Volume 7 Number 3

Summer 1998

Constitution Watch
     A country-by-country update on constitutional politics in Eastern Europe and the ex-USSR

Estonia
     Economic worries dominated Estonia’s summer months, after the collapse in early June of the country’s sixth-largest bank led to confusion in the financial sector and growing speculation that Estonia’s economic miracle may be headed for a slowdown. On June 8, the owners of Maapank decided to shut down operations after an internal audit revealed that the bank was insolvent. Losses at the bank had been mounting since the beginning of the year, although figures released publicly during those months showed only a slight downturn at times; otherwise, the accounts seemed to be in balance. The decision to close the bank’s 68 offices across Estonia came after one of its major shareholders, Nordika Insurance, demanded changes in the bank’s executive board. Upon acquainting themselves with the actual state of the bank’s finances, the new board members called for an immediate halt in operations.

     The collapse hit hardest in Estonia’s northeastern and southeastern counties, where Maapank was the only bank in many cities. A total of more than 91,000 accounts were frozen, amounting to more than 500 million kroons ($35.5 million) in savings. The majority of these accounts (roughly 80,000) belonged to private individuals. In addition, another 560 million kroons ($40 million) in public-sector money was lost, including 70 million kroons ($5 million) belonging to the state budget, 115 million ($7 million) to local governments, and the rest to various government welfare agencies.

     To save these funds, Prime Minister Mart Siimann (Coalition Party [CoP]) initially sought to work out a deal by which Maapank would be bought out by two larger banks, Hansapank and Uhispank. However, after banks refused to take over Maapank’s assets in full, the government agreed to initiate formal bankruptcy proceedings while attempting to find alternative sources of financing for paying depositors with relatively small but—for them—crucial accounts.

     On June 29, the Riigikogu (State Council) agreed to allocate a total of 366 million kroons ($20 million) to bail out the bank, the bulk of which would come as a loan taken from the government’s stabilization fund. The fund was created last year for dealing with precisely such crises. The sum would allow compensation of up to 18,000 kroons ($1,300) per client, which, according to the government, would cover a majority of Maapank’s individual-account holders. On July 10, Uhispank began distributing the compensation. The prospect for recovering the public-sector money held in Maapank seems less likely, and none of these funds have been recovered to date.

     The political fallout from the Maapank closure was less significant than expected. In part, this was due to the fact that the parliament was preparing to recess for the summer and thus had little time in which to debate the issue more seriously. While many politicians blamed the Bank of Estonia (the central bank) for not having intervened earlier, the central bank faulted Maapank’s executive board for poor management and claimed that it also had been kept in the dark about the true extent of the bank’s financial difficulties. A review of Maapank’s loan portfolio revealed that questionable loans had been made to a number of rural Estonian politicians. Most of all, though, the bank had lost money as a result of Estonia’s stock market crash last October.

     The stock market’s decline also caused problems for Estonia’s second-largest bank, Hoiupank, when it was revealed in June that key bank officials had secretly borrowed money from the bank to cover certain market losses and that these loans had now come due. The news came just as Hoiupank was to be taken over by Estonia’s largest bank, Hansapank, in a deal that would create the Baltics’ largest financial concern, with over 24 billion kroons ($1.7 billion) in assets. An investigation revealed that Hoiupank had lost about 225 million kroons ($15 million) in the affair. The Hansapank– Hoiupank merger nevertheless took place, in early July.

     Although the consolidations helped shore up the financial sector, concerns continued to be raised in the press about a potential slowdown in the country’s economic recovery, which began in earnest in 1993. Although the economy continued to expand by more than 10 percent in 1997, Estonia’s high trade deficit (totaling 33 percent of GDP in 1997) spawned fears that Estonia was living dangerously beyond its means. Without continued high levels of foreign investment, many warned, the economy would soon show signs of decline. In 1997, the IMF required the government to create a rainy-day stabilization fund in excess of one billion kroons to prepare for any major setbacks. The IMF also called on the government to take steps to curb consumer consumption. Other voices (including that of the Economist-owned Business Central Europe magazine) continued to call for a fundamental change in Estonia’s economic policy, away from its current laissez-faire stance and in the direction of a more strategic approach to industrial investment and development. Little change in economic policy is likely, however, since the current, centrist minority government of CoP, the Rural Union, and other smaller parties is too weak to begin a major overhaul of economic policy. And with the next parliamentary elections set for March 1999, significant changes seem even less likely than before.

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     The Constitutional Review Chamber heard two cases in May and June, both of which concerned lower court rulings calling into question the constitutionality of certain government decrees. According to Art. 87.6 of the Constitution, the government may “issue decrees and regulations for fulfillment, in accordance with the law.” Under Estonia’s constitutional-review procedure, when a lower court declares an otherwise legal act, such as a decree, unconstitutional, the act is automatically appealed to the Constitutional Review Chamber. The first case involved a government decree of November 1994 that regulated the issuing of seaman passports for Estonian citizens and resident noncitizens. In March 1998, a resident, noncitizen seaman, Aleksandr Panov, claimed that the decree was discriminatory since it established different rules for citizens and noncitizens. Article 29.1 of the Constitution guarantees all citizens “the right freely to choose his or her sphere of activity, profession, and place of work.” This right extends automatically to noncitizens “unless otherwise provided by law.” Panov argued that since the regulations had been enacted by decree and not by a parliamentary law, as required by the Constitution, the decree was unconstitutional. In addition, Panov also referred to the International Labor Organization’s Convention No. 108, ratified by Estonia in October 1996, which requires member states to treat citizen and noncitizen seamen equally. Article 123 of the Constitution states that, “If laws or other legislation of Estonia are in conflict with international treaties ratified by the Riigikogu, the provisions of the international treaty shall apply.” Thus, in this regard as well, the decree was unconstitutional.

     In its ruling of May 27, the Constitutional Review Chamber agreed in principle with the Tallinn Admin-istrative Court decision that the government decree was unconstitutional. In the meantime, however, the government had rescinded the decree on May 5, so the Chamber technically had to turn down the appeal.

     In the second ruling handed down on June 17, the Chamber reviewed an appeal by the Tartu Regional Court claiming that a March 1995 government decree, which regulated trade in timber products, was unconstitutional because it lacked any reference to standing legislation that would authorize such a decree. The case had originally been brought by a small logging company in Viljandi that local tax authorities had charged with tax evasion. While the company claimed it had paid its taxes correctly, based on Estonia’s general tax code, the tax authorities argued, based on the government’s March 1995 decree and its new regulations, that the company owed additional taxes. While the company lost its original case in the Viljandi County Court, it won on appeal in the Tartu Regional Court on April 27. The Tartu court ruled that the March 1995 government decree was unconstitutional since it had been issued without any basis in existing legislation. According to Art. 87.6 of the Constitution, the government can issue decrees only “in accordance with the law.” In this particular case, the parliament did amend the Law on Forests, in order to enable the government to adopt the necessary regulatory decrees, but only in May 1995, two months after the original decree.

     As a result, the Tartu court ruled that such amendments could not retroactively sanction an earlier decree that was fundamentally unconstitutional, and that any action taken on the basis of that decree (such as a demand for additional tax payments) was illegal. The Constitutional Review Chamber upheld the Tartu court decision, citing the technical argument that the government decree was unconstitutional. Moreover, it noted that tax burdens can only be levied based on specific changes to the tax code and not through other legislation such as the Law on Forests. As a result, the Chamber threw out the government decree. The ruling, however, drew a dissenting view from the Chamber’s chief justice, Rait Maruste. While Maruste agreed with the legal points of the Chamber’s decision, he warned that the ruling went too far in the direction of legal fetishism. Instead, Maruste suggested that the Chamber should have delayed its ruling in order to allow the government to update the decree instead of creating an immediate regulatory vacuum by throwing it out.

     In this, Maruste was true to his own persistent viewpoint that the Chamber’s job should also be to interpret substantive or essential issues relating to the constitutionality of individual laws, not just their legal-technical merits. The June 1998 opinion was Maruste’s last, since shortly thereafter, he resigned as chief justice in order to take up an appointment on the European Court of Human Rights in Strasbourg. He will replace Uno Lohmus, who had previously served from Estonia. On June 3, President Lennart Meri nominated Lohmus to replace Maruste as chief justice. The nomination will be passed on by the parliament in the fall.

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