© DELFI / Mindaugas Ažušilis

Having grown rapidly in 2017, export flows to Russia will continue to rise this year, however they will likely not yet reach the same level as in 2013. The Russian market is making up an increasingly small part of Lithuanian exports.

The Crimean annexation in 2014, the Western sanctions that followed and Russia's response with a food goods embargo change the composition of Lithuanian exports. Most of the Lithuanian origin export goods in 2013 were cheeses and curd, followed by clothes hangers, trailers and in third place – beef.

In 2017, the first place in Lithuanian origin exports goes to cider, clothes hangers remain second, after which follow panels and film. Dairy and meat produce exports were barred.

However as Swedbank chief economist Nerijus Mačiulis observed, immediately after the application of the embargo, exports to Russia dropped to zero, however exports to Belarus rose by more than tenfold.

"It is likely that a major part of the Lithuanian dairy produce imported there, was not consumed in Belarus," he summarised.

In the general export statistics, in 2013, it was wine, cheeses, curd and cars that were first in the export market. In 2017 wine continued to be in first place, with makeup coming in second and industrial machinery used for food processing in third. In 2017, exports to Russia reached 80.9% of the 2013 levels.

Quantities rising, portion declining

In 2013, Lithuanian exports to Russia reached 4.87 billion euro and made up 19.8% of the country's exports.

While Russia declared an embargo on food goods from European Union countries in August 2014, the overall export amounts still rose that year. However, in 2015 and 2016 exports from Lithuania declined significantly.

In 2017, a notable recovery was observed, a whole 29.3%. Last year Lithuanian exports worth 3.94 billion euro were exported to Russia, accounting for 14.9% of Lithuanian exports.

Over the period from 2013 to 2017, overall Lithuanian exports increased by 1.85 billion euro, up to 26.43 billion euro.

Predicting growth

Versli Lietuva analysts state that favourable world economic trends will create favourable conditions for continued export growth in 2018.

"Various international institutions predict that the growth of the world economy this year will be the fastest since 2011. Favourable economic developments are predicted for Lithuania's main export partners – the EU and Russia – as well.

The EU market should grow by 2.1-2.3%, while economic growth around 1.6-2% is predicted for Russia. More than two thirds of Lithuanian export produce is exported to the EU, while Russia is the largest market for Lithuanian companies dealing in re-exports," the February review states.

Versli Lietuva chief analyst Vadimas Ivanovas explained to Delfi that the growth of exports to Russia observed last year was mostly linked with economic recovery in the country.

"The recovery of the Russian economy is due to growing private consumption and investment, which are impactful in regard to imports, thus in 2017 we observed a rapid growth of Lithuanian re-exports to Russia.

Further consumption and investment growth is forecast in 2018. These two components are the main factors leading to growth in re-export from Lithuania to Russia based on the goods re-export economic model used by Versli Lietuva," he said.

V. Ivanovas also noted that after several years' stagnation, Russian companies have begun renewing their machinery and vehicles, also leading to significant growth in Lithuanian origin exports to Russia.

"Nevertheless it is difficult to tell if goods exports will reach the same levels as in 2014. It will be influenced by several factors – the food and agricultural goods produce embargo is still in place and even if it were abolished, Lithuanian companies would take time to regain lost positions (The re-export of goods banned later on from Lithuania to Russia made up 700 million euro, with Lithuanian origin goods contributing another 230 million euro)," V. Ivanovas said.

The analyst stated that Russia is increasingly producing its own goods, however it is very difficult to evaluate this factor.

"The economic recovery is not sustainable because the economy continues to heavily rely on trends in the oil market and fundamental reforms are not enacted," V. Ivanovas said.

Risky market

Vilnius University Institute of International Relations and Political Science (VU TSPMI) professor Tomas Janeliūnas was also uninclined to believe that Lithuanian exports will return to the levels reached in 2013-2014.

"If we compare Lithuania's entire export, it is natural that over the past 3-4 years there was a very clear orientation to divert agriculture production, food products, to other markets," he said.

The political scientist stated that after Russia established the embargo, it was realised that it is a risky market and focusing on it too much would be dangerous for any business.

"As such, Russia is viewed more as a secondary market and this is a significant shift, compared to what we had in the past decade. Overall, with increasing exports, it is clear that at some point it may reach the level seen in 2014, however this is only because of overall exports growth," T. Janeliūnas summarised.

The TSPMI professor explained that the risk in Russia is due to the significant impact of political events on the business environment.

"This shows that with deteriorating relations between Russia and the West, new shifts can occur in trade policy as well. The implementation or removal of sanctions is inevitably related to the political situation. This level can significantly impact business conditions," he mused.

T. Janeliūnas also pointed out the general situation in international markets, which have a great influence on those exporting to Russia.

"Russia has adapted to the general economic sanctions over the past few years, but it is worth noting changes in the state budget – how they manage to regulate the whole economic system, when it is necessary to subsist under different conditions.

Even with rising oil prices, budget income is suboptimal. Political decisions to support certain branches of the economy may depend on this. It can also influence businesses," he said.

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