EU sanctions policy leads to dark days for Northern Europe

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Opinion Commentary by Chris Devonshire-Ellis – July 11, 2022

A brain drain and flows of commercial capital begin to occur as northern Europeans look to Italy and Spain.

By Chris Devonshire-Ellis

Continuing my tour of Russia and Europe, I find myself in Tallinn, the capital of Estonia for the first time since January 2020 – just before the Covid storm. Although this has now diminished, the expected gradual resurgence of trade and life in Northern Europe has not materialized. Speaking to local businesses here, a remarkable number of them now want to leave, a worrying sign among smaller nations also seen as on the frontline with Russia.

Yet there is a disconnect between local opinions and those of politicians. Much has been said about neighboring Finland and Sweden’s applications for NATO membership, but in Tallinn the population seems ambivalent. In fact, they say, the number of Russian servicemen and their equipment at the borders has dropped too low – they have been deployed to fight in Ukraine, hundreds of kilometers away. A Russian threat is also downplayed by people I’ve spoken to, even off-duty US intelligence seems to think a Russian incursion is unlikely.

Countries like Estonia have long lived both with and alongside Russia over the decades, becoming independent in 1991. Yet the surprising consensus among the many locals I spoke to too – as well as a handful of Latvians visiting Tallinn is that they wish to leave. It’s not the Russians they care about so much, they’ve been living with it for decades – but it’s the impact of Brussels sanctions on Russia that they question.

I am quoted electricity bills for a small shop which in June of last year was €60, last June with the same consumption this bill is now €540. While Estonia’s prime minister has just resigned, no one knows what the costs or supplies will be this winter, just four or five months away in a city where temperatures can drop to minus 10 and above. Inflation reached 21.9% in June. It was 20.1% in May and 18.8% in April. Prices have more than doubled since the start of the year, but no functioning government is in a position to act.

Another impact, I am told, is that unlike Russia, upon independence no real oligarch descended on the Baltics, the Russians involved in Northern European affairs in the early 1990s returned to Russia because the harvests were much better there. The transition from a Soviet economy to a European economy simply did not allow the emergence of large Estonian, Latvian or Lithuanian private companies. Instead, these countries were seen as prime commodity targets by their wealthier neighbors in Western Europe. The Latvian timber industry has become dominated by Germany. Automotive manufacturing facilities were merged with Scandinavian and German brands and then closed. There was little potential for the big EU Baltic brands to grow, become powerful and able to provide mass employment and develop business facilities between the Baltics and the EU. Instead, Western EU countries developed them with social benefits and taxable profits made in Germany, Finland and Sweden.

The result? Harsh winters and no guarantee of adequate energy supplies see nearly 50 Estonians I spoke to consider moving. Italy is often mentioned, as are Spain and Portugal. My Latvian friends say it’s the same in Riga and Vilnius. There is a desire to leave. Nothing is certain anymore, there are no more guarantees and it becomes more and more expensive.

Western and local media do not discuss the issue. For them, the discontent is minimal, the EU is “united” and the economic woes are all Russia’s fault. Yet, on the ground, the opinions expressed to me are that Northern Europe is heading for a dark period.
Once prosperous ports and Russian trade and markets have been completely disconnected. This matters in the Baltic countries, whereas in Estonia, Russian trade had increased by 73.6% in 2021, to reach 2.1 billion euros. In Latvia, bilateral trade increased by 64% and reached 634 million euros. Lithuania’s bilateral trade with Russia reached 5.29 billion euros and tripled compared to the previous year. All of that trading investment to support what used to be bull markets is completely gone. What was expected, and invested in, is now gone.

In Estonia, the ruling government collapsed in June, senior politicians are trying to reach a compromise and form a coalition, but more than a month later nothing has happened. No planning is in progress.

Shipments from the cargo port of Tallinn are down 8%, those from Helsinki by 10.27% and Haminakotka, the largest port in the Baltic and a major artery to the EU, by 15.64% compared to to 2021.

“It’s the same in Poland and northern Germany,” I was told. “Scandinavia too. Ports operate at quarter or half capacity. Shipping costs are much more expensive, insurance rates have astronomical rates. I can’t get the goods I want. Everything is expensive, winter is coming and no one is preparing for it. There is going to be a huge brain drain to southern Europe. We can’t stay here anymore.

This is a question that I had already studied and on which I had to make a decision in April. Our company had planned in January 2022 to set up an office in Northern Europe, and interviews were conducted in Sweden, Finland, Denmark and Estonia. These plans have now been postponed indefinitely and the planned Northern European investment has been made in Dubai instead.

A small manufacturing company based on Pik Street in Tallinn has the final say: “This was imposed on us by Brussels as a ‘show of unity’. But if the situation does not change quickly, Northern Europe and in particular the Baltic countries will enter a deep recession. We will have to lay off all our local staff and relocate almost everything. At least in Italy we can be warm, it’s much cheaper and our business, which we depend on, has a chance to survive.

EU politicians have gone so far on Russian sanctions and closing down all businesses and ports that it seems they can’t back down without looking very dumb and not a bit incompetent. The potential result has been a threading of the industrial heartland of Northern Europe and the gutting of entire commercial industries, while in countries like Estonia there is not even a viable government to impose some kind corrective action. Dark days are coming.

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Any views or opinions represented in this blog are personal comments, belong solely to the contributor and do not necessarily represent the views of Asia Briefing Limited or Dezan Shira & Associates.

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