Latvia's freight industry is inconveniently poised to feel the effects of the deterioration in trade relations between the EU and the Russian Federation. While on aggregate sanctions put in place by the West have not significantly affected the EU's growth outlook, they have hit Latvia hard. Russia is one of Latvia's largest trading partners, accounting for 10% of total exports, and both the visible goods and services trade is suffering as a direct result.
Nonetheless, tensions appear to have reached a plateau for the time being, with the EU opting not to enact any further sanctions on Russia in November, while Russia and Ukraine reached a deal which should lead to the resumption of gas supplies to Ukraine. This suggests that the risk of worst-case scenario for Latvia's banking sector, involving an intensification of capital and financial market sanctions on Russian assets, has declined slightly.
In 2015, growth across all of the freight modes in Latvia is set to be relatively mooted, with the exception of the air freight sector, which is set for year-on-year (y-o-y) growth of a healthy 6.90%. While the road freight sector is pencilled in for steady y-o-y gains of 3.60%, rail freight will fare worse with annual growth of just under 1%.
Headline Industry Data
2015 port of Riga tonnage throughput is forecast to grow 1.54%.
2015 Port of Ventspils tonnage throughput is forecast to rise 1.56%.
2015 air freight tonnage throughput is forecast to increase 6.90%.
2015 rail freight tonnage throughput is forecast to rise 0.97%.
2015 road freight tonnage throughput is forecast to grow 3.60%.
2015 total trade real growth is forecast to rise 1.50%.
Key Industry Trends
Rail Freight Exposed To Sanctions - Latvia's rail freight sector will continue to be negatively impacted by the trade sanctions placed on Russia by the West due to Latvia's role as a conduit for Russia's imports and exports. Trade sanctions and counter-sanctions between Russia and Western states will continue to impact the volume of goods transported via Latvia's railway network.
Toll Comes Into Affect On Latvia's Roads - A toll affecting truck drivers in Latvia using the country's highways came into force at the beginning of 2014, autopistas.com reported. Entitled the 'eurovignette', the toll is also in force in Estonia with the money being used to enhance Latvia's road infrastructure.
Riga Revised Down On H1 Performance - BMI has revised down our forecast for full-year container throughput at the Latvian port of Riga based on data for the first half of 2014, while keeping our forecast for tonnage throughput despite Russia's continuing re-routing of liquid bulk cargoes through its domestic ports. This has hit all Baltic States' ports hard, as Russian oil exports used to be a major part of their cargo operations. Latvia's ports have also been blighted by bad news: a World Bank report has been critical of the port of Riga's slowness at dredging and developing modern cargo terminals. On top of this, the State Audit Office has found funding misuse cases at the port. However, the port authority believes that cargo volumes will not decrease at the port this year.
Risks To Outlook
The main risk at the time of writing would be an intensification of the trade war between Russia and the West. Due to Latvia, as well as the other Baltic states, playing a key role in Russian supply chains, the sanctions placed on Russia by the West (which are beginning to bite) will lead to a decrease in trade volumes which, in turn, will have a knock-on impact on volumes transiting through Latvia. Russia officially recognised the result of the elections held by pro-Russian separatists in eastern Ukraine whereas Western governments denounced the elections, seeing them as a violation of the September 5 ceasefire. The vote may thus be used to further criticise Moscow. German officials have even spoken of tightening the sanctions on Russia.
While some of the rhetoric from the West is likely to be a knee-jerk reaction to the November 2 elections, we caution that the level of fighting in Eastern Ukraine is still sufficient to keep Western leaders highly critical of Moscow. Moreover, virtually any escalation of the fighting would almost certainly be blamed on the Kremlin. Latvia remains one of the most exposed countries in the European Union to any intensification of trade barriers between Russia and the EU, which would adversely affect Latvia's current account.