The Estonian e-Residency programme has reached its first 5-year milestone. In those first five years, 63,000 people from 167 countries around the world have joined Estonia’s digital nation as e-residents.
E-residents have established 10,100 new companies so far – around 8% of all the active companies registered – and contributed directly or indirectly towards boosting the country’s economy.
In 2019, e-residents paid 10.8 million euros in direct taxes, and the cumulative profit for Estonia in those 5 years has doubled year-by-year, now exceeding 31 million euros. “In addition, there is an obvious spillover effect,” claims Ott Vatter, Managing Director of the e-Residency Programme. According to Enrico Moretti from Berkeley University, every high-value exports job created in the country further supports over five service jobs in the economy, from accountant and lawyers to drivers to yoga teachers. “But we still need to agree how to measure the socio-economic impact,” Vatter admits. For now, he prefers to stick to measurable facts like the total cost of the programme, which was 7.4 million euros until the end of 2018.
Vatter, who runs his team of 18 people from a rather frugal office located in an old limestone building of a former papermill with a view of the planes landing in Tallinn airport, stresses that it’s not just the tax income but mostly the indirect effect – Estonian brand awareness outside of the country and easing the process of conducting business abroad for Estonian companies.
“In the five years, they have learned that a big part of e-residents actually come from EU countries. They are company owners, freelancers who travel extensively due to the nature of their work and they might not have one certain base for their business. Thus Estonia provides a perfect solution,” Vatter overturns the common understanding that the programme’s main focus is attracting aspiring entrepreneurs from ‘third countries’.
Yet, there are obvious success stories from elsewhere in the world: starting from an Indian ceramicist who got to sell his pottery in the EU market thanks to his e-Residency status; to Silicon Valley-based venture capitalist Tim Draper who uses e-Residency to manage his investments and praises Estonian e-Residency to big audiences whenever he can.
Disrupting a country
“If we cannot be big in numbers, we have to be big in our spirit”, Jakob Hurt, one of the forefathers of Estonian independence movement, famously announced in his speech during the first Song Festival in 1869.
Hurt appeared to be an oracle: the population figures have not improved too dramatically over the 150 years since. Yet as an interpretation of the second part of his famous sentence, a similar idea was launched. In 2014, Taavi Kotka, Ruth Annus and Siim Sikkut came up with an idea to pursue the numbers from outside.
For the ideation contest for the then state-run Development Fund, the trio came up with an idea called “10 million e-Estonians by 2025”. The idea was seen as carrying major potential and a team was set up to work on implementing it.
On December 1st, 2014, Edward Lucas, then Senior Editor of The Economist, became the first e-resident of Estonia. “I run a small company which I use for my freelance work and I’m tempted to put it on Estonian pay and taxes to see how it goes,” Lucas said at the launch event. “For anything we do online we increasingly need digital signatures and this will enable a digital signature issued by a government the way that isn’t possible at the moment in Britain.”
Kaspar Korjus, an aspiring young leader, got to building the team of other young disruptors. One of them was Ott Vatter, who initially joined for a few months only. He had just sold his previous venture and was about to move to New York, but issuing of the visa and other paperwork took time so he offered himself to help out the recently launched e-Residency team.
“My task was to figure out how to set up the online application process and the initial job was supposed to last for two months.” But as is usually the case, the job got so interesting he never made it to the US and decided to stay to build this new programme instead. It offered an enormous opportunity: “You can shape the country and contribute to the GDP,” Vatter said.
Formerly, if a foreign founder wanted to set up a company in Estonia, they had to physically show up or pay a lawyer or a notary to set it up for them. Now they could apply for e-Residency from anywhere in the world, and after the Police and the Customs Department have approved the application, pick up the card from a local embassy.
Obstacles on the way
Nevertheless, something unexpected changed on the way. The restrictions around the international finance sector have tightened quite a bit. A five-year timeline of e-Residency has coincided with a row of falling domino pieces: the invasion of Eastern Ukraine, which triggered Western countries to impose economic sanctions on Russia, which in turn complicated money flows in and out of Europe, which in turn has led to money laundering scandals that recently shook the three largest Scandinavian banks, that also operate subsidiaries in Estonia.
Logically, e-residents should benefit from their special status in this situation. Each of them has been carefully background checked and has traded their biometrics for a government-issued secure digital identity.
But it is only natural that in this age of heightened ‘know your customer’ (KYC) pressure on banks, many honest e-residents trying to start their businesses in the EU have been caught in the general scepticism bankers may have of new customers they have never physically met. “We do not stand apart from the global finance sector, and we cannot force the banks – and a government should never force – opening accounts for foreign residents,” Vatter admits.
When Kaspar Korjus left in early 2019, Vatter was about to leave as well but nevertheless stayed on: “I decided to dedicate these years of my life to take e-Residency to phase 2.0 and rebuild the team. My promise has been to solve the issues within the country, to make our people actually believe that e-Residency is an asset to the country.”
“I had reached the goals I had set for myself,” recalls Korjus who has now co-founded Pactum, a company building an AI-solution to automate negotiation processes. “E-Residency had found a problem-solution fit, product-market fit, business model and a scalable solution. As the last step, we had to make it sustainable inside the country and, in this new phase of stability, Ott is the best leader.”
Big in Japan
According to the “E-Residency 2.0 White Paper” published a year ago, the number of mentions of the e-Residency program in foreign media in 2017 equalled the number of other mentions of Estonia. Thanks to this programme, Estonia has been hailed as the most digitally advanced society in the world by several world-renowned outlets such as Forbes, The New Yorker and Wired magazine. From 2014 until the summer of 2019, there were 11,000 mentions of e-Residency in the media, 4 books have been written on the topic and more than 20 academic papers. For some reason, Estonia seems to be especially popular in the Japanese media.
“The Estonian story has really grown big in Japan,” Vatter laughs. “Estonia is perceived as some sort of a fantastic fairy-tale land, an e-Narnia that everyone wants to be part of. I guess it relates to the fact that Japan has historically been leading in hardware technology and would like to catch up in software as well. Estonia seems like a tiny distant country in the future that has a good cultural fit, a somewhat similarly sounding language and Scandinavian ambiance; plus Finnair will physically help them directly get here. In 2018, we received the most queries and applications from Japan and many of their e-residents actually do relocate to Estonia.”
One of the many Japanese e-residents who moved to Estonia, Kota Alex Saito, seconds Vatter’s words on why he initially became an e-resident three years ago: “It sounded like the future. So I decided to come to Estonia just for 3 months to experience the actual e-Estonia and avoid the hot and humid Japanese summer. But this experience – the lovely environment, friendly people and stimulating business environment – turned my life upside down. A year later, I declined the job offer from a consulting firm in Japan to physically relocate to Estonia and found a company, all thanks to the e-Residency programme.”
After initially working for Veriff, an Estonian startup, Saito has now set up his own company. SetGo works with a wide range of startups in IT, trading and even a sports association, offering them consulting services to bridge Estonian and Japanese business environments. “E-Residency really helped my relocation to Estonia even though it does not work as a visa. I can do almost the same things that an Estonian does.”
As a contributor to Forbes Japan and other business media as well, Saito is essentially one of the soft-power agents telling the story of e-Estonia and its business environment.
“In the long term, it would make sense to set up a subscription-based model,” Vatter sums up his plans and adds that it’s more about the quality and less the quantity. “And why not reach the number of 10 million e-residents sometime in the future?”
Source: Life in Estonia magazine