The three Baltic states of Estonia, Lithuania and Latvia have been part of the European Union for 18 years now. And for the last six years, investors have been better off there than they have been in slow, crisis-clad Europe.

The OMX Baltic 10 Index has been beating FTSE Europe ever since. It still is, even in a bad year like this one, when looked at year-to-date. It proves emerging economies can still beat developing ones.

That winning streak is coming to an end.

Geopolitics and a high-level corruption case among a well-known Latvian business threatens to dull the shine off of what has been the best kept secret of Euro-land investors for years.

Saber Rattling, a Definite Headwind

There is too much saber rattling going on. The Baltic states, not a fan of Moscow by any means after decades of Soviet rule, are rooting for Russia to go down in defeat in Ukraine.

Latvia’s Krišjānis Kariņš and Lithuania’s Ingrida Šimonytė told the FT’s Global Boardroom conference on June 8 that it was becoming harder to keep Europe united on sanctions due to inflation. But they added that the EU had to keep pressuring Russia, or risk Russia turning its sights on other countries. “Our goal must be for Putin to lose the war,” Kariņš said.

Not to be outdone, on June 21, Lithuania’s leader then ordered a transit route blocked between Kaliningrad, a small territory owned by Russia on the Lithuanian western border, and Belarus. For two countries warning that Russia might get aggressive against other weak, former Soviet states, both Latvia and Lithuania seem fine poking a hornet’s nest.

A week after the blockade, Russia and Belarus threatened Lithuania with military action if they kept the transit route blocked, the Kyiv Post reported on June 27. They’ve been saying this almost every other week since.

“Any talk of a blockade of Kaliningrad is a lie. Lithuania is complying with the sanctions imposed by the EU on Russia for its aggression and war against Ukraine,” Simonyte said.

There are sanctions against that transit route, no matter what Simonyte says.

The Baltic 10 market is down around 1.58% since Simonyte’s comments on June 21 on the transit route sanctions. FTSE Europe is up 0.98% since then. The market is worried.

Big Business, Big Concerns

With war on the brain, now is not the time for emerging market business stories to start turning people off.

Earlier this year, Latvia’s Court of Economic Affairs acquitted all of the accused in the so-called “Digitalgate” criminal case – a corruption fight that’s been ongoing since the mid-2000s.

Lawyers familiar with that case said that the government is still holding millions in seized funds.

John Sandweg, a partner at Nixon Peabody in Washington and former General Counsel at the Department of Homeland Security, and former Acting Director of ICE in the Obama administration said this “fails to strike a fair balance between general interests and investors fundamental right to its property.” He is not familiar with the Digitalgate case. But similarly, people who have had assets frozen in white-collar criminal investigations never got it back, or when they won a case, were reverted to a new court for a do-over.

Fighting corruption is always one of the main tenants of joining the European Union. It will likely be one of the biggest blockades to allowing Ukraine to join.

Regarding Latvian courts, Olav Gutting, Member of the Bundestag Financial Committee in Germany, noted that “Latvia’s judicial and court systems require urgent reforms. The Latvian courts’ repeated failure to prosecute local oligarchs and corrupt high-ranking officials, instead choosing to pursue Foreign Direct Investment leaders, hurts Latvia’s reputation.”


Gutting said that local prosecutors and judges were being too “aggressive with asset seizures”, and that they had a blanket “disregard (for) the fundamentals of prosecutorial discretion, fairness, and respect of the criminal procedure and the rules of evidence.”

Many cases in which private property was illegally seized in Latvia over the years will soon be tried in European and British courts. This could hurt Latvia’s image — a country that is part of the three Baltic sisters that have since outperformed mainland Europe.

“The Russian threat makes it even more important for Europe to stand together,” Gutting said. “We can’t allow for any cracks in the European house when it comes to questions of the rule of law,” he said.

In a letter dated June 23 to Didier Reynders, European Commissioner for Justice, Marion Walsmann, Member of the European Parliament in Germany and Vice-Chair of the Legal Affairs Committee, wrote that Latvia was setting a “dangerous precedent” in some of its recent white collar criminal cases where – after no wrongdoing was proven in a higher court, a lower court was given the powers to erase the decision and start over.

“Latvian authorities (are) in striking contradiction to European primary and secondary law, including the rule of law, the right to a fair trial, the presumption of innocence and the right to not be retried for a crime already acquitted or punished for,” Walsmann wrote.

When the Baltics joined the EU in 2004, markets took some time to mature. Unraveling from the state-controlled ways of the old Soviet Union would take time.

Changing its currencies to the Euro came with growing pains. State-controlled enterprises were privatized; parts sold off. New mini-empires were built. Under the European Union, it was essential to ensure those remnants of the old Soviet system did not remain intact.

This is a generational issue, and the Baltics, like much of old Communist Europe, still have growing pains.

“I applaud Latvia’s commitment to combat money laundering, but the reality is that Latvian courts are failing to hold the government accountable and are allowing the seizure of funds based on little to no evidence of wrongdoing,” Sandweg says. “The courts have allowed the government to simply refile the same case and take another bite at the apple.”

He said that in one case Nixon Peabody was involved in, they demonstrated the legitimacy of seized funds before a trial court and won. The government appealed the ruling. “We again prevailed as the appellate court affirmed the trial court’s verdict. Rather than accept the verdict, the government simply refiled the case in another trial court,” he says.

Odd twists and turns in the rule of law spook investors in emerging markets. War only adds to it. Over the last four weeks, the Baltics have slipped below the stock marketse of Western Europe. If the sabor rattling keeps up, and a real gunfight ensues, things will turn very fast for the three Baltic states.

Still, within the confines of Europe, these are the growth stories. Latvia grew 3.6% in the first quarter of 2022; Lithuania grew 1%. Estonia is in the worst shape and is nearly flatlined at 0.1% growth in the first. By comparison, France GDP shrunk 0.2% in the first quarter. Italy and Germany grew on par with Estonia.

On June 28, the Organization for Economic Cooperation and Development said that Estonia has done well handling the economic shocks caused by the pandemic and is expected to see continued economic growth. The economic risks are mainly geopolitical – namely Russia risk and the Ukraine war’s impact on inflation.

In Lithuania, the largest of the Baltic states, the CEO of Civinity, one of the largest facility management and engineering groups in the Baltics, was reportedly charged in Latvia with alleged money laundering earlier this month.

And in Latvia, according to the Economics Ministry, prices on electricity, natural gas, thermal power and oil are likely to rise by 39% this year, with gasoline prices expected to rise 40% due to Europe’s policy to sanction Russian oil and gas.

It’s another headwind the market does not seem to have priced in. Year-to-date, the OMX Baltic 10 isn’t even in a bear market yet, unlike the FTSE Europe. It’s only a matter of time now.


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