A “drowning” Russian economy is more of a threat to Lithuania than the possibility of military aggression, the country’s finance minister told Emerging Markets.
“We’re very worried,” said Rimantas Šadžius, about the fallout from an ailing Russian economy. “Exports to Russia in different areas of the economy have contracted between 60% and 100%, and are still falling.”
Russia accounted for just over one-fifth of total Lithuanian exports in 2014, according to Fitch Ratings. In some cases, like dairy, Russian bans on EU imports has resulted a wholesale rejection of Lithuanian products. In others, weak Russian demand amid economic contraction is sending Lithuanian exports down. Both, in turn, are hurting Lithuania’s transport sector.
“Our assessment was that a predicted economic downturn of 3.5% in Russia could decrease Lithuanian GDP by 1%,” said Šadžius. The 3.5% prediction comes from the IMF’s January World Economic Outlook report, although the World Bank expects a bleaker 3.8% dive in Russian GDP. Lithuania’s ministry of finance had expected domestic real GDP growth of 4.3% for 2015, notes Šadžius, but instead has seen only a 2.5%.
“The Russian economy has a large influence on ours,” he said. “But it’s not only Russia’s economy. The weak rouble has dragged down currencies of our [trading] partners in Central Asia, where we could expect better economic relations.”
This has at least prompted the Baltic state, awarded an upgrade to A3 from Moody’s last week, to look past Russia to new trading partners. The country sent 46% of its 2014 exports into the eurozone, and is looking towards the United Arab Emirates, China and the US among others, said Šadžius.
Reliance on Russian energy, meanwhile, has fallen with the completion of a new liquid natural gas terminal, and Lithuania is building two new connecting lines — one through Sweden and one through Poland — to draw electricity from Western markets. At certain times of the year up to 70% of Lithuania’s electricity comes from Russia, Šadžius said. The Swedish line should be finished later in 2015 and active in 2016, he added.
RUSSIAN AGGRESSION
Lithuania has also had to contend with the geopolitical implications of Russian aggression in the region. This prompted minister of national defence Juozas Olekas to unveil in January a citizens guide on what to do in the event of war on Lithuanian soil. But the economic implications seem more of a threat than the military belligerence.
“On the one hand you have this huge military machine,” said Šadžius. “But on the other we are members of the EU and Nato and now in the eurozone.”
This gives Lithuania the assurance of safety, he said. And although the government did not use this argument in its campaign to adopt the euro, Šadžius thinks that the strong vote in favour was to some extent driven by the additional layer of safety the eurozone was perceived to provide.
The threat of Russian action was also instrumental in securing cross-party agreement on increasing defence spending. Lithuania has ramped up defence spending by 38% from 2014 and plans to meet the 2% of GDP defence spending target for Nato members by 2020, Šadžius said.
“Theory is one thing,” he said. “But real life is another, especially when real life isn’t as pleasant as one could wish.”