Letter from Tallinn

If ever a currency could claim to be appropriately named, it’s the EEK, the Estonian kroon. The 400,000 residents of Tallinn, Estonia’s capital city and Baltic port, might well squeak in horror – here, the average price of a two-room apartment has shot up 42 per cent in the past year. Rents have increased 14 per cent.

The world’s fastest-rising property prices are the result of an economic boom of 12 per cent annual growth, spurred on by a flat tax rate, a rocketing technology industry (Tallinn has been called “Silicon Valley on the Baltic Sea”) and a buoyant mood since joining the European Union and Nato in 2004.

Newly accessible to the rest of Europe thanks to knock-down air travel – and with no restrictions on foreigners buying property – entrepreneurs and tourists are fuelling the economy of the former Soviet state, which gained independence as recently as 1991.

“It is very hard for even me to remember how Tallinn looked 15 years ago,” chuckles Mart Laar, 46, the affable, two times former Estonian prime minister, who is credited with pioneering flat taxes, leading economic reform and preparing his country for entry into Europe. “You can imagine a city without cars? In 1991, I was going into the centre of town from the harbour and I saw only two cars on the street. There was the lack of petrol. No colour. The city was in a very devastated mood.”

I meet Laar at his campaign headquarters near Toompea Castle, home to Estonia’s parliament, days after the March elections that saw his Union of Pro Patria and Res Publica (IRL) party form a coalition government with three of four rival parties. Laar is between summits at the Radisson SAS hotel, where his terrifyingly young colleagues – Tallinn once boasted a 27-year-old mayor – are thrashing out the allocation of seats. Post-election, the city’s mood is buoyant.

“Business people are very happy,” explains Steve Roman, editor in chief at The Baltic Times. “The fact that these parties are forming their coalition makes Tallinn even more friendly to foreign business. But it’s a young political system and politics here is a very populist affair. One party [IRL] promised a free laptop for every high school student. We’ve yet to see if that will happen.”

Either way, it would seem a shrewd vote-winner. Since the 1950s, when the Soviets chose the Baltic states as the location for numerous scientific institutions and Tallinn gained its Institute of Cybernetics, “e-Stonia” has been one of the world’s most tech-forward countries. Now it’s in a race to modernity that is outstripping the rest of the West.

Here, mobile phones are used to pay for parking, 95 per cent of bank transactions are done online and petrol stations come Wi-Fi enabled, so customers can check their emails after refuelling. Anyone alighting at any of the tens of cafés in Tallinn’s medieval Old Town – a UNESCO World Heritage site – without pulling out a MacBook and hunkering down to some serious virtual networking is liable to feel a perverse sort of social pariah.

“In terms of information society, we are 10 times ahead of other countries,” says Linnar Viik, the government advisor and professor at Tallinn’s IT College, whose Jedi-like demeanour has earned him the sobriquet “Estonia’s Mr Internet”. “As a former communist country, where corruption was an issue, the internet increases transparency. Now the leaders cannot abuse their positions.”

Today, Tallinn’s Institute of Cybernetics houses Skype, the successful service granting free telephone calls over the internet, which has racked up 125 million subscribers in little more than three years and Playtech, which designs software for online gambling and was valued on London’s Stock Exchange at close to €1bn.

Here, the contrast between old and new Tallinn could hardly be sharper. Outside, a punishing Baltic wind whips around the dour, imposing Soviet block. Inside, Skype’s bright young things take delivery of a 46-inch TV, Justin Timberlake plays on the stereo and a dachshund wanders around reception.

“What makes Tallinn, and Estonia in general, a special place for this kind of business is simply the lack of people,” says Sten Tamkivi, Skype’s 29-year-old head of worldwide operations. The first version was developed with four guys over four months. Next month, we had a million subscribers.” Skype’s founders sold their share of the business to eBay for €1.9bn in 2005.

As the city increasingly looks west to distance itself from its past, signs of new prosperity are everywhere. Not so long ago, the central Kaubamaja (with Soviet literalness: “department store”) boasted a wall devoted to a single style of shoe. Now it houses Chanel, Dior and Lancôme. It has been suggested you will see more Ladas on the streets of Liverpool than Tallinn. “Spending on cars increased a billion kroons last year,” says The Baltic Times’ Joel Alas. “People have to have the latest thing. All the kids have nice clothes and iPods.”

Some suggest Estonia is on course to become one of the richest countries in Europe in the next five years. Others – like Danske Bank – say the boom is unsustainable and the economy is in danger of overheating. But Laar says he’s got it all under control. “Everywhere you look in Tallinn, you see cranes, new buildings starting. After 50 years of Soviet occupation, everything must be fixed. But, always, you must be careful.”

Still, with St Petersburg just five hours away by road and the Soviet threat refusing to recede completely – “People talk about how, one day, Estonia will be invaded again. There’s a lot of nervousness of Russia,” says Roman – who could deny Tallinn a little retail therapy?

“Unlike the rest of the Soviet Union, Tallinn was the one place you could watch Finnish TV,” says Alas. “I have a friend who used to say the adverts for Mars bars looked like absolute heaven. He couldn’t imagine living in a world where there were Mars bars available to buy. He’s only 22,” he says. “It’s not that long ago.”