than double of the total annual outflow of rivers from the Estonian territory. In spring, the water level in the lake may rise up to 1 metre thus increasing the lake area by up to 780 km 2. The lowest level is in October. Ice cover is usually formed at the end of November and may last till April. Thirty islands are situated on Lake Peipsi; the largest is Piirisaar, which belongs to Estonia. Natural resources The region is comparatively poor in natural resources. Ida-Viru county in Estonia has huge deposits of oil-shale (estimated geological reserves up to 6 billion tons). The layers continue into Slantsy District in the Leningrad Region (estimated reserves 5 billion tons) at a depth of 10 to 150 metres. Other minerals of industrial importance here include marls, limestone, clays, sands and peat. Jõgeva, Tartu and Põlva counties in Estonia have relatively big peat, construction sand and gravel reserves, Jõgeva county also construction dolomite and limestone deposits. Phosphorites are Kingisepp District s most important natural resource (the estimated reserves are 220 million tons). Limestone, dolomite, peat, oil-shale and various building materials clays, gravel and gravel sands are also of industrial importance. Pskov District is rich in high-quality limestone, dolomites, gypsums, quartz sands and gravel. Gypsum in Pechory District deserves special attention (the estimated reserves are 7-8 million tons). The deposits of sapropel (curative lake mud), which can be used as an organic fertiliser amount to about 11 million m 3. There are some low melting clay, building sand, gravel and peat deposits in Gdov District.

8 Lake Peipsi Region Business Profile English Climate The climate in the northern part of Lake Peipsi is moderately humid. Spring is usually 2-3 days late compared to the southern end of the lake. The average annual temperature is +4,1 C, registered maximum +33 C. In winter, the temperature may drop to C. Average annual precipitation is mm. Jõgeva, Tartu and Põlva Counties have more continental climate. The average temperature in July is 17 C (max temperatures reach C), in February -5 C to 7,5 C (minimal temperatures may be as low as C). Annual precipitation amounts to mm, the snow cover lasts on the average days. The basin of Lakes Pskov and Peipsi in its eastern part has a temperate humid continental climate, the average temperature in July is +18 o and in January 7.5 o. Windy weather prevailing throughout the year and relatively much precipitation ( mm) create favourable conditions for the dispersion of industrial discharges in the atmosphere, which results in a blurred picture from point sources. There are frostfree days annually. On the whole, the lake has a cooling effect on the shore areas in spring and warms them in autumn. Environmental issues Lake Peipsi is a eutrophic and highly biologically productive lake. Eutrophication due to significant nutrient loads in Lake Peipsi represents a major threat for the water quality of the lake. The ecological conditions of Lake Peipsi have constantly been worsening during the last 50 years. However, the pollution load dynamics has changed over the last 10 years. The economic recession that followed the collapse of Soviet Union combined with increased wastewater treatment capacities of big settlements will most likely contribute to improved ecological conditions in the lake. During the 1990s, the phytoplankton in Lake Pskov has increased and eutrophication remains to be the major environmental problem of Lake Peipsi. The lake s eutrophication is heavily dependent on agriculture. Only 7% of the nitrogen load from Estonian rivers originates from wastewater, half of the load comes from agriculture and 22% originates from forests and other diffuse sources. Of the phosphorus load, 36% comes from point pollution sources and 38% from agriculture. (A. Jaani et al., 1998).

9 Lake Peipsi Region Business Profile English Culture & People Population in the lakeside Estonian counties 2001 County Area (km 2 ) Population Population Urban Rural (share %) (share %) Ida-Viru Jõgeva Tartu Põlva Estonia Source: Statistical Office of Estonia 2001 Population in the Russian lakeside districts 2000 Administrative unit Area (km 2 ) Population Population Urban (share %) Rural (share %) City of Pskov Gdov District Pechory District Pskov District Slantsõ District Kingisepp district Town of Ivangorod Total Source: Russian Regional Statistical Offices 2000 Estonian lakeside region Lake Peipsi region is where cultures and religions meet. Sticking to the general idea of the heady mix of Russian and Estonian cultures does not tell much about the region in question. The population in Ida-Viru county has decreased by 12% during the 1990s. The birth rate has been the lowest in Estonia during the decade. Another remarkable demographic feature is the fact that most of the non-ethnic residents live in the industrialised northern part of the county whereas Estonian population prevails in the southern agricultural rural municipalities. Two thirds of the population in Jõgevamaa live in rural areas. Only 20% of the county s population have higher education that makes it one of the lowest educational level counties in Estonia. Even more, 72,6% of the population lives in the countryside in Põlva County but the number of rural inhabitants has been gradually decreasing over the last decade. Circa 20% of the work force is associated with agriculture. Regarding the population figures, urbanisation and the

10 Lake Peipsi Region Business Profile English amount of non-estonians, Tartu County is in third place in Estonia. The birth rate of the county has been negative during the last decade, but in recent years the number of immigrants exceeds that of the emigrants. The Russian population of the Estonian western and northern coast of Lake Peipsi is a peculiar national entity made up of resettlers of different orig ins and confessions, mainly "old-believers" who escaped from orthodox persecution in Russia and runaway serfs. The oldest Old Believers congregation on the Estonian territory is that of Väike-Kolkja (established in 1710). Near the end of the 18th century Russians could have formed about a quarter of the population around Lake Peipsi. Today, there are about 10,000 Old Believers in Estonia. Their settlements are mainly located along the coast of Lake Peipsi where there are quaint kilometres long villages. These people have been successful in retaining their lifestyle and religion up to date regardless of different political powers and complicated times. The Setu people (13,000), who live in the south-east corner of Estonia and in the Pechory District in Russia, are ethnically distinct: quite large proportion of locals is Orthodox and speak their own Setu dialect, one of several South Estonian dialects. Russian lakeside region Since the late 1980s the lakeside territories as well as the whole of Pskov Region have been facing a demographic crisis. The natural decrease in population in 1994 was more than 2% in rural areas and 0.8% in cities and towns. The rural population of lakeside areas is continuing to dwindle. The population of Pskov District is more stable, which can be explained by the fact that it is in the sphere of influence of the Region s centre. The three lakeside districts of Pskov Region still have a positive migration balance. Pskov and Pechory District attract most migrants and Gdov District is less attractive. The population of the Peipsi districts is relatively young compared to the rest of the Region. In rural areas, the proportion of people who are younger than employable age is more than 20%. The share of people who are older than employable age is 3-5% lower than the two Regions average and is slightly over 30%. Due to the relatively young population, the share of employable people exceeds the Region s average by 2-4% and constitutes about 50%. The educational level of the districts population is quite high compared to the rest of Leningrad and Pskov Region. Even in rural areas, there are many people with a university degree or vocational education. One of the reasons is that Pskov and St-Petersburg are easily accessible in terms of transport and the share of recent migrants in the population structure is high.

11 Lake Peipsi Region Business Profile English Another reason is that relatively few people are involved in the agricultural sector of the economy and there are quite many civil servants. More than 94% of the region s population are ethnic Russians. The other most numerous ethnic groups Ukrainians and Belorussians. There are also Estonians and Setu people in Pechory District, Estonians and Latvians in Gdov District, Izhorians and Ingrian Finns in Kingisepp District. Major towns (2000): Pskov , Kingisepp , Slantsy , Pechory , Ivangorod , Gdov inhabitants (2000). Level of unemployment in the Great Peipsi Area Administrative unit 1997 (%) 1999 (%) Ida-Viru county Jõgeva county Põlva county Tartu county Estonian average Gdov district Pechory district Pskov district City of Pskov Pskov region average Slantsy district Kingisepp district 5.0 Source: Statistical Office of Estonia, Pskov and Leningrad Region statistical offices SUMMARY Lake Peipsi (or Chudskoe) - the fourth largest lake in Europe forms a natural border between Estonia and Russia. In the business profile we proceeded from the understanding that we would deal with two regions - the Great Peipsi Area (county level in Estonia, district level in Russia) and the Small Peipsi Area (the municipalities bordering the lake), which in many cases is the more essential point of departure. The capitals of the Peipsi region are Tartu in Estonia and Pskov in Russia. The genuine settlements characteristics of Lake Peipsi are very old. Different cultures, nations and ethnic groups have lived here side by side for centuries. The most intriguing local minorities are the Old Believers and Setus. Fishing, agriculture, handicrafts and trading have been the traditional means of providing daily bread.

12 Lake Peipsi Region Business Profile English The Peipsi basin has a temperate humid continental climate. Windy weather is prevailing throughout the year and relatively large amounts of precipitation. In winter the lake is covered with ice. Lake Peipsi is a eutrophic and highly biologically productive lake. Euutrophication due to significant nutrient loads in Lake Peipsi represents a major threat for the water quality of the lake, although during the last decade the situation has improved. The lakeside municipalities (the Small Peipsi Area) are characterised by tendencies typical to peripheral areas: unfavourable demographic situation, depopulation of the region, recession of economic life, underdeveloped infrastructure. These municipalities also rank below the average national living standard. 2. POLITICAL-ADMINISTRATIVE BACKGROUND 2.1 Estonian - Russian cross-border cooperatio n Current situation Estonian-Russian relationships have a long and complex history. The National Security Concept adopted by the Estonian State Assembly (Riigikogu) on 6 March 2001 summarises the present situation as follows: Estonia's relations with Russia are based on a political stability that results from long years of work. In 1996 at a meeting of the foreign ministers, the two sides reached agreement on the text of a border agreement between the Republic Estonia and the Russian Federation. In 1999, the technical preparations for an agreement were concluded at the level of negotiating teams. Estonia has reiterated its readiness to sign the agreement without delay. At present, Estonia and Russia are focusing in bilateral relations on the resolution of practical questions and on preparing for concrete agreements in the economic, social and cultural fields. In order to increase the efficacy of this work, an Intergovernmental Commission cochaired by the Estonian Prime Minister and the Russian Deputy Prime Minister was formed in Estonia has closer ties with regions of Russia bordering on Estonia, especially at the regional and municipal level. In recent years, Co-operation has developed further at the working level, primarily between border guard, customs, and police authorities as well as in the area of environmental protection. Bilateral relations are now and will, in the future, be increasingly influenced by Estonia's membership in international organisations.

13 Lake Peipsi Region Business Profile English Because of its proximity and the size of its market, Russia remains an important trade and transit partner for Estonia. The scope of the sensitive issues in the Estonian-Russian relations has remained more or less unchanged during the last decade: the state border treaty the rights of compatriots (most of whom still do not have citizenship though the liberalisation of the respective legislation has been going on in Estonia for a while). On the local grassroot level the border issue is seen from a different angle compared to the state level. Border crossing as a totally new experience was rather shocking for the local inhabitants when introduced at the beginning of 1990s. Mutual interdependence of the border areas of Estonia and Russia went much farther than just the neighbouring areas across the border. The connections to the neighbouring villages across the border suffered most from the established border regime. A lot of efforts have also been caused due to the incompatibility of Estonian and Russian administrative patterns. In Russia, the right to handle external relations resides with the regional authorities and regions are also somewhat independent in their positions. Since these positions differ, Estonia has practically two authorities to negotiate with at a time the Leningrad and Pskov regions. The district administrations in Russia are usually more directly interested in relations with their Estonian neighbours but they have to lobby the respective decisions at the regional level. In Estonia, the local authorities are also very dependent on national authorities as far as political issues related to foreign affairs are concerned. Agreements and contracts Since 12 January 1991, there have been 24 agreements and contracts signed between the Estonian Republic and the Russian F ederation or their respective governments. The topics governed include but are not limited to the following: basic principles of the inter-state relationships procedures for settlement of procurement of goods and payments for goods of a non-commercial nature establishment of trade representations road and air transport cooperation in communication customs border checkpoints

14 Lake Peipsi Region Business Profile English relationships concerning fishing, protection and use of fish resources in Lake Peipsi, Lake Lämmi and Lake Pskov cooperation in environmental protection cooperation in the protection and sustainable development of boundary water bodies cultural heritage mutual recognition of educational documents cooperation and mutual assistance in customs matters Estonia Legislative power The right to initiate laws rests with members, factions, and committees of the State Assembly (Riigikogu) and with the government of the Republic. Laws are proclaimed by the President of the Republic. Local authorities might have specific interest for special regulation of some areas of government. The councils of local authorities have the right to make proposals to the Government of the Republic to initiate or amend a law or other legislative acts. Local authorities shall also be consulted timely and in a proper manner in case of issues concerning them directly. The Government of the Republic has the executive power. It implements domestic and foreign policies of the State, issues orders and regulations, submits draft laws to the State Assembly, as well as foreign treaties for ratification and denunciation, prepares drafts of State budgets, administers the implementation of the State budget, etc. The Government of the Republic Act sets the areas of governance of the Government and ministries that in itself sets limitations to the competencies of the local authorities. For further information on state authorities please check State restrictions on land use Proceeding from the Estonian legislation, there exist different land use restrictions that are shown as state land use restrictions on the land cadastre restrictions maps. These restrictions (deriving from the following legislative acts: Protected natural objects act, Heritage act, Coast and shore protection act, Water act, Forest act, Irrigation act, Railway act, Roads act,

15 Lake Peipsi Region Business Profile English Waste act) play a great importance in developing the detailed and master plans of local authorities. Within their administrative jurisdiction the local government has the authority to: 1) give permits for special use of water; 50% of the permit fees accrue to the local budget and 50% accrue to the state budget 2) arrange management of water bodies which belong to the local government jurisdiction 3) arrange the elimination of the results of water accidents and sudden pollution of water. Special regulations hold to the boundary water bodies (the sea, Narva reservoir, Lake Peipsi and Lake Pskov, boundary rivers). Fees from use of water from these bodies accrue to the state budget. English translations of most of these acts are available from the home page of the Estonian Legal Translation Centre at Current System of Local Government Local Government Act defines local government as popular decision-making, directly or through elected bodies, on matters concerning the community. Local government has to consider the interests of the population and the distinctive features affecting the development of the area. The main responsibilities of primary-level authorities include: education, cultural activities, health care, social services, housing, transport, environmental protection, fire services, administration of central government reforms and maintenance of public facilities. Legal Basis The provisions for a local self government are: All local issues shall be resolved and regulated by local governments, which shall operate independently in accordance with the law. Obligations may be imposed upon local governments only in accordance with the law or with the agreement of the local government. Expenditures related to the obligations imposed on local governments by law shall be funded within the state budget.

16 Lake Peipsi Region Business Profile English The units of local government shall be rural municipalities and towns. Other units of local government may be formed in accordance with the bases and procedures established by law. The representative body of local governments shall be the council, which shall be elected in free elections for a term of three years. The Organisation of Local and Regional Authorities Estonia is divided into counties, towns and rural municipalities and there are presently 247 units of local government, representing both rural and urban municipalities, and ranging in size from Tallinn with inhabitants to Ruhnu with as few as 68. According to the Government of the Republic Act the county governments act as offices of the county governors who represent the national government at regional level. Local self government is exercised (solely) at the municipal level. The rights and responsibilities of local governments in different areas are determined by laws. The Local Government Organisation Act establishes the functions, jurisdiction, responsibilities and organisational structure of local authorities, their relationship with other local bodies and with the national government. The following bodies carry out the functions of local government: 1) The council (volikogu) is a representative body elected by the residents of a municipality. 2) The government (valitsus) is an executive body formed by the council. It is headed by a mayor (linnapea in towns, vallavanem in rural municipalities), who is appointed for a three-year term. The municipal or town secretary is an ex-officio member of the local government. Other members are chosen by the mayor with the approval of the council. Possibilities of local government to promote entrepreneurship Local governments are legislatively entitled to decide upon a quite wide spectre of matters that under certain conditions may serve as enhancing entrepreneurship. It must be mentioned, though, that these potential privileges do not confirm, as a rule, to the public interests. This means that the possibilities of local governments to create a favourable investment climate for businesspeople are mostly not applicable.

17 Lake Peipsi Region Business Profile English Local governments are entitled to initiate both detailed and master plans, which provides quite a good possibilities for determining its future. According to the Planning and Building Act, the administration of planning, design and construction in the territory of a local government is within the competence of the local government. Local government is to: 1) ensure the preparation of plans which are the basis for land use and construction; 2) ensure, as a prerequisite for adoption of a plan, the consideration and concordance of the interests of all interested persons; 3) ensure adherence to and implementation of adopted plans; 4) arrange for construction supervision. County government The county governor (maavanem) represents the central government at the regional level. Among the responsibilities of the county governor are co-ordination of the administrative functions of the central government in the county, management of state property, and the awarding, subject to the authorisation of the Government of the Republic, of administration contracts with municipalities for performance of state obligations. The governor leads also the governor s office (maavalitsus), whose activities are funded by the central government. The county governor is accountable to the central government. Governors have supervisory and advisory functions in relation to local self government. The exact division of powers between central and local authority is regulated by special legislation. 2.3 RUSSIA Legislation The Russian Constitution of 12 December 1993 sets the principles of the state system. Russia is a federative secular state with a republican form of government. At present the Russian Federation consists of 89 subjects (administrative units) having equal constitutional rights. Federation subjects include republics, territories, autonomous regions, autonomous areas and cities of federal importance (St-Petersburg and Moscow). Leningrad and Pskov Regions are also federation subjects enjoying equal rights with others.

18 Lake Peipsi Region Business Profile English Article 66 of the Constitution says that the status of a federation subject is determined by the Russian Constitution and the subject s statutes. Further details about legal regulations in Leningrad and Pskov Regions are available on the Internet at and Issues governed by the federation only or by the federation and its subjects jointly are specified in Articles In particular, the rights of federation subjects include: a) ensuring the compliance of the constitutions and laws of republics and the statutes, laws and other normative legal acts of territories, regions, cities of federal importance with the Constitution of the Russian Federation and federal laws; b) protection of human and civil rights and freedoms; protection of the rights of ethnic minorities, ensuring law and order and maintaining the appropriate regime in border zones; c) ownership, use and management of land, minerals, water and other natural resources; d) demarcation of state property; e) nature use; environmental protection and ecological safety; particularly protected natural territories and historical and cultural monuments; f) general issues of education, training, science, culture and sport; g) coordination of health issues; family, maternity, paternity and childhood protection; social protection including social security; h) taking action to combat disasters and epidemics and to liquidate their consequences; i) establishment of the general principles of taxation and levies in the Russian Federation; j) administrative, administrative trial, labour, family, housing, land, water, forest, natural resources and environmental legislation; k) court and law enforcement agencies staff; barristers; notaries; l) protection of the natural environment and traditional way of life of small ethnic communities; m) establishment of the general principles of the operation of public authorities and local government; n) coordination of the international and foreign economic relations of the subjects of the Russian Federation and execution of the international agreements of the Russian Federation.

19 Lake Peipsi Region Business Profile English Local government Chapter 8 of the Constitution sets the main principles of local government. Local government in the Russian Federation ensures that the population can independently make decisions on issues of local importance such as the ownership, use and management of municipal property. Local government is exercised by citizens via referenda, elections and other forms of direct expression of their will through elected and other local government authorities. Local government exists in cities, towns and villages and other areas in accordance with historical and other local traditions. The structure of local government is independently determined by the population. In practice, the structure is specified in the statutes of the federation subject. Local government independently manages municipal property, draws up, approves and implements the local budget, sets local taxes and levies, maintains law and order and deals with other issues of local importance. In Leningrad and Pskov Regions, the historical form of local government is division into districts run by local elected legislative and executive authorities. The district administration normally has rather vast authority in controlling the economy and resources within limits set by law. Local taxes and transfer payments specified in the federal budget and the budget of the federation subject constitute the main funding source of local government. In the Leningrad Region there are 20 cities subordinated to the Region and 11 cities subordinated to districts as well as 17 districts in the Region. Local government is represented by 29 municipal units. The Pskov Region is administratively divided into 24 districts and has 14 cities.

20 Lake Peipsi Region Business Profile English Tax legislation Estonian tax legislation The following is a summary document of the Estonian tax system as of January 1, 2001 Taxation Act (passed on December 16, 1993) Income Tax Income Tax Act (passed on 15 December 1999) Value-Added Tax Law On Value-Added Tax (passed on August 25, 1993) Excises Tobacco Excise Duty Act (passed on June 29, 1994) Fuel Excise Duty Act Packaging Excise Duty Act (passed on December ) Customs Duty Customs Tariffs Act (passed on October 14, 1997) Customs Valuation Act (passed on February 8, 1995) Most Favoured Nation Customs Duty Act (passed on November 17, 1999) Gambling Tax Gambling Tax Act (passed on December 6, 1995) Land Tax Land Tax Act (passed on May 6, 1993) State Fees State Fees Act (passed on October 22, 1997) Social Tax Social Tax Act (passed on April 15, 1998) Local Taxes Local Taxes Act (passed on September 21, 1994) Source: Estonian Ministry of Financial Affairs Enterprise income tax (Income Tax Law, effective January 1, 2000) Principles and conception of the tax have been completely changed recently. Up to 31 December 1999, the taxable income of a company was calculated by adjusting its net profit as shown in its income statement (profit and loss account) in accordance with the tax legislation. However, from 1 January 2000, resident companies and permanent establishments of the foreign entities (including branches) are subject to income tax only in respect of all distributions (both actual and deemed), including: dividends and other profit distributions;

21 Lake Peipsi Region Business Profile English fringe benefits; gifts, donations and representation expenses; and expenses and payments not related to business. All distributions will be subject to income tax at the grossed-up rate of 26/74 of the amount of taxable payment. The transfer of assets of the permanent establishment to its head office or to other non-residents is also treated like distribution. Under the new income tax legislation, therefore, the corporate entities are exempt from income tax on undistributed profits, regardless of whether these are reinvested or merely retained. As there is no annual net taxation of corporate profits, the corporate entities are also not subject to tax depreciation rules. The regional income tax incentives introduced for the under-developed regions of Estonia in 1998 were abolished from 1 January The corporate entities are not able to deduct from their taxable payments the losses attributable to this incentive. Also, the tax incentives granted under the previous income tax laws prior to 1994 to qualifying companies with foreign investment are ineffective. Personal income tax (Income Tax Law, effective January 1, 2000) Residents pay tax on their worldwide income. Taxable income includes, in particular, income from employment; business income; interest, royalties, rental income; gains from disposal of assets; pensions and scholarships (except pensions paid on the basis of the Public Pension Insurance Act and scholarships paid on the basis of law) and alimony payments received. Taxable income does not include dividends, which are subject to a final tax as part of enterprise income. Unilateral relief for double taxation, if income derived from abroad, is available in the form of ordinary tax credit for tax paid abroad. Non-residents pay tax on their income from Estonian sources as listed in the Income Tax Act. For resident persons, there is a basic exemption of EEK (since January 1, 2001) during the period of taxation. There is a general flat rate of 26 percent of taxable income. The withholding tax rate on royalties, payments to non-residents for services provided in Estonia, and on payments to non-resident artists and sportsmen the rate is 15 percent. The withholding tax rate on pension payments is 10 percent. The period of taxation is the calendar year.

22 Lake Peipsi Region Business Profile English Employment income is subject to a withholding tax at the general rate of 26 percent. The withholding agent (enterprise or employer) has the obligation to remit the relevant amounts to the tax authority monthly. From January 1, 1996, tax revenue from income tax of persons accrues by 44 percent of the yield to the state budget and by 56 percent of the yield to the local budget of the local authorities of the place of residence of the taxpayer. Value -added tax (VAT) (Law on Value-Added Tax, effective January 1, 1994) Enterprises whose taxable supply (excluding import) exceeds EEK 250,000 in a calendar year are eligible. The tax is charged on transactions in goods and services in Estonia and on importation of goods (excluding exemptions). Goods and services exempt are: education; public mail services and postage stamps; medical and health-related services; funeral requisites and services; banking and insurance services; organization of gambling; lottery tickets; letting of housing; social services. The tax rate is 18 percent of taxable value. The VAT rate is 5 percent for: (1) books; (2) medicines and medical equipment; (3) treatment of hazardous waste. The VAT rate is zero for: (1) exports; (2) subscribed periodicals; (3) tickets of theatrical performances and concerts organized by theatres and concert organizations included in the list approved by the Minister of Culture; (4) textbooks and workbooks for basic schools and gymnas iums; (5) goods and services sold to non-profit associations and foundations enjoying income tax allowances in the list approved by the Government of the Republic of Estonia. The tax period is the calendar month and VAT returns are due to be filed by the 20th day of the month following the relevant period. Tax accrues wholly to the state budget. Registration of enterprises is undertaken by the National Tax Board, which also administers VAT on domestic goods and services. The Customs Board administers the tax for imports. Customs duty (Customs Tariffs Act, effective 14 October 1997) Customs duty is imposed on importation of certain goods: live animals, agricultural products, foodstuffs (falling within headings of the Nomenclature of Estonian Commodities). The customs duty is imposed on goods conveyed into the customs territory of Estonia under the customs procedure import for free circulation. This is Most Favoured Nation (MFN) customs duty and tariff rates are between 0 59 % as WTO trade rules prescribe. The MFN customs duty is imposed on goods, which originate from foreign states except on goods, which, pursuant to an international agreement, are not subject to customs

23 Lake Peipsi Region Business Profile English duty. Goods originating from EU are not subject to the customs duty because of the free trade agreement. There are no customs duties imposed on any other goods. Russian tax legislation Legal aspect The principles of Russia s federative system suggest three legislative levels, each of which shapes legal environment at one of the three levels of the federation. These are as follows: - federal; - regional; - local. The Russian Constitution and the Civil Code of the Russian Federation (CCRF) outline the main principles of social life including basic business conditions. The Civil Code determines the organisational and legal forms of business, fundamental principles of legal relations between legal entities and individuals and minimum requirements to business documentation. However, legislative acts specifying these general norms are also very important for production and investment practices. Tax legislation has the clearest economic significance. The Tax Code of the Russian Federation (TCRF) is now gradually coming into force. Its first part determining the general taxation principles of the Russian Federation and establishing the system of taxes and levies came into effect on 1 January The second part and some provisions of the first part came into force on 1 January Section 8 of the TCRF will determine the rules for calculating and paying main federal taxes and levies (VAT, excise taxes, social tax and personal income tax). The Customs Code of the Russian Federation (another CCRF) stipulates the rules for customs clearance and customs control during the movement of goods through the RF customs border. The CCRF sets both tariff and non-tariff methods regulating foreign economic activities. Non-tariff measures are used on the basis of the Russian Government s decisions and are specified in the decrees of the National Customs Committee of the Russian Federation (NCCRF) and other institutions. Issues other than the customs regime can also play a significant role in the movement of goods across the border. These issues are normally based on international agreements, federal laws and other Russian legislative acts and can involve tax and customs duty rebates and exemptions.