Let us start with the topical. This Wednesday (July 26 – ed.) saw all Estonian fuel sellers hike the price of motor fuels by 3 cents just 10 minutes apart. Are there sectors in Estonia that betray the makings of a cartel and regarding which talking about a free market is perhaps a little rich?

A very good question. I believe the head of the Competition Authority would be better poised to answer though. I have not kept an eye on the fuel market like that. From a consumer's point of view, sure. I believe it matters little where you buy this particular product. Electricity, water, fuel all have the same parameters more or less. This usually leads to level prices on the market as no one has a better product for which they can charge more. I believe that is one part of the dynamic. But why prices go up by exactly the same amount and within just a few minutes is difficult to comment.

Looking at Estonian companies and sectors as a whole, one might get the impression that there is not much room for newcomers?

We need to realize that Estonia has fewer people than a metropolis' borough, which clearly suggests critical mass is reached sooner or later. Europe has around 4,000 banks that are catering to a lot of people. In banking and perhaps a few other areas, it just doesn't make sense for us to have 20 banks or 30 telecoms here. There would not be enough customers to go around.

Eesti Ekspress wrote this week (last week – ed.) that several major basic commodities chains made less in the way of profit than a premium-class agricultural producer based near Tallinn. For example, when the Coop Central Cooperative Society made €6 million in profit, while the Laheotsa Farm made more. We can see increased competition on the retail market following the arrival of Lidl, while there is clearly too little competition on the telecom market. And the same goes for banking. This year is the most profitable for banks to date.

Yes, there is considerable tailwind courtesy of the interest rate environment. But talking about margins, there is daily struggle for clients. I do not feel there's too little competition for us.

Looking at corporate investment loans, the fight to land major and medium-sized clients is fierce. Regarding smaller clients, the question of which banks want to pursue which loans is created. But lucrative major deals – the competition in terms of who can offer better risk conditions, interest margins. In the end, there is a spreadsheet somewhere on how much capital needs to be put in for return on equity to make sense. So there is competition in those terms.

Margin negotiations are part of the process also for housing loans, with active competitors and customers who are not afraid to ask for better rates. That's the way of it, and you don't really need more than two competing sides for a price war.

And yet, no bank in Estonia has consciously launched such a price war. Margins were a lot lower the last time Euribor was where it is today.

Yes, but the deals are made for 25-30 years. You have to live with that margin in a different environment later on. Customers like to view these deals in the moment they are signed, while we need to keep in mind that interest curves can change a lot over 10-15 years. They can fall off abruptly, with the margin the only thing keeping you from going under then.

That is what is keeping banks from initiating such a price war, issuing zero-margin loans. If the Euribor rate falls, profitability of loans goes with it, and a lossmaking bank is quite a big problem.

We saw banks seemingly pay off certain loans when Euribor was dipping into the red. However, the [Estonian] banking sector's profit estimate of around a billion euros for this year suggests there should be room on the market. That said, there is no great rush to enter the market.

I know there are lobbying efforts in Lithuania to attract Polish banks for the same reasons, and then politicians and officials are surprised to find no one really wants to come. And the reason is not that profits aren't promising – no one looks at a single year's profit. Rather, the geopolitical aspect is the main reason. Perhaps not for Poland, but when viewed from afar. I would suggest an iron curtain runs somewhere that discourages one from buying bonds or investing in the region. Because the current geopolitical situation is a problem.

Is there a clear divide after Russia launched its full-scale war in Ukraine?

Yes, I believe there is. We have seen investors pull out of several major deals. I'm not talking about banking but business as a whole. Bond issue has been complicated, they still succeed in some places, while the wider environment does not favor investments in the region. If you are an investment banker in far-away New York spinning your globe to see where the object is located, you rather cross it out and move on with the other 40 potential candidates in terms of where to seek returns.

However, this problem should then also affect Finland and Poland, while we recently learned of Intel's plan of building a massive chip factory in the latter.

Some investments are still happening, while it has become rather complicated in certain fields. There are exceptions, and things like the Intel factory work to calm the others, suggest that we are not dealing with a war zone. Even though what is happening in Ukraine, which is still very close to where we are, is terrible, investors should perhaps be able to tell the difference. It remains the million dollar question how to make those risks palatable.

And there aren't any silver bullet solutions. The situation needs to normalize. Banking is a good example. Who wants to invest in a situation where assets, securities are being wholly destroyed somewhere not too far from here? You will no longer have those assets, they will no longer generate cash flow, and you will have to write off the loans. A collapse is inevitable.

While certain guarantees help in certain places, there is little that can stand up to the mother of all risks, which is war. The preferred option is to keep a geographical distance.

This means we will have to make do with our own devices, we need investments and Estonian capital, which has been slowly building up. We should hold on to that tooth and nail. We must create an environment where businesses that have the capital would want to invest here, instead of emulating Western investors in selling and parking their money somewhere else. I believe countries in the West are much more conscious about protecting their investor base.

It seems to me that we tend to keep our entrepreneurs at arm's length and away from decisions in fear that they might do something that is in their interests, while it may also be in our shared interest.

We can see quite a few fintech companies offering products and services without a traditional bank's expenses or regulative burden elsewhere in the world. There is little of that in Estonia. While we have a few online banks, one still has to borrow from the office of an Estonian bank.

It makes for an interesting topic and one the watchdog, politicians and regulators should ponder. Personally, I don't really believe in arbitration of the legal environment so to speak. That we'll end up with a better service if we give someone relaxed rules or exempt them from compliance when the situation does not seem to be working. This begs the question of why have rules in the first place if we believe we can do just fine without them.

Revolut has made the scene in Estonia, and there are a few other online banks. I would say that this already is arbitration to some extent as bailiffs and other organs often cannot touch them. It's a way for them to shirk their duties.

You cannot do that if you're a bank. We are diligent about making sure we comply with every regulation, do what society has asked us to do. Someone else finding a way around it does not constitute a level playing field from where I'm standing. Why aren't they issuing loans? Because giving out a loan is the easiest thing in the world, while getting it back is much trickier. It requires a measure of competency, market feel. I believe that is where it starts.

Do we have too much banking regulation in Estonia?

In Europe as a whole, those who must comply always feel there is too much regulation. Some things have gotten very detailed, with particular situations regulated instead of policy. Ideologically, I'm not a fan and would rather have more freedom, while that entails more risk, which the FSA does not like in its turn. Looking at the Americans, they have chosen the path where someone goes under from time to time, which is the price you need to pay for innovation and to avoid overregulation.

Europe is trying to keep its banks from going under and therefore has more regulation. That is the reality. I cannot choose my environment and have to navigate it as it is. There is a lot of regulation, and I'm sure a part of it is absolutely necessary. I even feel there could be more regulation in certain areas, for example, as concerns responsible lending in the context of small loans. Elsewhere, what regulation is trying to achieve is no longer sensible. What we get are higher margins. I'm talking about corporate investment loans – growing reporting, capital and other obligations will eventually be reflected in the rates banks offer customers. Everyone working at the bank to make sure we comply with regulations will also be reflected in the customer's margin.

It seems to me that we often lack a constructive debate in society. A new requirement simply lands, and we cannot tell whether someone has even analyzed what it entails for society as a whole. Yes, we will have control over a certain aspect, but are we prepared to pay for it?

Regulation in Estonia is holding back competition to some extent, standing in the way of smaller banks who are perhaps in the most difficult situation because of these regulations when first starting out.

It sometimes feels the banking and financials sectors are not the only ones where new regulation comes without much effects analysis. But it could also be a part of the democratic process.

Perhaps. Some entrepreneurs share this feeling of there being [too] much regulation. What sets us [the banking sector] apart is that there is very close supervision, the laws and norms are brought into force very diligently. This ensures a level playing field as long as the regulation applies the same for everyone.

But there are also sectors where the level of everyday supervision is far more modest. That while there may be a regulation, the realization that perhaps it was not always complied with only arrives after the fact.

If those regulations operate as a market failure, the Lithuanians have found it sensible to tax banks' additional profits. [Estonian banker] Indrek Neivelt said on Thursday that it would be a great idea [also in Estonia] to help maintain solidarity in society. The government has no plan to go down that road, while the opposition has said that banks' money should be taken away. Where do you stand?

We should go back further. I have seen some pretty wild business models and return on equity during my time in banking. For better or worse, the government usually overlooks these businesses and does not know where such fantastic return on equity is generated. Banks are visible and make for a good target in that sense.

Let us recall that banks have been subject to advance income tax for years. It is a percentage, meaning that the more money we make, the more tax we pay.

We still have to pay 20 percent if there is extraordinary profit, such as this year. There is no alleviation. In that sense, banks are already paying their way. They also have to pay for things other businesses do not. For example, we pay for our own supervision.

We are also paying into the deposit guarantee fund. Those are real sums we're transferring there quarterly. We have quite a few duties, while some of them are meant to ensure system stability. We're fine with that.

I believe banks have different positions when it comes to income tax. Some who are still in the growth phase and squeezed for capital feel that it is painful because today's profit is tomorrow's capital and the next day's loan. And if you cannot issue that new loan because your capital was taken away when it was still profit, you have to go and ask the owners for more money. Business models where you ask the owner for more money for growth exist, of course, while the owner will still ask you why you cannot grow based on profit. So it does hold back growth to some extent. Next, we come to the wider political question of how we want to see society develop?

It is easy to take away tomorrow's growth from those who have it. But how are we supposed to grow then? What are the sectors and where are we contributing? I believe Estonia strikes a fine balance between tomorrow's growth and today's tax revenue. Looking at developments in Lithuania, I believe it will be an interesting experiment, and I believe there is bad news in store for their economic growth.

What is Lithuania doing that is so different?

This taxation of banks. Banks have been robbed of certainty and motivation to invest in new loans. While you can promise to exempt new loans from the tax, you have broken your word once before and changed the rules as you go. There is little in the way of certainty after that.

Investors looks at entire countries. Today it's banks, tomorrow energy companies, then telecoms and grocery stores after that. Changing the rules on the go like that does not inspire confidence. We also had the debate here in Estonia, drew the lines somewhere, while it seemed to me that no one walked away satisfied. There are several tax matters in the air right now, and they're never pleasant for those expected to pay. But we have managed to avoid a cataclysm or serious breach of trust. Perhaps I'm wrong, but that is how it feels to me. Perhaps it has happened somewhere.

Depends on who you ask. Many are not happy about having to pay considerably more for their mortgage or leased car, while banks are posting record profits. Any political force that promises to change this situation is looking at increased support.

Absolutely. While interest rates are a little higher than the long-term average now, as a whole, what we have seen is normalization of the previously negative interest environment.

One thing we're not talking about is how depositors have begun to see returns. I find it to be a major part of the equation that is somehow overlooked. People only see the expenses side, while it benefits other members of society who have savings. /.../

I like the car tax example where everyone seems to agree that someone else's car needs to be taxed. It is similar to these sporadic exclamations according to which banks' money needs to be taken away. It is easy to say someone else should pay taxes if it's not your money. How much would [other] entrepreneurs be willing to contribute from their revenues?

We have seen rather broad-based tax hikes that were not debated before elections. What effect could these tax changes have in your view?

It is indeed unfortunate that these things were not discussed before elections. The questions were asked but no answers followed. I kept a close eye on election debates where the journalist asked on four occasions how the candidates planned to pay for promises only to be ignored. That is not good culture. Dodging questions is no way to have a debate about anything. We should appreciate the fact that the people of Estonia are on top of their own financial affairs and public matters in terms of expenses being a reality.

One part of the equation is done, starting with the most painful aspect of tax hikes. But I cannot see any serious analysis of what we could dial back. We are massively overspending somewhere. As an individual – when your expenses exceed your income, one option is to boost the latter by taking on a second job or negotiating your salary. It seems that the public sector has done this part by asking for more money. But the other side of it, going over our expenses as individuals or thinking about where to invest, we're seeing none of it in the public sector. I'm not seeing cuts anywhere. This part leaves me at a loss.

Do you see room for cuts?

I would join in the chorus of the National Audit Office and, I believe, Mr. Aivar Sõerd in that the state budget has been rendered completely opaque from the bystander's perspective. It is a major problem, as how can we have a debate if lines in the budget do not reveal where the money is spent. Hence the question of where to cut back.

I believe the National Audit Office has pointed to a very serious problem, while no finance minister or the ministry has managed to propose a solution. Instead, an abstract and bureaucratic manner of speaking is maintained where it remains unclear where some of the money ends up. And we're talking about millions upon millions here.

Actually, it is closer to billions. The noble goal there was for politicians to be able to make broader choices of where to allocate funds, with officials in charge of the details.

I cannot really imagine appearing in front of my supervisory board and simply telling them I plan to build the best bank in Estonia. And when they ask about how I plan to spend the money, I would just point them to a single line titled the Estonian bank. I have officials here on the second floor in charge of how it should be achieved, so just give me the money. In a company, you need to show where the money is being spent, with the executives responsible. In the public sector context, it should be the government's task to demonstrate where it is spending the money. Otherwise, we will lose control over where the money goes. I believe we could use a cost review committee to shed light on this matter. But because it concerns so many people who depend on that funding one way or another, there will be a lot of noise. Politicians will need thick skin to pull off that exercise.

Looking at support measures aimed at renovating private homes and buying electric vehicles – such things are myriad – perhaps we are after the kind of state that helps people live the right way.

It runs the risk of the state dictating what is the proper way to live at one point and we'll find ourselves in a world no one wants. There have been a few such initiatives recently. I believe it is a slippery slope.

As concerns support measures for reconstructing private residences, we do support renovation of apartment buildings where a number of Estonian citizens benefit from the common pot. Should people who have private residences not qualify for the same thing? It is a matter of policy choices. Rather, I would say that we need to phrase a goal for it. If it's energy efficiency, that is the political choice. But these things need to be publicly debated in terms of what the long-term goals are.

Do we have reason to suspect Estonian politicians of having any longer-term plan?

To provide another parallel from the world of business, we cannot be the best at everything, while we have made certain strategic choices in terms of where we do want to be number one. That is what governs strategies, from laying down annual goals to the details of customer service. You need a long-term goal of where you want to be the best to be able to say things are going well.

I sometimes get the feeling that this narrative is kept vague on purpose to make it look like we want to be the best at everything. But we don't have the resources for it. You need to find key areas to concentrate on, and politicians need to phrase Estonia's key areas.

There should be a few choices in terms of where we want to be headed. Looking at the big picture, we have little in the way of natural resources. We have a little timber, peat and flammable rock in the ground that can also be turned into chemicals. We should not compare ourselves to countries with a more traditional set of resources, and we're better off for it as they tend to have other problems. Our greatest resource is our people, their skills, and this is where politicians need to make important choices in terms of what to invest in. What kind of people will we need in 10, 15 or 20 years' time? It doesn't have to be as detailed as needing system engineers; rather, what kind of skills people graduating from basic and high school as well as university should have. Education is what makes the difference. I would make the claim that Estonia has come far and done well for some time because we have had capable people with diverse skillsets. Making sure that is still the case a decade from now is a great challenge.

We have record low birthrate. Is it something politicians should address?

As a father of three, it has never crossed my mind that they came into this world because of some policy. It needs to be a choice people make. While politicians can affect people's choices to some extent, trying to buy children is a questionable path.

That said, I understand why it may be necessary in certain context. People who make that choice have bigger expenses, need to support others, and we should invest in that as a society. Birthrate is perhaps the other major challenge next to education. In other words, how to maintain society with fewer and fewer people.

Do you believe the state budget should be balanced, or could we keep borrowing?

We should strive for balance as a whole and have savings we could use to invest. While investments should be seen separately, the traditional part of the budget should be balanced. But again, that is up to policymakers to decide. While borrowing on this scale does not fit in with my worldview, I do not want to tell them what they should do. There are countries with public debt stretching to 200 percent of GDP. It is not viable as interest rates will go up eventually and it is very painful when they do.

How are people in Estonia doing, looking at how much money is kept in accounts? Interest hikes seem to have had a pleasant effect. But how many are those who run out of money well before the month's end?

We do not keep a detailed eye on this, while I have said before that there are plenty of people in Estonia with no savings to speak of. We are talking hundreds of thousands. On the one hand, we can say that as long as unemployment remains at 5 percent, there is no problem. People go to work, make money and take care of things.

But should we experience a macroeconomic shock of some kind, see unemployment spike, unfortunately, we have a lot of people who will not have any money at least for a time. Benefits will keep them afloat for a time but it is still a challenge. One of our goals as a bank is to have more people with savings. Customers who have a strong financial background are better for us and society as a whole. Therefore, people could have a lot more in savings.

Isn't it a sign of Estonians feeling safe in their own country, that they can make do even if they don't have savings?

I believe that we have developed enough as a society over the last 30 years not to consciously leave anyone in the cold, that we will try to save and help people. But if we say that our living standard is close to the European average, we now need to shift up if we want to get to the next level. And that is where we will come up against countries that have much longer savings regimes and culture.

There are people who do not like some aspects of how Scandinavian countries have organized their societies, while others like other things, But they have been phenomenal in setting up their education systems. The other thing they have succeeded at are pension systems.

A colleague gave me a detailed overview of the development of the Swedish pension system a year ago. They were exactly where we are, they couldn't get it going and there was much debate over whether expectations went far enough. But once compound interest started working in their favor... They have a very effective system today. Rather, they are getting into a situation where those who have saved a lot are losing motivation to work, while young people are struggling to get off the line. Such long-term systems always have the generational conflict engineered in. But if there is anyone to emulate in terms of how to set up our society, we should probably look to Scandinavia.

We have that same problem of getting off the line in Estonia. People moving to Tallinn or moving out to live on their own are finding it hard to save enough for a down payment on a piece of real estate in the capital. And while real estate prices have started coming down in Finland and Sweden, this has not reached us.

Our macroeconomics team recently calculated Estonia's price level as having reached 89 percent of the EU average. Prices have gone up in recent years. We are the 14th most expensive country in the EU, while we were 18th only in 2021. We have overtaken Portugal, Greece and Slovenia. When I still went to school, life in those countries was good compared to Estonia. But today our prices are in the same place, while salaries are not quite there yet. Estonia is getting to a place where it is not looking up at others and where others will be looking up at us in terms of price level and social organization.

And how to move on in this situation is the million dollar question. More of what we do needs to be knowledge-based, which brings me back to education. We need to decide some things somehow.

Why have higher interest rates had little effect on the Estonian real estate market? Prices have changed very little.

Why? Because the average salary has not fallen and rather the level of income has grown over time. People can still afford to buy new and second-hand real estate. That is the main part of the answer. Activity is down a little to suggest that sellers believe prices will continue to go up and refuse to come down in what they're asking, while buyers are also holding off to wait and see. That is when you get a 30-percent reduction in transactions.

When we were making forecasts last year, there was this tension in the air of whether something else would follow the war and soaring interest rates etc. It has not happened by today. Are we in a better place today than we were a year ago.

In truth, it is good news that we haven't seen anything else. But does that mean we won't see it tomorrow? I cannot be sure as our main export markets are weak. It is perhaps a peculiarity of the work of a banker that you rather tend to see risks materialize, and you can be satisfied when they don't. Let us say I'm not sure we're out of the woods yet. The good news is that the crisis has not hit Estonian society on a broad scale yet; we don't have widespread unemployment and are not seeing waves of bankruptcies.

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