Euro Chaos Tops Politics as Baltic Exporters Revive Russia Ties

Estonia’s biggest liquor producer has no time for political squabbles as sales to Russia help it plot a safe passage through the euro-area debt turmoil.

“It would be very shortsighted if we turned our backs on Russia,” Liviko AS’s Chief Executive Officer Janek Kalvi said in a phone interview from the capital, Tallinn. “Especially if you look at what’s been happening in Europe.”

Liviko, whose revenue reached 130 million euros ($168 million) in 2011, has bolstered sales to Russia for each of the last five years, even after Prime Minister Andrus Ansip encouraged curbs on exports to the Baltic nation’s neighbor. Growth in 2012 has been about 10 percent, according to Kalvi.

Baltic exports to Russia, now Estonia’s top destination for goods, have jumped to the highest in more than a decade, fueling Europe’s fastest growth after the region that also includes Latvia and Lithuania endured the world’s worst recessions after Lehman Brothers Inc.’s 2008 collapse. The surge has defied strained ties over issues from Soviet occupation to energy imports and has helped drive Baltic debt yields to record lows.

“Export demand in western Europe is going to be pretty weak for a while,” Neil Shearing, chief emerging-market economist at Capital Economics Ltd. in London, said Sept. 12 by phone. “If that’s the case, you’re going to take export growth were you can get it for the next couple of years. That’s where political objectives may meet cold hard economic realities.”

Record Yields

Latvian gross domestic product surged 5 percent from a year earlier in the second quarter, the EU’s fastest pace, while Lithuania grew 2.2 percent and Estonia expanded 2.2 percent, the fifth-quickest rate.

The yield on Lithuania’s dollar bond due 2022 dropped to a record 3.770 percent Sept. 12, according to data compiled by Bloomberg. The yield on Latvia’s 2021 dollar bond fell to 3.339 percent, the lowest since trading began last June.

Baltic-Russia ties have foundered since the Soviet Union broke up more than 20 years ago.

Lithuanian politicians including Prime Minister Andrius Kubilius are pursuing compensation from Russia for Soviet occupation and damages after 280,000 of its citizens were deported to labor camps from Siberia to Kazakhstan between 1940 and 1953. Russia rejects that the Baltic nations were occupied.

Estonia, where ethnic Russians rioted in 2007 over the relocation of a Soviet war memorial, jailed a high-ranking ex- police official in June for spying for Russia. Before elections last March, authorities said the main opposition Center Party posed a security risk to the country by seeking financing from a potential Russian backer.

Energy Fears

Party leader Edgar Savisaar, the mayor of the capital, Tallinn, said at the time that the party had sought 1.5 million euros from OAO Russian Railways Chief Executive Officer Vladimir Yakunin to build a church in Tallinn.

Estonian President Toomas Ilves used his Twitter Inc. account to liken the jailing of Russian punk activists Pussy Riot, who blame President Vladimir Putin for their plight, to a 13th century “witch trial.”

The three Baltic nations plan to build a nuclear-power plant in Visaginas, Lithuania, an electricity link with Sweden and liquefied natural-gas terminals to trim energy reliance on Russia, which they deem an unreliable partner.

After losing out to Poland in the 2006 auction of the Baltic region’s only oil refinery, Orlen Lietuva AB, Russia halted deliveries through a crude pipeline to the company, citing a leak. Russia’s state-run OAO Transneft has refused to fix the pipe since.

‘Highest Prices’

OAO Gazprom (GAZP), Russia’s natural-gas export monopoly, faces an EU antitrust probe over the pricing of fuel sales in central and eastern Europe after complaints from nations such as Lithuania.

Lithuanian Energy Minister Arvydas Sekmokas said his country was “punished with the highest prices in Europe” when it tried to implement EU energy policy to open up markets, according to a comment e-mailed Sept. 5.

“Domination or even open hostility often prevails in Russian policies both in bilateral and multilateral relations,” Lithuanian Foreign Minister Audronius Azubalis wrote in a March 15 opinion piece for the Delfi news service. “That’s unacceptable for us.”

Still, Estonia, Latvia and Lithuania, which joined the European Union in 2004 to bolster Western trade, have increased the share of goods they send to Russia by as much as half since 2009. Russia now accounts for as much as 19 percent of exports, the most in at least 14 years, while the shares of nations such as France and Belgium have shrunk as they grapple with Europe’s debt crisis.

‘More Clarity’

“We’d certainly want more clarity and less tension on the political level but that hasn’t been too big of an obstacle for business,” Audrius Statulevicius, chief financial officer of dairy-products maker Pieno Zvaigzdes AB (PZV1L), said by phone from Vilnius, Lithuania’s capital. “We don’t make a drama out of the politics.”

Russian sales at Pieno Zvaigzdes, which sells Svalia brand cheese at supermarkets from St. Petersburg to Kamchatka, grew 20 percent in 2011, according to Statulevicius.

Russia’s economy will expand 3.5 percent this year, driven retail sales and investment, the Economy Ministry said Aug. 28. Gross domestic product advanced 4 percent from a year earlier between April and June as the euro area recorded its second quarterly contraction in nine months.

Biggest Partner

Russian sales helped Lithuanian exports reach a record-high 6.5 billion litai ($2.4 billion) in July and is now the country’s biggest trading partner. Russia was Estonia’s biggest export partner for the first time in almost 20 years that month as re-exports of equipment including front-loading excavators fueled a 35 percent advance in sales.

While the export relationship has flourished, there are reasons for concern over the prospects for Russia’s economy, which crashed after a ruble devaluation and debt default in 1998, causing sales from Estonia to plunge 43 percent the following year and pushing all three Baltic nations into recession.

Russia faces “considerable” risks of spillover from global economic difficulties as there’s less room for fiscal response than in 2008 and the country’s budget is still “heavily dependent” on oil revenue, the International Monetary Fund said last month.

Russia’s economy, forecast by the IMF to grow 4 percent in 2012 and 2013, contracted 7.8 percent in 2009 after the credit squeeze and global slowdown that followed the collapse of Lehman Brothers Holdings Inc.

For the time being, demand is firmer in Russia than the euro area, where GDP contracted 0.4 percent in the second quarter.

Egidijus Valentinavicius, Chairman of Lithuania’s SBA Furniture Group, is looking to tap growing Russian consumption as he diversifies away from European sales. SBA, a contractor for Swedish home-furnishings retailer IKEA, increased sales 18 percent from a year earlier through the first five months.

“Growth in Russia is considerably stronger than in western Europe,” Valentinavicius said. “Consumption is still lower than in the West, so growth potential is there for the future.”

To contact the reporters on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.net Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.