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The tough Baltic States are steady under pressure, ready for what's next

The Baltic States haven't been in the headlines this much since they came together to hold hands in an effort to spur the downfall of the Soviet Union.
Unfortunately, this time it's not for such a positive reason. Whether it's a wide-eyed reaction to the Titanic-hit-the-iceberg economic news or speculation about whether or not Latvia will devalue its currency, the Baltic States have become synonymous with dashed hopes and economic collapse.

The rest of Europe is worried about how people here will respond. In a recent article in London's Guardian newspaper, historians asked to analyze the consequences of the British National Party's election to the European Parliament said that while the possibility of a fascist takeover of the UK is remote, it's more conceivable in one of the Baltic States.

Political stability is the most paramount issue for the Baltic States' eventual economic recovery — if one of these countries lapsed back into authoritarianism it would likely be expelled from the European Union, irrevocably complicating its economic prospects. But rest assured, British historians and foreign investors, right now a dictatorship here seems as likely as a Muslim theocracy.

Other nations in Eastern Europe elected hard-right parties to the EP this month but none of the Baltic States did so. Extremist parties exist here, as in most democracies, but they are not gaining power and remain very marginal. The political situation looked more dangerous in January when riots struck the capital cities of Latvia and Lithuania. Cars were torched, parliament buildings were pelted with bricks, and a fog of tear gas enveloped the historical centers. But these violent protests proved to be isolated events. Five months later they have yet to be repeated.
Lithuania just elected Dalia Grybauskaite, an EU bureaucrat, to be its next president and the ruling conservative coalition is facing no serious power challenges since it won last October's election. Latvia changed governments but this was hardly a radical break from the past — a similar group of conservative parties under Valdis Dombrovskis is in charge. Meanwhile Estonia has had the same center-right prime minister, Andrus Ansip, since 2005. The big, bad wolf blew down the economy's straw house, but not the brick one of the political system's brick.

Looking steady

The crisis has brought hardship to many people's lives here, but they're a tough lot. The elderly citizens have suffered horrors that their counterparts in the West, especially the United States, have been spared. During World War II, the Baltic States were front and center to the brutal struggle between Nazi Germany and the Soviet Union. When peace was restored they were given not freedom like Western Europe, but continued occupation by the communist superpower. Hundreds of thousands were imprisoned, shipped to Siberia or executed for simply voicing disagreement with the Soviet system. Those who avoided punishment by the state got to spend 45 years living with the centrally planned economy's ensured consumer goods shortages and some of the ugliest housing options ever built.

Now these times are over, but the memory obviously remains. So as bad as things have gotten for many people here in the last six months with the wage reductions, layoffs, and price increases, they are being rather stoic about it and keeping things in perspective. In fact they're doing it so well that a visitor would scarcely notice any crisis at all. Cafes and bars are full and the tourists continue to visit, especially Riga, unabated.

Meanwhile, there are signs that the economies here could be stabilizing and the smart investor is eyeing the recovery instead of worrying about the downturn.
According to the country's Department of Statistics, retail sales (excluding automobiles) in Lithuania are up 5.2 percent from March 2009, while in Estonia retail sales are up one percent. ECE Projektmanagement is even going ahead with the construction of an enormous shopping mall in Vilnius.

Baltic States still seen as a good investment

New investments prove that market players have faith in the long-term prospects here. As long as the political system isn't toppled, the three nations will remain in the European Union and NATO, which safeguards them from potential Russian aggression. Their location on the Baltic coast and long-standing port cities facilitate manufacturing as products are easily shipped. Meanwhile, wage levels that were already only 65 percent of the EU average are declining. This month the Norwegian company BAU-HOW AS announced its decision to build a construction module factory in the port city of Ventspils, Latvia.

The lower salaries, combined with high education levels (many residents in the Baltic State speak three or more languages), make not just high-tech manufacturing but also services feasible for a lower cost than in the West. Barclays just signed an initial agreement with the Lithuanian government to build a service center in Vilnius.

Earlier this month, Vilnius hosted the World Forum of Direct Investment and its organizer, the Lithuanian Development Agency, along with the country's leading politicians, spelled out a vision of the country becoming the Silicon Valley of Europe. This will happen by the clustering of software companies here as the Baltic States already have numerous software startups. The now-ubiquitous Skype program was developed in Estonia. Maybe a combination of education, ambition and the often cloudy weather that certainly makes one want to be in front of a computer more than California sunshine will bolster development in this direction.

The biggest variable to economic recovery here is whether or not Latvia will devalue its currency. Currency speculators have been betting both ways. The Latvian government remains against it, as does the EU and IMF. However, the momentum is heading toward not devaluing. Moody's decided in June not to downgrade Latvia's debt like it did in the spring. The IMF has agreed to raise Latvia's deficit cap by two percentage points. Latvia's government has not been squeamish about slashing its ministries' budgets like Jack the Ripper either, and most importantly, the population is taking it all in stride. I suppose enough realize that this short-term disaster is really just a temporary setback for long-term development toward the Western lifestyle.

By Nathan Greenhalgh