1. Introduction The research of the economic impact of one country to other is the key method in modern economic ge- ography. The influence of one economic system on other may increase or decrease depending on the historical, geographical, institutional and other fea- tures of countries’ cooperation. The border and historical links with such a large state as the Russian Federation, of course, affects the economy of the Baltic states. However, the existing different political views and rather “cool” relations at the international level between Russia and the Bal- tic states disrupt economic links to a certain degree. After the dissolution of the Soviet Union Estonia, Latvia and Lithuania became independent and the vector of their economies was sent to the European Union, in particular – to the states of Fennoscandia. Currently Sweden, Finland, Germany and the Neth- erlands are the main trade and economic partners of the Baltic states. However, certain Russian interests in the Baltic states and current economic and trans- port links make Russia as one of the most important partners of Estonia, Latvia and Lithuania. The initial hypothesis is that Russia lost during last 23 years its status as the main economic part- ner of the Baltic states, but saved important role in some parts of economy (transport, industry) and that modern Russian interests are not only in indus- try, but also in financial sector. Journal of Geography, Politics and Society 2016, 6(2), 68–75 DOI 10.4467/24512249JG.16.014.5487 RUSSIA’S ROLE IN THE BALTIC STATES’ INVESTMENT Aleksandr Sergeevich Pestich Department of Economic and Social Geography of Russia, Faculty of Geography, Lomonosov Moscow State University, Leninskie gory, 119991 Moscow GSP-1, Russia, e-mail: alpestich@gmail.com Citation Pestich A.S., 2016, Russian’s role in the Baltic States’ investment, Journal of Geography, Politics and Society, 6(2), 68–75. Abstract The aim of this article is to determine the modern role of Russia in the investment space of the Baltic states and to assess the current stage of integration of Russian and the Baltic states’ economies. The basis of the work is the analysis of the dynamics and structure of Russian investment in Estonia, Latvia and Lithuania. This article shows the decreasing role of Russia in the Baltic states’ investment, but Russia is still an important economic partner for these states. Absolute amounts of investment are growing, while the share of Russia in different countries varies in different ways and, depending on the implementation of any project. Structure of Russian investments is different in all countries. Key words Russia, Estonia, Latvia, Lithuania, investment, business. Russia’s role in the Baltic States’ investment 69 2. Russian role in trade and investment After the dissolution of the Soviet Union Estonia, Lat- via and Lithuania have started pro-western policies, trying to focus mostly on European Union, not on Russia. During the Soviet period, about 95% of eco- nomic and trade balance were in communication with the other republics of the Union. Nowadays Russia’s share in the trade balance of the Baltic states rarely exceeds 25%, but is not the same for Estonia, Latvia and Lithuania (fig. 1). Russia’s share in the trade balance of Lithuania is much higher than other Baltic states. More than 90% of Russian import to Lithuania are oil and oil Fig. 1. Russia’s share in the trade balance of the Baltic states Source: statistics departments of Estonia, Latvia, and Lithuania. 70 Aleksandr Sergeevich Pestich products, because the only oil refinery in the Baltic states is in Mazeikiai, Lithuania. At the same time, in Estonia and Latvia Russian share is lower than 10–12% during last 10 years. The share of Russia changed wavy: recessions are connected with crisis in 1998 and 2008. It is remarkable that only Lithuania still has trade deficit with Russia: Estonia got trade surplus in 2008, Latvia – in 2013. The delay of Rus- sian economic growth in 2013-2014 and developing of Russian ports in Leningrad oblast had negative impact on trade between the Baltic states and Rus- sia: Exports from Estonia began to decline, and from Lithuania – slowed; imports stagnated in Estonia and in Lithuania – decreased significantly. Russia was not the major investor in the Baltic states in 2014 (tab. 1). Share and place of Russia in 2014 in the incoming flow of foreign direct investment (hereinafter – FDI) Tab. 1. Main investors in the Baltic states in 2014 № Estonia Latvia Lithuania Country Share Country Share Country Share 1 Sweden 26.4% Sweden 21.1% Sweden 23.0% 2 Finland 21.8% Netherlands 8.2% Germany 10.1% 3 Netherlands 10.4% Cyprus 7.3% Poland 9.8% 4 Norway 5.5% Russia 6.9% Netherlands 9.1% 5 Russia 5.5% Germany 5.6% Norway 6.0% 6 Cyprus 3.4% Norway 5.5% Estonia 5.6% 7 Denmark 3.2% Estonia 4.7% Denmark 5.4% 8 Lithuania 2.7% Denmark 4.0% Finland 4.5% 9 Latvia 2.7% Lithuania 3.0% Russia 4.1% 10 USA 2.2% The United Kingdom 2.7% Cyprus 3.5% Source: statistics departments of Estonia, Latvia and Lithuania. Fig. 2. Dynamics of the Russian volume of FDI in the economy of the Baltic countries and Russia’s share in total FDI Source: statistics departments of Estonia, Latvia and Lithuania. Russia’s role in the Baltic States’ investment 71 in the countries differ slightly. However, consider the volume and share of FDI in one year is not quite cor- rect, so consider the dynamics of the volume of FDI in the economy of the Baltic countries and Russia’s share in total FDI (fig. 2.). Absolute figures of Russian investments grow in all the Baltic states (except Lithuania), and the proportion varies in different ways: in Latvia - de- creases with the increase in 2014, in Estonia – is growing, in Lithuania – changes in waves. To under- stand the causes of this dynamics, it is necessary to analyze the structure of Russian investments in the economy of these countries (fig. 3). Fig. 3. The structure of Russian investments in the economy of the Baltic states Source: statistics departments of Estonia, Latvia and Lithuania, Eurostat. 72 Aleksandr Sergeevich Pestich Analysis of the data shows that all three coun- tries have different structure of Russian investments. It shows different directions of Russian interests in the Baltic states. Dynamics of investment in Latvia shows that the most interesting for Russian inves- tors are the financial sector and the production and distribution of electricity, gas and water. This is ex- plained by increased activity of Russian banks in the Latvian financial sector and the fact that 50% of the shares of the largest gas company in Latvia «Latvijas Gāze», controlling pipelines Latvia, belong to Rus- sian companies (“Gazprom” – 34%, “Itera”1 – 16%). The share of investment in real estate is growing since 2008. Russian bought real estate in Latvia to receive permanent residency, but since 2014, it is forbidden to the Russian citizens. This can decrease Russian investment in Latvian real estate in future. From the rest of the Baltic states Lithuania is allo- cated with the least level of diversification of Russian investments. In 2004–2005 manufacturing attracted more than 60% of all Russian investments. In 2005 also was the largest volume of Russian investment in Lithuania, and in 2006 was a sharp recession. In the same year, the share of manufacturing in the struc- ture of Russian investment felt sharply and sharply increased the share of energy production and distri- bution, gas and water. The reason is that Mazeikiai oil refinery was bought in 2003 by the Russian com- pany «Yukos» and sold out to the Polish company «PKN Orlen» in 2006. Also in 2004 Russian company “Mechel” bought Iron and Steel Works in Kaunas. In 2010, investment increased because the crisis was over and the transaction on purchase chemical plant Lifosa in Kėdainiai by Russian «EuroChem» was over too. The high proportion of investment in energy production and distribution is explained in a similar manner as in the case of Latvia: 37% of the company «Lietuvos dujos, controlling GTS Lithuania belong to «Gazprom». Russian investment in Lithuanian finan- cial sector rapidly increased in 2007, but because of crisis in 2008 they quickly decreased in 2008. Estonia is a country with the most the most di- versified flow of Russian investments. No one sector is significantly stands out, as in Lithuania. Neverthe- less, should be noted the highest share among all countries on volume of investments in trade and real estate, and a significant amount of investment in the financial sector. Gradually declined investment in manufacturing (to zero in 2012), and production and distribution of energy. Quite difficult to estimate the number of enter- prises with Russian capital. According to various sources, the number of enterprises with Russian 1 “Rosneft” subsidiary company. capital in Latvia is about 4.5 thousand, in Estonia – 2.4 thousand. If remove the companies that are not Russian, but have Russian capital, their number de- creased markedly. Representation of Russian com- panies weakly correlated with the volume of Russian investments (tab. 2). Tab.  2. The number of Russian companies in the Baltic states Year Estonia Latvia Lithuania 2003 10 93 58 2004 19 99 71 2005 19 91 82 2006 26 129 86 2007 29 146 90 2008 25 153 92 2009 28 175 90 2010 32 228 116 2011 34 240 128 2012 28 261 – Source: UNCTAD. Among the largest foreign branches in the Bal- tic states2 only three are allocated: «Severstallat As» (Latvia) and Lukoil Baltija (Latvia and Lithuania). Ri- ga’s plant «Severstal» is one of the largest branches of foreign enterprises in Latvia in the manufacturing sector, and Lukoil Baltija is the largest company on the sale of gasoline in Lithuania. Enterprises with Russian capital are not the major foreign investor in the Baltic countries. In Latvia in the top twenty of the largest foreign investors is only one Russian company – «Transnefteproduct», which has invested in the subsidiary SIA LatRosTrans 51,6 million euros. There are 8 more Russian companies in top-100 foreign investors in Latvia (tab. 3). However, even the total amount of investment from the larg- est Russian investors in Latvia is not even a one third of the investments of the Swedish bank «Swedbank AB» (tab. 4). In the first ten largest investors in Latvia seven companies belong to financial sector. Among the directions of investment of major Russian investors in Latvia the main are the financial sector and companies associated with the transport of minerals, because of favorable conditions and simple implementation of financial activity in Latvia, and the convenience of Latvian ports for transporta- tion of goods to Western Europe. “Gazprom” invest- ments should be considered from the political point of view to control the Baltic pipeline in order to re- duce costs and increase the impact on the energy 2 By UNCTAD. Russia’s role in the Baltic States’ investment 73 market of the Baltic States, Poland and Germany. However, there are reports in recent years about the desire of governments of the Baltic countries to buy out the share of “Gazprom” in gas companies, espe- cially in view of the desire of the German sharehold- ers to sell their share of the company “Latvijas gāze”. Four of top-100 companies in Estonia are Russian subsidiaries. All these companies connected with transportation and storage (tab. 5). Russian companies actively invest in Estonian ports. „Acron” is the largest shareholder of the ter- minal complex AS DBT capacity of 160 thousand tons in port Muuga, Tallinn. Also „Acron” has AS BCT terminal for transportation and storage of ammonia and liquid fertilizers in Sillamae port with capacity of 80 thousand tons, launched in 2009. Besides „Akron”, own terminal in Sillamae for transshipment of liquid chemicals has „EuroChem”. Vopak EOS – a subsidi- ary of the Russian “Global Ports” engaged in service terminals for storage and handling of liquid cargo. Capitalization of some companies considerably re- duced from 2012 (Vopak – from 626 million to 366 million euros, DBT – 73 to 50 million euros). That is connected with the gradual reorientation of Russian trade flows from ports in Estonia to ports in Lenin- grad oblast. Eesti Gaas is the fourth company, which Tab. 3. Top Russian investors in Latvia in 2014 № Company/person Investment (mln. euros) Subsidiary Sector 1 Transnefteproduct 51.90 SIA LatRosTrans Oil transportation 2 Property Department of Moscow 28.53 AO Amo Plant Motor vehicle production 3 Andrey Vdovin 27.86 Bank M2M Europe Financial 4 Igor Tsyplakov 22.07 Rigensis bank Financial 5 Mine „Zarechnaya” 20.02 Indtec Baltic Coal SIA Coal terminal in Ventspils port 6 Gazprom 19.26 АО Latvijas gāze Gas transportation 7 SMP Bank 15.02 SMP Bank Financial 8 Igor Kim 11.64 Expobank Financial 9 „Stroyrazvitie „ 10.20 Stroyrazvitie LV Construction Source: www.lursoft.lv Tab. 4. Top foreign companies-investors in Latvia in 2014 № Company Investment (mln. euros) Country Sector 1 Swedbank AB 942.8 Sweden Financial 2 GE Capital 226.3 USA Financial 3 DNB BANK ASA 190.8 Norway Financial 4 Skandinaviska enskilda banken 146.9 Sweden Financial 5 Rugby Holding B.V. 137.2 Netherland Financial 6 EKTORNET LATVIA AB 137.0 Sweden Financial 7 UniCredit Bank Austria AG 127.8 Austria Financial 8 Tilts communications a/s 101.7 Denmark Communication 9 BERGVIK SKOG AB 99.5 Sweden Forestry 10 BITE Lietuva UAB 98.8 Lithuania Communication Source: www.lursoft.lv Tab. 5. Top companies with Russian capital in Estonia in 2014 № Company Subsidiary in Estonia Sector Capitalization (mln. euros) 7 Global Ports Vopak E.O.S. AS Transport 366 18 Global Trans Spacecom AS Transport 151 23 Gazprom Eesti Gaas Gas transport 138 88 Acron DBT AS Transport 50 Source: GILD100. 74 Aleksandr Sergeevich Pestich specialization is transportation and storage of gas. In next few years, „Gazprom” may lose control of the Estonian gas pipelines because the Estonian govern- ment plans to allocate from the jurisdiction of the company Eesti Gaas gas pipelines to bring the law „On Natural Gas” to the requirements of the Euro- pean Union. Interests of the Russian capital in Lithuania differ from those in Latvia and Estonia. First it should be noted that half (three of six) companies connected with chemical industry (tab. 6). The high activity of Russian business in the chemical industry can be explained by several facts. Lithuania is the only Baltic state with oil refinery in Mazeikiai. The presence of a large petrochemical plant contributed to the migration of skilled staff in the field of chemistry, and development of the fol- lowing stages of the chemical industry. The accumu- lated potential with interest of Russian companies in entering international markets and increasing pro- duction capacities abroad helped to attract Russian capital in the Lithuanian chemical industry. One of the first companies to have passed under the con- trol of the Russian company became the oil refin- ery in Mazeikiai. More than a half of the company «Mažeikių nafta» until 2006 belonged to the Dutch subsidiary „Yukos” “Yukos International UK-BV”. How- ever, after the bankruptcy of „YUKOS” oil refinery was sold to the Polish ORLEN. Originally, plant Lifosa, located in Kedainiai, and belonged to American company «Cargill». Ffter re- ducing prices for ammonium phosphate on the global market and crisis of the production in 2003, it came under the control of „EuroChem”. Now the modernization of plant is over, and the volume of production is about 1 mln. tons of phosphate ferti- lizers. Since 2014, the company planned to switch completely to the Karelian raw materials. The Russian company for the production of plas- tic packaging „Retal Industries” owns two enterprises in Lithuania: Neo Group and Retal Europe. Capacity of plant NeoGroup is more than 300 thousand tons per year, and the products are exported mainly to Western Europe, Scandinavia and the Baltic states. As in the other Baltic countries, „Gazprom” is one of the largest shareholders of the main gas company of the country – „Lietuvos dujos”. The Lithuanian government was concerned about this fact, and in the middle of 2013 the company was separated in two: „Lietuvos dujos” – selling gas and „Amber Grid” – gas transportation. „Gazprom” re- ceived 37.1% of the new company, but it is possible to get all shares by the Lithuanian government. Ac- cording to analysts, there is a possibility of such an operation, while guaranteeing the uninterrupted supply of gas to the Kaliningrad region and an end to litigation. Inter RAO is represented in Lithuania by subsidi- ary InterRao Lietuva, engaged in the production and distribution of electricity. In 2007 Inter RAO bought the largest Baltic wind power plant for 53 mln. dol- lars. This purchase caused by the desire to gain a foothold in the Baltic market and the desire to demonstrate to the international community inter- est in the development of alternative energy. Also in 2011, was signed an agreement for the sale electric- ity from currently under construction Kaliningrad NPP from 2017 to 2036 to the Baltic states. This NPP, as well as the agreement may be a barrier to the con- struction of Visaginas NPP. 3. Summing up Thus, because of analysis of the main indicators of Russian investment activity in the Baltic states, the following conclusions are: Russia’s share in foreign trade is maximum in Lith- uania (30% of total imports of Lithuania). Lithuania is the only republic with trade deficit with Russia, but in the next years may be trade surplus. Russia is important, but not the main investment partner of the Baltic states. Absolute amounts of in- vestment are growing, while the share of Russia in Tab. 6. Top companies with Russian capital in Lithuania in 2014 № Company Subsidiary in Lithuania Sector Capitalization (mln. euros) 6 EuroChem Lifosa Production of mineral fertilizers 1417 10 Gazprom Lietuvos dujos Gas transport 970 20 Retal Industries Neo Group Production of plastic packaging 648 27 Inter RAO InterRao Lietuva Producing and distribution of energy 396 36 Retal Industries Retal Europe Production of plastic packaging 242 84 Lukoil Lukoil Baltija Oil products 111 Source: GILD100. Russia’s role in the Baltic States’ investment 75 different countries varies in different ways and, de- pending on the implementation of any project. Structure of Russian investments is different in all countries, but there is a general trend: in the struc- ture of investment in all countries, especially in re- cent years, stand out investment in energy produc- tion and distribution and in the financial sector. Major Russian companies are not among the leaders by the volume of investments and capitaliza- tion. The main are Swedish and other Western Euro- pean companies (Swedbank AB invested in 2014 in Latvia nearly 1 billion euros, Transnefteproduct – 52 million). The main interest of Russian business is differ- ent in every country: in Estonia – transportation and storage, in Latvia – the financial sector and the transportation of minerals, in Lithuania – chemical industry and transportation of energy. Russian com- panies are trying to use the profitability of the Baltic ports and a convenient institutional environment for business. One of the geopolitical interests of the Russian capital in the Baltic states is to control the gas pipe- lines. In order to comply with the legislation and reduce the influence of “Gazprom” current gas com- panies should be separated in two: company for gas sale and for gas transportation. This process has al- ready taken place in Lithuania and will take place in Latvia and Estonia. References Eesti statistica, http://www.stat.ee/ [15.03.2015] Eurostat, http://epp.eurostat.ec.europa.eu/ [15.03.2015] GILD100, ranks the 100 most valuable Estonian and Lithuanian companies, http://www.gildcf.com/ [15.03.2015] Latvijas statistika, http://www.csb.gov.lv/ [15.03.2015] Lietuvos statisticos departamentas, http://www.stat.gov.lt/ [15.03.2015] Lursoft - data bases of enterprises, https://www.lursoft.lv [15.03.2015] UNCTAD (United Nations Conference on Trade and Develop- ment), http://unctadstat.unctad.org/ [15.03.2015]