SUMMARY |
ECONOMICS
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EUROPEAN
UNION  |
By Oleg Bozhko
Just
like all transition economy countries, The Baltic States, lacking their own
capital accruals, have a desperate need for foreign investments, a very substantial
precondition for economic growth. The share of public investments in Latvia
doesn’t exceed one third of the amount of foreign investments, besides,
a quarter of the above mentioned public investments is made up of foreign donations
to Latvia. Foreign investment stabilizes the balance of payments, thus also
bringing stability to the exchange rates for Baltic national currencies and
making the Baltic region more appealing for potential investors (on the account
of their own investments). International ratings serve as crucial guidelines
and tips for foreign investors.
Ranking by the amount of direct foreign investments (DFI)
accumulated over a certain period of time is the simplest way to rate investment
appeal for a country or region. DFI are investments made into the capital
of companies with resident status, thus allowing investors to control from
10 to 100% of the resident’s capital.
As opposed to portfolio investments, which give a control of less than 10%
over a resident company’s capital (as a rule against further speculative operations),
DFI are long-term investments leaving a stabilizing impact on the balance
of payments (which in most cases are in deficit) for transition economies.
DFI per capita or per every million of the GDP are indices that help to evaluate
the different economic levels of various countries. No matter what the experts
say, only money votes show the real situation of investment appeal for investors.
As for DFI accumulation over the past 10 years, the situation in the Baltics
on April 1, 2001 reveals the following: the ranking is headed by Estonia which
shows the best performance in both total figures and ratio-based indices for
DFI – USD 2.7 bln and USD 1,800 per capita. This is followed by Lithuania
and Latvia, which basically share second place with total figures at USD 2.4
bln and USD 2.1 bln, making USD 649 and USD 857 per capita respectively.
Of course, in comparison to Poland, Hungary and the Czech Republic, where
DFI amounts to between 20 and 28 billion dollars, the achievements of the
Baltic States seem not so impressive; nevertheless, if compared by the level
of DFI per capita, Estonia comes in the second place among all Central and
Eastern European countries, surpassed only by Hungary which has managed to
attract more than 2,000 dollars of DFI per capita.
This fact could be explained with the geographical
location. Speaking of these particular countries having given a preference
to making investments into the Baltic States, the situation is as follows:
Sweden, Germany and Estonia which are the three leading investors in Latvia
make up 36% of all foreign investments channeled to the country; the two major
foreign investors in Estonia (Finland and Sweden) have made investments exceeding
two thirds of the amount of all foreign investments, and only 10% of the foreign
capital is invested by Germany. Lithuania is chosen by three primary investors
– Sweden, the USA and Finland – having invested 43% of all investments.
So Swedish capital, mainly invested in the banking sector, is represented
in all three Baltic countries among the top 3 foreign investors. Officially,
the fourth largest investor in Latvia is considered to be Denmark; the actual
situation with Finnish capital (represented through Sonera) gives sound
basis to claim that Finland also ranks among the leading foreign investors
in the Baltics.
Both of these Scandinavian neighbors (Sweden and Finland) have become partners
within the framework of the Baltic Pulp project initiated to examine
the feasibility of building a large pulp mill in Latvia, also the largest
investment project for the Baltic region – the project is planned to receive
approximately 1 billion euros. Trade, finance and communication sectors are
areas attracting the most foreign investments so far – only 20% of all investments
were made into industrial branches.
Although Norwegian capital has failed to enter the Baltics together with its
neighboring countries, the Linstow company alone has already managed
to invest approximately USD 200 million in the region, and it seems that the
Norwegians are about to eliminate the gap. A liberal tax system, promoting
an investor-friendly business environment, largely explains the fact of Estonia
being the third major investor in Latvia – in the presence of rather favorable
conditions, international foreign capital is moved to Latvia via Estonia.
Ratings made by such international agencies as
Standard & Poor`s (S&P), Moody`s Investor Service and Fitch
IBCA help foreign investors assess the investment risk - the higher the
rating the lower the risk in investing within a given country. To request
such financial rating services is a costly thing for any country, but on the
other hand, if you are not listed in the ratings – you don’t exist at all.
Table 1 reveals the current ratings of some of the post-socialistic countries.
As we can see, the so-called investment grade rating is given to all Baltic
countries (BBB+ for Estonia, BBB for Latvia and Lithuania); the local currency
credit ratings are even a little higher than the foreign currency credit rates.
American banks, for instance, are allowed to buy securities (including also
promissory notes) only if they have investment grades of BBB and higher (up
to AAA) – securities with lower investment grades rating are equaled to securities
of a speculative character. So officially, the leading companies of the Baltic
region can already independently borrow money on the global market, and not
only receive funding from the EBRD or the World Bank.
Can the rating of the companies with resident status exceed the rating of
the country it resides in? So far it was considered to be impossible, but
a recent announcement by Moody`s illustrates the opposite –Estonia’s
Hansapank is expected to become the first precedent in the Baltics
to surpass its own country in terms of ratings.
So-called development forecasts indicate the potential changes in the grade
of the current investment rates – either stable, positive or negative. For
instance, positive changes expected to occur with the Latvian economy in the
near future, such as a reduction in fiscal deficit and increase of exports
to the EU (despite the weak euro) etc., are all reasons for the Latvian development
forecast having been changed from stable to positive in mid-July.
By Inna Rogatchi, Rogatchi Productions & Communications Ltd
The Baltic market has seemingly not yet become sufficiently important for the world’s major economic players, except for maybe Germany. The size of the market, its distance from the US and most of Western Europe, its’ closeness to the complicated and unpredictable Russian market are the main factors for an obviously insufficient flow of Western investments into the region.
 Mary Helen Berar. |
Mari-Helene Berard, one of the leading and
most experienced French financiers, chairman and co-founder of the MHB
bank and former special adviser to president Chirac, commented the current situation
and the prospects of the Baltic market as not very attractive for French business:
"This is a very small market, from the French industrialists’ point of
view, with yet undeveloped purchasing power. One of the major French companies,
manufacturer of electric appliances, Moulinex, had tried to settle in
the Baltics, and start developing its business there. But they were hit by the
Russian crisis in 1998, as business in the Baltic is much dependable on Russia,
and after experiencing quite heavy losses, they decided to withdraw from the
Baltics. In comparison, French business is booming in Poland, and it can be
said that by now French businessmen have developed both a taste and trust for
doing business in Poland. We can see that everything there goes quite well,
in correspondence to Western standards and understanding, this is especially
so for the banking sector, which is a crucial element for the development of
emerging markets. We also see that we are welcomed there, that Polish partners,
executives, managers are glad to co-operate with westerners, and try to correspond
to our standards. That’s why French businessmen are glad to invest in Poland,
and business is flourishing between us.
Returning to the Baltic region, in general, we regard it as part of Northern
Europe, with its own connections, traditions, and areas of mutual interests.
It would be rather illogical if Scandinavia did not become the central point
of development for business with its Baltic neighbours, wouldn’t it?"
 Kenneth Warren. |
British businesses express similar views. Sir Kenneth Warren, a long term British Parliament Member and head of the Association of the British Aircraft Industry, commented as to why powerful British businesses are not represented enough on the Baltic business stage: "Well, the size of the market does dictate the rules of the game here. As far as I know, there are some interest in our financial circles towards the Baltics, as they can’t miss the opportunity to be present in any possible region, especially a region so closely connected to Russia; and because of the tricky situation British businesses have found themselves in, because of the "pound versus euro" game. The more seriously we are present and secured worldwide in the financial sector, not necessarily in banking but in all its parts, securities, investments and portfolio services, and insurances including, the more secure the entire British economy will feel itself. But besides this, and some food and drink manufacturers which are always finding their markets everywhere, big British business is not going in big volumes to the Baltics, because huge expenses of investing into new markets would not be economically advisable because the market is too small for big international companies".
 Veesa Vaarea. |
The Baltic region is quite important for Finland
and Scandinavia; although its’ population is not too large, but because
of historical and primarily geographical and geopolitical reasons it is a rather
significant direction for the North European economy, - says Vesa Varhee,
one of the leading Finnish market analysts. He sees the three Baltic States
as three separate cases from the point of view of developing bilateral economic
ties between Estonia, Latvia and Lithuania and their European partners. " If
Estonia is looking firstly towards Finland and Scandinavia, Lithuania and Latvia
are more orientated towards Central Europe, Holland and Germany in their economical
strategies".
"From the Finnish point of view, the Estonian market is closest to us; and although
by size it is not a major market, it is the number one partner for Finland between
the three Baltic countries, there are as much as eight ferries coming from Helsinki
to Tallinn daily, Finnish tourists are constantly bringing a lot of money into
the Estonian economy, and this direction of investments is perfectly natural
for Finnish business".
The brewery industry, well developed and quite important for both countries,
is one such example for self-developing and productive co-operation. " Not only
are the two biggest breweries, Hartwall and Olvi, producing their beer in Estonia,
but they are also selling Finnish beer there. As a partnership exists, we are
expecting Estonians to sell more of their beer in Finland. Undoubtedly, it will
be even more successful when Estonia becomes an EU member, and many limits imposed
upon her as an exporter at the moment, will be lifted".
Finnish and Scandinavian business has "certainly noticed attractive parts in
Latvia, in particular, in its building industry, its forestry industry, and
furniture making. Competitive quality in combination with low taxation and low
labour costs certainly makes these sectors of the Latvian economy attractive
for Scandinavia and Finland".
The Baltic states are a gate to the giant Russian market. So far, Finland is
the only EU country with a joint borderline with Russia. Looking back to the
beginning of the Nineties, we can see what a boost the Finnish business and
economy gained by the factor of becoming the EU gate to Russia. It is a major
factor for developing the entire economy of this country. We are expecting the
same to happen to Estonia as soon as it is accepted as an EU member. The EU
will then have two borders with Russia. Just like Finland, Estonia has a Russian
standard railway system, a major factor for transportation infrastructure. But
unlike Finland, Tallinn also has a brand new cargo port, and that circumstance
will allow Estonia become a major transportation link between Western Europe
and Russia which is an extremely advantageous scenario for the economy and business".
One should remember, however, that to speak of linking the economy with the
Russian market, purchasing power in Russia must be strengthened substantially.
To be realistic, we will wait for a satisfactory result there for 20 years.
"Latvia’s Ventspils harbour and its oil terminals which are also known
as being in good shape with fairly competitive technologically, undoubtedly
will become a major route for the sale of Russian oil to foreign markets".
Analysing the prospect of the Lithuanian investment climate – the country’s
major benefits would be because of the border with Poland, which itself will
become an EU member by year 2007- 2009. When this happens, Lithuania will become
the country between Ukraine, Belarus and Russia, from the one side, and the
EU from another. Border operations will be of major importance and intensity,
and Lithuania will undoubtedly benefit from becoming such a focus point in the
economic process between these three countries".
When asked about the current situation and prospects of financing and banking
in the Baltic States, the major problem for all three countries is that they
are considered rather young and without a strong legislative tradition. This
makes it rather risky for foreigners to deposit money into Baltic financial
institutions as yet. This kind of business needs at least 20 years of successful
and sustainable practices before clients can be sure of depositing their funds
here. In the beginning of the post-Soviet era, Estonia, for example, had a lot
of new banks; there was then a lot of bankruptcies in these banks, followed
by a lots of mergers. The same situation took place also in Latvia and Lithuania.
In situations like this, clients can not be sure of a financial institution,
and so far it has been the case, that they should not expect any serious income
from foreign capital into the Baltic financial institutions, not yet. But, again,
in Estonia, there are joint banks with Finnish and Swedish major banks, and
by working in those ventures, Estonian financiers and bankers, of course are
gaining experience and knowledge absolutely vital for them.
One of the most intriguing moments for entire
economic development of the Baltic region is the future of Kaliningrad,
claims Vesa Varhee.
"A lot will depend on what the Russian government will do with Kaliningrad.
They could and they should introduce special legislation making the area
"the Baltic Hong Kong", build an offshore zone there and develop its possibilities
to the best. If this happened, Lithuania and the rest of the Baltic region
will become an even more important place for the EU, as it will become the
closest EU point with immediate contact to the Russian offshore located
quite a distance away and practically isolated from the mainland Russia.
This will create an extremely interesting situation from the economical
and business point of view, and a lot of new possibilities. How the Russian
government develops its Hong Kong on the Baltic, is something that many
of the world’s businessmen would like to see with great interests and plenty
of ideas."
While we were discussing the matter with the Finnish analyst, the Russian
Security Council had a special session to discuss the issue in Moscow (July
26, 2001). As a result of that first step in the important and interesting
process, Russia’s president Vladimir Putin has decided to introduce
a new post as first deputy to the head of the North-Western Federal region
of Russia with responsibility over Kaliningrad, which Putin sees as "becoming
an enclave within the EU". It has its draw backs, but it also bears benefits
from the Russian president’s point of view. The main thing which has already
been put on the table by the Russian leadership, is the strategy according
to which Russia will practice its relations with the EU in Kaliningrad.
Another key thing announced is that the Russian leadership has decided to
reconsider its five-year plan for Kaliningrad development. No further details
have been provided so far, but undoubtedly, Kaliningrad has become a test-
field for new Russian politics in the Baltic and for its relationship with
the EU. This process should be worth while a watchful eye by all interested
parties, first of all – by all three Baltic States.
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EDITOR'S NOTE |
ECONOMICS
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EUROPEAN
UNION |