Lithuania suffers weak euro

  • 2000-05-18
  • By Peter J. Mladineo
VILNIUS - For five years, the Apavikta footwear company flourished in its Vilnius shoe manufactory, nabbing large contracts with Puma and Adidas.

Then came the euro.

As most people in this crisis-bound country already know, the euro's bathyspheric plunge to around $0.90 at press time (a drop of nearly 25 percent in value since its introduction in January 1999) has not helped Lithuanian exporters and suppliers. Lithuanian companies, increasingly reliant on western markets after the Russian financial collapse, are finding their products un-competitive in these markets - mostly because the Lithuanian litas is pegged to the strong dollar and the euro continues to get weaker.

Apavikta lost its largest two clients Puma and Adidas, primarily, company officials say, because goods produced in Lithuania are too expensive for the European companies' preferences.

"Our customers want to buy cheaper and cheaper footwear, and the price of the raw materials that we buy for our production price increased," said Daiva Kaukeniene, Apavikta's supply department manager. "And I think that these big foreign companies are looking for cheaper shoes."

According to reports in Lithuanian dailies, Puma and Adidas, which comprised 90 percent of Apavikta's markets, are choosing cheaper markets in Bulgaria and Romania, and possibly Ukraine. Apavikta is not giving up - it is now concentrating on contracts in Scandinavia, as well as diversifying into work safety shoes and army boots.

In a report on Lithuanian macroeconomics, Gitanas Nauseda, adviser to the president of Vilniaus Bankas, noted the weak euro's effect on Lithuanian trade.

"There is no doubt that the U.S. dollar appreciation against the euro hindered Lithuanian exports to the West, though it is fairly difficult to estimate by how much in general terms. In the first months of this year, the U.S. dollar continues to appreciate. As a result, the competitiveness of the Lithuanian products in Europe is further complicated," Nauseda wrote.

The hardest hit by the currency inequities are companies that buy raw materials from eastern markets in dollars and sell to the West for euros. The best protection for many Lithuanian exporters is hedging - buying futures on materials for the same price over a longer term period - explains Tomas Andrejauskas, an equity trader with HansaBankas.

"Unfortunately a lot of companies aren't in the position to understand that these kinds of tactics save money - for a lot of reasons, their financial management is old-style, or they lack knowledge of these kinds of things. Local banks were not very active in the business of educating the clients. So we feel the results, a lot of companies are suffering from the euro/dollar rate, and a lot of them are speaking loudly through the media," Andrejauskas said.

What could further complicate matters for Lithuanian foreign trade is the eventual repeg of the litas to the euro.

"Logically looking at the rates and at the movement of the time, it's obvious that the time to re-peg is over. Its getting expensive. If the U.S. economy starts sliding down and the European economy does better and rates reverse, then Lithuania will lose again if they re-peg. That's going to be a very tough question for central bank. It's all about the timing," Andrejauskas said.

In October 1999, the Bank of Lithuania opted to make its final decision about the currency peg - straight to the euro, not to an intermediate euro/dollar basket phase as was initially envisioned - in the second half of 2001. At the time, central bank Chairman Reinoldijus Sarkinas declared that the decision was independent of the current health of the ailing euro.

"What if it rises abruptly? I wouldn't like to go into forecasting exchange rates. Of course, it would not be very good if the exchange rate fell," he said.

In the meantime, Lithuanian companies will have to continue struggling. For the Snaige refrigerator company in Alytus, dealing in euro currency has resulted in roughly 24 percent in turnover losses.

"This problem is very big," said Antanas Andriulonis, Snaige's president. "The euro lost about 25 percent in about 500 days since it was started. Snaige exports about 70 percent of its products to European countries. The time from the beginning of production to sales of our product is about three months. In this interval in the first quarter of 2000, losses in euro amounted to eight percent. The company is losing money right now because Europe is too competitive."