Publication: Monitor Volume: 5 Issue: 203

When the ruble collapsed in August 1998, the Baltic states seemed better placed to resist the “Russian flu” than the other Soviet successor states. But in contrast to the CIS countries, most of which reported GDP growth in 1998 and the first half of 1999, the Baltic economies have fallen into recession. Estonia’s GDP fell 5.6 percent in the first quarter of 1999 and 2.4 percent in the second, while Latvia’s fell 2.3 percent and 1.9 percent in the first two quarters, respectively. Lithuania’s second-quarter GDP was down 4.0 percent, after a 5.6 percent decline in the first quarter.

The Baltic recessions have resulted in part from the need to reduce unsustainable current account deficits, which in 1998 grew to 10 percent of GDP in Estonia, 11 percent in Latvia and 12 percent in Lithuania. The Baltic governments in 1998 had therefore moved to tighten fiscal policy and slow their economies even before the onset of the Russian crisis. The outflow of foreign capital triggered by the Russian crisis then slowed spending further. Also, since financial systems in the Baltic states are more developed than in the CIS economies, the rising interest rates which followed the ruble’s collapse had a larger impact on Baltic investment and construction spending than in CIS countries. Third, while the share of Baltic exports going to Russia has declined dramatically since the early 1990s, sectors such as food processing are still dependent on the Russian market. Declines in cross-border sales and lower truck traffic after the collapse of Russian imports also contributed to the declines in output. Finally, the Russian crisis coincided with a general slowdown in many European Union economies as well, further reducing demand for many Baltic exports.

In the longer term, however, the Baltic economies should be well placed for economic growth. The EU already accounts for well over half of total exports, and foreign investment has been extensive. Baltic subsidiaries of Western firms are able to draw on parent company resources to tide themselves over during financial crises. All three Baltic countries remain in good standing with international financial institutions, and their close ties to the EU afford them better access to emergency finance and balance of payments support than the CIS countries. The European Commission’s October 13 recommendation that EU membership negotiations be initiated with Latvia and Lithuania ( underscores the extent to which the Baltic states have already become integrated into the European economy (Estonia began membership negotiations in 1998).