Last month low global oil prices and economic sanctions ramped up the pressure on the Russian economy, causing the Russian rouble to weaken. Meanwhile, Lithuania spent December preparing to join the eurozone, successfully adopting the euro as its national currency on Jan. 1. TBT editor Richard Martyn-Hemphill spoke to Zygimantas Mauricas, Nordea Bank’s Chief Economist for Lithuania, to hear about the economic impact of these currency developments on the Baltic region.
How is the weakening of the Russian Rouble affecting the economies of the three Baltic States?
Actually at the moment, the effects are not visible in the data yet, as it just started a couple of months ago; but my initial estimate is that it will have a bigger impact than the direct economic sanctions imposed in August 2014 — which basically banned the exports of food products to Russia.
Why is this the case?
Lithuania, and also Latvia to some extent, are transit companies, transporting lots of products from Western Europe to Russia. Since the rouble is weakening, the purchasing power of Russian customers is falling quite dramatically.
Basically the fall in Russian economic activity is somewhere between that of the global economic crisis of 2008 and the Russian sovereign debt crisis of 1998. We expect the effect to be somewhere in the middle, which may result in a fall in this transit activity by up to 50 percent.
In effect, reexports are expected to fall by up to 50 percent in the coming years if oil prices remain as weak as they are now, and if the rouble remains as weak as its present level. So this will definitely have a negative effect, particularly for the transport sector, for infrastructure and a little bit for the wholesale trade sector. This is actually the main challenge for the Baltic economies.
Regarding manufacturing production from the Baltics, actually all Baltic States have shifted very much to exporting to the West. For example, Lithuania now only sends 5 percent of its manufactured products to Russia; Latvia exports a slightly higher percentage of its manufactured products but it is really very similar in this respect. Most of the manufacturing was food products, and so since they were banned anyway during Russia’s sanctions in August, that had already taken the hit.
So this should be kept in mind: for our regional manufacturers, the weakened rouble should not have a large material effect, but for our transport sector and logistics - this may have a bigger effect. The third channel affected is the tourism sector, because all three Baltic States are frequented by tourists from Russia; and in Lithuania in particular, there are lots of tourists from Belarus, too, which has been suffering economically as well.
Lithuania has just joined the eurozone this January. Will this push up prices?
It has already pushed up prices of some products, especially with regards to the service sector. But this was done in the lead up to Lithuania adopting the euro, when some companies just rounded up numbers so that they would look better in euros.
Now, however, we don’t see any big increases in prices and actually we can only talk about some decimal percentage points in general and this is supported by the experience of Latvia and Estonia, who joined the eurozone in 2013 and 2011 respectively.
So just to give you one example: in Lithuania, people were very fearful of rapidly rising prices. If you look at consumer surveys, as much as 45 percent of consumers were thinking that over the next 12 months prices would increase dramatically. This was just a couple of months ago. But we expect these fears to fade away soon. In both Latvia and Estonia it was the same.
Just a few months before the introduction of the euro, more than a third of consumers feared rapidly rising prices. But just a few months afterwards, those fears fell to 10 percent.
Effectively those fears did not materialise. In Latvia you had some jump in prices in some specific areas, but overall the index only increased by 0.6 − 0.8 percent because of the euro, and Estonia it was even lower.
So in Lithuania, we can expect that there will be some increase because of rounding effects but it will be definitely less than 1 percent, and most likely 0.5 percent. But at the same time we should take into account that salaries have a tendency also to increase with the adoption of the euro, as we saw with Estonia and Latvia after they joined.