NARVA, Estonia — Right on the Russian border, Europe’s first commercial-scale rare-earth magnet factory is starting to supply automotive and green tech customers from a forgotten corner of Estonia.

The project represents an act of defiance against Russian aggression. It’s a bid to counter China’s chokehold over critical minerals that is Beijing’s trump card in its escalating trade war with the United States. And it’s a vote of optimism regarding European industry, its backers say.

“The future of Europe’s competitiveness is here,” Estonian Prime Minister Kristen Michal said at the opening of the factory last month. On the day of the ceremony, Russian military jets intruded into Estonian airspace.

The first phase of the new factory, owned by Neo Performance Materials, will be capable of producing magnets for 1 million electric vehicles and 1,000 generators for the wind industry annually. These magnets make electric systems more efficient, and demand is picking up rapidly. 

European Commission President Ursula von der Leyen even brought a magnet made in Narva to the G7 summit in Canada in June, where she handed it to Prime Minister Mark Carney, in recognition of Neo’s Canadian roots. 

As they are made with rare earth elements — metals whose extraction and refining is dominated by China — there was no commercial-scale production in Europe before Neo set its sights on this city right on the Russian border.  

Just east of the factory, a fortress sits on each bank of the Narva River, which forms the EU and NATO’s border with Russia.  

But it’s not just European industry that is counting on the plant run by Neo. Estonia and the rusting province around Narva also see it as vital to their futures. 

Making a comeback 

Estonia’s third-largest city feels forgotten, peripheral and decidedly unfashionable. The local textile industry collapsed so long ago that locals barely remember it. The colorful Hanseatic hipster capital Tallinn feels distant, with its Michelin-starred restaurants, pricey craft beer and tech startup scene.  

“Narva used to be a quiet place at the end of Europe. Young people were moving away,” said Aivar Virunen, the plant’s production manager and Neo’s first employee in Narva. A lifelong resident and former machine engineer in the oil shale sector, he’s excited about the promise of a revival. 

Ida-Virumaa, the province Narva is a part of, is the old industrial heartland of Estonia. The region, home to approximately 130,000 people, is centered on the shale oil industry. Or used to be. 

The local tar sands offered Estonia de facto energy independence from Russia — in contrast to neighboring Latvia and Lithuania — at the cost of relying on a polluting source of energy and heating.  

By 2035, Tallinn wants to have phased out shale oil. For over a decade the industry has been in slow decline as the sprawling plants built during Soviet occupation times have rarely undergone renovation, let alone expansion.  

For Narva, the shale exit means that thousands of people in the mining and energy production sectors are set to lose their jobs. 

“Of my colleagues, 30 percent come from the oil shale industry,” Virunen explained. “But also, others are coming from all over Estonia,” he said, adding 14 nationalities are already represented on the factory floor. 

Moving fast 

The digital metamorphosis that has occurred in the Estonian government over recent decades is now being implemented in Narva with Neo’s factory. What started with a so-called Tiger’s Leap by the state to connect every school in the country to the internet as early as 1996, led — along with the birth of Skype, Wise and Bolt — to a highly skilled workforce. 

“We evaluated lots of places,” Neo CEO Rahim Suleman told POLITICO. The company went with Narva when it “looked at the kind of digital capabilities and the speed upon we could do this,” he explained, referring to the quick permitting of the project. 

On a budget of €100 million, Neo received €17 million from the EU’s Just Transition Fund, meant to entice investments to deindustrializing regions that need to move jobs away from fossil fuel industries. In Estonia only Ida-Virumaa qualifies for the subsidies, to the tune of €340 million. 

Neo’s factory — only the first phase of a potentially much larger footprint in Narva — will support 300 jobs, with the potential to grow to about 1,000. It will source its supplies of neodymium, a rare earth used in permanent magnets, from Australia.

The permitting process was so fast that new EU-wide rules on industrial permitting — the Net-Zero Industry Act and the Critical Raw Materials Act — didn’t influence it.  

Maive Rute, herself Estonian, one of the European Commission’s most senior civil servants on industrial policy, said the Narva facility “proves that Europe can not only invent but also produce. It can produce sustainably, and it can lead” the way in the green transition. 

Border risk 

What could go wrong? 

Narva and its environs, with their large Russian-speaking population, could be next in Moscow’s sights after Crimea, Donbass and the rest of Ukraine. Should Russian President Vladimir Putin order his troops into Estonia, the town would be one of their first targets. 

But Neo isn’t worried about that, Suleman said. “We’re not a geopolitical company. We have another facility nearby, so we were already exposed longer to Estonia’s way of doing business,” he told POLITICO.  “Let’s state the obvious: It’s a NATO country. We’re confident in the alliance’s response and we hope for the existing war to end as soon as possible.” 

As for Estonia, hosting a factory that is unique outside Asia is precisely the type of deeper integration the country continuously seeks with the EU and NATO. It was occupied by Moscow for almost six decades during the Cold War, subjected to indiscriminate deportations and russification. Acutely aware of Russia’s imperialist tendencies, Tallinn has always viewed any policy through a lens of security and deterrence — even in the case of factories. 

Becoming a cog in Europe’s push to electrify the car industry and grow the wind power sector is very much in line with that approach — almost as much as adopting the euro or swapping the Russian power grid for the European one. 

“With this investment, Estonia is now at the very heart of Europe’s rare earth magnet manufacturing,” Michal said. “This plant proves that it’s possible for international capital, European support and Estonian know-how to come together.” 

Graphic by Lucia Mackenzie. This story has been updated.