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Lithuania could lose up to 4 percent of its annual GDP


The Western countries and Russia after beginning of the Ukrainian crisis in 2014 imposed broad scope of the economic and other sanctions against each other, but the most sensitive for Lithuania is Moscow decision in August, 2014 to stop the import of almost all agricultural products from EU, US, Canada and Norway

In November 2014 Russia imposed country specific sanctions against Lithuanian road carriers (introduction of the particularly harsh and exceptionally slow custom checks for the trucks with Lithuanian number plates. Such sanctions are also imposed on the trucks, registered in other countries, but carrying the freights, which paperwork was carried out in Lithuania). Russian officials stated, that sanctions are imposed because of the widespread smuggling and the counterfeiting of the custom documents. But it is clear, that this is Moscow revenge for the active Lithuanian foreign policy after the beginning of the Ukrainian crisis (including the active support for the introduction of the economic sanctions against Russia, aims to increase NATO military presence in the Baltic Sea region etc).

It is also worth to mention, that politically motivated Russian economic sanctions against Lithuania is not a new phenomena for the Lithuanian companies. In the last several years Russia at least twice imposed country specific and politically motivated economic sanctions against Lithuania. In both cases (in 2009 and in 2013 during the Lithuanian EU Council presidency) Russia hit Lithuanian milk products exports and road carriers. But this time impact from the sanctions could be more harmful, because the sanctions are imposed not only on Lithuania, but also on most Western countries. It means, that because of the higher competition it could be much more difficult to substitute Russian market with the export markets of the EU or third countries.

Despite limited statistical data available at the moment of the writing it is worth to estimate the possible impact of the Russian sanctions on the Lithuanian economy. Some international experts, including EUROMONITOR, predicted that Lithuania will be most hardly hit by the sanctions and could lose up to 2,5 percent of the GDP annually.

In November 2014, Prime Minister of Lithuania A. Butkevičius stated, that in absolute worst scenario of total abolishment of any economic ties with Russia, Lithuania could lose up to 4 percent of its annual GDP, but at the same time he expressed the opinion that such negative scenario is pretty unrealistic. In November 2014, the Ministry of Finance predicted that in 2015, despite the sanctions, Lithuanian GDP will grow by 3,4 percent. Leading economists are more cautious and predict the more moderate 2,0-2,5 percent annual growth in 2015.

From the first sight Lithuanian economy seems very dependent on trade with Russia. In 2013 Lithuanian export to Russia amounted 4,8 billion EUR (19,6 percent of the total export), import – 7,37 billion EUR (28 percent of total import). But only 14,6 percent of Lithuanian export to Russia constituted of the goods of Lithuanian origin (85,4 percent of the export is reexport from third countries – both EU and non EU), which is only 2 percent of the Lithuanian GDP. At the same time Lithuania is pretty important player in the goods reexport to Russia. For example, in 2013 Lithuanian export of vegetables (almost all – reexport) to Russia was 340 mln. EUR (total EU export to Russia – 780 million. EUR), fruits – 309 mln. EUR (EU – 1259 mln. EUR, Poland – 339 mln. EUR).

Lithuanian road carriers have around 10-12 percent share of the Russia–EU road transportation market. In 2013, total export of Lithuanian transportation and other logistical services to Russia was higher than the amount of export of the goods of Lithuanian origin and amounted 1,27 billion EUR (3,6 percent of GDP). These numbers perfectly illustrate susceptibility of the Lithuanian transportation and logistics sector to the Russian sanctions.

Another sector, which already suffers considerable consequences is agriculture and food processing (particularly exporters of milk products). In 2013 Lithuania was the third largest exporter of milk products to Russia in the EU. Its milk products export (almost all of Lithuanian origin) in 2013 was 160 million EUR (Finland – 250 million EUR, Germany – 182 mln. EUR, Poland – 141 mln. EUR). Russian market was so profitable to milk producers (particularly for cheese exports), that they did not want to withdraw from this market even after two rounds of Russian sanctions in 2009 and 2013. The introduction of the new sanctions in August 2014 led to a steep drop in raw milk prices (they were lowered by 1/3), because the milk product producers are trying to relieve the burden of the potential losses on the expense of farmers.

Increased competition from the other EU producers in the Lithua nian home market is visibly lowering the prices of the groceries, but at the same time putting serious pressure on the producers. In the 3rd quarter of 2014, export of the goods of Lithuanian origin to Russia was 8,3 percent lower than in the same quarter of 2013.

The export of milk and other food products almost stopped. It is clear that in the results of the 4th quarter will be even worse, because the 3rd quarter included only 1,5 month of the sanctions.

At the same time Lithuanian exporters of goods and services are actively working in order to tackle consequences of the Russian sanctions. Food producers are trying to enter other markets such as Middle East and China. There are also some indicators, which show that the part of the direct deliveries to the Russian market could be substituted by reexport (with partial processing) through Belarus.

For the Lithuanian transportation and logistics sector (including reexport business) it is much more difficult to substitute Russian market, because this sector was for many years developed taking into consideration preferential Lithuanian geographic position between Russia and EU.

Besides the direct sanctions, considerable worsening of the Russia macroeconomic situation (because of the Western sanctions, and particularly rapid decrease of the oil price) is beginning to negatively affect Lithuania. Devaluation of the rouble leads to the decrease of the purchasing power of the Russian consumers, meaning less opportunities for the goods and services export, smaller tourist inflow from Russia to Lithuania (Lithuanian state tourism department predicts that the number of Russian tourists who visit Lithuania will shrink in 2014 by 10 percent) and economic difficulties in important export partner countries for Lithuania, such as Belarus.

To sum it up, economic impact of the Russian economic sanctions is painful for the Lithuanian economy, but it provides the opportunity to diversify the geography of export (including China and Gulf countries) and to increase competitiveness of the Lithuanian companies. The extent of the losses will heavily depend on the duration and the future character of the sanctions.

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