Russian woes fail to dent Lithuanian growth

By bne IntelliNews March 1, 2015

Jan Cienski in Vilnius -

 

Lithuania is one of Europe's most exposed economies to Russia, with more than a quarter of all transport services geared towards its enormous neighbour, and 10% of agricultural products and the bulk of its agricultural exports heading to Russia as well. But the overall impact of Russia's recession and the tit-for-tat sanctions between the European Union and Moscow will be barely noticeable in one of the EU's fastest growing economies.

In all, exports to Russia fell by about 10% last year and the expectation is that this year exports will decline by about a quarter, says Zygimantas Mauricas, chief Baltic economist for Nordea Bank. But the headline numbers look scarier than they really are.

Almost 90% of Lithuania's exports to Russia are in fact re-exports, goods from western Europe that are shipped through Lithuania on to either Russia's Kaliningrad district or to Russia proper. There is almost no Lithuanian value added. Lithuania's real exports to Russia, mostly milk and other agricultural products, come to only 1.7% of GDP. And a lot of that is already being redirected through Belarus and Kazakhstan to get around Russia's blockade of EU foods, says Mauricas.

Transport companies, especially smaller ones, have already started laying off workers as shipments to Russia shrivel. But unemployment in the broader economy is falling, from 10.6% in 2014 to a forecast 9.7% in 2015, which means shippers losing their jobs have a chance of finding work elsewhere.

Russia's contraction – a recession of about 3% of GDP is expected this year – will have an impact. Rimantas Sadzius, Lithuania's finance minister, estimates a contraction of that size will knock about 1% off Lithuania's GDP. The cumulative effect should take about 1.7% off Lithuania's expected GDP growth this year, estimates Mauricas.

However, there are some countervailing winds. Price deflation, especially in imported fuels, is helping, as is the European Central Bank's new policy of quantitative easing. Lithuania recently refinanced part of its foreign debt at significantly lower rates than when the loans were originally taken during the height of the global economic crisis five years ago. In November, Lithuania sold €1bn in 12-year bonds at record-low interest rates, helped by the country's impending accession to the eurozone, which took place on January 1.

Lithuania's finance ministry last year recalculated expected growth for 2015 to 3.4% from 4.3%, but that new estimate seems safe despite continued turbulence in Russia. Mauricas estimates that cheaper fuel and lower interest rates just about cancel out the Russian impact. He expects growth to be similar in 2016, which would make Lithuania one of the fastest growing economies in the EU.

The country's economy looks very solid. Unlike in 2006, when Lithuania narrowly missed joining the euro because its inflation was fractionally too high, this year's adoption of the common currency caused barely a ruffle. Lithuania, along with Latvia and Estonia, now boast some of the soundest fiscal numbers in the eurozone: the public deficit is 1.1% of GDP, and public debt is 41% of GDP. 

All three Baltic countries had their currencies pegged to the euro for more than a decade, so switching to the euro was more of a book-keeping exercise than the kind of momentous decision that will have to eventually be taken by Poland and the Czech Republic, both countries which have retained independent monetary policies.

Although Lithuania's voice will barely be heard at the European Central Bank, it will at least have a role in shaping monetary policy. “We have a seat at the table, so now the situation is better,” says Vitas Vasiliauskas, governor of Lithuania's central bank. “Before we were standing in the corridor.”

The bank estimates that the largest impact from joining the euro will be a steady increase in exports, which it calculates will grow by about €10bn until 2022. If that happens, it should continue to buffer Lithuania from growing problems in Russia.

 

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