Euro entry in Jan follows tough market reforms

Euro entry in Jan follows tough market reforms
A Lithuanian border guard inspects a truck as it enters Lithuania at a border crossing with Russia in Kybartai December 16, 2014.

KYBARTAI - Geopolitics plague Lithuanians at this frozen Russian border post, where a return trip by car can mean 48 hours of queuing. It is a reminder for some of why the former Soviet republic will cement its move to the West by joining the euro zone next month.

Tensions with Moscow have simmered ever since Lithuania became the first republic to declare independence from the Soviet Union in 1990, although only 6 per cent of the population are Russian speakers, far fewer than in its Baltic neighbours.

On Jan. 1, it will be the last of the Baltic states to join the currency bloc, hoping like Estonia and Latvia for more investment and lower borrowing costs to spur one of Europe's poorest but fastest-growing economies.

All three have felt the blowback from East-West tension over Russia's encroachment into Ukraine this year in the form of Russian sanctions and military grandstanding on their borders.

When Lithuanian President Dalia Grybauskaite announced military aid for Ukraine last month, accusing Moscow of being a"terrorist country", Russia launched a go-slow on the border with its Kaliningrad enclave - home to Russia's Baltic sea fleet and, most Lithuanians suspect, tactical nuclear weapons.

The number of private Lithuanian cars crossing over plunged tenfold. "Before it only took a couple of hours," said unemployed Lionius Medelis, one of just three drivers huddled in the cold in the hope of buying cheap gasoline in Kaliningrad."It's terrible what's happening here." The move to the euro coincides with steps towards greater energy independence and requests for more NATO troops in Lithuania, marking a new shift away from Moscow. But half those polled in this state of three million do not welcome the euro. "It is all a horror movie," elderly Laima Krecikiene said outside a supermarket by the border. "Don't you understand? Can you imagine how little money people in the villages have? Just look at the prices, they shot up in anticipation of the euro." Market reforms and wider economic crisis have been tough for Lithuanians, driving many to emigrate. But few oppose its shift towards the West.

Russia's move into Ukraine has awoken fears the Baltics could be next. NATO has scrambled its jets over 150 times this year after Russian sorties, three times more than last year. Moscow held surprise military exercises in Kaliningrad in December with 9,000 troops and 55 ships.

Russian sanctions have hit Lithuania's transport sector, which employs around 100,000, as well as its dairy industry.

While the aim may be to bring the country back into Moscow's orbit, analysts say it is having the opposite effect, focusing business minds on the west and emerging markets like Asia. "I think Russians are trying to educate us how to behave,"said Gitanas Nauseda, chief economist as SEB bank in Lithuania."But among executives the mentality of having Russia in your strategic plan is disappearing." VOCAL With Russia still accounting for some 20 per cent of exports compared with 60 per cent going elsewhere in the European Union, the government, which has been among the most vocal in Europe in denouncing Russia, says there is some way to go.

Prime Minister Algirdas Butkevicius said some businesses still did not appreciate the risks of dealing with Russia. "It's better to work with less risky markets, make use of having a stable currency like the euro in Lithuania, have lower profits but long-term stability in business," he told Reuters.

A big step came in October when "Independence", a floating liquefied natural gas import terminal, arrived under heavy guard in Lithuania, marking the end of the Baltic state's reliance on Russian gas by allowing it to import from countries like Norway as well.

While a Russian crisis could upset forecasts, the central bank says euro zone membership could add 1.3 per cent to GDP in the long term.

The economy is expected to grow 2.9 per cent this year. Massive public spending cuts coupled with economic crisis saw Lithuanian GDP shrink by 15 per cent in 2009, a drop that took until 2014 to recover. Around a tenth of the population has emigrated, half since the crisis.

Now Lithuania seems healthier than many EU economies, but central bank head Vitas Vasiliauskas said it could not relax."The euro gives you a lot of opportunities. At the same time you must move forward with reforms," he said in an interview.

Deeper problems include creaking education and health systems and the brain drain, and even businesspeople are sceptical about the benefits of joining the euro.

Visvaldas Matijosaitis, CEO of Viciunai Group, producer of frozen products that exports to 56 countries and employs 7,500 people, complained of a shortage of skilled labour - his company is forced to bus in workers from 100 km (60 miles) away. "Productivity is not what it is in the West," Matijosaitis said, as lines of women filleted fish by hand nearby. "A lot of investment would be needed to raise productivity." Asked if the euro would help, he did not hesitate. "It changes nothing," he said.

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