The Baltic Course
No Rate, No Date | How Europe Sees Us

No Rate, No Date

By Oleg Bozhko

Just like all transition economy countries, The Baltic States, lacking their own capital accruals, have a desperate need for foreign investments, a very substantial precondition for economic growth. The share of public investments in Latvia doesn’t exceed one third of the amount of foreign investments, besides, a quarter of the above mentioned public investments is made up of foreign donations to Latvia. Foreign investment stabilizes the balance of payments, thus also bringing stability to the exchange rates for Baltic national currencies and making the Baltic region more appealing for potential investors (on the account of their own investments). International ratings serve as crucial guidelines and tips for foreign investors.

DFI - an indicator of appeal

Ranking by the amount of direct foreign investments (DFI) accumulated over a certain period of time is the simplest way to rate investment appeal for a country or region. DFI are investments made into the capital of companies with resident status, thus allowing investors to control from 10 to 100% of the resident’s capital.
As opposed to portfolio investments, which give a control of less than 10% over a resident company’s capital (as a rule against further speculative operations), DFI are long-term investments leaving a stabilizing impact on the balance of payments (which in most cases are in deficit) for transition economies.
DFI per capita or per every million of the GDP are indices that help to evaluate the different economic levels of various countries. No matter what the experts say, only money votes show the real situation of investment appeal for investors.
As for DFI accumulation over the past 10 years, the situation in the Baltics on April 1, 2001 reveals the following: the ranking is headed by Estonia which shows the best performance in both total figures and ratio-based indices for DFI – USD 2.7 bln and USD 1,800 per capita. This is followed by Lithuania and Latvia, which basically share second place with total figures at USD 2.4 bln and USD 2.1 bln, making USD 649 and USD 857 per capita respectively.
Of course, in comparison to Poland, Hungary and the Czech Republic, where DFI amounts to between 20 and 28 billion dollars, the achievements of the Baltic States seem not so impressive; nevertheless, if compared by the level of DFI per capita, Estonia comes in the second place among all Central and Eastern European countries, surpassed only by Hungary which has managed to attract more than 2,000 dollars of DFI per capita.

Swedes and Finns sweetening the Baltics

This fact could be explained with the geographical location. Speaking of these particular countries having given a preference to making investments into the Baltic States, the situation is as follows: Sweden, Germany and Estonia which are the three leading investors in Latvia make up 36% of all foreign investments channeled to the country; the two major foreign investors in Estonia (Finland and Sweden) have made investments exceeding two thirds of the amount of all foreign investments, and only 10% of the foreign capital is invested by Germany. Lithuania  is chosen by three primary investors – Sweden, the USA and Finland – having invested 43% of all investments.
So Swedish capital, mainly invested in the banking sector, is represented in all three Baltic countries among the top 3 foreign investors. Officially, the fourth largest investor in Latvia is considered to be Denmark; the actual situation with Finnish capital (represented through Sonera) gives sound basis to claim that Finland also ranks among the leading foreign investors in the Baltics.
Both of these Scandinavian neighbors (Sweden and Finland) have become partners within the framework of the Baltic Pulp project initiated to examine the feasibility of building a large pulp mill in Latvia, also the largest investment project for the Baltic region – the project is planned to receive approximately 1 billion euros. Trade, finance and communication sectors are areas attracting the most foreign investments so far – only 20% of all investments were made into industrial branches.
Although Norwegian capital has failed to enter the Baltics together with its neighboring countries, the Linstow company alone has already managed to invest approximately USD 200 million in the region, and it seems that the Norwegians are about to eliminate the gap. A liberal tax system, promoting an investor-friendly business environment, largely explains the fact of Estonia being the third major investor in Latvia – in the presence of rather favorable conditions, international foreign capital is moved to Latvia via Estonia.


Ratings made by such international agencies as Standard & Poor`s (S&P), Moody`s Investor Service and Fitch IBCA help foreign investors assess the investment risk - the higher the rating the lower the risk in investing within a given country. To request such financial rating services is a costly thing for any country, but on the other hand, if you are not listed in the ratings – you don’t exist at all.
Table 1 reveals the current ratings of some of the post-socialistic countries. As we can see, the so-called investment grade rating is given to all Baltic countries (BBB+ for Estonia, BBB for Latvia and Lithuania); the local currency credit ratings are even a little higher than the foreign currency credit rates.
American banks, for instance, are allowed to buy securities (including also promissory notes) only if they have investment grades of BBB and higher (up to AAA) – securities with lower investment grades rating are equaled to securities of a speculative character. So officially, the leading companies of the Baltic region can already independently borrow money on the global market, and not only receive funding from the EBRD or the World Bank.
Can the rating of the companies with resident status exceed the rating of the country it resides in? So far it was considered to be impossible, but a recent announcement by Moody`s illustrates the opposite –Estonia’s Hansapank is expected to become the first precedent in the Baltics to surpass its own country in terms of ratings.
So-called development forecasts indicate the potential changes in the grade of the current investment rates – either stable, positive or negative. For instance, positive changes expected to occur with the Latvian economy in the near future, such as a reduction in fiscal deficit and increase of exports to the EU (despite the weak euro) etc., are all reasons for the Latvian development forecast having been changed from stable to positive in mid-July.


How Europe Sees Us

By Inna  Rogatchi, Rogatchi Productions & Communications Ltd

The Baltic market has seemingly not yet become sufficiently important for the world’s major economic players, except for maybe Germany. The size of the market, its distance from the US and most of Western Europe, its’ closeness to the complicated and unpredictable Russian market are the main factors for an obviously insufficient flow of Western investments into the region.

Too small, too far, and too close to the big risks

Mary Helen Berar.

Mari-Helene Berard, one of the leading and most experienced French financiers, chairman and co-founder of the MHB bank and former special adviser to president Chirac, commented the current situation and the prospects of the Baltic market as not very attractive for French business:
"This is a very small market, from the French industrialists’ point of view, with yet undeveloped purchasing power. One of the major French companies, manufacturer of electric appliances, Moulinex, had  tried to settle in the Baltics, and start developing its business there. But they were hit by the Russian crisis in 1998, as business in the Baltic is much dependable on Russia, and after experiencing quite heavy losses, they decided to withdraw from the Baltics. In comparison, French business is booming in Poland, and it can be said that by now French businessmen have developed both a taste and trust for doing business in Poland. We can see that everything there goes quite well, in correspondence to Western standards and understanding, this is especially so for the banking sector, which is a crucial element for the development of emerging markets. We also see that we are welcomed there, that Polish partners, executives, managers are glad to co-operate with westerners, and try to correspond to our standards. That’s why French businessmen are glad to invest in Poland, and business is flourishing between us.
Returning to the Baltic region, in general, we regard it as part of Northern Europe, with its own connections, traditions, and areas of mutual interests. It would be rather illogical if Scandinavia did not become the central point of development for business with its Baltic neighbours, wouldn’t it?"

Kenneth Warren.

British businesses express similar views. Sir Kenneth Warren, a long term British Parliament Member and head of the Association of the British Aircraft Industry, commented as to why powerful British businesses are not represented enough on the Baltic business stage: "Well, the size of the market does dictate the rules of the game here. As far as I know, there are some interest in our financial circles towards the Baltics, as they can’t miss the opportunity to be present in any possible region, especially a region so closely connected to Russia; and because of the tricky situation British businesses have found themselves in, because of the "pound versus euro" game. The more seriously we are present and secured worldwide in the financial sector, not necessarily in banking but in all its parts, securities, investments and portfolio services, and insurances including, the more secure the entire British economy will feel itself. But besides this, and some food and drink manufacturers which are always finding their markets everywhere, big British business is not going in big volumes to the Baltics, because huge expenses of investing into new markets would not be economically advisable because the market is too small for big international companies".

Closer and more at home

Veesa Vaarea.

The Baltic region is quite important for Finland and Scandinavia; although its’ population is not too large, but because of historical and primarily geographical and geopolitical reasons it is a rather significant direction for the North European economy, - says Vesa Varhee, one of the leading Finnish market analysts. He sees the three Baltic States as three separate cases from the point of view of developing bilateral economic ties between Estonia, Latvia and Lithuania and their European partners. " If Estonia is looking firstly towards Finland and Scandinavia, Lithuania and Latvia are more orientated towards Central Europe, Holland and Germany in their economical strategies".
"From the Finnish point of view, the Estonian market is closest to us; and although by size it is not a major market, it is the number one partner for Finland between the three Baltic countries, there are as much as eight ferries coming from Helsinki to Tallinn daily, Finnish tourists are constantly bringing a lot of money into the Estonian economy, and this direction of investments is perfectly natural for Finnish business".
The brewery industry, well developed and quite important for both countries, is one such example for self-developing and productive co-operation. " Not only are the two biggest breweries, Hartwall and Olvi, producing their beer in Estonia, but they are also selling Finnish beer there. As a partnership exists, we are expecting Estonians to sell more of their beer in Finland. Undoubtedly, it will be even more successful when Estonia becomes an EU member, and many limits imposed upon her as an exporter at the moment, will be lifted".
Finnish and Scandinavian business has "certainly noticed attractive parts in Latvia, in particular, in its building industry, its forestry industry, and furniture making. Competitive quality in combination with low taxation and low labour costs certainly makes these sectors of the Latvian economy attractive for Scandinavia and Finland".
The Baltic states are a gate to the giant Russian market. So far, Finland is the only EU country with a joint borderline with Russia. Looking back to the beginning of the Nineties, we can see what a boost the Finnish business and economy gained by the factor of becoming the EU gate to Russia. It is a major factor for developing the entire economy of this country. We are expecting the same to happen to Estonia as soon as it is accepted as an EU member. The EU will then have two borders with Russia. Just like Finland, Estonia has a Russian standard railway system, a major factor for transportation infrastructure. But unlike Finland, Tallinn also has a brand new cargo port, and that circumstance will allow Estonia become a major transportation link between Western Europe and Russia which is an extremely advantageous scenario for the economy and business". One should remember, however, that to speak of linking the economy with the Russian market, purchasing power in Russia must be strengthened substantially. To be realistic, we will wait for a satisfactory result there for 20 years. "Latvia’s Ventspils harbour and its oil terminals which are also known as being in good shape with fairly competitive technologically, undoubtedly will become a major route for the sale of Russian oil to foreign markets".
Analysing the prospect of the Lithuanian investment climate – the country’s major benefits would be because of the border with Poland, which itself will become an EU member by year 2007- 2009. When this happens, Lithuania will become the country between Ukraine, Belarus and Russia, from the one side, and the EU from another. Border operations will be of major importance and intensity, and Lithuania will undoubtedly benefit from becoming such a focus point in the economic process between these three countries".
When asked about the current situation and prospects of financing and banking in the Baltic States, the major problem for all three countries is that they are considered rather young and without a strong legislative tradition. This makes it rather risky for foreigners to deposit money into Baltic financial institutions as yet. This kind of business needs at least 20 years of successful and sustainable practices before clients can be sure of depositing their funds here. In the beginning of the post-Soviet era, Estonia, for example, had a lot of new banks; there was then a lot of bankruptcies in these banks, followed by a lots of mergers. The same situation took place also in Latvia and Lithuania. In situations like this, clients can not be sure of a financial institution, and so far it has been the case, that they should not expect any serious income from foreign capital into the Baltic financial institutions, not yet. But, again, in Estonia, there are joint banks with Finnish and Swedish major banks, and by working in those ventures, Estonian financiers and bankers, of course are gaining experience and knowledge absolutely vital for them.

Kaliningrad: Russia’s Hong Kong on the Baltic?

One of the most intriguing moments for entire economic development of the Baltic region is the future of Kaliningrad, claims Vesa Varhee.
"A lot will depend on what the Russian government will do with Kaliningrad. They could and they should introduce special legislation making the area  "the Baltic Hong Kong", build an offshore zone there and develop its possibilities to the best. If this happened, Lithuania and the rest of the Baltic region will become an even more important place for the EU, as it will become the closest EU point with immediate contact to the Russian offshore located quite a distance away and practically isolated from the mainland Russia. This will create an extremely interesting situation from the economical and business point of view, and a lot of new possibilities. How the Russian government develops its Hong Kong on the Baltic, is something that many of the world’s businessmen would like to see with great interests and plenty of ideas."
While we were discussing the matter with the Finnish analyst, the Russian Security Council had a special session to discuss the issue in Moscow (July 26, 2001). As a result of that first step in the important and interesting process, Russia’s president Vladimir Putin has decided to introduce a new post as first deputy to the head of the North-Western Federal region of Russia with responsibility over Kaliningrad, which Putin sees as "becoming an enclave within the EU". It has its draw backs, but it also bears benefits from the Russian president’s point of view. The main thing which has already been put on the table by the Russian leadership, is the strategy according to which Russia will practice its relations with the EU in Kaliningrad. Another key thing announced is that the Russian leadership has decided to reconsider its five-year plan for Kaliningrad development. No further details have been provided so far, but undoubtedly, Kaliningrad has become a test- field for new Russian politics in the Baltic and for its relationship with the EU. This process should be worth while a watchful eye by all interested parties, first of all – by all three Baltic States.

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