Estonia's foreign policy focuses on integration of the Baltic States into European and international institutions in order to protect itself against possible reemergence of a hostile and aggressive Russia. Estonia applied for European Union (EU) membership in 1995. The EU opened talks with Estonia on possible membership in March 1998 and announced in October 1999 that Estonia was close to meeting the economic requirements for membership in the EU and was one of twelve nations being considered for membership. In December of 2002, the EU announced that accession talks with Estonia had successfully come to an end. The EU announced in March 1999 the committal of US $60 billion over a seven-year period for building up the economies and infrastructures of prospective member countries in Central and Eastern Europe, Estonia among them; Germany, however, refuses to fund further spending in this direction. Estonia was also admitted to the NATO Alliance in 2002, as it was asked to join the alliance against Iraq. Estonia accepted, and pledged support for any action NATO might take against Iraq and its leaders.
Considering its geographical situation, Estonia has naturally developed strong economic ties with the Scandinavian countries. Scandinavian banks have sought aggressively to expand into the Baltics, where growing economies and underdeveloped markets make for prime investment territory. SwedBank gained a majority interest in Hansabank, the largest bank in Estonia and a preeminent Baltic financial institution. The banking industry is relatively nascent in Estonia due to its Soviet past, and as of 1999 total bank deposits in Estonia comprise only some 30% of its GDP. The country now has five commercial banks as the result of closures and mergers, including foreign mergers.
Relations between Estonia and its Scandinavian neighbors are not without tensions, however. Strong diplomatic, military, and economic ties between Finland and Estonia have been tested by wage disparities between the countries. Efforts to resolve such issues, however, have largely been successful.
Russian-Estonian relations have been strained since Estonia's independence. The 31 August 1994 withdrawal of Russian troops resolved one key issue, but other issues remain, including the Russian-speaking minorities in the Baltic states, and a border demarcation dispute. Estonia struggles to assert its new-found identity against the influence of its huge neighbor to the east. The Estonian town of Narva cut off water and sewage treatment it had provided to the Russian town of Ivangorod across the border after the latter failed to pay more than US $1 million for services received. A 78-year-old man, a former member of the Soviet secret police, was convicted and given an eight-year suspended sentence for having ordered the deportation of over 20 families during the Stalinist era. For their part, Russian authorities expelled an Estonian man after he confessed to gathering secret information about the Russian air force for the intelligence wing of a militant group in Estonia. Yet the government in Estonia remains stable; according to Transparency International, a non-governmental group that monitors governmental corruption, Estonia is among the former Communist bloc nations least affected by government corruption.
The communist background of the new president (he was a Central Committee member of Estonia's Communist Party in the Soviet era) makes many Estonians—as well as some international interests—uneasy. But Rüütel assures his people that the goals of incorporation into the greater European society will not change under his leadership.