Category: Uncategorized

Since the end of the Cold War, the Black Sea region has gained even greater political and economic importance and has become the subject of a dominance battle between world powers including the United States of America, Russia and the most influential member states of the European Union.

While these world powers battle for dominance, local players such as Turkey and Ukraine have also gained importance and have used their geopolitical position to promote themselves as key international policy players.

The Black Sea region has, throughout history, represented an area of global interest. As one of the most important strategic east-west corridors between Asia and Europe (that connects Europe, Russia, Central Asia, and the Middle East), the region has often been at the heart of political tension, economic interest and military aspirations.

The importance of the Black Sea region is more evident in no other but the energy sector. This region has become one of the most important crossroads through which both Russia and the European Union are trying to exert energy sector control, particularly in the area of natural gas.

On the one hand, Russia is trying to maintain its dominance in Europe’s energy sector. It has attempted to bypass the troublesome Ukraine as a transit country (although this has been, at least partly, achieved with the construction of the Nord Stream pipeline, which transports natural gas from Russia through the Baltic Sea to North-eastern Germany), while at the same time denying Ukraine and Moldova alternative gas supplies.

On the other hand, the European Union is trying to decrease its Russian energy dependency by using the Black Sea region to bypass Russia and to purchase natural gas directly from alternative Caspian Sea suppliers (thus reducing Russia’s political leverage in the Caucasus Mountains, the Black Sea region, and in South-eastern Europe).

The European Union seems to have based its strategic goal to decrease Russian dominance in Europe’s natural gas market on both political and economic/ financial reasoning. While the political reasoning is self-evident, the economic/ financial reasoning may perhaps be best explained by referring to an article from the Russian newspaper “Izvestia” containing a list of prices of Russian gas sold in different European countries. Specifically, this price list indicates that countries that are heavily dependent on Russian gas pay a much higher price in comparison to countries that have a liberalised gas-to-gas market.

Nabucco vs South Stream

The broader Black Sea Region, encompassing the twelve Black Sea Economic Cooperation member states (Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Serbia, Turkey and Ukraine) has had more than its fair share of proposed oil pipeline projects, reflecting the importance of this region for the European energy sector.

What started off in the early and mid-nineties as a rivalry between two highly promising large gas pipeline projects, the EU-backed Nabucco and the Russian-backed South Stream, seemed to have finished ingloriously for both parties and projects.

Specifically, Russia officially dropped the South Stream natural gas pipeline project in late 2014 due to complications related to regulatory challenges and non-compliance with the EU’s Third Energy Package, particularly in the area of ownership unbundling which would have required the separation of Russian companies’ generation and sale operations from their transmission networks.

The Nabucco project also seems to have hit a major stumbling block (although the project has not officially been cancelled or dropped yet). Namely, the decision of the members of the Shah Deniz II Consortium to select the Trans Adriatic Pipeline (as part of the Southern Gas Corridor) as the delivery route for the initial 10 bcm of gas to the Italian market  has posed some serious challenges and has left Nabucco’s shareholders in a difficult position regarding the future of the project.

Alternative pipeline projects

Since the original European and Russian rival projects (seem to) have fallen through, both the European Union and Russia have quickly turned their attention to the next geopolitical battle.

The European Union now seems poised to offer its support behind the Southern Gas Corridor project which would include three separate but interconnected segments of one gas pipeline corridor:

• the already functional South Caucasus Pipeline;
• the Trans-Anatolian Natural Gas Pipeline – TANAP (expected to be constructed by 2018); and
• the Trans Adriatic Pipeline – TAP (expected to be constructed by 2018).

The Southern Gas Corridor will ultimately transport natural gas from the Shah Deniz gas field in Azerbaijan, through Georgia, Turkey, Greece, Albania and the Adriatic Sea to Italy. Moreover, the corridor will have the possibility for further connections to gas networks in South Eastern, Central and Western Europe.

Russia is unlikely to sit idly by as the Southern Gas Corridor project is under development. In its latest move, Russia has indicated that it will attempt to effectuate the suggested natural gas pipeline project from Russia to Turkey across the Black Sea and then to the Turkish-Greek border. The suggested annual capacity for this pipeline is 63 billion cubic metres (same as that which was planned for the South Stream project). The projected pipeline remains without an official name as of yet, however it has been referred to as the Turkish Stream in the media.

Russia seems to be on the diplomatic offensive side in obtaining support for the Turkish Stream project with Russian President Vladimir Putin holding talks on this subject matter with both his Turkish and Greek counterparts Recep Tayyip Erdogan  and Alexis Tsipras  respectively. The foreign ministers of Serbia, Hungary, Greece, Turkey, and Macedonia also recently held a meeting to discuss their potential participation in the Turkish Stream pipeline project.

The role of the Western Balkans

EU candidate countries Albania, FYROM, Montenegro and Serbia, as well as potential applicants Kosovo and Bosnia-Herzegovina, would all like to benefit from the planed pipeline projects and to avoid being bypassed by gas pipeline developments in the region. Moreover, all of these countries are, to the best of their leadership’s abilities, attempting to become transit countries (instead of a cul-de-sac) with respect to any pipeline that may cross through their territory, which would in turn give them a greater geopolitical and economic stake in these energy developments.

Russia’s natural gas dominance in the region would surely be diminished by the development of the Southern Gas Corridor pipeline, leaving the possibility for Western Balkan countries to become more energy secure open.

By Veton Qoku, Associate, karanovic/nikolic

Estonian Parliament adopted an amendment by majority vote according to which, everyone may apply for e-resident’s digital identity starting from 1 December 2014. What makes the amendment so unique is the fact that the person who applies for digital identity does neither have to be a citizen of Estonia nor a foreign resident living in Estonia. It is possible to apply for e-residency irrespective of the person’s citizenship or residency.

By introducing e-residency, Estonia takes a huge step in developing its economy, science, education and culture by making its public and private e-services available to all people around the world. The procedure of applying for e-residency is similar to that of applying for a visa – an application must be submitted to a Police and Border Guard office in Estonia, the applicant must be identified, circumstances on the basis of which the digital identity is issued must be motivated and a state fee of 50 Euros must be paid. During the first period of implementation of the law, one must come to Estonia to apply for e-residency; however, it is planned to take into use a new citizenship and migration information system starting from the second half of 2015, which would enable to apply for e-residency in foreign missions of Estonia all over the world.

The purpose of introducing e-residency is to make Estonia more attractive as a friendly environment for living and travelling or maintaining and developing any other kind of business, science or cultural relations with Estonia. Although it is the bigger purpose of the law to encourage new business contacts, the scope of application of the law is not limited only to entrepreneurship. For example, students may apply for digital ID to communicate officially with Estonian universities; digital ID is also useful for researchers who would like to get convenient access to Estonian libraries and databases. If someone has relatives living in Estonia, they can make respective inquiries to archives by using e-residency. An owner of a summer-house located in Estonia may apply for e-residency to resolve issues related to land tax solely via Internet. Also, why not apply for e-residency to open up a bank account in Estonia and make one’s everyday bank transfers via Internet through a bank located in Estonia (i.e., in the European Union).

There are many ways how to use Estonian digital ID and new options are created constantly. An entrepreneur may be interested in the possibility of establishing a company via Internet in less than half an hour. Starting a business in Estonia has been made very easy and usually no licences, permits or registrations are required. For example, an Estonian e-resident living in Germany may reach from an idea to an active company in Estonia and transactions entered into in its name within a few hours. To conclude transactions one does not need to come to Estonia since digital ID enables digital signing of all contracts and documents. Once Estonian e-residency become more widely used, the possibilities offered by the digital ID may also be used more widely and not solely in connection with Estonia – it is quite realistic that, for example, citizens of Australia and Canada who are also both Estonian e-residents enter into a contract between themselves by signing it digitally with an Estonian digital ID and through that save tens of flight hours and thousands of dollars. 

In Estonia the e-Tax Board/e-Customs has become extremely popular – more than 95% of Estonian residents submit their income tax return electronically because it is easy (already filled), secure and takes only a few minutes. Almost all banking services can be used through digital ID. Digital access has been guaranteed for many public registers, including the Commercial Register, Register of Construction Works and Land Register, and digital ID enables making several amendments of entries without having to have to leave the office. If a person has entered into notarial transactions in Estonia, they will have free access to all notarial documents related to them in the e-Notary. In the case of disputes, all communication with courts goes through electronic means and in more straightforward matters it is not even necessary to appear to a court hearing since the matter is settled in written proceedings. When a judgement enters into force, it can be forwarded to a bailiff for enforcement with a digitally signed petition. More information about Estonian public e-services can be found from https://www.eesti.ee/eng/services. In addition to public e-services, many private entrepreneurs also offer access to their services through ID-cards.

When until now, the above mentioned e-services were, as a rule, only available to Estonian citizens and residents then now e-residents may use almost all Estonian e-services irrespective of their citizenship and location or residence. Only services that are essentially guaranteed for the citizens of the Republic of Estonia, such as the right to participate in e-voting, are forbidden to e-residents.

Estonia has long-term experience in using the ID-card and naturally it has been in the centre of attention to make it secure to use ID-cards and protect the identity of users. People who apply for e-residency do not have to be afraid of becoming guinea-pigs for the new and complex IT application. The possibilities and solutions offered by the digital ID of e-residents are no different from those of the ID-cards of Estonian residents, which is why it is a tested product that has been proved to be secure. The quality mark of Estonian digital identity is the e-elections system. Estonian citizens can give their vote digitally during the elections of both the parliamentary assembly and local governments. The e-voting platform has been tested, attacked and its security called into question too many times to be counted; however, so far no one has been successful in damaging the reliability of Estonian e-identity.

By Leonid Tolstov, Partner, VARUL

Starting from 1 December 2014 amendments to Estonian Identity Documents Act that enable all people irrespective of their citizenship and physical residency to apply for Estonian e-residency and digital ID shall enter into force in Estonia. In the context of Estonia this means limitless opportunities for developing business activity without leaving the comfort of one’s own home or office, provided that there is internet connection.

An Estonian e-resident may establish a company in Estonia, appoint its members of the management board, submit returns to the Tax Board and Commercial Register, make bank transfers, enter into contracts and perform many other everyday acts needed to run the company via the Internet with the digital ID at any location in the world. 

Hand in hand with the introduction of e-residency goes modernisation of Estonian Commercial Code to encourage establishment of new companies and investments into Estonia. Starting from 1 July 2015 several amendments, one purpose of which is to foster the establishment of start-ups, shall enter into force.

The two most common types of companies in Estonia are private limited companies and public limited companies. Their main difference lies in the closeness of the circle of shareholders – if private limited companies are meant more for small closed circles of shareholders then public limited companies are used to include many investors. There is also an essential difference in minimum capital requirements – minimum capital of private limited companies may be 2,500 euros, but the company may also be established without making any contributions (instead of contributions, claim against shareholders shall be reflected in the balance sheet); minimum capital of public limited companies must be at least 25,000 euros.

Closeness of the circle of shareholders of private limited companies has caused this type of company to be rather rigidly regulated, making it hostile to investors in practice. At the same time, however, the private limited company has always been clearly favoured to public limited company, especially in the case of start-ups, due to its low capital requirements. Therefore, in certain stages of development entrepreneurs have had to face the need to change the form of the company or even consider moving the company to a country with a more favourable jurisdiction.

New amendments concerning the regulation of private limited companies should solve the above mentioned issues and maximise the taking account of the needs of a modern cross-border entrepreneur. By and large, the planned amendments may be divided into three parts.

Encouragement of the involvement of additional capital

So far involvement of additional capital in private limited companies has largely been limited to either granting of loans or making contributions to the share capital, whereby the terms of contributions have been rigid and substantial deviation from what is provided by law has not been possible.

Pursuant to the new regulation, share capital may also be increased through conditional increase and issue of convertible bonds. On certain conditions the management board may also be given the right to increase share capital, which will enable the management to act more promptly, especially in the case of foreign shareholders, without having to have to wait for the decision of the general meeting of shareholders.

Regulation concerning contributions shall become much more flexible and share capital of the private limited company may be increased by share subscription, i.e., it is not necessary to note specific shareholders and the amount of their contributions in the decision taken for increasing the share capital, instead, the company shall have much more liberty in taking in capital by share subscription.

More flexible regulation of options

It is common practice in the beginning or growing stage of the company that key employees are motivated with an option to purchase shares. Estonian legislator has previously already amended the tax regulation and enabled employees to acquire options with exemption from tax if they are sold no earlier than 3 years after the conclusion of the options contract. 

However, in practice, repurchase limitations on own contribution have turned out to be problematic. Often options are executed in such a manner that the company buys a certain number of shares from the core shareholder and transfers them to an employee on the basis of an option. This scheme has been limited by a prohibition to acquire more than one-tenth of the share capital as own share. Pursuant to the amendments to the Commercial Code, the said amount shall be increased to one-third of the share capital.

Granting of special rights to different shareholders

Involving of investors in private limited companies has also been hindered by the limitation on the issue of more than one class of shares. Pursuant to the valid regulation, all shareholders of a private limited company have equal rights and each shareholder can own one share, the nominal value of which may be different determining the number of votes the shareholder has. When a shareholder acquires the share of another shareholder, it will be added to the acquirer’s share and the share’s nominal value will increase. If the shares were not of the same class, this kind of joining would not be possible.

If an investor is offered minority shareholding in a company, the investor would probably like to receive special rights such as the right to participate in the appointment of the management, distribution of profit, submitting of reporting, etc. The new amendment enables explicitly to issue more than one class of shares, and one shareholder may also own several shares if the rights accompanying the shares are different.

To summarise, it can be said that Estonian legislator has taken a big step forward in modernising the business environment and hopefully it will motivate entrepreneurs all around the world to consider Estonia as a great place to do business. 

By Leonid Tolstov, Partner, VARUL