STOCKHOLM – For years now since the fall of the Berlin Wall I’ve often been urged to invest in Russia. Surely, these proponents argue, with Slavic talent unleashed by the defeat of the czars and the collapse of communism Russia will finally take its place as a world economic power.

However, my eight-week trek across Russia and the time we spent in Moscow confirmed me in my decade-old view—that because Russia was an enormous empire, that is, a collection of disparate nations and ethnic groups, the dozens of tribes comprising Russia will need decades to settle their political differences and build up their productive prowess.

Well, I’m then urged, if the time is not ripe to invest in Russia, surely the European parts of the old USSR and especially the Baltic states are a great place. Hard by Europe, in its center, actually, desperately desiring to join Europe, these states could be the next Switzerland, Singapore, or Uruguay of Northern Europe. These folks aren’t empire builders, but are more trodden upon than the wearers of hob-nailed boots. You ought to put money there, I’m urged, with these friendly European peoples.

So I’ve made my second visit to Belarussia and my first ever to the three small Baltic countries. First, these countries have a genuine old-world charm. The capitals in the Baltic states have old towns in their centers that go back as far as 500 years, something we didn’t see in Russia. I suspect the USSR, which took over the Asian republics in the 1920s, had more time to raze and rebuild there; they only occupied these three small states since the 1940s. Yet after driving through their expanses and old-world charm I’m not convinced any wise investor should plunk down money on the shores of the Baltic. I’ll give you the facts. See what you think.

Because these countries are so alike and so similar, it’s helpful first to view them via a table of their geographic and population highlights:

Country	Pop in Mils.	Approximate Size	Capital City	Terrain
Belarus	10.4	Kansas	Minsk	Lowland Fertile soil
Lithuania	3.6	West Va.	Vilnius	Marshy Lowlands
Latvia	2.4	West Va.	Riga	Low plain
Estonia	1.4	NH & Vermont	Tallinn	Marshy Lowlands

Table 1 – Size and geography of four European states formerly in the USSR.

 

Belarus is land-locked; the other three have Baltic ports, and some are never ice-locked.

And what of these countries economic strength and opportunities for strife?

 

Country	GDP in Bn.	GDP per Capita	Major Ethnic Groups	Major Languages	Major Religions
Belarus	$53.7	$5,200	Byelorussian – 78%Russian – 13%	ByelorussianRussian	East. Orthodox
Lithuania	$17.6	$4,900	Lithuanian – 80%Russian – 9% Polish – 7%	LithuanianPolish Russian	Rom. CatholicLutheran Rus. Orthodox
Latvia	$9.7	$4,100	Latvian – 57%Russian – 30%	LettishLithuanian Russian	LutheranRom. Catholic Rus. Orthodox
Estonia	$7.8	$5,500	Estonian – 65%Russian – 28% Ukrainian – 3%	EstonianRussian Ukrainian	LutheranRus. Orthodox Eston. Orthod.

Table 2 – Economic and population characteristics in 1998 of four European states formerly in the USSR. (Cells’ entries ranked by size.)

Except for Belarus, table 2 makes clear that these are small economies with populations incompatible in language, religion, and nationality, situations ripe for strife—particularly where there is a lack of prosperity, such as existed for decades in Ireland. These four countries were occupied by Russia during the communist years, so that the native population now wants to keep their Russian populations, their former masters, firmly in their place. Concerned about its citizens living here, Russia dreams of re-annexing these four countries to grow itself a new empire. Given their history of being trodden upon by their larger neighbor, however, these countries are wary of giving their internal Russians any opportunity to become strong politically or economically.

Since prosperity eases a lot of political problems, can these states export their way to wealth? Let’s look at their size and what they need to import and what they sell their trading partners, Russia, Poland, Germany, Finland, Sweden, and of course, each other.

 

Country	Export $-Bn	Exports By Item	Imports $-Bn	Imports By Item
Belarus	7.4	MachineryTrans. Equip Chemicals Foodstuffs	8.5	FuelNatural gas Raw materials Textiles Sugar
Lithuania	4.2	AgriculturalMinerals Textiles Machinery Live animals	5.9	MineralsMachinery Transport Equipment Chemicals Textiles Foodstuffs
Latvia	1.9	WoodWood products Textiles Foodstuffs	3.1	FuelsMachinery Equipment Chemicals
Estonia	2.6	TextilesFood products Machinery Equipment Metals	3.9	MachineryEquipment Foodstuffs Minerals Textiles Metals

Table 3 – Major exports and imports of four European states formerly in the USSR in 1998. All four show a trade deficit.

Not only do these four countries have tiny GDPs, but all four have a balance-of-payments problem. The goods they do export are not of high quality and cannot command a premium on the world market.

Belarus

For centuries Byelorussia was fought over, devastated, and partitioned among Russia, Poland, Lithuania, and in World Wars I and II, Germany. Geographically Belarus is little more than a landlocked great plain. Over the centuries it’s been a large field over which the great armies of Europe have marched, a buffer zone between Europe and Russia. After seven miserable decades as a Soviet republic, the newly named Belarus declared its independence in August, 1991.

Chiefly Slavic, Belarus has retained closer political ties to Russia than any of the other former Soviet republics, and both Yeltsin and its President Alexander Lukashenka have made a career of promising to link up again. Indeed, in December, 1998, the two signed agreements intended to provide greater political, economic, and social integration while preserving both states’ sovereignty.

This agreement suits both politicians’ political agendas. To ensure he remains in power, Lukashenka wants to bring back the “glory years” of the “prosperity” of the Soviet Union, and Yeltsin wants to show that he’s making a start in rebuilding the Soviet empire. No sooner than Yeltsin appoints a new prime minister than he hotfoots it over to Belarus to promise again that yes, the two are going to hook up again. Actually, both politicians are grandstanding, something successful politicians are good at. Hooking up with Belarus will suit Yeltsin’s plans big time. He can say that with this addition, there has to be a new constitution, maybe even a special meeting of the Duma, before there can be another Russian election, and the result will be a silent political coup.

No sooner than we entered Belarus I knew there was trouble afoot. On the toll road coming in the collector refused to take the Belarusian ruble, his own country’s currency, but insisted on our paying in a hard currency, the dollar, mark, etc.

Any time a government’s minions refuse to accept its own currency you know the country’s in economic distress. The last place this happened to us was Yugoslavia in February.

Today Belarus is falling apart at an even more rapid rate than Russia, which is saying a lot. While it exports food to its neighbors and military aircraft to Africa, it has little else to sell, meaning it has a difficult time obtaining hard currency, with which it could purchase the sorts of goods–industrial, electronic, and telephonic–to make its people’s lives less harsh and more productive.

Politically as well as economically Belarus is in terrible shape. President Lukashenka has been in office since July of 1994. Although a new election was supposed to have been held several years ago, like the thug he is he’s refused to order a new one, holding on to power by hook and by crook. The bleak political climate in Belarus reminds me all too much of the USSR in Stalin’s days, not that of a modern democracy. The former head of the central bank, Tamara Vinnikova, and a former interior minister, Yury Zakharenko, disappeared earlier this year. On September 16th Viktar Hanchar, deputy speaker of the parliament disbanded by Lukashenka in 1996, also disappeared. Except for the Economist, little of these disappearances has been noticed in the Western or the Russian Press.

To “save” the economy Lukashenka’s been printing money like mad. Whereas in Russia the ruble is worth about 26 to a dollar, the local Belarus ruble has fallen to about 500,000 to the dollar—and still falling by the day. The treasury is preparing to issue 5-million ruble notes, as mere 1-million notes are no longer large enough for everyday transactions. In a vain attempt to keep the rapidly rising inflation in check, the government placed strict price controls on food and consumer products, which naturally resulted in food shortages. Long lines for dairy products, chicken, and pork became common.

To give you an idea of the speed and seriousness of currency collapse, consider our run-in with the Belarus version of a speed scam.

One Sunday we were barreling along the Belarus autobahn when we encountered a sign that said 40 kph, Workmen Ahead. As there were no workmen and it was Sunday, we continued on at 101 kph. A Belarus policeman flagged us down. He argued we should pay 5,000,000 rubles–on the spot. The sum seemed so gigantic to him, however, that he reversed himself and reduced it to only 1,000,000—about $2.00. He had not yet comprehended how much his own currency had collapsed.

Indeed, when you buy an item even as lowly as a hamburger at a kiosk, you’re told the price is three “units,” which units then have to be multiplied by an exchange rate against outside currencies that goes up every day. You’d think such an unstable market would accept dollars, as Cuba’s does, but Belarus is too far away from the US. A babushka selling onions or bread doesn’t trust such strange money, plus Belarus has made it illegal.

Belarus has little to sell to the Russians or to anybody else. All it really offers others is a geographical and political buffer zone. Over the centuries it’s been its role to be a weak pawn; and as geography is destiny, there’s no reason to believe there’s anything else in store for this small country any time soon.

Sadly, Belarus has seen little structural reform since 1995, when Lukashenka launched the country on the path of something called “market socialism,” an oxymoron if there ever was one. With the goal of slowing down the devaluation of the Belarusian ruble, in 1997 Lukashenka introduced a new, complex system of legal buying and selling of hard currencies. However, you can’t both command a market and have it work as a free market. Naturally this new command system proved unworkable and resulted in galloping devaluation.

Now his only hope is to rejoin Russia. He hopes the Russian army will keep him in power, and he hopes the Russian ruble will provide a stable currency or at least one more stable than his. I do not know what’s in it for the Russians except renewed imperialistic glory, but it may happen since it will bolster Moscow’s politicians.

If it does take place it will not last. The people we met in Belarus have no interest in Moscow. They are struggling for survival and blame many of their present problems on Moscow and the USSR.

Lithuania

To our surprise, we learned that the beautiful church across from our hotel in Vilnius had been a grain warehouse under the Russian occupation—as well as under the occupation of the Germans, Swedes, and Poles before them. This is a perfect example of how an occupation thinks—to suppress the local culture and at the same time create supplies for its own needs.

Like Belarus, Lithuania has been a crossroads for armies marching back and forth across Europe. Unlike Belarus, however, its politicians didn’t believe in printing money to escape their economic troubles, but in heavy borrowing, which produced a different kind of problem. Like all these Baltic countries, Lithuania has little to sell the West.

Reducing its high deficit is Lithuania’s immediate economic challenge, one I don’t see it solving easily. Its major neighbors keep deprecating their currencies so that Lithuania has trouble competing with them. Lithuania is dependent on Russian oil; giving the Russians yet another hold on their small neighbor, as they are discovering now in refinery negotiations.

Eighty-seven percent of Lithuania’s electric power is furnished by a Chernobyl-type plant called Ignalina. In addition to contamination of soil and ground water with petroleum products and chemicals at military bases, the nuclear plant at Ignalina leaks, making Lithuania’s future even bleaker.

To my surprise I learned that Lithuania is the very center of geographical Europe. In the U.S. we don’t normally think of Russia as part of the European continent, but that part west of the Urals certainly is, and there’s a spot right outside of Vilna that is the continent’s geographical center. Thus, these four states are smack dab in the heart of geographic Europe, and if they were more disciplined they might turn themselves into another Switzerland. However, each of their populations is declining, with more deaths than births and a brain drain, and their economies can easily falter.

To my further surprise, I found that Lithuania has an American president, a former EPA bureaucrat in his seventies who has come back to run his country—a politician who was everybody’s second choice.

Latvia

Latvia has a big Russian population and thus the potential for intense ethnic strife. The Latvians are 57% of the population, while the Russians comprise 30%.

Naturally the Russians want to continue to speak Russian. It was made the official language when Stalin took over in the 1940s. The Latvians are having no more of it. Now that they have the upper hand, they insist the state language be Lettish. Indeed, wherever we went we found that our Russian translator wasn’t liked, and this had nothing to do with his personality, only his nationality. In fact, he needed a visa, while we Americans needed no papers. The Latvians are getting their own back at a people who for decades made them present papers at every turn.

They too, have a “foreign” president—a Canadian-Latvian, a woman, and a retired professor, in her sixties. She was elected so fast and unexpectedly that she had to send back to Canada for her clothes so she could stay and govern. To her credit, even though the local assembly has passed a law saying only Latvian can be spoken in Latvia, she refuses to sign it. Certainly a Canadian ought to be an expert in understanding the mischief linguistic restrictions can cause!

There’s a depressing and unhealthy haze across Latvia, because some of the deposits of shale oil, peat, and phosphorus are being burned. They do some ship-building, but nothing spectacular.

Along with most of the other small nations of Europe, Latvia has been invaded often by its neighbors, Sweden, Poland, Germany, and Russia. Unemployment has become a growing problem. Latvia hopes to receive an invitation to begin EU accession talks by the end of 1999. Everyone we met kept explaining that the EU would be their salvation.

However its GDP has dropped, but this drop is largely attributable to the impact of Russia’s financial crisis and the reduced investment in emerging markets following the financial troubles in Asia. The unofficial sanctions that Russia imposed in the spring initially hurt Latvia’s exporters—Russia is among Latvia’s top three trade partners—but also prompted them to seek other markets.

They are learning the hard way that democracy does not automatically mean prosperity. The transition from communism to a market economy will cause even more problems down the road—one way or the other. Getting into the EU remains Latvia’s fantasy for salvation, and it expects to be invited to start EU talks by the end of the year.

To its credit Latvia has pipelines crossing it, transporting hydrocarbons from Lithuania to Russia, but this is not enough to produce much income. Latvia, too, has the same overvalued currency problem as Lithuania. I kept finding myself paying developed country prices in what is clearly a developing country. Something has to give.

Estonia

Estonia is in the best economic position of all the Baltic countries. While Lithuania and Latvia have little to sell the outside world and don’t run a tight ship, Estonia has not only run a government surplus, but it has more to sell. Its relative success has put it on a fast track to become the first to become a part of the European Union, a goal which all these countries are eager to obtain.

Estonian, the language, is similar to Finnish. The Finns see the Estonians as their cousins, and often visit here. As are Latvia and Lithuania, Estonia is participating in the NATO military radar system called Air Sovereignty and Operations Center (ASOC) which is to ring Russia with spy stations. Still NATO isn’t likely to admit any of these small countries into its defense network because they’d have to be supported by the rest of NATO, like Greece.

In and out of Swedish and Russian control over the centuries, this tiny state was re-incorporated into the USSR after the German occupation ended in World War II. Independence came with the collapse of the USSR in 1991; and the last Russian troops left in 1994. Estonia then became free to develop economic and political ties with Western Europe. Again, the number of ethnic Russians, 28% of the population, remains a concern of Moscow.

Estonia has reformed its markets, maintained disciplined fiscal and monetary politics, and liberalized its trade. It’s no surprise that its GDP first grew, but then under the weight of the Russian and Asian financial crisis it dropped. It began to talk to the EU about joining, and to its credit its banks are consolidating and strengthening. It has restructured its national telephone system, and it hopes to join the WTO.

If any of the four is going to make it, it will be Estonia, but it’s still a tiny country with an overvalued currency. There are only about a million Estonians living in Estonia. The EU may well take them in since it won’t be a great burden, but what then? Is Estonia being consumed by yet another larger neighbor just as it has been since the beginning of time?

All Together Now

All four of these states are desperately eager to become part of Europe and to convert their feeble currencies into real money.

However, it won’t happen for a long time. They badly need more people, but they have aging populations, a low birth rate, emigration to other lands, and a high divorce rate. Unfortunately, their long-term fate is the same as their long-term history: to be absorbed by some larger and stronger entity. Their people’s background and geography means they will continue to be poor cousins, in one fashion or another supported by someone else. For centuries they’ve been pawns, and this isn’t likely to change. The best analogy I can think of is that of Mongolia to China and Russia, always a poor cousin, because of its geography never able to establish itself as an independent power in its own right.

These four countries have severe economic problems that cannot easily be cured. If they worked at it, really worked at it, they might turn themselves into the Singapore of Europe, but such discipline and dedication is not likely to occur and would take many years. After all, Switzerland, too, was once overrun constantly by its neighbors, but it disciplined itself and put a stop to it. So it’s possible, just not likely. That two of the four need North Americans as presidents shows how politically unstable the area is, that they possessed no better candidates. Indeed, the head of the Lithuanian military is a retired American army colonel.

After the Berlin wall fell, Latvia, Estonia, and Lithuania each established a public stock market. Naturally the companies listed there were local banks, industries, and transportation companies, infrastructure companies that are always the first to go onto developing countries’ stock markets. Sometimes these can be terrific investments, as the infrastructure usually grows as fast as the country develops, but these countries haven’t done all that well, and these shares aren’t likely to do well either. We just could not find the strong, vibrant economies which are necessary for surging capital markets.

Not that it’s impossible to do well here. We met Benita, 31, a tall slender brunette with a five-year old child. Her husband had died two or three years ago, and she’s now the Mercedes dealer for all of Latvia. Next to the Canadian president, Benita is the most famous woman in the country. She also owns a major perfume company, the Chanel distributorship, and has expanded both businesses successfully.

Catty rumors say Benita fired all the beautiful women on taking over the Mercedes dealership; we certainly saw enough good-looking female employees there to tell us those rumors are only mischievous gossip.

I don’t know whether Benita’s story is a single-parent success story or a feminine success story, but despite the economic collapse of 1998 she’s continued to be a major player. So it’s possible to make it big here—I just can’t see how any outsider can manage it. To succeed here, you are going to have to be on the ground and fight with the wind whipping against you, not a passive overseas investor.

In tootling around this part of the world we came across a particularly odd political anomaly—Kaliningrad. Formerly the Prussian city and province of Konigsberg, and now separated from Germany, Kaliningrad sits atop Poland and is both a province of Russia and a city. Its most famous son, Imanuel Kant, the philosopher, was born, lived, and died here.

Today Kaliningrad is not only (still) Russian but unattached by land to Russia. To get to Kaliningrad from Russia you must transverse Lithuania. Just as Alaska is not part of the contiguous United States, neither is Kaliningrad part of contiguous Russia. It has turned itself into the Uruguay of the Baltics, the home of serious smugglers. Many New Russians have built huge houses here with their new prosperity. I suspect they know this will not always be a part of Russia so they feel somewhat secure building on the shores of the Baltic. Whichever neighbor absorbs Kaliningrad in the future will be better than Moscow.

When Stalin took Konigsberg over, he sent the Germans there back to Germany, but we saw many signs that the Germans are returning to this formerly Prussian state. However, there are still lots of Russian here, as the Russian troops in Lithuania were all sent here in 1993 and 1994, not back to Russia. As a result, Lithuania has the smallest Russian problem of any of the three Baltic states, but they also have the Russian army at their doorstep if Moscow ever decides to use it.

Over the long haul it will be hard for these four states to stay independent, and harder for them to become prosperous. Those who urge me to get involved here in any way are flat wrong. There’s no reason for optimism over these states even though they are European and could now look west instead of east. Nor can I see a reason for any Westerner looking for a decent return from an accommodating economic climate to consider an investment.

= the end =