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News highlights from Lithuania, Latvia and Estonia.

News Highlights from June 15—June 22, 1998

• On a cross-Baltic tour this past week, NATO Secretary-General Javier Solana repeated that the door to alliance remained open to Lithuania, Latvia and Estonia—despite objections from Russia. Since regaining independence in 1991, the Baltics have made accession into NATO a top foreign policy goal. Leaders in the Baltic argue that denying their countries membership would consign them to an ill-defined and dangerous security zone. But while Moscow has grudgingly accepted NATO expansion to Poland, Hungary and the Czech Republic, it has said it will never accept moving NATO eastward to include the Baltic nations—all three of which share borders with Russia. In Latvia, Solana also went out of his way to urge the country to enact changes to the country’s controversial citizenship laws, laws which have been a source of tension with Russia. Some 700,000 Russian-speakers in Latvia have failed to pass citizenship requirements and remain stateless. Moscow accuses Latvia of trying to disenfranchise its Russian minority, and it recently threaten Latvia with economic sanctions over the issue. All three Baltic states are hoping to win an invitation to join the NATO alliance in 1999, when NATO again takes up the issue of further expanding the alliance at a summit in Washington. But most observers say NATO is unlikely to extend invitations to the Baltics next year. Baltic armies still fall well short of NATO standards, and their cash-strapped governments say they can’t find the money to properly upgrade their militaries. Latvia spends just 0.6 percent of its gross domestic product (GDP) on defense—one of the lowest national defense expenditures in Europe. To make sure it qualifies for NATO, the government says it wants to gradually raise defense spending to 2 percent of GDP. Russian objections are also likely to seriously complicate the Baltic bid for membership.   During a visit to Vilnius just a few days before Solana’s arrival, Russian Foreign Minister Yevgeny Primakov repeated Kremlin opposition to Baltic membership, telling a news conference that Russia strongly disagreed with Lithuania over the NATO issue. "The joining of the Baltic states to NATO is unacceptable since it creates certain inconveniences and dangers, and infringes on our interests in geopolitical terms," the Russian Foreign Minister said. The Baltics say they would like to win membership as soon as possible, and some hold out hope that the countries—or at least one of them—will actually receive NATO invitations in Washington next year. But Latvian Foreign Minister Valdis Birkavs told journalists just prior to Solana’s visit that Latvians had to be realistic. "I would not like to create an illusion that we will get an invitation to NATO during Solana’s visit, or that it is even likely to happen next year," the Baltic News Service (BNS) quoted Birkavs as saying. The NATO Secretary-General started his swing through the Baltic states Wednesday in Lithuania, traveling to Latvia on Thursday and to Estonia on Friday.

• Estonia’s current account deficit has come down slightly, but still remains one of the highest in the world—according to statistics released on June 15 by the country’s central bank, the Bank of Estonia.  The indicator, which has been watched closely by observers worried that the Estonian economy might be growing too fast, fell to 11 percent of gross domestic product (GDP) from 12 percent of GDP at the start of the year, the central bank said. Many analysts in Estonia welcomed the new figure, saying they hoped it meant the current account deficit would now continue to contract. "Before today’s announcement, many people anticipated that the figure might even go up to as high as 14 percent," said Heikki Kallu, an analysts at Estonia’s Hansapank. "So the 11 percent figure is definitely a move in the right direction." The International Monetary Fund, however, said Estonia’s current account deficit was still extremely high, and that it was too soon to tell if there was a clear downward trend. "In an otherwise strong economy, the main message from these figures is that the current account deficit remains the No. 1 macro-economic risk of the Estonian economy," said Dimitri Demekas, the IMF representative for Estonia and Latvia. Estonia’s current account deficit of 11 percent compares to Poland’s 5 percent and the Czech Republic’s 4 percent, according to the European Bank for Reconstruction and Development (EBRD). The current account deficit in the United States is around 4.5 percent. Lithuania and Latvia also have relatively high current account deficits of 10 and 8 percent. Estonia’s unusually high current account deficit—-an indicator of a country’s short-term foreign credit—has been a source of nervous speculation by both policy makers and investors in recent months Analysts say high current account deficits can indicate consumer spending is out of control and that an economy is in danger of overheating. High current accounts deficits preceded financial crises in Asia, and also earlier in Mexico. Estonia’s economy grew by over 8 percent in the first quarter of this year, and in 1997 topped 11 percent—-one of the highest growth rates in Europe. Heikki Kallu said the fear is that unchecked growth can lead to reckless investment decisions, which can come back to haunt an economy later. More moderate growth is generally seen as more sustainable, he said. The IMF’s Dimitri Demekas said Estonia had to remain vigilant to bring the current account figure down and to ensure sustainable growth. Among other measures, Demekas urged policy makers to stick to tight fiscal policies, and to take measures to strengthen the banking system and slow down the growth of credit. By the end of the week, the government did say it was considering new measures, including the possibility of higher capital adequacy requirements for banks, to make sure growth is brought under control. Estonia’s economy has long been seen as the star performer among ex-Soviet republics. No-nonsense free market reforms were implemented immediately after independence in 1991, and the economy was booming within a few years. Growing wariness about the economy, however, has been reflected on the Estonian stock market, where share prices have been plunging for most of the year.

• In a rare sign of cooperation between their armed forces, Estonian and Russian border guards on June 16 held a joint exercises on a lake bordering the two nations. Estonian-Russian relations have been cool since the Soviet collapse, and the two countries have not even signed a formal border agreement. Russia has also been angered by Estonia’s bid to join the NATO military alliance. Spokesman for the Estonian Border Guards, Aare Soome, said the one-day exercise—which involved around 50 men and three boats—was meant to improve practical cooperation in stopping smuggling. He insisted there was no political element to the maneuvers, which included the testing of cross-border communication links. "We are neighbors, so it simply makes sense for our border guards to work together as well as possible," said spokesman Aare Soome, speaking from Border Guard headquarters in Tallinn. "Politics had nothing to do with it." Soome said joint maneuvers were rare, though Estonian and Russian border troops did hold similar exercises last year.

 

News Highlights from June 8—June 15, 1998

• Russian Foreign Minister Yevgeny Primakov visited Vilnius on June 13 in what was a rare visit to the Baltic states by such a high-ranking Russian official. While the one-day visit was low-key, it was also a clear sign that Lithuania now enjoys the warmest relations with Moscow among the Baltic states. Lithuania has a proportionally small Russian-speaking population—just 10 percent of the population—and the treatment of this minority has not been a flash point as it has been in Moscow’s relations with Latvia and Estonia. Relations with Latvia have been especially strained recently over Moscow charges the country is denying citizenship to Russian-speakers, who make up almost 40 percent of the Latvian population. While there have been no tensions over minority issues, Lithuania’s bid to join NATO has angered Moscow. Primakov has spearheaded the Kremlin attack against expansion to the Baltics, warning it would seriously undermine Russia’s relationship with the West.          Lithuanians say they understand Russian anxieties, but insist there is no question of  backing away from their long-cherished goal of full alliance membership. "In no way are we going to give this up," said Arunas Godunavicius, an advisor to the Lithuanian parliament’s foreign relations committee.  "Lithuania is sticking to its goal of NATO membership and is doing everything in its power to qualify." Officials described Primakov’s short stay in Vilnius as a working visit. He met with Lithuania’s president, prime minister and foreign minister.

• Estonia’s sixth largest bank, Maapank, announced on June 8 that it was halting payments to account holders and would soon go into voluntary liquidation. Speculation has surrounded Maapank for weeks after reports it had taken major losses on the country’s ailing stock market, and that it was plagued by mismanagement. Maapank, with total assets of around 115 million dollars, is not considered one of the key players in the financial sector in Estonia—where the largest banks have assets approaching 1 billion dollars. But Maapank’s announcement that it was on the verge of bankruptcy prompted further speculation that the entire economy was entering rough waters. There has been growing unease about the economy for months, especially about the banking sector. Banking profits, which soared in 1997, have been mediocre so far this year. Scandals surrounding the management of several top banks have undermined confidence in the banking industry. In a statement, Estonia’s central bank, the Bank of Estonia, tried to put a positive spin on news that Maapank faced liquidation, saying it would ultimately make the rest of the banking industry even stronger. Estonian Prime Minsiter Mart Siimann also sought to downplay the impact of Maapank’s demise, telling Radio 4 that it was a small bank and so would not affect Estonian banking as a whole.  Siimann said the government would also seek to activate a law already in parliament that insures deposits of small account holders. If Maapank went bankrupt, small deposits should not be endangered, he said. Hardo Pajula of Price Waterhouse’s Tallinn office told Reuters this week that Estonian banks, once the stars of the booming economy, are starting to feel the brunt of changing economic fortunes. "The economic cycle has turned and the banks are the first to suffer as they are the first to benefit,'' he said "The problems are to do with the fact the cycle has turned combined with corporate governance problems and perhaps the youth of bankers."

• A Russian citizen living in Estonia has been charged with organizing protest rallies without obtaining the proper permits, the Baltic News Service (BNS) reported on June 9. The charges against 52-year-old Yuri Mishin relate to public demonstrations he helped stage in Estonia last October, BNS said. The rallies started out protesting higher costs of living, but ended up denouncing the Estonian government.  Mishin is a well-known Russian activist in Estonia, and heads the hardline Russian Citizens Union of Estonia. He accuses Estonia’s government of trying to disenfranchise the country’s 500,000-strong Russian-speaking minority. The charges against Mishin come days after related charges were filed against two elderly Russian women--Esya Shur, 64, and Lidiya Kashnova, 63. Estonian police said they know legal proceedings against the Russians, all of whom hold Russian citizenship, could be a sensitive matter. But they argue that they had little choice but to file charges after investigators concluded laws had been violated.    In April, the Russian government blasted neighboring Latvia for alleged discrimination against its Russian-speakers, and even threatened economic sanctions.