Benefits to Lithuania in the EU-Russian economic war

Lithuanians have adapted well to the European Union‘s economic sanctions on Russia and its retaliatory bans on European imports. Though the export of Lithuanian origin goods to Russia has almost halved since the Crimean annexation in 2014, over several years our country’s businesses have found a different niche and are rebuilding trade flows. The amount of goods of third party origin being exported from Lithuania to Russia is growing. Just last year overall exports to Russia grew almost 30%, Lietuvos Žinios writes.

Over 10 months in 2017 goods worth 3.1 billion euro were exported to Russia which made up 14.5% of all Lithuanian exports, in 2016 respectively around 3.5 billion euro and 15%. Exports to Latvia, Poland, Germany, the USA and other countries were smaller. Imports from Russia are also the largest among Lithuanian trade partners, some 3.1 billion dollars’ worth of goods was imported, which made up 13.2% of Lithuanian imports.

Nevertheless economists admit that the Russia market has greatly withered for Lithuanian manufacturers

Impressive growth

Swedbank chief economist Nerijus Mačiulis stated that with Russia applying sanctions, Lithuanian goods export to this market has roughly halved from 600 million euro in 2014, to less than 300 million last year. Now exports to Russia comprise only 2% of all Lithuanian origin goods export, three times less than to the United Kingdom and five times less than to Sweden.

“As such, few Lithuanian manufacturers are dependent on this market and in the near future there will not be any great shifts in this front,” he said.

However N. Mačiulis stressed that a completely different image can be seen in regard to overall export statistics which envelops not only Lithuanian origin goods, but also re-exports. “Based on the overall metric, Russia was the largest export market for Lithuania last year – overall exports to Russia grew at a truly impressive rate – almost 30%,” he stated.

According to the economist, these changes were mostly due not to the changing political and economic relations between Lithuania and Russia, but simply the recovering Russian economy and its growing demand.

“Most of the exports were Western made investment or long term use goods – various cars, mechanical, optical and medical devices.

A significant amount of plastics, various drinks, furniture was also exported. In other terms, goods were exported that are not under the Russian embargo. It is worth noting that the largest amount of Lithuanian services exports is intended namely for the Russia market, mostly this is transport services. As such it is not the manufacturers, but the transport sector that remains the most dependent on this market,” N. Mačiulis explained.

Not attaching significance to the changes

Chief analyst for the bank Luminor Indrė Genytė-Pikčienė said that when reviewing detail trade statistics with Russia, no significant breakthrough can be seen. “The sanctions are working, while export flows are increasing in other goods groups,” she stated.

The economist believes that the importance of the Russian market has greatly declined for Lithuanian manufacturers: only 1.9% of all Lithuanian origin exports are headed for the Russian market, it is the 16^th market based on Lithuanian exports.

She explains that the largest goods groups exported to Russia are the following: 24% of the Lithuanian origin goods flow is food or agricultural products (almost half being alcoholic and non-alcoholic beverages and vinegar, 25% – sugar, cocoa, flour and their produce, confectionary products, 9% milling produce, malt, starch, inulin and wheat gluten), 18% of the Lithuanian origin goods flow is made up of cars and devices, 106% – Lithuanian made plastics and rubber goods, 8.7% – transport vehicles, 8.4% – industrial chemistry produce.

However re-export to Russia makes up around a third of all Lithuanian re-export. Based on preliminary 2017 data, the structure of re-export to Russia is as follows: 36% of all Lithuanian re-exports to Russia was made up of cars and devices, 13% – chemistry produce and fertiliser, 11% – food and agricultural produce, 8.8% – clothing and textiles, 6.1% – metals and their produce, 5.5% – plastics and rubber products, 4.9% – transport vehicles.

“Russia remains the most important re-export market – such are the goods that Lithuania re-exports to Russia from other states. This Lithuanian role of corridor between East and West is important to us in that it grants sustenance to the transport, logistics and wholesale sectors,” I. Genytė-Pikčienė stated.

Export and changes in January-October 2017

Source: Statistics Lithuania

Import and changes in January-October 2017

Source: Statistics Lithuania

Exports to Russia since 2014

*January-October

Source: Statistics Lithuania

Imports from Russia since 2014

*January-October

Source: Statistics Lithuania

EU and Russian sanctions

From March 2014, the EU gradually applied restrictive measures for Russia in response to the illegal annexation of Crimea and the destabilisation of Ukraine.

The EU applied restrictive measures of two types, including diplomatic, individual restrictive (freezing of assets and travel restrictions”, restrictions of economic relations with Crimea and Sevastopol, economic sanctions and restrictions of economic cooperation.

In March 2014 the European Council ruled to freeze the property of individuals responsible for the embezzlement of Ukrainian state funds. Most recently the application of these measures was extended in March 2017 up to March 6, 2018.

The council also approved restrictive measures applied only in the territories of Crimea and Sevastopol for EU citizens and companies.

The EU implemented a ban on goods from Crimea and Sevastopol and investment linked with certain economics sectors and infrastructure projects, a ban to provide tourism services in Crimea or Sevastopol, as well as export certain goods and technologies. On June 19, 2017 the application of these measures was extended to June 23, 2018.

In June and August 2014 the EU implemented economic sanctions targeted at trade with Russia in specific economic sectors. In March 2015 EU leaders decided to link the application of the current sanction regime with the total implementation of the Minsk agreements which was outlined in late December, 2015. As this failed, the application of economic sanctions was extended to July 31, 2016.

The application of the economic sanctions was extended repeatedly over 6 month periods on July 1, 2016, December 19, 2016, June 28, 2017, after evaluations of the implementation of the Minsk agreement every time. Currently the application of economic sanctions has been extended to January 31, 2018.

These measures restrict access to primary and secondary EU capital markets for certain Russian banks and companies, establish export and import bans on weapons trade;

An export ban on dual use goods intended for military use or military end users in Russia is applied, Russian capacities to employ certain technologies and services of critical importance for oil drilling and scouting are restricted.

In July 2014 EU leaders applied economic cooperation restrictions. The European Investment Bank was requested to halt the signing of new financing operations in the Russian Federation, EU member states agreed to coordinate their positions in the executive council of the European Reconstruction and Development Bank to halt the financing of new operations and the implementation of bilateral and regional cooperation programmes of the EU with Russia were reviewed and some were halted.

In reaction to Russian sanctions, in August 2014 Russia banned food and agricultural goods import from the EU, USA and other Western countries. These restrictions are still in place.

Sources: European Council, Lietuvos Žinios.