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Nordic Ferries Look For Way To Survive EU Transition
Impact International / October 15, 1998

By Larry Luxner

HELSINKI -- During the Cold War, Finland -- forced by geography to walk a deli-cate tightrope between the Eastern and Western blocs -- was one of the world's biggest spy dens. A reminder of this mistrustful period can be found at Helsinki's downtown Hotel Torni, where a plaque in the lobby notes that this tall building once served as the headquarters of the notorious Soviet control commissioner, Andrey Zhdanov.

Says a guidebook: "Finnish policemen stood on guard outside the hotel day and night while Soviet soldiers kept guard inside. After the control commission left, an inven-tory was made at the hotel: the furniture had to be replaced, as well as the phone systems."

Today, the KGB men are gone. Instead, hordes of Russian-speaking tourists now flock to Helsinki's department stores and hotels for a weekend of shopping and relaxation.

"We're coming out of a heavy recession, and we had a lot of hope for European and U.S. tourism passing through Helsinki to make side trips to St. Petersburg," said Olof C. Jurva, managing director of the 512-room Inter-Continental Hotel Helsinki -- the largest hotel in Finland and the second-largest in Scandinavia. "But that hasn't happened. Instead, lots of nouveau riche Russians are coming for shopping, and that's compensated for it."

Interestingly, Finland's hoteliers and restaurant owners are firmly behind a new European Union directive that will eliminate duty-free sales within the EU by July 1, 1999.

Because of social policies adopted long ago to curb alcoholism in their countries, Finns, Swedes and Norwegians today pay the highest liquor taxes in the world. Since the Cold War's end, Finns and Russians have been flocking to the former Soviet republic of Estonia -- only 50 miles across the Gulf of Finland from Helsinki -- where they can buy vodka and other spirits much more cheaply, and in many cases, resell it back in Finland for a hefty profit.

Last year, however, a new law was passed requiring travelers to be away from Finland for at least 20 hours in order to take advantage of the liquor tax exemption.

"We were lobbying to get that 20-hour limit," said Pekka Ropponen, manager of the 220-member Finnish Hotel and Restaurant Association. He noted that ferry companies offer 22 trips a day between Helsinki and Tallinn, the Estonian capital. "Many people were making three or four trips a day, selling liquor cheaply in the streets. That was a real threat to our members."

A bigger threat, says Ropponen, has been duty-free liquor sales aboard Scandinavian passenger ferries, which eat into the profits of Finnish hotels and restaurants that don't enjoy similar exemptions from sky-high liquor taxes.

"If you can no longer buy tax-free alcohol and spirits, it means we can make more business in the restaurant sector," Ropponen said in an interview in Helsinki. "By 2004, there will be no tax-free area in the EU. That means alcohol taxes will be the same in Finland as in other countries. We want alcohol taxes to come down. In restaurants, taxes comprise 80% of liquor prices."

The duty-free industry doesn't see things quite the same way, of course.

The European Travel Research Foundation, in a publication entitled The Duty & Tax-Free Industry in the European Union, claims that Finland is Europe's second-largest market for duty and tax-free sales, and has the highest sales of duty-free per passenger.

If duty-free is in fact abolished, says the ETRF, "ferries would be severely affected, since currently only 21% of revenue arises from ticket sales, while 69% comes from duty and tax-free sales, including restaurant/bar sales. Ticket prices would rise sharply -- by up to 150% -- to recover lost income."

In addition, the ETRF report says, "falling passenger numbers would lead to rationalization of routes and ships. Capacity on Sweden-Finland routes would be halved. Loss of ferry services and frequencies would lead to increased cargo costs, further isolating Finland from the main-stream European economy."

Tuomas Nyland is vice-president of community relations at Silja Line, one of Finland's two leading passenger ferry operators. A lawyer by training, Nyland also serves as chairman of Trade and Traffic Finland, the country's national duty-free organization.

"It's quite obvious that in principle, if there were a single market in force, all indirect taxes would be harmonized. There would not be a need for duty-free when crossing borders," he said in a lengthy interview in Helsinki. "But the decision-makers thought development toward harmonization would be much more rapid. There are still 15 selfish independent states who all want to get as much tax revenue as they can. They have not been able to agree on the process."

Last year, Silja Line's revenues came to FIM 3.3 billion ($634.4 million), of which 25% came from passenger ticket sales, 13% from cargo fees, 38% from onboard duty-free shops and 23% from restaurants. In 1996, Finland's total duty-free ferry sales came to $797 million -- by far the highest in Europe and higher than Danish and Swedish duty-free sales combined. Approximately 94% of those sales are at risk with the end of duty-free.

At present, alcohol excise duties and value-added tax constitute almost 60% of the final consumer prices for beer and wine, and almost 80% for spirits. "Being exempt from these taxes is thereby an essential factor in setting the price on products sold onboard Finnish ferries," says the Helsinki Research Institute for Business Administration.

The report says that "in some cases the ability to purchase duty-free is a major reason for travel. To the extent that this is the case, passenger numbers will fall." Another possible effect of abolishing duty-free could be the diversion of routes to take in third countries, or territories with equivalent status. "These stopovers would be costly and make traveling times longer," it says. "However, if the only way to keep revenues up were to be such diversions, the operators would be likely to choose Tallinn, which in turn would mean lost income to the EU."

Popular with Finnish day tourists who come over on the ferry for cheap liquor and cigarettes (and in some cases sex), Tallinn nevertheless has more than its share of culture. On the main square, known as Raekoja Plats, fast-food restaurants, bars and striptease joints all compete for attention with venerable Orthodox churches, museums and art galleries. Along with St. Petersburg to the east, Tallinn is one of the best-preserved medieval cities of the former Soviet Union.

At present, there are 22 ferry crossings a day between Helsinki and Tallinn. Thanks to significantly cheaper labor rates, one Estonian company, Tallink, has been able to grab an estimated 40% of this booming market.

"The Helsinki-Tallinn route is by far the fastest-growing in the region, with a total market of 5.3 million passengers," said Nyland. "When Estonia became independent [from the Soviet Union in 1991], development took off, and prices for consumers came down. Added to competition from Estonian ship-owners, it's only a matter of time before they move into our traditional market. The reason for that is they're very competitive in labor rates, which are only 20% of the cost of a Finnish or Swedish crew."

One way for continuing duty-free sales on the most important ferry routes after 1999 is to divert traffic to Finland's ┼land Islands, which has an autonomous status guaranteed under international law.

This 6,000-island chain off Finland's southwest coast is politically Finnish but culturally Swedish, with place names exclusively in Swedish -- including Marienhamn, the quaint fishing village that serves as the ┼lands' capital city. The islands came under Russian rule in 1807 and remained so even after Finland gained independence from Moscow in 1917. Three years later, under a 1920 League of Nations mandate, Finnish sovereignty was established in return for autonomy and complete demilitarization.

"When Finland began negotiating for EU membership in 1993, we knew there was this threat of abolishing duty-free sales," Nyland explained. "Finland requested an extra transitional period to continue duty-free sales until 2005. That was not accepted. Then the Finnish negotiators proposed using the ┼lands' special status as a stopover. That was accepted in 1994. So we will call on ┼land Islands ports on the route between Turku and Stockholm. Between Helsinki and Stockholm, we'll stop either in ┼land or Tallinn."

Meanwhile, he says, the northern route between Vaasa, Finland, and Umeň, Sweden, has one million passengers a year, and would be affected the most by the abolition of intra-EU duty-free.

To circumvent the new restrictions, Viking Line also plans on rerouting its Helsinki-Stockholm service to go through ┼land, whose tax-free status permits duty-free sales. Meanwhile, Sweden's Stena Line AB is pressing to allow duty-free sales in international waters.

To be fair, not all the news out of Finland is bad. In an ironic twist, on Jul. 1, 1999 -- the same day duty-free is axed -- Finland takes over the EU's rotating chairmanship.

"We have calculated there will be at least 90 EU meetings over a 12-month period," says Ropponen of the Finnish Hotel and Restaurant Association. "Maybe half of them will be in Helsinki, and the other half in other parts of Finland."

In addition, Helsinki will also be hosting some major sporting events, including a world figure-skating championship next March. The city is also bidding for the 2006 Winter Olympics; if it wins, the Finnish Olympic Committee has designated the Hotel Inter-Continental Helsinki to be the event's official headquarters.

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