The Baltic Course

A new turn.

The Baltic states look eastward again

By Oleg Bozhko

Stagnation of the Western economy amid Russian economic growth and the proximity of EU accession have been good reasons for a new wave of Baltic businessmen to broaden their economic relations with Russia. Firmly established businesses of the Baltic region have also started to exert influence on the political structures regarding this issue

Until 1991 the Baltic economy was fully integrated with the Soviet Union, approximately 70% of its trade turnover went in the direction of Russia. Most of the produce was made by companies under strict Moscow's command, or as we might say now - the manufacture of goods was secured by Soviet capital.

Political reasons caused a collapse of the industrial sector, after which the number of larger manufacturing companies sharply decreased (only 2 or 3 major companies were left in each of the Baltic states), as they most were not so successful in attracting foreign partners or investors such as, for instance, the Ditton PKR motor-chain factory in Latvia, the Ekranas TV factory in Siauliai, Lithuania and Estonia's seat-belt maker Norma.

The majority of companies went bankrupt across the line, as a result, the region lost not only more than one-third of its job places, but also its well-established export markets. The kind of an impact such a situation left upon business activities was again experienced by Baltic entrepreneurs after the Russian melt- down in 1998, when they again had to explore new, mainly Western markets.

Investments and trade with Russia are insignificant

The fact that Latvian exports to Russia constitute only 5.5% of its total export volume (total exports to CIS countries makes up 10%), whereas imports from Russia account for 9.5% of Latvia's imports (total imports from CIS countries - 15%) clearly illustrates how the situation has changed over the last ten years.

In Estonia these figures are even smaller: exports to CIS countries didn't exceed 5% in mid-2001 (exports to Russia - 4%), while imports from CIS countries constitute 10% (imports from Russia - 10%).

Lithuania's total exports to CIS countries, including Russia, makes up 19% (exports to Russia - 11%), while imports accounts for 30% of the country's total (imports from Russia - 10.5%). But even in Lithuania, a country more successful in maintaining former contacts than its northern neighbors, Russia is still not listed among the top 3 foreign trade partners.

Nevertheless, a significant increase in foreign trade turnover with Russia has been observed in the last year for all three Baltic states. For instance, Latvian exports have seen a 29.5% increase, and up to half of this increase is connected with export growth to Russia. Estonian exports to Russia almost doubled and its share in the Estonian export structure has exceeded 10%.

Figures are even more striking when speaking of investments. The volume of Russian investments into the capital of Latvian companies accounts for 6.6%, thus ranking Russia only in sixth place after Denmark, Germany, the USA, UK and Sweden. Estonia with a figure of 6.2% is following close behind. Even so, it seems that this process may have exhausted itself and opposite trends could dominate in the near future.

Change of mood

Stagnation of the Western economy amid Russian economic growth and proximity of EU accession has been a good stimulus for the new wave of Baltic businessmen to broaden their economic relations with Russia.

By the way, a similar trend can also be observed in China - an oasis of a steady growth. Although Latvian- Chinese foreign trade in 2001 increased by 70% the total volume still remains insignificant on 78 million USD.

Under favorable conditions the Baltic States could be admitted into the EU at the end of 2004, while some businessmen have already started worrying about the future of their businesses. Once again they are looking towards Russia and the CIS - markets involving well-established contacts, more familiar than the bureaucratic Western market.

They are particularly looking for possibilities to implement projects for the joint production of goods in Russia, thus getting rid of custom duties and reducing labor costs. By the way, non-resident companies have deposited more than 1.5 billion dollars in Latvian commercial banks (resident companies - three times less), and most of this capital is owned by Russian resident companies. As they say, if only we had some interesting projects.

Earlier, such interesting projects had been proposed by the Kaija fisheries and Laima chocolate companies, but some of the recent cases are Daugavpils-based company Ditton PKR (motor-chain factory), Riga-based Jauda and Lithuanian producer of crab sticks Viciunai which are now very actively engaged in the search of suitable production locations in Russia. Although real results have not yet been achieved, the overall tendency is quite obvious - Russia once again seems attractive for the Baltic businessmen.

The above-mentioned fact is confirmed by such construction companies as Lithuanian Panevezio statubo trestas and Latvian Kalnozols celtnieciba, which have also received a number of orders from Moscow and Kaliningrad.

As previously experienced, the Baltic states are again paying fixed and even jealous attention to Russian transit goods, as these constitute a quarter to one-third of their budgets. One should wonder, whether this has much to do with changes in the procedure for issuing road transportation permits, harmonization of railroad tariffs or with changes in the procedure for exports of round timber etc.

But even here everybody is mainly thinking of his own interests. Although the launch of the Primorsk oil terminal has created threats to Baltic ports, Estonian companies engaged in the bunkering of tankers are in the mood for making a profit as the major centers providing bunkering services are located in Gibraltar and Singapore.

A great deal of activity can now be observed in regard to the modernization of ports and development of port specialization. For instance, the port of Riga (oil projects and a construction project for a carbide reloading complex worth 500 mln USD), or in Estonia where the Tallinn Port Authority invests hundreds of millions of crowns into the development of the Paldiski South Port (dredging, building ro-ro terminals). Such activities are carried out not only in the light of Russian transit, but also because of the forthcoming accession of the Baltic States into the EU, which will subsequently bring European transit to the Baltic ports.

Of course, a lot of attention is focused on energy resources: oil exports, the laying of gas-mains (via Lithuania), as the electricity industry is the only sector where the Baltic states can manage with their own resources. Nevertheless, Latvia still has to buy up to 10-15% of the necessary energy resources from its neighbors.

Business influencing politics?

It seems that for the first time in a while we can say that the interests of political and business elites of the Baltic States are gradually sharing common traits in regard to Russia.

After Lithuania's Algirdas Brazaus-kas visited Moscow, Estonia's newly- elected President, Arnold Ruutel, has on several occasions expressed his willingness to visit the neighboring country, while in Russia this fact has passed over in silence. The president is being urged by his Estonian businessmen who even offer to undertake all the organizing matters, at the same time reminding him of the necessity to solve the problem of registering the Estonia's Russian Orthodox Church.

During a recent emergency session, the Estonian Parliament decided to return privileges to its free trade zones (abolition of tax levied on the amount of transactions made in free zones, excluding double taxation of Estonian goods exported to Russia).

In Latvia the latest initiatives are mostly carried out by the Riga City Council, which recently seems to have managed establishing good relationships with the Moscow Government. So even if the situation is not changing as fast as dictated by business interests, it is, however, changing for the better.

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