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Latvia: Russian Crisis Fuels Economic Worries

By Katya Cengel

Riga, 5 November 1998 (RFE/RL) -- Russia's continuing economic crisis is causing problems for those countries which have significant trade links with it. This is certainly true of neighboring Latvia, for Russia is Latvia's second largest market, and a range of Latvian companies are now under stress.

Official statistics show that before the crisis, some 15 percent of Latvia's exports went to Russia and almost 12 percent of its imports came from that country. It is widely expected that newer numbers will indicate a drop in trade, the effect of which is already being seen in unemployment figures.

In August, Latvia's unemployment rate was officially listed as 7.4 percent, but already by the end of September, according to the State Employment Service, it had climbed to 7.6 percent. Much of the increase is being linked to the situation in Russia, as a pattern of higher-than-average unemployment is showing up in those districts where exports to Russia are highest. This appears especially so for areas dealing with food and fish products.

At a press conference last month, Latvia's Welfare Minister Vladimir Makarov said he expects 10,000 more people to lose their jobs in the future with the closure of Latvian companies due to the Russian crisis. He said he also expects official unemployment to hit 8.6 percent in the coming months and that "even highly qualified and well paid workers are in danger.2

Out of the companies most severely affected, there are 70 which have scaled down their business or manufacturing operations. Of these, 14 have halted work altogether and 46 have partially closed. Some 2,000 employees have been laid off and 5,000 more sent on unpaid leave.

Auto Elektroaparatu Rupnicas (Riga Auto Electric Apparatus Plant, RAR) is an example of one company that has been forced to reorganize. With 70 percent of its business involving shipments to Russia, the company recently reduced its 1,200 employees to 700.

Arnis Ermanis Shemins, president of the company, said they were unable to give any of the former employees severance benefits and that they would have to cut back their work force further. The company has suspended exports to Russia and sales have declined by half.

Workers are not the only ones some companies cannot pay. Maiga Dzervite, deputy director general of the State Revenue Service, said 50 companies have requested extensions of their tax payment period. Some 15 of them are linked with the fishing industry. Transport was the next most affected sector, with nine, and then food and beverage with eight. Latest available figures put the export of food products at 8.7 percent less than last year, and the export of machinery and electrical equipment has declined by 6.8 percent.

Dzervite warned that worse is to come for the whole economy. She said, "Revenue is decreasing, the economy is distorted, and the gross national product (GDP) is going down.2 She added that Latvia "will survive but it will not be such a nice picture as we originally drew for 1998."

Dzervite separated the effects of the Russian crisis into three cycles. The first cycle affects companies selling directly to Russia. The second hits those supplying goods to companies that export to Russia. The third involves companies across the economy supplying products to Latvian consumers.

More unemployment among the populace, of course, means that fewer people are buying goods and services. Some companies are resorting to barter to continue trade with Russia. OlainFarm pharmaceuticals, which formerly sold 60 percent of its products to Russia, has just signed a contract to exchange medicine for Russian coal. Currently, about 30 percent of their production is going to Russia in barter trade.

The company's advertising director, Egils Grikis, credits the Russian government for the barter idea, which will allow OlainFarm to retain all of its employees. The arrangement has reduced the necessity of finding new markets -- a difficult process.

Agris Skuja, director of the industry department for the Latvian Economics Ministry, acknowledged that Latvian products are generally "not good enough quality for the European market," adding that "it is expensive to meet European standards."

Skuja said the situation is "very bad" and improvement will entail a long, expensive program. Employee training and expertise needs to improve, the government must set a better legislative framework for business, companies must further investigate other markets and develop marketing strategies, and Latvia must gain increased political and economic support from the European Union.

Some officials hope Latvia's entrance into the World Trade Organization will help provide a way forward. Latvia was accepted as a WTO member last month. The Latvian parliament's ratification is expected this month.