Coping with the Russian crisis

It has been a year since
the ruble crashed. A year
since Latvian exports to Russia and the Commonwealth of Independent States -plunged, as if they had reached a drop on a roller coaster ride. Have we stayed on track?

That depends on where you look. The financial sector seems to have recovered from the blow struck by the crash of the Russian ruble and freezing of the Russian government securities. Rigas Komercbanka, which has probably been hit the hardest, is expected to open its doors in mid-September. Unibanka has restored its deposits and can boast higher profits than in the year preceding the crisis.

Other banks also have their profit and loss accounts finally showing profits and not losses. In fact, the total profit of Latvian banks in the first half of 1999 exceeded 10 million lats ($16.95 million).

Although banking has more or less recovered, industry is still on the low. Wood processing, the industry where growth of 20 percent annually is usually expected, would be lucky to keep its production volumes at last year's level. Other branches are doing much worse.

Agriculture tops the list of industries which did not cope with the Russian crisis well and may take a while to recover. Apart from economic disaster in the East, the major export market, it has been hit by disasters of a natural kind - weather conditions have been less than favorable.

It may be hard to separate the effect of one from the effect of the other, but working together the two misfortunes led to a fall in agricultural exports by 43.5 percent in 1998 compared with 1997. The first quarter of 1999, when the effects of the Russian crisis were in full force, exports of agricultural products went down three times compared with the first quarter of 1998.

The first half of 1999 also saw a 15 percent decline in the total volume of manufacturing. The electrical equipment sector has been hit extremely hard. Its total output going down by almost 10 percent and exports by 66 percent. Apart from having an effect on unemployment, this development is very unfavorable for the Latvian economy as a whole, as it again shifts the emphasis onto natural resource intensive manufacturing, instead of technology intensive sectors, which have a higher long-term potential for development.

The situation in manufacturing is beginning to improve, and unemployment is stabilizing if not falling - a good enough sign. But if one assumes that Latvian manufacturing will grow by an optimistic 17 percent, as in 1997, the 1998 level will be reached again only in 2001.

Such a growth rate is unlikely. Manufacturers will need to find new export markets, since the Russian market will not reach its pre-crisis size in the nearest future, and finding new markets in the West is a tricky business.

Due to the Russian crisis Latvia lost a good deal of growth momentum. While in 1997 GDP increased by 8.3 percent, 1998 saw only a 3.6 percent rise, and the first quarter of 1999 - an actual GDP decline. Overall, 1999 is likely to see 1 percent to 2 percent growth, and the prospects for 2000 lie around 4 percent.

Balance of trade has deteriorated, since the volume of exports to Russia, which made up about a fifth of total Latvian exports, decreased by two thirds. This did not only damage the budget position but showed unfavorably in the performance of the transport industry. The added value of the sector fell by 1.3 percent in 1998.

However grim is the look of things right now, there is always sun above the clouds, and it is beginning to show. Recovery of the banking sector leads the way, and the construction sector volumes are growing steadily.

Perhaps the largest loss Latvia incurred as a result of the Russian crisis was not the loss due to slow GDP growth or decline in exports but the decline in foreign investment and loss of confidence among the local producers and consumers.

The loss of confidence, sufficient to cause a brief currency crisis in Ventspils when a controversial comment of the city mayor made Ventspils residents buy up all U.S. dollars available in the city at that moment, despite the assurances of central bank officials that devaluation was not on the cards.

Now that the economy has started moving in the right direction, the challenge of getting it out of the crisis becomes political as much as economic. It lies in persuading the public at home and abroad that a year after the ruble crash, recovery is strongly on its way, and it was just another roller coaster ride not a crash against the ground.