How a former Soviet state became one of the world’s most advanced digital nations

Imagine a country that runs completely online. A place where internet access is declared a basic human right – much like food and shelter – and the capital city has had a free Wi-Fi network for more than 15 years. Welcome to Estonia.

The birthplace of Skype and TransferWise, this Baltic state regained independence from the Soviet Union in 1991. Its capital, Tallinn, is the largest city in Estonia with a population of just over 400,000. Take a walk through the narrow medieval alleyways of Tallinn’s Old Town and you can see why it’s listed as a UNESCO World Heritage Site. What might not be as obvious is the fact that this city of Gothic spires and Baroque architecture is home to one of Europe’s most forward-thinking tech scenes.

So how did this pint-sized David become a Goliath of the digital age? The answer lies in a combination of tech-savvy citizens and entrepreneur-friendly regulations, but events in the 20th century also had a crucial impact.

“Tallinn has managed to turn the Soviet legacy to its advantage in many ways,” says Ott Jalakas, COO and co-founder of the language-learning platform Lingvist. “Throughout the 20th century, Tallinn lacked contemporary ICT systems as they were not imported from Europe and the US to the Soviet Union. Instead, we have innovated, advanced, and amplified.

“We essentially skipped the generation of ICT infrastructure which dominated the 1990s and the early 2000s, and the current generation of ICT applications has been easily and seamlessly implemented into Estonian society.”

(Above: Soviet Tanks entering Tallinn in 1991. Source: Estonian World)

To give an example: since so few people had landline phones under Soviet occupation, many simply leapfrogged to mobile phones. It’s what we’re seeing in China today, with consumers jumping from the pre-web era straight to smartphones, and bypassing the personal computer altogether.

Karoli Hindriks, who co-founded Jobbatical in 2014 to help professionals find work abroad, agrees. “I think one of the reasons Estonia has been more successful in recovering from the Soviet occupation, was the fact that it took a transparent approach from year one and moved far away from the Soviet identity.”

“The country was built from scratch using the most modern technologies,” Hindriks continues. Since cheque books were never introduced in Estonia, the post-Soviet country went straight ahead with bank cards, which made the transition to online banking easy. “Hansabank launched the first electronic banking solution in 1993 and by 2003, 95% of payments were made via e-banking facilities (both online and offline). Now 99% of banking transactions are made online, 98% of the companies are established online, and 95% of tax declarations are filed online.”

Online elections and e-residencies

This seamless process of building a digital life starts early. At birth, every Estonian is provided with a unique 11-digit number, which acts as their online national identifier. This digital ID system allows citizens to do everything from filling out a tax return online to setting up a company in just fifteen minutes. It’s also the same system that saw Tallinn become the first city in the world to hold elections online, over a decade ago. In the 2014 European Parliament elections, more than 103,000 voters used internet voting in Estonia – that’s 31% of all voters.

By now, Estonia is used to being a country of firsts. In 2013, Taavi Kotka, a software engineer and entrepreneur, came up with the concept of virtual “e-residency” after becoming the Estonian government’s chief information officer. With typical Estonian efficiency, the first e-residency cards rolled out in December 2014.

(Above: An Estonian digital ID card. Source: e-resident.gov.ee)

“Our vision is to offer every world citizen, regardless of nationality or location, access to Estonian e-services,” says Kaspar Korjus, programme director for e-Residency. “By launching e-Residency, we aim to make Estonia bigger, to grow our digital economy and market with new customers and at the same time help to empower entrepreneurs the world over. In terms of numbers we want to build a digital society of ten million by 2025.”

E-residents can register companies in Estonia, even if they don’t live there, thus gaining automatic access to the EU’s common market – a huge temptation in these times of Brexit-induced uncertainty. In fact, prior to the referendum, just three British citizens applied per week, but that has risen to more than 50 per week in its aftermath.

Estonian unicorns

Founded in Tallinn in 2003, Skype was the brainchild of Estonian developers Ahti Heinla, Priit Kasesalu and Jaan Tallinn, Danish developer Janus Friis and Sweden’s Niklas Zennström. The company was sold to Microsoft in 2011 for $8.5 billion, and ex-Skypers invested heavily in Tallinn’s burgeoning startup scene. The impact was enormous. If you were to play the six degrees of separation game with startups in Tallinn, it wouldn’t take long to connect the dots to Skype.

Take that other Estonian unicorn for instance, TransferWise. In 2010, Skype’s first employee, Taavet Hinrikus, co-founded the online money-transfer company with Kristo Käärmann when they were both living in London. Seven years later, and the company has nine offices with over 600 employees, across four continents.

“Skype was the first true success story for Estonian engineers (there was no real startup scene back then in 2003) and today, we see three advantages that the Skype ecosystem has created,” reveals Käärmann, co-founder and CEO of TransferWise. “First of all, engineers and developers gained [the] necessary skills and developed an international mindset that allowed them to do business on a global scale.

(Source: Viiphoto)

“That in turn increased their confidence, which quickly spread to other entrepreneurs and founders of other startups. And lastly, Skype’s exit (the company was first bought by eBay, then later by Microsoft) created a generation of startup entrepreneurs and angel investors who invested their gains back into the ecosystem. Many of today’s successful Estonian startups have been founded by former Skype employees. My co-founder Taavet is just one example. I’m pretty confident that TransferWise will spawn another generation of entrepreneurs.”

It’s a sentiment echoed by Hindriks: “There has been a big leap of confidence since a few seemingly random guys from Tallinn co-founded Skype and changed the global industry of telecommunications. Having started my entrepreneurial journey long before the word ‘startup’ was popular, I have had a chance to witness an interesting change in Tallinn. As a young girl, I became an entrepreneur when nobody really thought of starting your own business. Today, it’s almost weird if you don’t! There has been a complete shift in mindset.”

Of course, this shift comes with all the usual signifiers of a startup hub: ‘new Nordic’ restaurants springing up like mushrooms, driverless electric buses, and an annual tech event that attracts more than 2,000 international guests (Latitude59 runs 24 to 25 May 2018). But what are some of the challenges facing Estonia?

Widening wealth gap

Like many other major economies, the wealth gap in Estonia has worsened since the 2008 financial crisis. New data collated by the Organisation for Economic Co-operation and Development (OECD) shows that increased urbanisation has led to reduced rural public services. A move that is perhaps made all the more galling as Tallinn introduced free public transport at the beginning of 2013. Residents of Tallinn (who must contribute €1,000 of their income tax to the municipality every year) pay just €2 for a “green card” and then they can ride the city’s buses, trams, trolley buses, and trains for free.

Since the scheme began, an additional 25,000 people have registered in the city. But this has caused fiscal tensions across the country, as other places feel that Tallinn is taking money that could be better spent elsewhere. Dr Oded Cats, who spent a year studying the project, told The Guardian: “It’s not hard to see why the government and the mayor’s office might see things differently.”

Tax was also a contentious issue at the recent European Union’s Economic and Financial Affairs Council (ECOFIN), held in Tallinn in September. Following the meeting, Toomas Tõniste, Estonia’s minister for finance, emphasised the importance of agreeing on new international tax rules that take into account digital economy business models:

“Tax problems connected with the digital economy and the need for new solutions have been a subject of discussion for a long time. At the same time, companies have to operate in unequal conditions. Countries are deprived of tax income and to compensate for that, they impose unilateral measures. This, however, harms our common market and the entire EU. Thus, the sooner we reach a solution the better. This guarantees the fairer taxation of companies and creates a better business environment.”

The ministers’ next meeting is set for December, where Estonia will once again try to ‘disrupt’ the old, comfortable habits of Western Europe. Erkki Koort, Estonia’s deputy secretary-general for internal security policy, was borderline evangelical about his country’s role in dragging Europe into a tech utopia: “We are the e-believers.”

Allan Martinson, COO of Starship Technologies (which, incidentally, also counts Skype alumni amongst its founders), warns that despite the recent boom in tech companies, the challenge is to sustain growth. “Another issue that entrepreneurs are facing is the nation’s inexperience in capital markets – with many of the local niches already taken, only high-tech is truly scalable.”

Käärmann concurs, and points out that Tallinn must avoid the trap of becoming complacent and not challenging the status quo anymore. “Luckily, the Estonian public sector has committed to a ‘no-legacy’ rule,” he adds. “No public sector IT system can be more than thirteen years old, to avoid getting stuck in old technology.”

Finally, for emerging cities looking to the Estonian capital for instruction, Hindriks has one last piece of advice: “In a world where every seventh person on the planet is a migrant, what becomes significantly more important is the ‘user experience’ of a city. What Tallinn has achieved is that the people barely need to spend any time on bureaucracy. Almost any public service just requires you to log in with your ID-card or Mobile-ID and if anything takes more than ten minutes then people get anxious.”

Who knows, maybe the reason we’re not zipping around on hoverboards is all that red tape tying us down. If so, Tallinn might know how to cut it.