Annual Report 1998. Notes to the Financial Statements of Eesti Pank

PRINCIPLES OF ACCOUNTING

General Principles

The Financial Statements have been prepared in accordance with the Central Bank Act and the Statute of Eesti Pank. Estonian Accounting Act, from which Eesti Pank is exempted, and International Accounting Standards have been adopted only where Management considers them to be appropriate and applicable to the activities of a central bank.

The Financial Statements have been prepared in accordance with the historical cost basis of accounting; modified to include the revaluation of certain assets as referred to in the principles of accounting below.

The Financial Statements and notes have been prepared using accounting policies consistent with those used in recent years. The published balance sheet of Eesti Pank has been structured so that the domestic and foreign assets and liabilities can be separated. In addition, the balance sheet structure demonstrates the backing of the kroon by gold and convertible foreign currency assets.

In accordance with the Central Bank Act, Eesti Pank is not subject to taxes or any other payments connected with its economic activities to the State budget or to local budgets, except for taxes connected with natural persons.

The principal accounting policies adopted for the preparation of the Financial Statements are set out below.

Income and Expenses

Realised income and expenses are accounted for in the profit and loss account in the relevant reporting period on an accrual basis regardless of when cash is received or paid. Unrealised gains and losses are credited or charged to reserves.

Foreign Currency Translation

Transactions denominated in foreign currencies are translated into kroons, the legal tender of the Republic of Estonia, using the official exchange rates of Eesti Pank valid on the day of the transaction. Foreign currency assets and liabilities are translated into Estonian kroons at the Eesti Pank official exchange rate valid on the balance sheet date. Unrealised foreign exchange gains and losses are credited or charged to reserves.

Official exchange rates used at 31 December 1998 and 1997 were as follows:

	1998	1997
DEM	8.00000	8.00000
USD	13.41040	14.33560
SDR	18.84424	19.34665

Gold

Gold reserves are valued at the market rate at the end of the year. Revaluation gains and losses are credited or charged to reserves.

Investments in Convertible Foreign Currency Assets

Foreign treasury bills and other quoted securities denominated in convertible currencies are recorded at their market value valid at the end of the year. Unrealised revaluation gains and losses are credited or charged to reserves. Securities purchased under reverse repurchase agreements are valued at their purchase price.

Investments in Shares

Investments in shares are included at their purchase price, less provisions for any diminution in value, which are considered to be other than temporary. Profits and losses on the disposal of investments in shares are recognised when the sale becomes unconditional.

Fixed Assets

Fixed assets are recorded at cost, less depreciation which is provided for on a straight line basis over the estimated useful lives of the assets at the following rates:

	1998	1997
Buildings	3%	3%
Computers	33%	33%
Software	50%	20%
Other	20%	20%

From the beginning of 1998, the depreciation rate for existing software was increased to 50% reflecting management reassessment of its useful life. In previous years the depreciation rate of 20% was used as for other fixed assets.

Building renovation costs are charged to the profit and loss account as expenses except where the expenditure results in an increase to the external floor area of the building or a change in its use, in which case such costs are added to fixed assets. Provisions are made where it is known or probable that the market value of the asset is less than the value recorded in the accounts.

Loans, Other Assets and Provisions

Loans and other assets are reassessed periodically and specific provisions are established against those considered to be bad or doubtful due to the borrower's insolvency. Loan and other assets provisions are recorded as expenses of the reporting period and are included in the balance sheet as a deduction against the assets concerned. Loans and other assets are maintained in the balance sheet until they are repaid or written off. They are written off only after all legal measures to recover them have been taken.

Provisions for Guarantees

Provisions for guarantees are established as liabilities in the balance sheet, where it is considered probable that future events will result in payments being made by the Bank under the terms of guarantees. Such provisions are recorded as expenses of the reporting period.

ITEM 1 - GOLD

Movements in the Bank’s gold reserves are as follows:

	Amount (troy ounce)	Market price (EEK per ounce)	Market value (EEK thousand)
Balance as of 31.12.1997	8,250.171	4,147.28908	34,216
Revaluation			-2,380
Balance as of 31.12.1998	8,250.171	3,858.84260	31,836

ITEM 2 - CONVERTIBLE FOREIGN CURRENCY ASSETS

These comprise the Bank’s convertible foreign exchange reserves denominated in convertible foreign currency, together with accrued interest where applicable. To manage the foreign exchange reserves the following financial instruments are used: demand and term deposits, discounted, floating, fixed and index linked bonds (securities), spot, forward and swap transactions, repos and reverse repos and credits from foreign financial institutions.

During 1998, Eesti Pank’s convertible foreign currency assets remained at the same level as at the end of 1997. The increase arising from the income earned on government bonds and short-term investments. The income earned from these investments has been offset by the foreign currency sales to Estonian credit institutions, repayment of the Standby Agreement (SBA) to the IMF before the actual maturity date (see Item 3) and exchange rate movements due to the increase in the value of the German mark against most other foreign currencies. At the end of 1998, the proportion of assets denominated in German mark within the Bank’s foreign currency reserves was 97%, which is in accordance with the currency risk management principles.

The Bank's investment policies only allow transactions with highly rated banks and financial institutions. Under the Bank’s general investment principles the foreign currency reserves are intended to secure full convertibility of the kroon into other selected currencies and sufficient liquidity to meet the Bank's obligations whilst achieving reasonable returns within the given risk constraints. To fulfil these investment policies, the Bank keeps its foreign reserves in low risk liquid instruments with an average maturity of approximately two years.

ITEM 3 (AND ITEM 12) - SPECIAL DRAWING RIGHTS (SDR'S)

These items comprise the unutilised assets and liabilities, denominated in SDR's, arising from loans granted by the International Monetary Fund (IMF) to Estonia.

Between 1992 and 1995 the International Monetary Fund granted a Standby Agreement (SBA) loan to Eesti Pank which at the end of 1994 was invested under a management agreement by a foreign investment bank in securities denominated in the SDR basket currencies using the assets more efficiently compared to keeping the funds deposited with the IMF. Repayment of the SBA loan began in 1995 and its final maturity date was March 2000. Its major tranches were repaid in 1997 and 1998. Following the repayments in 1997 and 1998 and the consequent reduction in the size of the funds invested, its management by an external fund administrator would have been ineffective. Therefore, the SBA was repaid to the IMF before the actual maturity date and the fund management agreement with the foreign investment bank was cancelled in December 1998.

Between 1993 and 1995 the Systemic Transformation Facility (STF) was granted by the IMF to the Government of the Republic of Estonia and intermediated by Eesti Pank who acted as agent for the Government. The final maturity date of the STF is January 2005, with repayments beginning in 1998 when two tranches were repaid.

The following Table shows the movements in SDRs held by the Bank resulting from the changes described above:

EEK thousand
	SBA	STF	Total
Balance as of 31.12.1997	166	2	168
Interest and other income	1,467	672	2,139
Purchases of SDR's	328,969	57,545	386,514
Loans repaid to the IMF	-318,128	-36,768	-354,896
Interest and other expenses	-11,942	-20,993	-32,935
Currency translation differences	-121	25	-96
Balance as of 31.12.1998	411	483	894

ITEM 4 (AND ITEM 12) - PARTICIPATION IN IMF

Participation in the IMF is recorded in the assets’ side of the balance sheet and equals the country’s quota in the IMF, which is recorded in the liabilities’ side of the balance sheet ("IMF kroon accounts"). Estonia’s quota in the IMF was SDR 46.5 million (EEK 876.3 million) at the end of 1998:

ITEM 5 (AND ITEM 17) - OTHER CLAIMS ON IMF

Since March 1997, this item reflects amounts which originate from the percentage (currently 0.4%) added to the interest rate of SBA and STF and for strengthening the IMF’s financial position and financing the Enhanced Structural Adjustment Facility (ESAF) of the IMF.

The following Table shows the structure of other claims and movements in 1998:

ITEM 6 (AND ITEM 18) - OTHER FOREIGN CURRENCY ASSETS

At the beginning of 1998, Eesti Pank stopped providing clearing services in non-convertible foreign currencies to the Estonian credit institutions. Credit institutions now rely to their own network of correspondent bank relationships. This item shows the accounts of Eesti Pank held with central banks of the CIS countries (Belarus and Uzbekistan), which at the end of 1998 were in the process of being closed. The compensating balances with those organisations in kroons are shown as demand deposits of the Estonian credit institutions in Item 18 "Other foreign currency deposits".

ITEM 7 - LOANS

Loans to credit institutions decreased during 1998 by nearly EEK 10 million, due mainly to repayments of intermediary loans. Loans given to the staff of Eesti Pank increased by EEK 13.2 million.

Set out below is an analysis of the loan movements followed by additional explanations:

Eesti Ühispank/Union Bank of Estonia (Põhja-Eesti Pank/North Estonian Bank Ltd)

In 1995 and 1996, Arrow AS, a property holding company, received financial aid of EEK 0.3 million and 0.9 million, respectively, for the maintenance of a building under construction. Under an agreement signed at the end of 1996, Eesti Pank assigned its claim against Arrow AS worth EEK 1.2 million to Põhja-Eesti Pank, who repaid EEK 1.4 million on April 1998. Profit of EEK 0.2 million was recorded in domestic earnings.

According to an agreement between Eesti Pank and Põhja-Eesti Pank (Eesti Ühispank) Eesti Pank obtained a legal claim over Põhja-Eesti Pank’s loans with the principle value of EEK 123.9 million. These loans are administered by Eesti Ühispank. In 1997, Eesti Ühispank opened a deposit for Eesti Pank and transferred sums received from the recovery of these loans under the agreement. In 1998, these recovered loans amounted to EEK 1.5 million (EEK 3.0 million in 1997) which was recorded as an exceptional item (see Item 27).

Intermediary Loans

The reduction in intermediary loans by half is due to the repayment of loans granted to Estonian commercial banks by a Finnish financial organisation Vientiluotto OY, for which Eesti Pank acts as agent. The final maturity date for these intermediary loans falls in November 2001 (see Item 11).

Loans to the Employees of Eesti Pank

Home purchasing loans secured by property and consumer loans to the employees of Eesti Pank are provided for a maximum of 25 and 2 years, respectively. In addition, study loans were granted for a maximum of 10 years.

ITEM 8 - SHARES

Shares held by Eesti Pank comprise the following:

Eesti Investeerimispank/Estonian Investment Bank

An agreement for the sale of shares in Eesti Investeerimispank to Immerman OÜ was signed on 18 December 1997. The sale was completed on 7 January 1998 when payment was received and all the conditions of the sale were met. According to this agreement Eesti Pank sold 44,121 shares to Immerman OÜ with nominal value EEK 1000 for EEK 103.3 million. The profit of EEK 55.8 million is recorded in 1998 profit and loss account as an exceptional item (see Item 27).

Optiva Pank/Optiva Bank

In 1998, in order to assist the stable and smooth functioning of the banking system, Eesti Pank purchased shares of the two Estonian commercial banks (Eesti Investeerimispank, and Eesti Forekspank/Estonian Forexbank). The purchases were connected with the merger agreement between the commercial banks which was signed on 30 September 1998 and which envisaged the reconstruction of the banks as a merged bank. This act strengthened the banking system and the general economic environment of Estonia.

The investment was made under two separate transactions:

1) Eesti Pank purchased 66,633 common shares of Eesti Investeerimispank from Eesti Forekspank with nominal value EEK 1000 for EEK 135 million on 2 October 1998. By this transaction Eesti Pank shareholding in Investeerimispank was 50.24%.

2) The share capital of Forekspank was increased by EEK 120 million by the issue of 12 million common shares with nominal value EEK 10 to Eesti Pank, which was paid for on 16 October 1998.

The merger agreement was approved by shareholders’ general meeting of each bank, after which Eesti Pank gave its approval for the merger. On 18 December 1998, the merger of Eesti Investeerimispank and Eesti Forekspank was entered in the Tallinn Commercial Register under the name Optiva Pank. At the same time, each Investeerimispank share was replaced by 178.243 Forekspank shares and as a result Eesti Pank additionally obtained 11,876,865 Forekspank shares. At the end of 1998, the Eesti Pank shareholding in Optiva Pank was 57.9%.

The investment in Optiva Pank is not consolidated as the intention of Eesti Pank is to dispose of its holding to a strategic investor as soon as possible ensuring the stability of financial system.

The audited financial statements of Optiva Pank as of 31 December 1998 showed Optiva Pank as having total assets of EEK 3,173.8 million and equity of EEK 337.9 million.

Eesti Hoiupank/Estonian Savings Bank and Hansapank/Hansabank merger

According to the decision of Eesti Hoiupank shareholders’ general meeting of 14 April 1998, the share capital of Hoiupank was increased by a capitalisation issue. For each share three new shares were issued. As a result Eesti Pank obtained 3,086,799 new shares in April 1998.

Managements of Hansapank and Hoiupank signed a merger agreement on 11 June 1998. The agreement was subsequently approved by shareholders’ extraordinary general meetings of both banks and was approved by Eesti Pank. The merger of these banks took place by way of share exchange. Each shareholder of Hoiupank obtained for each share, 0.264 shares in Hansapank. The share exchange took place on 21 July 1998 when Hansapank and Hoiupank were entered into Tallinn Commercial Register under the name Hansapank. As a result, Eesti Pank obtained 1,086,553 Hansapank shares with nominal value EEK 10 for 4,115,732 Hoiupank shares.

Bank for International Settlements (BIS)

BIS shares (25% paid in) with a total book value of EEK 7,837.50 are included at their historical cost established in 1930 (when Eesti Pank joined the BIS). The historical cost includes the conversion from Estonian kroons to roubles in 1940 and from roubles to Estonian kroons in 1992. The BIS has not made calls for share capital against Eesti Pank although such calls might possibly arise in the future. According to the Statute of the Bank for International Settlements, the BIS can make a call by a management decision (see Item 28).

Väärtpaberite Keskdepositoorium/Central Depository for Securities

In 1998, the nominal value of the Central Depository for Securities share was split 10 times. The total holding of Eesti Pank in the share capital remained the same as in 1997.

Tallinna Väärtpaberibörs/Tallinn Stock Exchange

In 1998, the share of Eesti Pank in the share capital of the Tallinn Stock Exchange was reduced to 3.0%, as a result of a share issue in which Eesti Pank did not participate.

ITEM 9 - OTHER ASSETS

This item includes the difference between the nominal value and selling price of the Eesti Pank certificates of deposit sold to banks, prepayments for services and goods, to be provided in 1999 and the cost of Eesti Pank sundry assets.

It also includes an amount recoverable of EEK 800,000 based on an agreement between Eesti Pank and Eesti Maapank/Land Bank of Estonia under which Eesti Pank paid the latter’s moving expenses from the Bank’s building at 11 Estonia pst in 1996. From the prepayments, Maapank spent EEK 18,100 in removal expenses. Due to the bankruptcy of Maapank, the remaining EEK 781,900 was included under loss provisions at the end of 1998 since the recovery of this sum is unlikely. Loss provisions were also made for EEK 170,900 due from Maapank for penalties for violating the minimum reserve requirements in June 1998.

This item also includes EEK 13.0 million as a prepayment to recover the losses of Eesti Hoiupank’s non-performing loans according to a guarantee agreement with Hoiupank. Full provision was made for the prepayment at the end of 1996. Hoiupank is obliged to transfer any sums received from the recovery of these loans to Eesti Pank until 15 March 2001, after deducting any direct costs of Hoiupank. During 1998, Hoiupank has paid Eesti Pank EEK 7.7 million (EEK 4.7 million in 1997) which is recorded in exceptional item (see Item 27).

ITEM 10 - FIXED ASSETS

Details of movements in fixed assets during 1998 are as follows:

In 1998, fixed assets increased by EEK 29.3 million as compared to 1997. At the end of 1998 the building connecting 11 Estonia pst with 13 Estonia pst was completed, at the cost of EEK 15.1 million. EEK 11.6 million of building and renovation work was carried out in the bank building at 11 Estonia pst and EEK 7.6 million on the training centre in Maardu. EEK 10.3 million was spent on furniture and fittings for the new buildings and premises.

ITEM 11 - FOREIGN DEBTS

The balance of foreign debts to Vientiluotto OY, which also include accrued but not yet received interest at the end of 1998 and 1997, were EEK 9.9 and 20.3 million, respectively. The related assets connected to the above items are included in "Loans to credit institutions" (see Item 7).

ITEM 12 - IMF KROON ACCOUNTS

This item shows the Estonian kroon deposits of the IMF held with Eesti Pank, which include loans granted by the IMF to Eesti Pank and the quota of the Republic of Estonia in the IMF (see also Items 3, 4 and 17).

The following Table (in kroons) shows the movements of the loans obtained from the IMF and participation in the IMF:

ITEM 13 - ACCOUNTS OF NON-RESIDENTS

This item includes non-interest bearing accounts held with Eesti Pank by the central banks of the CIS countries which are used for settling transactions between Estonia and those countries through Eesti Pank.

ITEM 14 - NOTES AND COINS IN CIRCULATION

This item shows banknotes and coins issued for circulation by Eesti Pank. An analysis of the notes and coins in circulation is shown on pages 64-67 of the Annual Report.

ITEM 15 - ACCOUNTS OF CREDIT INSTITUTIONS AND OTHER CURRENT LIABILITIES

This includes the clearing accounts of Estonian credit institutions with Eesti Pank. With effect from 1 July 1996, Eesti Pank has commenced paying interest at a rate calculated by reference to the Deutsche Bundesbank discount rate on the amount by which average balance on a credit institution’s clearing account with Eesti Pank exceeds its minimum reserve requirement for a reporting month. From 1 January 1999, the interest rate paid was lined by reference to the deposit rate of the European Central Bank.

ITEM 16 - SECURITIES

The short-term certificates of deposit (CDs) raised during the year are 28day discountable paper issued to Estonian commercial banks in amounts of EEK 100,000 nominal value each. No CDs were outstanding at 31 December 1998.

ITEM 17 - CONVERTIBLE FOREIGN CURRENCY DEPOSITS

The convertible foreign currency account shows demand deposits of the Republic of Estonia held with Eesti Pank. It includes the undistributed element of the Systemic Transformation Facility (STF) in SDR provided to the Republic of Estonia by the IMF, together with accrued interest payable. In addition, the convertible foreign currency account includes the claim on the International Monetary Fund, share of STF loan, which has been recognised since March 1997 resulting from the fact that the Republic of Estonia will participate in financing the IMF Enhanced Structural Adjustment Facility (ESAF). Eesti Pank acts as agent in the name of the borrower - the Republic of Estonia (see Item 5).

The above Table shows the movements on the STF loan account, including amounts received from the Government to pay STF loan interest and other expenses.

ITEM 18 - OTHER FOREIGN CURRENCY DEPOSITS

This item includes non-interest bearing foreign currency demand deposits of Estonian credit institutions with Eesti Pank. The deposits are related to transactions with the CIS countries carried out through Eesti Pank (see Item 6).

ITEM 19 - PROVISIONS FOR GUARANTEES

In 1998, no new provisions have been made for the guarantees.

ITEM 20 - OTHER LIABILITIES

This item includes sundry other accruals for 1998 costs such as salary costs, unpaid holiday, social tax and health insurance.

A liability of EEK 16,8 million was recorded in 1998 due to the fact that the Estonian one-kroon coin issues of 1992, 1993 and 1995 were withdrawn from circulation from 1 June 1998. At the end of 1998, the liability to exchange these one-kroon coins amounted to EEK 13,2 million.

ITEM 21 - CAPITAL AND RESERVES

Capital and reserves can be analysed as follows:

In accordance with the Central Bank Act at least 25% of annual profit must be allocated for increasing each of the statutory and reserve capital. After these allocations, part of the profit can be allocated for forming and supplementing special reserves, based on a decision of the Board of Eesti Pank. The remaining profit is transferred to the State budget.

In 1992, Eesti Pank covered from the special reserve the losses arising from revaluation of rouble assets and liabilities at the time of monetary reform, amounting in aggregate to more than half a billion kroons. In accordance with the 1993 Decision of the Board of Eesti Pank, the Eesti Pank reserves have to be restored from the profits of the Bank of the following ten years. The appropriations to special reserve during 1993-1998 amounted to EEK 332.8 million.

Appropriation of 1997 Profit

In accordance with the Decision made on 3 July 1998 by the Board of Eesti Pank, additional EEK 60 million from the 1997 profit was transferred to the State budget as an one-off allocation to compensate the Government who in turn compensated depositors in Eesti Maapank bankruptcy, at the same time reducing payments to the special reserve by a similar amount. The original and restated appropriations of the 1997 profit is given below (see also Eesti Pank Profit and Loss Account on p 93, and the Statement of Changes in Equity on p 94). The additional payment of EEK 60 million has been considered to be a further appropriation to the State budget in addition to the proposed appropriation of EEK 30 million.

Appropriation of 1998 Profit

The planned appropriations of the 1998 profit are shown below the Profit and Loss Account on page 87. In accordance with the Bank’s budget for the year, approved by the Board of the Bank, an amount of EEK 406.0 million is to be transferred to the special reserve in order to continue to restore the losses from monetary reform in 1992.

The revaluation reserve includes the unrealised difference between the cost and market price of foreign securities. At the end of 1998, the market price of the foreign securities was higher than their cost price.

The fixed assets reserve reflects the revaluation of fixed assets. The transfer from this reserve to the special reserve reflects the realisation of the revalued amount in line with depreciation on the related assets.

The translation reserve reflects the results of translating the assets and liabilities denominated in foreign currencies into kroons at the balance sheet date. The falling value of certain foreign currencies, particularly the US dollar against the German mark, in 1998 has caused this item to decrease.

ITEM 22 - FOREIGN NET INTEREST INCOME AND SIMILAR ITEMS

This includes principally realised exchange gains, income from the sale of securities, interest income from time deposits and short-term investments managed by foreign investment bank as well as dividends less interest expense of Standby Agreement loans and intermediary loans from Vientiluotto OY, as well as realised expenses on foreign exchange and swap transactions.

The increase in net income by EEK 231.0 million compared to 1997 was achieved from interest income, income from the purchase and sale of securities and short-term investments. There were no transactions with gold in 1998.

ITEM 23 - DOMESTIC NET INTEREST INCOME AND SIMILAR ITEMS

This includes interest earned and bank charges on loans granted by Vientiluotto OY and intermediated by the Bank to Estonian credit institutions, interest earned from loans to Eesti Pank employees, interest payable and other bank charges connected with the management of the clearing accounts from domestic credit institutions, agent fees of Systemic Transformation Facility and interest payable on CD’s issued by the Bank.

Interest earned by the Bank in 1998 has decreased by almost EEK 9 million compared to 1997. The reason for this has been the increase in interest expenses relating to the management of credit institutions’ clearing accounts because Eesti Pank is paying interest on the excess deposited over the minimum reserve requirement.

ITEM 24 - OTHER OPERATING INCOME

This includes income connected with various charges for sundry non-banking related services, including services which are not connected with the Bank’s main objectives. In 1998, this present item includes income earned from the sale of the commemorative coins (10-, 100- and 500kroon coins), gains from rent of buildings and equipment as well as other charges, such as income from the use of telephones and the sale of Eesti Pank bulletins.

ITEM 25 - OTHER OPERATING EXPENSES

Other operating expenses have been analysed by principal category, consistent with the way in which the Bank's Management budgets for and monitors costs.

Staff-related expenses comprise not only salaries and salary-related expenses, including health insurance and social security taxes, but also training and business travel expenses. The increase in staff-related expenses is due to salary increases and the related taxes as well as training and business travel.

In 1998, the cost of making notes and coins increased compared to 1997. 10- and 20sent coins and one-kroon coins were made to replenish the existing stocks and to meet the demand for new coins. In addition, 10-, 100- and 500kroon commemorative coins were made. The sale of commemorative coins yielded income recorded under other operating income (see Item 24).

Depreciation costs has increased due to the increase of existing depreciation rate for existing software from 1998, the completion of new buildings and the renovation of old buildings as well as acquisition of computers and fittings.

Renovation costs have increased in 1998 compared to 1997, as a result of the renovation of the buildings acquired in 1996.

In 1998, maintenance and administrative costs increased compared to 1997. The increase derives from the higher prices for communication services, growing maintenance costs due to the addition of new and renovated buildings, increasing cost of information (various market studies, expenditure on Eesti Pank Museum, higher printing costs of Eesti Pank publications and expenditure on new publications) and increasing information technology development and software expenses. General administration and other costs have been combined under one and the same item from 1998 and the comparatives have been restated on to a consistent basis.

ITEM 26 - PROVISIONS FOR BAD AND DOUBTFUL LOANS AND GUARANTEES

In December 1998, additional provisions for bad and non-performing loans including accrued interest were made as discussed in Item 9.

ITEM 27 - EXCEPTIONAL ITEMS

These include items of income and expense arising on transactions of an unusual or infrequent nature. In 1998, this included the following items:

This item includes the profit of EEK 55.8 million received from the sale of Eesti Investeerimispank shares, recovered loans from Eesti Ühispank of EEK 1.5 million and the EEK 7.7 million, which was received in respect of the prepayment made to Eesti Hoiupank in 1996, all of which have already been discussed in earlier items.

In addition, under an agreement signed between Eesti Pank and Eesti Ühispank the latter obtained from Eesti Pank the VEB Fund certificates with a nominal value of EEK 103.0 million which were fully provided for by the Bank in 1994. On May 1998, EEK 12.4 million was paid for these certificates to Eesti Pank.

Of the provisions made for Painküla Starch Factory in previous years EEK 0.4 million was recovered in 1998.

ITEM 28 - OFF-BALANCE SHEET ITEMS

Contingencies and Commitments

Legal Action

In September 1996, a petition was issued against the Bank and Mr V. Kraft in a court in Texas, USA by Eastern Credit Limited, Inc a stockholder of Eesti Innovatsioonipank, claiming damages, including exemplary damages, of at least EEK 203 million plus costs. In previous years management of Eesti Pank was of the opinion that this claim was without sound foundation and the Bank could not be a party in this case. Accordingly, no provision had been made in respect of this claim. The case was dismissed by the court at the request of the defendant on 9 June 1998, for lack of subject matter jurisdiction.

Forward Contracts

As of 31 December 1998, Eesti Pank had remaining forward contracts amounting to EEK 1,149.4 million (EEK 1,269.5 million in 1997) maturing on various dates up to 2002. Under these contracts, which are with Estonian commercial banks, Eesti Pank is committed to sell DEM at future specified dates for between 8.0010 and 8.0020. Such contracts were offered until March 1995.

Guarantee to the European Investment Bank

On 27 November 1995, Eesti Pank entered into an agreement with the European Investment Bank and Eesti Investeerimispank (Optiva Pank) whereby it guaranteed loans amounting to ECU 10 million, which mature in 2006.

Other Guarantees

In August 1996, Eesti Pank issued a letter of warranty for compensating the injured party for medical treatment costs up to an amount of EEK 500,000 relating to a traffic accident involving one of the Bank’s cars which took place on Merivälja tee in Tallinn at the beginning of 1996. This amount is expected to be recovered from the employee of the Bank involved.

Uncalled Share Capital of Bank for International Settlements (BIS)

There exists a commitment in respect of the uncalled share capital of BIS since 1930. This liability represents an amount unpaid for the BIS shares and denominated in Swiss gold francs which kroon equivalent was EEK 34,2 million as of 31 December 1998 (see Item 8).

Printing Banknotes and Coins

At the end of 1998, the contractual liabilities of Eesti Pank for printing banknotes and minting coins in 1999 amounted to EEK 19.5 million (EEK 5.6 million in 1997).