The Baltic Course


When a Crisis Becomes a Stimuls

Olga Pavuk, Paulius Tamulionis (Lietuvos Rytas), Elizaveta Gavrilova (Investinfo)

The top three of the main export goods in all three Baltic countries is headed by the group of textile and textile products which usually are sold to the Western market under foreign brand names. For Latvia and Estonia, wood and wood products sold to the European markets still form a significant share of exports. At the same time among the leaders in Estonia and also Lithuania are machinery and electrical equipment, which in turn indicates that these countries have a better developed engineering industry than Latvia.

With respect to imports, all three countries have similar indicators: the first place is taken by import of machines and equipment. Among the most significant import products for the Baltics are mineral raw materials, the foremost being oil and oil products, as well as natural gas and energy. The crisis of August 1998 and the devaluation of the rouble along with the rise in prices on the world oil market have been a great stimulus for growing oil product transit from Russia.

Latvia: Forced to Think Westward

Foreign trade of the country for the first time during the last four years decreased in 1999. The drop in the trade turnover impacted both exports (compared to 1998 - a decrease of 4.9 %) and imports (down by 3.5%). However, for the first time during this period, the trade balance, though still negative, slowed in its pace of descent. Politicians gladly use figures showing the increase in trade with EU member states. In fact, in 1999, exports to EU countries grew faster (7.2%) than the drop in volumes exported to the CIS countries (-6.7%). In the mean time, the Russian crisis had an amplified effect on Latvia's trade with its closest neighbours, Lithuania and Estonia: export to these countries dropped by 0.3 and 0.6% respectively.

Another «first-time experience» is the fact that Russia has lost its leader status in Latvia's trade balance, both with respect to export and import of goods, handing the champion's title over to Germany. In 1999, exports to Germany constituted 16.9% (in 1998 - 11.7%), while the amount of goods exported to Russia amounted to only 6.6% (16.0%). Imports from Germany were 15.2% (14.2%), while the amount of imports from Russia in 1999 was 10.5% (14.5%).

Russian statistical authorities, however, show a figure for trade turnover with Latvia last year that 2.5 times exceeds the one indicated in domestic statistics: USD 1052 million against USD 422.8 million - the difference is more than half a billion dollars. In fact Latvia and Russia use different methods for calculation of trade turnover. Head of the Foreign trade statistics department of the Central Statistical Bureau of Latvia Elga Beinarte assumes that the difference between the two methodologies indicates the respective amount of re-export and re-import among the two countries. In this case, unaccounted export and import of goods to third countries that passes through Latvian customs, special economic zones and free ports amounted to USD 600 million, i.e., one tenth of Latvia's budget. The problem of re-exports and re-imports has not yet been solved on the intergovernmental level. For several years, the Latvian - Russian intergovernmental commission has not managed to come together for discussion on these issues. The Russian side has also not yet managed to name the head of its commission.

It is hard to predict the development of the relations with Russia once the new President is truly in action. For some time Russia has been discussing economic sanctions against Latvia; it is hard to see how such discussions (mainly in the State Duma - the lower house of the Russian Parliament) could stimulate the improvement of economic relations between the two countries. This January, Russia did not make it even into the top five export destinations of Latvia. At the same time a slight increase has been witnessed in imports from Russia - 0.2%.

Analysing the structure of exports from the perspective of product groups, intermediary goods (raw materials) have the greatest share in the total exports and imports. In exports - 66% - these are mostly food products used for further processing. The weight of intermediary goods in imports in 1999 has remained at the level of 1998 - 48% (including natural gas - 6.2%, energy - 3.2%). The share of consumer goods in the total exports constitutes to 27%, while investment goods (including investments in company growth) amount to 4.8%. Europe consumed 27% of consumer goods exports, Russia - 42%.

Latvia's main export product to the West is wood and wood products amounting to 37.2% of total exports. This group is followed by textiles (mainly cloth) - 15.4%, metal and metal products with a share of 11.5%. Sales of food products mainly to the East (including alcohol and tobacco) last year decreased by almost a half amounting only to 3.7% of the total exports.

The Russian crisis has forced Latvian producers to think west. Traditionally, that region absorbs a great part of wood product and textile exports. And by and large, enterprises with foreign capital export more than domestic companies. Producers with foreign capital have a higher competitiveness and a more successful marketing strategy says the Director of the Investment Department of the Latvian Development Agency, Andris Liepins. He highlights that the weight of export of goods with a higher value-added is gradually increasing and it becomes less profitable to establish facilities that process local wood and other raw materials. It is wiser to produce finished goods for exports.

Candy, canned fish and alcohol producers that suffered the largest losses during the Russian crisis, have taken steps to export larger volumes of their production to CIS countries. One of the most popular methods used by food producers is to establish facilities there.

Food producers are still optimistic about increasing their share of exports to the West. First of all they need to reach European standards; that implies looking for additional resources to modernise the production process. Some companies do so - for example, the Daugavpils Meat Processing Plant (Daugavpils galas kombinats) and the dairy in Limbazi which has plans to produce Italian-style cheeses for sales in Northern America and the EU.

Lithuania: Hoping for the Euro to Rise

In January 2000, the Lithuanian economy, which is fully dependent on exports, started showing signs of improvement. For the first time after the Russian crisis, Lithuania's exports were up. It was a surprise to find out that in January Lithuania's exports were by 30.8% larger than in January 1999. Export growth is present in all the main product groups.

Since 1995, the volumes grew each year. The total exports of 1996 by USD 750 million exceeded the results of 1998. This tendency continued until 1998 when the Russian crisis broke and the export growth stopped: in fact, export volumes dropped from USD 3.7 billion in 1998 to USD 2.9 billion in 1999.

Losses in the East were the chief driving forces behind the drop in total exports by 19.3% in 1999. Exports then amounted to 11.983 billion litas while imports reached 19.163 billion litas. Imports decreased too - by more than 17%, but still not as aggressively as exports and the foreign trade deficit was by 13.8% lower than in 1998.

In 1999, exports to the CIS decreased by more than 59%. The former focus on countries eastward is the main reason behind the current macroeconomic indicators of Lithuania being the worst in the Baltics. Estonia and Latvia managed to refocus sooner and gain access to the markets in Western Europe.

This unfavourable situation with foreign trade drags down the whole economy since exports constitute to more than 50% of all gross national product. The dropping export volumes cause the decrease in production volumes, tax receipts and state budget. In 1999, when exports fell by more than 19%, gross national product decreased by 3%.

EU markets have not compensated the losses in the East. In 1999, the structure of exports changed and the share of exports to the EU grew from 38% in 1998 to 50.1%. However, in real terms the export volumes to the EU grew only by 6.5%. Lithuanian producers did not manage to quickly refocus their sales to Western markets.

Germany has become Lithuania's chief trade partner. It receives 15.9% of Lithuanias's total exports and its sales to this country constitute to 16.5% of Lithuania's total imports. Latvia follows with 12.7% and 2% respectively.

Experts link economic growth exclusively with the expected boost in export volumes. Future economic growth of Lithuania depends on how well the economies of EU countries and Russia will do. «Money will come to Russia but only through export. The demand and budgetary income in Lithuania will only grow if the sales volumes abroad will rise» predicts the macroeconomics' expert, Advisor to the Chairman of Vilniaus bankas Board, Gitanas Nauseda.

He estimates that at the end of 2000, export volumes might rise owing to the great economic growth forecasted by experts for the countries that are Lithuania's main economic partners. Russia's economy is growing at a far faster rate than that of Lithuania. Forecasts for Russia's GDP growth constitute 3%, as with other countries of the euro-zone.

Besides everything else, unfavourable for Lithuania is also the exchange rate of the national currency, which is not tied to the currencies of the countries that are among Lithuania's chief trade partners. Lithuanian goods are less competitive in Europe than the goods of the other two Baltic countries because the currency is tied to the US dollar. According to Gintanas Nausoda, it is too late now to alter the monetary policy. If the euro will grow against the dollar, Lithuania can hope for a growth in exports in which case with respect to exports the other two Baltic States could be considered less fortunate.

Experts are still careful about a generalisation of the export results in January 2000. Exports to Russia grew by 27.8%, while to the EU - by 12.5%. The driving force behind this improvement - growth in oil product export volumes, in January transported out of Lithuania for the sum of 278.7 million litas (one year earlier - for the sum of 128 million litas).

The volumes of food product exports have grown from 30.7 million litas in 1999 to 39.7 million litas in January 2000. Export of textile products, constituting to 25% of total exports, have grown to 232.2 million litas, while the figure in 1999 was 222.1 million litas. Nevertheless, these results are not as promising as they might first seem since the exports have mainly grown in monetary terms while in terms of goods remains at the level of 1997.

«Lithuania's domestic market is closed. Company managements surf exhibitions abroad in search of clients. As to now this seems to be the only reason for export growth», says Vidmantas Viksraitis, president of the Light Industry Association.

Estonia: Imports from Russia Up

Until 1999, Estonia's foreign trade turnover (both export and import) was growing. However, tangible effects of the negative trends like slowed export growth were only felt at the end of 1998, after the Russian crisis that started in August. Basically throughout the whole year of 1999 export and import figures did not exceed the corresponding results of 1998 and only at the end of last year did the situation start to show slight improvements. The drop in import volume in 1999 significantly exceeded the decrease rate of export and by the end of 1999 the trade deficit amounted to EEK 17.2 billion - EEK 5 billion less than in 1998.

The Russian crisis seems to have had a double impact on the Estonian economy. On the one hand, loyalty of the Western investors towards Estonia as an FSU country decreased which in turn decreased the Western demand and placed Estonia in a difficult economic situation. Due to the low liquidity of the market and tougher rules on banking set by the Bank of Estonia, the annual interest rate on the interbank currency market during half a year (since July 1998 to January 1999) grew from 8.5% to 16.4% (three-months Talibor). Commercial banks, whose obligatory reserves at the Bank of Estonia were also raised, started raising the basic interest rates on credits and posed tougher conditions for the borrowers. As a result, numerous companies that had lost a lot of working capital had to decrease or in some cases even cease entrepreneurial activity.

On the other hand, the Russian crisis let Estonia diminish the influence of the Eastern neighbour and helped stabilising the relations with Western partners. Still in mid 1998 Estonia channelled more than 14% of its total exports to Russia, which was Estonia's second largest trade partner. And if we account for the part of export to Latvia and Finland, which in fact is transit and hidden export to Russia then the Eastern neighbour might even be number one trade partner. According to the Statistics Department's data, by numbers at the end of 1999 export to Russia constituted to 9.2% of Estonia's total foreign trade turnover -35% less than at the end of 1998 and more than twice as little as in 1997, - and is currently compatible with the amount of export to Latvia (8.7%).

Along with dropping exports to Russia, a similar tendency can be observed with regard to other CIS countries: Ukraine (-46%), Belarus, and Uzbekistan.

Quite the opposite situation is with the share of EU countries in Estonian export, which is gradually growing - for the past year by 8% amounting to 63% of Estonia's total exports. In absolute terms, exports to Finland and Sweden have grown 1.3 times. The structure of export goods has also altered.

In 1998, agricultural and food products formed one of the main product groups of Estonian export. However, devaluation of the Russian currency has dramatically changed the situation. As in earlier times, the first place in the list of export goods is taken by machinery and spare parts (19.7% in 1998 and 20.9% in 1999). The share of exported agricultural and food products fell from 15.9% to 11%, overtaken by wood and wood products (up from 12.7% to 14.5%).

Food products made up, however, a large part of exports to Russia. Therefore as a result of the Russian crisis, many companies of this sphere lost their primary export market. The significant drop in the purchasing power of the ethnic Russian population along with the unfavourable real exchange rate of Estonian and Russian currencies created a situation where Estonian goods have lost their competitiveness on the Russian market in terms of the pricing policy. The chances are low that producers, earlier having no access to other markets, will be able to conquer any significant share of the Western market; therefore the structural changes might have a long-term nature.

The situation with imports from Russia is slightly different. In relative terms the share of Russian imports has grown by 2.4%, in absolute terms imports from Russia in 1999 have increased by 9%. From Russia, Estonia imports gas, oil products and metal products. Due to the lack of real financial resources, Russian companies are offering barter deals (for example, Leningradskii slanec [Leningrad shale] offered Eesti Energia to prolong the agreement which foresees that Leningradskii slanec will continue to receive Estonian electricity for supplied oil-shale). Estonian companies are not very keen on such a solution to the issue, nevertheless, e.g. according to the Competition Law the monopoly Eesti Energia is obliged to buy the cheaper oil-shale from Russia. The aforementioned problem is even more topical for Estonia since it might impact the domestic oil-shale market. If large lots are imported from Russia this might lead to closing down Estonian mines and laying off a large number of miners in the North-Eastern region of the country.

Thereby one could say that the Russian crisis became a sort of stimulus for changing Estonia's economic policy by accelerating the restructuring of foreign economic relations. The currency board system, which ensures monetary stability in the country along with the focus on Western markets make Estonia less vulnerable to a crisis in Eastern markets and create a great match for political priorities such as accession to EU and NATO.