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Riding the Baltic rollercoaster

Concerns about the Crimea crisis risk taking the gloss off euro entry for Latvia and Lithuania, but it is the legacy of recession that still poses the biggest challenges for the region’s banking sectors

The inhabitants of the Baltic republics could be forgiven for feeling that fortune is not on their side. No sooner, it seems, had the three states fought their way back from double-digit recessions in the wake of the global financial crisis to re-emerge as regional growth stars – and, in the case of Latvia, as the 18th member of the eurozone – than the Ukrainian crisis prompted a fresh wave of forecast downgrades and sell recommendations.

Analysts’ concerns are understandable. Not only are Estonia and Latvia home to sizeable ethnic Russian minorities – the casus belli in Crimea – but all three countries have strong economic and financial ties to their larger neighbour. Lithuania is wholly dependent on Gazprom for gas supplies and nearly 45% of Latvia’s imports come from Russia; exports to the former regional hegemon account for around 17% of the total for Lithuania and 14% for Latvia and Estonia.

The Baltic republics also benefit from their status as transit hubs for Russian trade. Last year, 10% of Latvia’s gross value added came from transportation and storage, according to analysts at Nomura, with Russian transit trade dominating the sector. Nearly three-quarters of all international freight traffic through Latvian ports in 2013 was made up of Russian goods.

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