The shadow of the bear

  • 1998-10-08
  • Chris Butler
It is a measure of how quickly things move in this part of the world that the last time this column appeared, there was very little talk of a financial meltdown in Russia. Now, five or six weeks later, there is little talk of anything else.

There have been an awful lot of opinions put forward in the name of the debate as to what the economic effect on the Baltic states might be.

At one extreme, a number of Western commentators have been predicting disaster, not realizing how far all three Baltic states have come since the beginning of the 1990s in re-orienting their economies away from Russia. It is to the credit of all three countries that collapse in Russia no longer means collapse in the Baltics as well.

At the other extreme, it would be churlish to suggest, as many local officials have tried to do, that there would be little or no effect at all on the Baltic economies. Given the large numbers of people whose jobs still depend on trade with Russia, this is also nonsense.

With commendable timing, a major conference on integration and economic growth for Lithuania is taking place this week.

It does not take a great deal of foresight to work out that the main question on the lips of foreign delegates will be to what extent Lithuania's economy can expect to suffer as a result of the Russian financial crisis.

Given the opportunity to speak to the conference delegates, Inside Track would take a cautiously optimistic position with regard to the short and medium term prospects for Lithuania.

First, there is little or no doubt that the Lithuanian economy will continue to grow during 1998 but almost certainly by less than the 8 percent real GDP growth that seemed likely at one point.

Fortunately in the short term at least, the banking sector will prove relatively robust, since most banks do not have significant direct exposure to Russia.

Via their loan portfolios, however, the banks are exposed to companies that export to Russia. Many of these companies are already facing financial difficulty and reports of staff lay-offs are already in the news. Over the next year to 18 months, losses on loans to some of these companies will be unavoidable.

This will mean less money in the economy in general and may possibly lead to a small recession as the banks are forced to tighten their belts.

The severity of any recession depends in part upon the Russian economy itself, but also upon the ability of local companies to adapt to the changed circumstances. Opportunities for exporting companies do still remain, and it is up to those companies to find a way around the problems.

For example, it is well known that Russia cannot provide for her own food needs, and Russians will still need basic meat and dairy products. Russian importers will pay by barter rather than cash if necessary.

Many Lithuanian companies already operate in this way, and others will be forced to follow. Quite possibly, Lithuania is the best placed of the three Baltic countries in this respect because of its relatively good political relations with Russia.

Furthermore, companies will be forced to look more aggressively to Western and Central Europe for exports, and the more dynamic among them have every chance of succeeding.

There is a real sense in which this can actually be good for Lithuania, in that it will speed up the integration of its economy with its European partners.

The coming year will undoubtedly be harder for business across the Baltics as a result of the Russian crisis, but there is no reason to suspect that economic collapse is imminent.