Lithuania's economy recovers despite Russian sanctions

By bne IntelliNews November 5, 2014

Linas Jegelevicius in Vilnius -


Lithuania’s farmers are suffering from Russia’s embargo on EU food imports, but the rest of the country so far seems to be shrugging off the "New Cold War" with its giant neighbour.

The country used to export 70-80% of its dairy products to Russia, a market that is now closed, causing surpluses and cutting prices. “With the milk purchase price plunging in three months to a new low - from LTL0.77 (€0.22) to LTL0.47 (€0.14) per litre of milk - our agricultural venture has been loss-making ever since,” says Egidijus Tamulis, chairman of Draugas, the largest Lithuanian milk producer. “The price is lower than the cost, and this cannot continue forever.”

On the Russian border in the Silute and Silale districts, the price of apples and vegetables this year have been also been at lows of around LTL0.40 (€0.12) per kilo. The meat purchase price, meanwhile, has halved - from LTL8-9 (€2.3-2.6) to LTL 4-5 (€1.2-1.45) per kilo.

Overall, the embargo has led to falls of 30% in milk and 40-50% in beef buying prices, and nearly as big a shrinkage in dairy and meat exports.

An agricultural subsidiary of Lytagra, a major Lithuanian agricultural machinery supplier, has reported a fall of LTL250,000-300,000 (€72,400-87,000) in its monthly income since the Russian embargo kicked in. “We have long-term contracts and obligations to the EU. We just cannot change the activities. Our agro venture sells now milk and meat below cost,” Adomas Balsys, Lytagra director general, told bne.

Agricultural exports to Russia have slumped by 43.8%. In July, exports were  LTL93.1 mn (€27mn) and this fell to LTL36.8 mn (€10.6 mn) in August, according to the  Lithuanian Statistics Department.

Overall exports  to Russia have decreased by 6.7%, while exports of Lithuanian-origin goods went down by 15.2%. Lithuanian haulers complain that Russia-bound Lithuanian truck traffic has slowed by roughly 30%. “The situation in logistics sector is very grim. If nothing changes soon, the year of 2015 will start off with a series of bankruptcies. As many as 25% of the haulers are estimated to go bankrupt,” Algimantas Kondrusevisius, president of Lithuania’s National Auto Carriers’ Association, told bne.

According to Creditreform Lietuva, a debt-recovery firm, there has been a spike in the number of assets seized from farming and logistics companies.

Most vulnerable status

At the beginning of September, the European Bank for Reconstruction and Development (EBRD) warned that Lithuania’s dependence on Russian-bound exports, which is the largest among the EU member states, will mean it will suffer the most from the Russian economic sanctions.

Predictions for Lithuanian economic growth have been revised down because of the Russian downturn and embargo. According to a recent forecast from the European Commission, GDP growth has slowed in the second half. “Geopolitical tensions have dampened consumer demand and business sentiment as well as exports. As a consequence, real GDP is set to decrease in the second half of the year, resulting in an overall growth rate of 2.7% in 2014.”

But growing domestic demand, and a predicted recovery in the Eurozone, should counteract the impact of falling exports to Russia. Looking ahead, the Commission predicts Lithuania's GDP will  grow by 3.1% in 2015 and 3.4% in 2016.

The central bank predicts GDP growth will be 2.9% this year and 3.3% in 2015, revised from its previous forecast of 3.3% and 3.6%. The Bank of Lithuania believes that the food imports embargo that affects about 4% of Lithuania’s exports (€0.87bn) annually is going to slow down real GDP growth by 0.4 percentage points.

But SEB bank is more bullish, predicting that Lithuania will be the fastest growing economy in the Baltics in 2014-2016 with 2.7% GDP growth in 2014, 3.2% in 2015, and 4% in 2016.

In the third quarter the economy grew by 2.6%, driven by domestically-oriented sectors such as construction, accommodation, and food services. The fact that transport and warehousing also supported GDP growth, indicated that a sharp decline in external activity was avoided.

The International Monetary Fund (IMF) has praised Lithuania for being able to resist the “intricate exterior environment”. 

“It just shows anew that the Lithuanian economy is flexible, your people are dexterous and the country itself is competitive,” said Christoph Klingen, deputy chief of the Emerging Europe Regional Division at the IMF’s European Department. “The environment for Lithuania, in a narrow sense, is now pretty complicated due to the Russian sanctions and, in a wide sense, because of the slower lookout for new trade partners. In the most likely scenario, the country’s economy next year will grow a little bit faster, taking into account the expected expansion of world economy and that the geopolitical tensions won’t increase, but rather calm down.”

Lithuania has also been looking for new export markets to take the place of Russia. Prime Minister Algirdas Butkevicius announced on October 20 that “the efforts of the Lithuanian government to find new export markets amid the Russian food embargo are paying off”.

The Social-Democrat-led  government is set to expand in 2015 its diplomatic and economic presence as far as in China, Kazakhstan and Turkey, and new Lithuanian diplomatic representation offices are going to be opened in South Africa and the US.

After lifting the ban on ritual slaughter of livestock, Lithuania from 2015 will also start exporting  beef to Israel, Kuwait and some other Middle East countries.

Looking ahead to 2015, when Lithuania will adopt the euro, the government is determined to sound optimistic. “This sends out a message that Lithuania possesses the potential growth despite the ill-effects to the economy stemming from the ongoing Russian and Ukrainian conflict and Russian embargo,” Rimantas Sadzius, economy minister, told bne. “The Lithuanian private business has obviously accrued certain experience in reacting to the difficulties and in re-directing its exports to new markets, thus solving the appearing financial problems.”

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