The Baltic states—Estonia, Latvia, and Lithuania—have navigated a complex economic landscape over the past few years, marked by significant external shocks and evolving trade dynamics. Our latest BSR Policy Briefing Recent trends in international trade and investments of the Baltic states by professor Alari Purju delves into the development of international trade and investments of these countries, highlighting their economic resilience and strategic shifts in response to global challenges.
Economic growth and external shocks
The period from 2019 to 2023 has been particularly eventful for the Baltic states. The Covid-19 pandemic caused a significant economic decline in 2020, but the Baltic economies demonstrated remarkable resilience, recovering rapidly in 2021. However, the recovery was short-lived as Russia’s invasion of Ukraine in 2022 led to decreased economic relations with Russia and Belarus, impacting the Baltic economies, especially Estonia.
GDP dynamics
The Baltic states experienced rapid economic growth until 2019, driven by both domestic and external demand. However, the pandemic and the war in Ukraine disrupted this growth trajectory. Despite these challenges, the GDP per capita of the Baltic states had been converging with the EU27 average until 2020, although this trend was interrupted from 2021 to 2023.
International trade of goods and services
The Baltic states have diversified their trade partners over the years, with a decreasing share of trade with the Nordic countries. The wood processing industry remains a dominant sector, with significant exports of wood products. Additionally, the food industry has integrated regionally, particularly with Poland, reflecting deeper economic ties within the region.
Service exports have been a bright spot for the Baltic states, showing impressive growth. Key sectors include telecommunications, business consultancy, and financial services. However, the relatively low value of goods-related services and intellectual property charges indicates that there is still room for improvement in the service sector.
Increased foreign direct investments
Both inward and outward FDI stocks have increased in the Baltic states, with significant investments from Nordic countries and financial centers. The financial and insurance activities sector dominates FDI in Estonia and Lithuania, while professional, scientific, and technical activities are significant in Latvia.
Trade with Russia and neighboring countries
Sanctions on Russia and Belarus have significantly reduced trade, particularly imports of oil and natural gas. Some trade activities have shifted to neighboring countries like Kazakhstan and Armenia, reflecting the Baltic states’ adaptability in maintaining trade flows despite geopolitical challenges.
Policy suggestions
Maintaining stable price levels is crucial for the competitiveness of the Baltic economies, emphasizing the importance of fiscal discipline to limit inflationary pressures. The deeper integration of the Baltic economies is ongoing, supported by increased FDI and regional trade. As the economic and political environment in Europe continues to evolve, comprehensive analysis and strategic policy-making will be essential for the Baltic states to navigate future challenges.
Read the whole issue: BSR Policy Briefing 1/2025 – Recent trends in international trade and investments of the Baltic states
