How the war in Ukraine would affect Lithuanians

Experts say that the Lithuanian economy would not be severely affected by a war with the geopolitical tensions in Ukraine. However, logistics companies would be hit hard, and the country’s population would not escape – gas, oil and heating prices would soar to unprecedented heights, Iveta Danieliūtė wrote in lrytas.lt

 At the same time, all other goods and services would become more expensive. However, it is likely that even higher prices would not deter Lithuanians from making expensive purchases, and real estate would continue to be snapped up.

In the event of war, everything would become more expensive

Aleksandras Izgorodinas, an economist at Brandnomika, assured lrytas.lt that both the Ukrainian and Russian markets are not particularly important for Lithuanian businesses, as we do not export very many Lithuanian goods to them.

“Therefore, if a war were to break out, we would not suffer much if our exports were disrupted. Lithuanian businesses mainly produce intermediate consumer products, while Ukraine needs more end-use products, so we do not have much to offer Ukraine, and we are oriented towards the West, our dependence on Ukraine is small,” the economist explained.

However, Dr Vincentas Vobolevičius, Associate Professor and Head of the Economics and Politics programme at the ISM University of Management and Economics, has a different opinion. According to him, Ukraine was the eighth largest export market for Lithuania last year. China was only twenty-third.

In January-November, Lithuanian exports to Ukraine amounted to almost EUR 833 million. According to V.Vobolevičius, “disconnecting” such a market would be very painful for the entire Lithuanian economy. The key question is: to what extent can Ukraine be “cut off” from international trade?

“If a war were to happen, it would be short. The Kremlin benefits from a short victorious military spectacle.

One possible scenario is that the Ukrainian army would successfully resist and deter Russia from territorial annexation. The other scenario is that Russia manages to seize the country’s Eastern territories quickly and starts threatening Kyiv.

The main niche for businesses exporting to Ukraine is Kyiv. It is the economic potential of this region that will determine the extent of the damage after a possible conflict”, he told lrytas.lt.

However, according to Izgorodinas, Ukraine is not even in Lithuania’s top 20 largest import markets. So theoretically, we may suffer, but practically, there is no need to make a big tragedy. We would no longer be able to import wood products, agricultural products, oils, metals and automotive equipment from Ukraine, but products from other countries could replace all these goods.

“Of course, they would be more expensive, but in any case, if there is a war, everything will become more expensive.

Only businesses will not shoulder this burden because businesses are already short of working capital, as the price of energy resources, electricity and gas has risen, and wages are rising. So, despite the fact that our economy is strong, businesses do not have free capital at the moment, so to the extent that imported goods and imports become more expensive, businesses will also raise the prices of their final products,” Izgorodinas commented.

However, Vobolevičius assured that he could not yet answer who would bear the burden of these increased costs, as it would depend on Lithuania’s economic situation, the product’s specifics of the product or the price elasticity.

Would Russia turn off the gas tap for Europe?

If a war were to break out, gas and oil prices would immediately skyrocket, making goods and services more expensive for a reason.

“There is talk that if war breaks out and Europe does not certify Nord Stream 2, then, of course, Russia would adjust its gas supplies to Europe.

In that case, gas prices would go up, and so would heating and oil prices. As a result, all goods and services would become more expensive. So the forecasts that inflation in Lithuania has already peaked would be dashed,” Izgorodinas said.

However, Vobolevičius said he doubted whether Russia could turn off the gas tap for Europe.

“First of all, the disruption of gas supplies should be seen as a lever to influence the position of critical European states in a direction more favourable to the Kremlin. However, even now, there is no sign that the role of Western European leaders is causing serious headaches for Vladimir Putin.

Therefore, a drastic decision to stop gas supplies during the cold season would be superfluous and not to Russia’s benefit. In addition, the Kremlin benefits from disagreements between Europe and the US and between Western Europe and Eastern Europe. Therefore, turning off the tap in winter could have the opposite – a unifying – effect”, he explained, noting that he does not expect the US to impose sanctions that would cause significant economic losses to its allies.

Monitoring, planning

According to economists, most Lithuanian businesses should be able to survive the conflict without significant losses, but logistics companies would be hit harder. According to Mr Izgorodinas, Russia ranked first in terms of re-exports last year, while Ukraine ranked seventh in 11 months. Many goods produced in other countries pass through Lithuania to Russia and Ukraine. In the event of a military conflict, this chain will be disrupted, and the losses to logistics companies will be considerable.

Povilas Drižas, Secretary-General of the International Transport and Logistics Alliance (TTLA), assured that all businesses closely watch what is happening.

” Hauliers are not going to dangerous places in Ukraine, but companies have plans B and C, which would mean a sudden interruption of operations or a redirection of hauliers to other sides, other roads. But it is difficult to predict exactly what should be done in the event of a conflict.

Consider the situation in Kazakhstan, where we had to react quickly, but we could not do so because there was no communication. It is difficult to predict everything,” Drižas told lrytas.lt.

If things escalate into a military conflict and the Ukrainian and Russian markets are completely closed, logistics companies would suffer big losses.

Algis Latakas, the head of the Port of Klaipėda, told a press conference last week that the port has crisis management plans in place in case of a military conflict.

“Everything is outlined on how the company should operate when it should hand over management to other institutions and bodies. But in the event of a military conflict, the decisions on how to proceed would of course no longer be ours. However, I hope that we will not come to such ugly scenarios”, said Latakas.

Some workers would emigrate

According to Mr Izgorodinas, if a conflict were to break out, the rouble and hryvnia would plummet, and all imports from Russia and Ukraine would become cheaper. However, this does not mean that these goods would be available.

“After all, a war is a war, it might not be possible to import those goods to Lithuania,” the economist said.

Another news is that Ukrainian service companies, such as those in the IT sector, design or even the film industry, could move to Lithuania.

“Lithuania has an excellent business climate, we have a good reputation, so the war would be an additional incentive for Ukrainian companies to move to Lithuania, to enter the eurozone,” Izgorodinas said.

However, the relocation of manufacturing companies should not be expected. As in Ukraine, production is made according to Eastern standards, not Western ones, so it would be difficult for them to enter the European Union market.

However, even for service companies, the bureaucratic pitfalls can make it difficult to relocate to our country – all the processes take a very long time. So, in this case, the big competitor would again be Poland, which could lure a large number of Ukrainian workers, as recruitment procedures are much shorter there.

“If there were a war, people would not wait. They would want to move to another country as soon as possible. So we should fight for those brains and we should fight for them ourselves by easing the procedures for recruiting foreigners”, the economist explained.

However, Vobolevičius stressed that Lithuania significantly overestimates Ukraine. As he said, it is an ageing society with an even lower birth rate than Lithuania. Moreover, Poland and Germany are also attracting migrants from Ukraine.

“A possible military conflict would mainly affect the eastern territories of Ukraine, whose inhabitants would probably migrate more to Russia than to the West. As for the relocation of businesses, eastern Ukraine would not be able to give us much of a gift either”, said Vobolevičius.

Anxiety would not deter Lithuanians from making expensive purchases

Robertas Dargis, Chairman of the Board of the construction company Eika, told lrytas.lt that geopolitical tensions were the only factor that could reduce real estate prices. According to Dargis, if hostilities were to break out with Ukraine, the whole region would be in tension. Therefore, it is unlikely that foreign companies would want to open their service centres in Lithuania. If the number of these centres started to decrease, the economy would slow down, and housing prices would fall.

However, Mr Izgorodinas was not convinced by such considerations. According to him, it is only a theoretical assumption that people would become frightened in the event of military action, feel more uncertain, and abandon more expensive purchases, including property.

A glance at the surveys carried out by the Statistics Department shows that consumer sentiment is good, and consumers are still willing to buy. Therefore, Izgorodinas does not believe that a war would be enough to dampen this mood and stop the heavy investment in property.

“As our economy and the mentality of our population is very much Westernized, the conflict in Ukraine seems very far away and does not bother Lithuanians. However, they are now much more concerned about gas and electricity bills,” he said.

Vobolevičius recalled the beginning of 2014. Then, when Russia annexed Crimea and sent “little green men” to Eastern Ukraine, he was asked by several friends whether it was safe to buy property in Lithuania.

“Then I assured them that it was safe because the security guarantees of a NATO member are different from those of Ukraine. So now I still think it is not a good idea to give up on a planned purchase of housing, cars or other goods”, he said.

Zigorodinas said the same about business. According to him, companies are still experiencing a lot of uncertainty, so the war in Ukraine would not increase anxiety and would not stop companies from investing in their development.