Analytics, Business, Estonia, Financial Services

The four currencies having importance for Estonian businesses – the U.S. Dollar, the Swedish Krona, the British Pound and the Russian Rouble – have decreased 10-20% in value against the Estonian Kroon and the Euro. The effects were immediate on the Estonian business. Outstanding payments for goods or services promptly decreased, and profit on otherwise lucrative contracts might be lost as well. At the same time, Estonian goods and services loose competitiveness for this reason.

Historically, other countries have dealt with the effects of currency devaluations and currency fluctuations, and businesses have had to deal with these realities before. Denmark and Sweden have felt the effect of devaluations before, and the question is if there are lessons to be learned from this experience.

In Denmark and Sweden there is little direct regulation of the effect of devaluation on private obligations. However, the laws of these countries provide for some fundamental rules similar to the Estonian regulations on the currency of the performance of payment found in the Law of Obligations Act.

The starting point in Denmark and Sweden, as well as in Estonia, is that the debtor is free to perform the payment either in the currency specified in the contract, or in the currency of the country of payment, unless agreed otherwise. Furthermore, just as in Estonia, under the Danish and Swedish Law the creditor may require compensation for a loss caused by currency fluctuations after a claim's due date if the debtor makes a late payment.

Apart from those basic rules, the history of Denmark and Sweden shows that various situations may occur in which neither the contract nor the law clearly state which of the parties should bear the risk of currency fluctuations, the expert noted.

Maunsbach highlighted the Danish and Swedish experience from devaluation – that various problems relating to contract law will arise when international currencies fluctuate because the value of a particular contract could change as a result of currency fluctuations.

For businesses currently involved in international transactions, it has become essential to take into account the currency risk.

If possible, companies should protect themselves, either by agreeing the currency risk beforehand, or by using foreign exchange hedging. The lessons from abroad all show that one thing is for certain – afterwards no party will voluntarily cover the price for currency fluctuations.