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Russia's Invasion Of Ukraine: A Setback For Baltics' Recovery

The economic recoveries of the three Baltic countries will most likely slow as a result of Russia's invasion of Ukraine. The immediate downside risk to the Baltic economies stems from the soaring costs of energy that feed already high inflation. The rising price pressure, general war uncertainty, and the imposed sanctions and counter sanctions will inevitably temper consumer confidence, weigh on investment decisions, and further disrupt supply chains. These factors are likely to weaken growth performance. While energy dependence on Russia will remain a key source of risk for the three countries, the direct Baltic-Russia trade links have significantly declined, and the Baltic States have ample national and EU-level support to help lessen the adverse economic consequences of the current shock.

Key Highlights include:
-- Persistent inflation from high energy costs a key risk to the Baltics.
-- The strong expected recoveries are likely to slow because of Russia's invasion.
-- The recoveries are not likely to stall entirely due to government and EU support measures.

“Russia’s invasion into Ukraine is undoubtably a setback to Baltic economic performance,” says Jason Graffam Vice President in the Global Sovereign Ratings Group. “But the direct economic links between the Baltic countries and Russia weakened long before the invasion. The Baltic governments have strong macroeconomic policymaking institutions and they benefit from being part of NATO, the European Union and the Euro area. These support structures help protect the Baltic States from the adverse economic consequences.”