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April 14, 2014 Please see important disclosures at the end of this document Page 1 of 545
Macro Research - The Estonian Economy
The Estonian Economy
Estonia’s economic linkages with Russia
Russia’s share in Estonia’s foreign trade is below 10%
Russia’s share in foreign investments remains small
The crisis in Ukraine will affect trade and investment flows
Russia’s share in Estonia’s foreign trade is below 10% Russia’s share in Estonia’s foreign trade is rather small, only 9% in 2013. However, Russia’s market is more relevant for certain sectors, like food industry and agriculture, as well as chemical and textile industries. As a source of raw materials, Russia is important for timber, furniture, chemical, and metal industries. Russia’s market is also significant for Estonia’s exports of transport and travel services.
Russia’s share in foreign investments remains small The stock of Estonia’s investment in Russia and Russia’s investment in Estonia remains modest. At the end of 2013, the stock of Estonia’s investments in Russia amounted to 4% in Estonia’s total investment abroad, and the stock of Russia’s investment in Estonia was also 4% of all foreign investment in Estonia.
The crisis in Ukraine will affect trade and investment flows Exports to Russia are affected not only by the decreasing purchasing power of Russians, but also by possible trade barriers. Investment flows will be smaller because investing in Eastern Europe is considered more risky and will be less profitable when economic growth in the region will be slower. If the conflict in Ukraine does not escalate and sanctions remain targeted with a modest impact, the Baltic economies are still expected to grow, albeit slower than anticipated before. Should the conflict escalate and broader trade sanctions be introduced, Estonia and the other Baltic economies will probably be hit harder – in which case a recession should not be ruled out.
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Tõnu Mertsina +372 888 7589, [email protected] Liis Elmik +372 888 7206, [email protected] Teele Reivik +372 888 7925, [email protected]
Macro Research
14 April, 2014
12%11%
6%5%
4% 4%
2% 2%
0%
2%
4%
6%
8%
10%
12%
14%
Share in Estonia's
exports of
services
Share in Estonia's
exports of
goods
Share in Estonia's
imports of
goods
Share in Estonia's
imports of
services
Share in the stock of
foreign
investment in
Estonia
Share in the stock of
Estonia's
investment
abroad
Share in motor fuel
imports
Share in real estate
purchases in
Estonia
Russia's share in Estonia's economy
Source: Statistics Estonia, Bank of Estonia, Land Board
April 14, 2014 Please see important disclosures at the end of this document Page 2 of 545
Macro Research - The Estonian Economy
Estonia’s economic linkages with Russia Russia’s share in Estonia’s trade is 9% and, in the stock of foreign investment, is only
a modest 4%. Russia is an important energy source, notably for natural gas. The
ongoing tensions in Ukraine will affect trade and investment flows, but if the conflict
does not escalate and sanctions remain modest, the Baltic economies are still
expected to grow, albeit slower than anticipated before.
Russia is an important trade partner for the Baltics
Trade with Russia is relevant for the Baltics and Finland. In 2013, Russia accounted for 6% of Estonia’s imports of goods and 5% of Estonia’s imports of services. Russia’s share in Estonia’s exports was two times higher, around 11% of the exports of goods and 12% of the exports of services. As transit goods (goods transported through the country without any value added) are not included in foreign trade statistics, the actual volume of trade from and to Russia is probably around two times higher. Transit goods from Russia to the West include oil products, grains, fertilisers, and wood, and from the West to Russia mostly vehicles and machinery.
In Latvia and Lithuania, 16-20% of exports go to Russia, while Estonia’s close ties with Finland and Sweden make its economy somewhat less dependent on Russia. About one-tenth of Finnish exports go to Russia, but, for most other European countries, including Germany, Sweden, and Poland, the proportion of exports sent to Russia is significantly lower.
Estonia mostly imports different raw materials from Russia. The most important import products are oil products, wood, chemicals, and metals. Estonia exports to Russia mainly construction machinery (often re-exports from Western Europe), electrical machinery, tanning/dyeing extracts, spirits (including re-exports from Western Europe), and dairy products.
0%
5%
10%
15%
20%
25%
30%
35%
Lithuania Latvia Estonia Finland Sweden EU28
Russia's share in exports and imports of goods
Russia's share in imports of goods
Russia's share in exports of goods
Source: Eurostat
26%
9%
9%
8%
4%3%
3%
3%
35%
Estonia's exports to Russia by commodities
Machinery and equipment
Electrical machinery
Beverages
Tanning, dyeing extracts
Dairy products
Precision instruments
Vehicles
Furniture, mattresses
Other
Source: Statistics Estonia
Russia’s share in
Estonia’s trade is 9%
51%
14%
6%
4%
4%
3%
18%
Estonia's imports from Russia by commodities
Oil products
Wood, articles of wood
Organic chemicals
Iron and steel
Fertilizers
Rail, tram vehicles
Other
Source: Statistics Estonia
April 14, 2014 Please see important disclosures at the end of this document Page 3 of 545
Macro Research - The Estonian Economy
Russia’s market is more relevant not only for Estonia’s food industry and agriculture, but also for chemical and textile industries. Russia’s share in the exports of these sectors ranges between 15% and 30%. As an important source of raw materials, Russia is also relevant for the transport, timber, furniture, chemical, and metal industries.
Russia’s market is also significant for Estonia’s exports of services, especially transport (with a share in Estonia’s exports of transport services of 14% in 2012) and tourism (share in Estonia’s exports of travel services 14% in 2012).
1 A small part of the oil products imported
from Russia to Estonia is consumed locally, but most of it is exported to other countries through Estonia’s ports. Oil products that are transported through Estonia (mostly by rail) but are not chemically processed here are not included in foreign trade statistics. Transit volumes of oil products are large, but added value in this sector is small; therefore, the impact on economic growth of the declining volumes of oil products’ transit is limited. It is also important to note that the volumes of oil products’ transport from Russia through Estonia have been decreasing for several years already for other reasons than the current crisis in Ukraine, and that this trend is expected to continue as Russia develops its own ports.
About 17% of the foreign tourists accommodated in Estonia in 2013 were Russians. Russians are the second most important foreign client group for Estonia’s tourism enterprises, after the Finnish (who accounted for 43% of foreign tourists accommodated in Estonia in 2013).
2 Around 300,000 Russian tourists were accommodated in Estonia in 2013.
Russia’s share in Estonia’s foreign investments remains small
The stock of Estonia’s investments in Russia and Russia’s investments in Estonia remains modest. At end-2013, the stock of Estonia’s investments in Russia amounted to EUR 899 million (the share in Estonia’s total investments abroad was 4%), and the stock of Russia’s investments in Estonia was EUR 1,241 million (mostly direct investments; the share in total foreign investments in Estonia was 4%).
1 http://www.eestipank.ee/publikatsioon/maksebilansi-aastaraamat/2012/maksebilansi-aastaraamat-
2012 2 https://d37vo8xv2lfdcj.cloudfront.net/docs/1498003_eesti-turism2013.pdf
0% 5% 10% 15% 20% 25% 30% 35%
Prepared foodstuffs; beverages
Chemical products
Optical, etc instruments
Live animals and products
Textiles
Machinery and equipment …
Plastics and rubber
Pulp of wood, paper
Metals
Miscellaneous manufactured articles
Vehicles
Mineral products
Wood and articles of wood
Russia's share in Estonia's exports
Sector's share in Estonia's exports
Russia's share in the sector
Source: Statistics Estonia
-300
-200
-100
0
100
200
300
400
500
600
700
2003 2005 2007 2009 2011 2013
Estonia's investment inflow and outflow from/to Russia (EUR million)
Other investment in Estonia by Russia
Estonia's other investment in Russia
Portfolio investment in Estonia by Russia
Estonia's portfolio investment in Russia
Estonia's direct investment in Russia
Direct investment in Estonia from Russia
Source: Bank of Estonia
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2003 2005 2007 2009 2011 2013
Inflow and outflow of investment income of Estonia (EUR million)
Total inflow into Estonia
Total outflow from Estonia
Inflow to Estonia from
Russia
Outflow from Estonia to
Russia
Source: Bank of Estonia
Russia is most
important for food and
chemical industries,
and transport and
tourism
April 14, 2014 Please see important disclosures at the end of this document Page 4 of 545
Macro Research - The Estonian Economy
Income from Estonia’s investments3 in Russia reached EUR 29.6 million in 2013 (4.6% of
total), whereas Russia’s income from its investments in Estonia amounted to EUR 61.6 million (3.9% of the total outflow of investment income from Estonia).
Russia’s investments in Estonia increased by EUR 94.3 million in 2013 (mostly direct investments; portfolio and other investment volumes from Russia were marginal). This was 19% of total foreign investments in Estonia in 2013. Estonia’s investments in Russia increased by EUR 2.3 million in 2013, against the backdrop of a decrease in Estonia’s total investments abroad of EUR 1.1 billion in the same year.
Russia provides 100% of Estonia’s natural gas
The Baltics depend on Russia’s energy, especially gas. Russia supplies about one-fourth of the EU’s natural gas, about half of which is transported through Ukraine. Russia is the sole gas provider for the Baltics and Finland. Natural gas constituted 8% of Estonia’s final consumption of fuels in 2012. Russia is also a major supplier of oil to such EU countries as Germany, the Netherlands, and Poland.
Russia’s share in Estonia’s motor fuel imports is very small. In 2013, Russia’s share was only 2%, trailing Lithuania’s 59%, Finland’s 30%, Belarus’s 5%, and the UK’s 4%. Estonia does not import electricity from Russia.
Russians’ share in Estonia’s real estate market is limited
According to Estonia’s Land Board, in 2012, 1.7% of all real estate purchases in Estonia were done by Russia’s residents and 1.2% by Finnish residents. In the capital city, Tallinn, Russia’s residents purchased 0.9% and Finnish residents 1.6% of all real estate sold in 2012. In the northeast of Estonia, Russian residents’ purchases are more relevant, and Russians accounted for 12% of all real estate purchases in that region.
The impact of the crisis in Ukraine is still unknown
The ongoing tensions in Ukraine will certainly affect trade and investment flows in the region. Exports to Russia are affected not only by the decreasing purchasing power of Russians (through the weaker rouble and smaller growth of incomes of Russians), but also by possible trade barriers introduced by Russia. Investment flows will decrease because investing in Eastern Europe will be considered more risky (also because of potential sanctions either by the Western powers or Russia) and less profitable when GDP growth will be smaller than it otherwise would have been.
Swedbank lowered its growth forecast for Russia for this year from January’s 2.0% to 0.8% in April, assuming that the conflict does not escalate and sanctions remain targeted with a modest impact. In comparison, the IMF projects 1.3% growth rate for Russia for this year
4
and the World Bank predicts 1.1%. The World Bank has also run a “high-risk scenario,” with a “more severe shock to economic and investment activities,” resulting in a contraction of Russia’s GDP of 1.8% in 2014 and growth of 2.1% in 2015.
5
Current sanctions by the US and the European Union in terms of visa bans and asset freezes of certain individuals will have a limited impact on the Baltic economies. If the conflict does not escalate and sanctions remain targeted with a modest impact, the Baltic economies are expected to still grow, but slower than anticipated before (in 2014, Estonia, 1.8%; Latvia, 3.0%; and Lithuania, 3.3% – according to Swedbank’s latest forecast).
6
Should the conflict escalate to cover broader trade sanctions, including energy, the impact on the growth rate of Estonia and its neighbours would be much bigger. If Russia were to shut the energy supply to Ukraine and/or Europe (not a likely scenario, considering its economic impact on Russia itself), energy prices would rise and the growth outlook would deteriorate further. Russia should not be able to engineer a dramatic rise in European gas prices, however, given the unusually large stocks thanks to a mild winter, weaker demand, and, in the longer term, the capacity of most of the European states to substitute other energy sources, including LNG, for Russian supplies. The US could also export gas or oil to keep prices down.
Liis Elmik
3 Investment income - interests and dividends received on foreign (direct, portfolio and other) investment
assets and payable on foreign investment liabilities. 4 http://www.imf.org/external/country/RUS/index.htm
5 http://www.worldbank.org/en/news/press-release/2014/03/26/russian-economic-report-31
6 http://www.swedbank-research.com/english/swedbank_economic_outlook/2014/q1/index.csp
Russia’s share in
Estonia’s foreign
investment is 4%
If the conflict does not
escalate and sanctions
remain modest, the
Baltic economies are
still expected to grow
April 14, 2014 Please see important disclosures at the end of this document Page 5 of 545
Macro Research - The Estonian Economy
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