In its appeal to the government, the Estonian Employers' Confederation said that the closure of the Strait of Hormuz has led not only to a major reduction in the supply of oil and petroleum products, but also to a decline in the supply of a large amount of other raw materials on the global market, including fertilizers, helium used in the semiconductor industry and aluminum.

The confederation's chairman, Hando Sutter, told ERR that the organization had gathered feedback from its members about the current situation and that the feedback was deeply worrying.

"I just came from Haapsalu, from one of the major employers there, and the picture was even darker than what we've been hearing here. They listed all of the materials. Prices have risen by 25 to 100 percent across the board, plus additional logistics and supply disruptions," Sutter said.

In their letter, the employers highlighted that rising energy prices are significantly increasing costs in transportation, infrastructure construction, building materials production, waste management and furniture manufacturing.

The plastics industry is facing problems because of the sharp rise in the cost of petroleum-based raw materials. The food industry is struggling with the availability of packaging materials, including PET bottles, and with the rapid increase in fertilizer prices. Exports to Asia have also stalled because of worsening access to transportation solutions.

The information and communications technology sector is also experiencing difficulties with hardware deliveries, while prices have risen there as well.

Sutter said that in the short term, supply chains have been completely drained, leaving a gap in the system. Even if the war ended immediately, the crisis would continue for months. In addition, rebuilding the destroyed infrastructure in the Persian Gulf region could take several years. It is currently unclear when and how the situation will end.

"What is fairly certain is that a very difficult winter lies ahead," Sutter said.

For its part, the representative organization is recommending that the government establish a standing crisis committee that would also include representatives of business organizations. The committee would serve as a forum for exchanging information, allowing business groups to continuously raise their concerns with the government.

Public contracts no longer feasible at agreed-upon prices

The employers said their biggest concern is public procurement. According to Hando Sutter, many previously signed public contracts can no longer be carried out at the agreed prices. Even in cases where price adjustment mechanisms were included, the Estonian Employers' Confederation believes they do not cover the actual increase in costs.

The confederation recommends that the state refrain from imposing contractual penalties, allow contract prices to be raised in line with higher input costs or launch new tenders.

Sutter singled out construction of the Rail Baltica route as the largest project affected. He said many subcontractors would simply go bankrupt if they were forced to complete the work under the original contracts.

"It is clear that under normal circumstances these risks were probably taken into account, but when some inputs have doubled in price and you still have to fulfill the contract, if the other side does not compromise and insists on its legal rights, then companies will simply be shut down," he added.

For future contracts, Sutter recommends indexing fuel prices into agreements until the situation stabilizes, because otherwise contracting authorities will inevitably have to build those risks into their bids. If the situation later normalizes, such bids would end up costing the state more than contracts with an adjustable fuel-price component.

According to Sutter, public procurement will become more expensive in any case.

"In the specific case of Rail Baltica earthworks transport contracts, involving dozens of companies, sample calculations were shown to me indicating there was not even a theoretical chance that those companies could complete the work. There are two possibilities: either something changes or those companies go bankrupt," Sutter said.

Sutter added that larger companies are already trying to reduce their risks.

"For example, major suppliers to our manufacturers have begun shortening their payment deadlines," Sutter said. "They are managing their own risk. They assume that some of their clients, especially smaller ones in certain sectors, may not be able to cope with these changes. Previously, a 60-day payment term was offered; now it is being reduced to 30 or 20 days. In some cases, advance payment is even being required."

According to Sutter, in some ways, the employers' message to the government is also to keep its powder dry.

"The feeling is that the longer this goes on, the greater the likelihood that the government will have to support someone anyway. Costs are increasing. Even with these positive budgets, the government should proceed cautiously and consider when the crisis will require relief measures," Sutter said.

Other measures

In addition to reviewing procurement contracts, the business group's representative organization is also asking the government to ease or completely waive interest charged on tax arrears and to offer sureties or guarantees to struggling companies through the Estonian Business and Innovation Agency (EIS).

The Estonian Employers' Confederation also believes the government should prepare for a situation in which gas prices have not fallen by autumn and there is a need to make broader use of oil shale to cover peak electricity demand.

"If we remember the winter of 2021-2022, peak electricity in the Baltics was actually produced from oil shale," Hando Sutter said, adding that Estonia should also be prepared, if necessary, to fuel district heating plants with shale oil.

Finally, Sutter said Estonia should monitor developments in neighboring countries. If another country decides to provide major support to its companies, Estonia should respond in a similar way so that Estonian exporters are not placed at too great a competitive disadvantage.

As an example, he noted that while Poland, Lithuania and Latvia have lowered excise duties on motor fuels, the differences are not yet very large. However, if those gaps widen significantly, Estonia should also take action.

"If the Latvians and Lithuanians decide to lower excise duties to the European minimum and we say here that we will not do that, then it becomes very difficult. We are so closely connected to them and it is clear that half of Estonia would start filling up in Latvia and probably industry as well," Sutter said.

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