Stefan Jugel: Latvia's high export performance - a short-term success story or a long-term strategy?

14. March, 2023

Despite the global turmoil of the last three years – from pandemics to Russia's war in Ukraine – Latvia's export performance has reached record highs. This time has shown exporting companies how quickly they can adapt to new situations, and the results show that new opportunities have opened up for Latvia's exports and we are seizing them. However, it is important to assess how sustainable these opportunities are and what Latvian companies need to do in the future to be able to maintain these results and not just be a short-term success story.

To briefly review the main reasons for the strong export performance, it should be stressed that, despite all the forecasts, exports were little affected by the pandemic. Of course, the first wave of Covid-19 in 2020 saw confusion in all sectors, especially as international trade and shipments were curtailed and employers had to adapt to a work-from-home environment. The global economy recovered quickly and Latvian companies also showed how quickly we can adapt to new conditions and even use them to our advantage, for example by entering new export markets and offering new products.

If we look at how the Russian war in Ukraine has affected export performance, we can see that Latvia's exports to neighbouring Russia increased last year, with goods that are subject to EU sanctions. It should be noted that it is not possible to directly trace whether goods pass through these neighbouring countries into Russia. The question is therefore how long such an export strategy will be desirable and feasible.

Risk management and market diversification will determine the stability of Latvian exports

Despite good export performance, the road to export performance has not been easy. This has been a time of change for businesses, and exports have been one of the areas where they have been forced to adapt most intensively to changing circumstances. To ensure that these successes continue, companies need to move towards a business model based on long-term strategy and risk management.

In the context of manufacturing companies, risk management involves long-term monitoring of the market, customers and suppliers. Moreover, it is the suppliers who play a crucial role. Monitoring and researching them includes identifying where raw materials are sourced from, assessing whether suppliers are sustainable and to what extent they are affected by supply chains from Asia and Russia. If any of the components are at risk of sanctions or raw material shortages, there is a high probability that all production processes will have to be halted. Therefore, VALMIERAS STIKLA ŠĶIEDRA, being aware of the importance of risk management, has eliminated the fast-moving business model from its export strategy, building relationships with customers over the long term, at least 5 to 10 years. 

In order to ensure the most stable and highest possible export performance in the future, market diversification is of great value - both in terms of target countries, diversifying the customer portfolio and expanding the range of products we offer. For example, currently 75% of VALMIERAS STIKLA ŠĶIEDRA exports are to Europe, around 14.2% to North America and 6.5% to Asia. We are currently working on opportunities to increase our share of exports to Asia and North America. We are also exploring other growth markets such as the Arab countries. By increasing these proportions, we want to be less dependent on the European economy and customers.

The second is the ongoing work to develop new products and research their applications. Our experience shows that there is great potential in the production of electric vehicles, where we supply materials for battery insulation, battery pack protection. We see long-term opportunities here, as this is also the electric car manufacturing business. It is precisely these sustainable niches that Latvian manufacturing companies need to look for.

Currently, the most stable partners are to be found in the Western market and the Western economy. I see that Latvia has great potential in this respect, especially in the electronics and programming sectors. There is also untapped potential in the energy sector because Latvia has land and solar parks, we can build wind turbines and sell this green energy to Europe, which is in dire need of it. Industries that only consume resources and do not add value will not be able to exist in the long term.

Economic growth is slowing down, exports will follow

While exports have continued to rise, experts point out that the economy is slowing down and this should not be ignored. High prices and the geopolitical situation are having a negative impact on people's purchasing power and ultimately on investor activity worldwide. Experts are therefore cautious, however, and recommend preparing for a slowdown in export growth. In crises, those who are most affected are those who engage in fast trading, where the strategy is based on the principle of cheaper and quicker. It is therefore long-term plans and preparedness for different scenarios that will determine the future ability of companies to sustain high export performance.

One of Latvia's greatest achievements in these last three years has been the government's ability to show that quick and well-thought-out decisions are also possible at the national level. The government is open to negotiation. This is a plus for Latvia that businesses can take advantage of, as they have more opportunities to be heard. There is also a general increase in public awareness of where we are and the risks we face, raising awareness of where Latvia needs to go as we move towards Western European markets and economies.