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Latvia: Russia's Economic Crisis Has Impact On Economy

Riga, 2 October 1998 (RFE/RL) -- Russia's economic crisis has strongly affected Latvia's economy. Its impact is felt now mainly in the loss of an important market and in the disruption of crucial transport arteries. But it is spreading to other areas as well.

Plant closures, envisaged massive layoffs, thwarted contracts, shattered business plans, and possibly endangered banking operations are just some of the consequences of Russia's woes that are beginning to be felt in Latvia.

And while Latvian officials claim the tiny Baltic state has largely severed most links with its giant neighbor and is orienting itself toward the West, as much as 30 percent of Latvian produce is still being exported to the now virtually non-existent Russian market. Much of this has been foodstuffs that are now decaying in Latvian warehouses.

According to the Latvian State Budget Directorate, the value of those goods exceeds $52 million. And Latvian firms have accumulated debts of about $48 million as a result of interrupted payments from Russia. More than 2,000 workers have already been layed off due to closures of Latvian companies, and many more are facing unemployment by year's end. Large numbers have already been released on unpaid leave.

Regional price stability is undercut by changing trade patterns. The recent import of cheap Lithuanian butter into Latvia has nearly halved the prevalent Latvian prices. "Local industry will go to ruins," Aigars Kalvitis of the Latvian Dairy Producers Central Union has warned in an interview with the local media. He has urged the Latvian government to impose import restrictions.

Earlier this week Riga has imposed some import curbs while seeking higher export quotas for Latvian goods on Central and Western European markets.

Latvia, like the other two Baltic Republics, has marketed itself as a Baltic gateway to the east. But now with the Russians unable to pay in hard currency, the transport business has ground to a halt. "This is a total cutoff," Eva Petersen of the Danish shipping agency DFDS was reported by the media as having said.

A Latvian government commission has said that the Russian crisis will have a negative impact on all sectors of life in Latvia, including the current account balance, the banking and insurance sectors, and the economy in general.

According to the commission's findings, if Latvian exports to Russia decrease by 10 percent, Latvia's current account deficit will increase by 1.6 to 8.5 percent of Gross Domestic Product.

The commission has also said control on Latvia's eastern borders will have to be strengthened for fear of illegal immigration and smuggling.

While Latvia has managed to create a relatively stable banking sector in recent years, financial institutions in Riga feel the tremors of Russia's crisis as well. Russian investment in Latvia's 30-odd banks is about $272 million or 9 percent of the total. About $200 million of this has been frozen, cutting Russian financial involvement in Latvia by more than half.

Some banks say they have insured themselves with western financial institutions. But many others have drawn up insurance in Russia, thus invoking fears of forthcoming insolvency.