Optimism in the Baltics as trio shows signs of recovery

Listen to this article

00:00
00:00

Skype is often referred to as the brainchild of its Nordic co-founders Niklas Zennström, a Swede, and Janus Friis, a Dane.

In fact, the internet telephony company, sold to eBay for $2.6bn (£1.8bn, €2.2bn) in 2005, owes its success at least as much to the Estonian programmers who developed Skype’s software in Tallinn.

The history of Skype highlights the increasingly close business ties between the Nordic region and the Baltic countries of Estonia, Latvia and Lithuania.

Roughly 70 per cent of foreign direct investment into Estonia comes from Finland and Sweden.

It was Nordic banks, led by Swedbank, SEB and Nordea of Sweden, that provided the financial fuel for the Baltic countries’ rapid economic growth following their accession into the EU in 2004.

The “Baltic Tiger” era ended beneath a mountain of bad debt during the global financial crisis, when Latvia was forced to turn to the International Monetary Fund for a €7.5bn (£6.2bn, $9bn) bail-out and Estonia and Lithuania plunged into deep recession.

But the trio has since stabilised and even shown tentative signs of recovery, with Estonia considered healthy enough by European authorities to become the first former Soviet state to join the euro next January.

While Swedish banks continue to count their Baltic losses, other Nordic investors are starting to focus again on the enduring opportunities offered by a region that combines the long-term growth potential of eastern Europe with strong cultural and economic ties to Scandinavia.

“Growth is going to be slower than it was before for the Baltics because they are facing a prolonged period of fiscal consolidation,” says Marcus Svedberg, chief economist at East Capital, a Swedish fund management company that focuses on emerging Europe. “But they are going to come out leaner and stronger.”

The first sign of renewed Nordic interest came last August, when TeliaSonera, Sweden’s biggest mobile phone operator, launched an SKr4.9bn (£420m, $608m, €508m) bid for full control of its Estonian and Lithuanian affiliates.

“Telia was an important signal,” says Mr Svedberg. “People looked at Telia and thought, ‘If they think it’s safe to invest, perhaps we should too.’”

More recently, in March, Autoliv, the Swedish seat-belt and air-bag maker, paid $50m for the 49 per cent of Norma, an Estonian affiliate, that it did not already own. East Capital, a big investor in Baltic companies and markets, was among the sellers.

It is not only large Nordic companies that are active in the Baltics. There are 1,300 Swedish companies in Estonia alone, most of them small and medium sized.

For Nordic SMEs looking for a lower-cost manufacturing base or a new consumer market with long-term growth potential, the Baltics remain the obvious choice.

“We have seen an enormous number of smaller companies moving in,” says Mr Svedberg. “It is close and business conditions are good. Russia offers a bigger opportunity, but it is a more difficult place to do business.”

While the Baltic countries often get lumped together, there are important differences between them. Estonia was the most advanced of the economies even before the crisis, having cracked down on corruption harder than its neighbours and embraced new technology more readily. It is ahead of many western European nations in terms of broadband internet speed and penetration.

Estonia kept its public finances in better shape than the other Baltic countries, and today has the lowest ratio of public debt to GDP in the entire EU. Latvia and Lithuania, by contrast, were more badly hit by the financial crisis and their business climates are generally considered less transparent.

Transparency International, the anti-corruption watchdog, ranked Estonia 27th in its 2009 survey of the world’s least corrupt countries. Lithuania and Latvia were in 52nd and 56th place, respectively, at a similar level to South Africa, Malaysia and Namibia.

“Estonia has benefited from its proximity to Finland,” says Sacha Zackariya, chief executive of The Change Group, a UK-based currency exchange business that operates in Tallinn. “That has made it more market orientated. Latvia has taken a bit longer but it is moving in the right direction.”

Estonia ranked 24th in the latest World Bank ranking of the easiest countries in which to do business, one place ahead of Germany and well in front of France, Spain and the Netherlands. Lithuania and Latvia ranked 26th and 27th, respectively.

It is not only Nordic countries forging closer economic ties with the region. For British companies such as Camira Fabrics, a specialist textile manufacturer, the Baltics offer lower costs than western Europe but with the regulatory certainty of the EU.

The Yorkshire-based business chose Lithuania for the site of its first overseas manufacturing plant five years ago. It has since invested £1.5m ($2.2m, €1.8m) in the factory and created 160 jobs.

Alan Williams, Camira’s manufacturing director, says the Soviet legacy is still evident in the Lithuanian workforce, which he describes as more disciplined than British workers. “People are very good at following instructions. The downside is that, when things go wrong, they go badly wrong, because people don’t think for themselves as much.”

Labour costs have increased from about a sixth of UK levels when Camira entered Lithuania to roughly a fifth or a quarter today, according to Mr Williams. But wage growth has swung into reverse since the financial crisis as the region undergoes a painful internal devaluation.

Mr Zackariya, at The Change Group, says a correction was inevitable after years of unsustainably fast growth that eroded the region’s cost competitiveness and funnelled investment into unproductive sectors, such as real estate.

“We’re seeing a healthy rebalancing of the economy and a refocusing of investment on productive sectors,” he says.

For the Baltics, attracting foreign investment from Nordic and western European countries is about more than economic development.

Mr Svedberg says it also supports their political aim to reorientate themselves towards the north and west after decades under Moscow’s sphere of influence.

“They want to be seen as part of the Nordic region rather than eastern Europe,” he says.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.