Large Companies and Institutions 3 of 4
Strategy and Macro Research
Large Corporates & Institutions Imports from Russia are limited, and for most products alternative suppliers are available (including oil products). The exception is natural gas, for which Russia is the only supplier at the moment. Natural gas constituted 9% of gross energy consumption in Estonia, 27% in Latvia, and 36% in Lithuania in 2012. The high dependency of Lithuania on imports of mineral products is mainly because of only two companies
an oil refinery (which is supplied with crude oil from Russia and would need to adjust its production process if switching to other type of oil) and a fertiliser producer (which is very dependent on natural gas). The major risk would be natural gas supply interruptions, which would increase uncertainty and cost and thereby also negatively affect the Baltic
ability to export elsewhere. Yet, Russia
ability to cut off the gas supply is mitigated by
an underground storage facility in Latvia, although the gas stock ownership rights are unclear;
a liquefied natural gas (LNG) terminal in Lithuania, operational in late 2014;
Finland and Estonia
plan to build an LNG terminal in two-three years; and
the limited on-site storage facilities of the Kaliningrad region and the supply of gas by Russia via Lithuania, which means that a potential supply interruption would be temporary.
Capital flows between the Baltics and Russia
It is hard to assess how big Russian and Ukrainian investments in the Baltics are, since capital may flow in/out via related companies in other European countries. According to official statistics, the share of Russian investments in total foreign direct investment (FDI) stock is about 5% in Latvia and Estonia, and 4% Lithuania
(Ukrainian investments are at 0.8%, 0.5%, and 0.1%, respectively). In turn, the share of Latvian FDI stock in Russia is 4% of the total (and nearly as much in Ukraine). For Estonia, these shares are nearly 5% and 6%, while for Lithuania they are 5% and 2%, respectively. Nonresident (including Russian) deposits and real estate purchases are more important in Latvia than in other Baltic countries. However, most of the Latvian banks focusing on nonresident clients are niche banks that are nonsystemic, and their regulation has strengthened in recent years (e.g., their liquidity ratios are much higher than those for domestically oriented banks). In previous years, we have also seen that
Lithuania’s data for
the first nine months of 2013.
these banks can downsize very quickly. Nonresidents have been important in the luxury real estate segment in Riga and its vicinity. Decreased activity in this segment may have a negative impact, but it would be limited to the top segment.
Impact on the Baltics from the conflict
So far, we see very little if any negative impact on economic activity in the Baltics from the Russia-Ukraine conflict. The conflict is still very fresh, and its impact on macro data will be seen only with a delay. The latest business and consumer confidence measurements are available from early March, and they have been largely stable. What is currently feeding through is the depreciation of the rouble, which, as of April 14, has fallen vis-a-vis the euro by 23% from a year ago and by 10% from the beginning of this year. This has made Baltic exports to Russia more expensive. The confidence developments are the most uncertain and hard to predict. If economic sentiment does not worsen significantly and the Russia-Ukraine conflict does not escalate, with sanctions remaining at about the current level (i.e., the baseline scenario), the Baltics will continue to grow, but slower than anticipated before. We forecast in 2014 about 3% growth for Latvia and Lithuania, and 1.8% for Estonia (for more details, see the
Swedbank Economic Outlook
, April 2014). The fall in exports to Russia will be compensated for by rising exports to a recovering EU. With slower economic growth, labour markets in the Baltics will heat up less
− unemployment will fall
slower and, thus, wage pressures will not be as strong as anticipated in our January
. Public finances will remain robust. The negative impact will dissipate during the next year, and we anticipate growth in the Baltics of 3-4% in 2015. However, if confidence in the Baltics dives and/or the conflict escalates, Baltic economies will be hit harder. In worse scenarios, the Baltics would see recessions, especially if Russia interrupts energy supplies and raises trade barriers significantly. However, even in this case, recessions in the Baltics will be substantially milder than the double-digit economic decline of 2008-2009. We are still in the baseline scenario, but developments in recent weeks in Ukraine show that the situation could be shifting towards worse scenarios.
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M i n e r a l p r o d u c t s F a t s & o i l s C h e m i c a l s W o o d p r o d u c t s M e t a l s P u l p & p a p e r T o t a l
Goods' imports from Russia in 2013, % of total imports in the specific sector
EstoniaLatviaLithuaniaSource: national statistics
Rouble exchange rate
EUR/RUB (reversed)USD/RUB (rs, reversed)Source: Reuters EcoWin