Impact of Russia’s Invasion on Latvian Industry: A Detailed Analysis of Changes and Challenges

Two years have now passed since Russia’s full-scale invasion of Ukraine. What impact has it had on Latvian industry? Has it changed in any way?

The war certainly has an impact, but to describe what has happened in recent years, one has to take a step back. For example, already in 2021, the price of energy resources and the very availability of these resources were an actual issue. At the same time, the crisis related to Covid-19 was going on. They almost wanted to put the industry in supermarket mode. Then we did the consolidation step. Production is the same for everyone. It is a collective of people who work and create some products as a result of an industrial process. We introduced various preventive measures related to health protection, so that we could safely continue working even in these harsh conditions. We created a unique “frame” that was suitable for the entire industry, which was transformed through the Latvian Employers’ Confederation and the Latvian Chamber of Commerce and Industry, and each manufacturing company could apply it to its needs. While overcoming covid, we had to face new challenges related to the Russian invasion of Ukraine. Our industry was the first to suffer – mechanical engineering, metalworking, because metal was one of the first goods subject to sanctions. According to the laws of the market, we should have actually stopped at that point. However, both in the nineties and in 2008-2009, we In the crisis of 2008, we learned that companies also need a second and third supplier of raw materials. Previously, in Latvia, we were largely on the “Severstaļlat” needle. When the war started, of course we got out of it, and it took two or three months. Of course, other industries also suffered, for example, electronics had problems with the supply of semiconductor components. However, production proved viable and we survived without significant decline. We stagnated a bit and then went up again. Analogies can also be sought in other industrial sectors.

How did you find the new raw material suppliers?

We had a big base in the Baltics, “Severstaļlat”, which controlled about 70% of the market. The remaining 30% came from Finland, Germany and other European Union countries. There were also further, more specific deliveries, for example from Turkey or China. Using other suppliers, we managed to overcome this 70% dependence in two to three months.

Dmitrijs Sulzic/MN

What is the purpose of the newly founded confederation and what can it bring to the companies of the association you represent?

Apart from the already mentioned covid crisis and geopolitical challenges, another aspect that forces industrialists to consolidate is the innovation policy in the country. It also includes competence centers in which eight industries are historically represented. For more than three years, these eight industries have been trying to talk to the state so that the support for innovation, research and development would be on reasonable terms, since there is zero support from the banks for such activities on the industrial side. The money that goes into innovation is European aid money. The so-called Recovery and Resilience Mechanism and other similar funding tools appeared. In order to get these funds under reasonable conditions to industry, its technological processes, new products, now we are also talking about the “green” and “digital” dimension, appropriate regulations have been developed. Three years of work has culminated in the fact that these rules, although not too friendly, are also not completely “fixed”.

What would you like to improve with the help of the new confederation?

In the Confederation of Latvian Industry Development, we consolidate a single opinion of industry. One area is the direction of innovation. The other is the defense industry, which we need to pay a lot of attention to. The third direction is the general development of industry and its competitiveness. One of the aspects that needs to be addressed is the existing bureaucracy in the country, which hinders the development of industry and contributes to our backwardness among the Baltic states.

What are currently the main bureaucratic obstacles that limit development?

The last example – the Defense Industry Law was recently reviewed in the Saeima. Our approach to this is not to make the law so complex that it is not practical in real life. The law should be a light “framework” that defines the main parameters. No formulas and no “deep” numbers. Often, specific numbers are included in the law without a specific justification, but this detailing can be done with the regulations of the Cabinet of Ministers. It has to be worked on. Our task is to be in the process of developing the legislation and not to allow the regulatory acts to be damaged from the very beginning.

Can you do it?

Innovations have been uneventful for three years. For example, the program that was “launched” last fall. Regulatory acts have been adopted and announced in September and October. Competence centers are already applying and collecting projects, but the program is suspended at the end of January and February.

Why is it?

The state apparatus suddenly feels that something needs to change. It would be like if we start playing hockey according to hockey rules, but in the second period we are told to switch to handball and in the third period to football rules. It is understandable that mistakes occur in the development of the legislative process, but the rules of the game should not be radically changed during the game itself. Underneath each project are real companies with leveraged funding to finance that project. For example, in the case of a competence center, you can get money back when something has already been done. From the beginning, the company spends its own money. You have spent your money, but after half a year you are told that it is not known whether the project will continue or not. This is how the state creates distrust in its decisions. [Daudznozīmīgi nopūšas, red.] Another very strange thing was the desire to apply the status of public officials to the entrepreneurs involved in the projects [ar no tā izrietošajām sekām, red.], to avoid any possible conflicts of interest. Such a setup is not acceptable for entrepreneurs.

Continuing with our goals, the next dimension is the technological development of production and the creation of new products. There is a wide spectrum of work here – both the creation of new products, the development of technologies and energy efficiency. This also includes questions about CO2 emissions. Factories are becoming “greener”, but this comes at a cost. During covid everyone said “Industrialists Malachi, you pulled our economy out of the hole” but now the industrialists are going to the second plate again. I once told a minister of economy that my goal when coming to the ministry is not to walk from cabinet to cabinet, but to find one door with the inscription “Industry”. If I knock on that door and it doesn’t open, I go to the minister.

Dmitrijs Sulzic/MN

How is it in Lithuania and Estonia? Does this system related to the state apparatus work for them, or are they still suffering?

Every country has its own problems and its own good solutions. If you compare the situation of companies that have entered the Lithuanian and Estonian markets, then the coordination procedures, premises, electricity connections, permits, etc. are easier to obtain than in Latvia. These processes are long for us. There is one more aspect that municipalities are currently facing. This is the question of industrial parks. There is a certain illogic built in from the very beginning. We hear about many empty industrial parks and we also hear about successful industrial parks. The potential owner of the industrial park must understand who will work there after the construction of this park. It is a mistake to try to build a “universal” industrial park. If a metalworking company plans to operate there, both durable floors and columns are needed, and the width and height of the gate are also important. Also another aspect. At the political level, there is talk that industry should make friends with science. However, the question arises again regarding the interpretation of “conflicts of interest”. If we involve a specialist from a scientific or educational institution in the selection of competence centers, we therefore exclude him from participation in projects. In order for the industry to develop and for us not to lose our competitiveness, this direction of innovation is very important for us. That’s why we go there and fight.

How has the business scale of members of your organization changed?

In 2000, our turnover was half a billion euros, but last year it was about two and a half billion euros. Last year could be similar to last year. It has been a normal organic growth of companies without excessive help from the state.

Any chance this year will be better than last year? It is said that with the decrease in interest rates, consumption will increase, including the goods offered by your industry.

There are production lines in our industry that started to recover already at the end of last year. In fact, the first half of last year was also very good. Then there was a slight drop in the summer and autumn, but at the end of the year production started to climb again. In my opinion, there should be a slight increase this year. Various market forecasts are optimistic for now. A drop in interest rates could have a greater impact on segments of the market where the end consumer is the individual buyer, such as boat trailers and gas cans. In this segment, large warehouse stocks are running low. Local governments could come to life in export markets. For example, in Scandinavia, where they had previously slowed down the development of infrastructure facilities. On the other hand, with regard to commercial construction projects, it can be said that they did not completely stop, but there could be growth here as well. It is true that this year will not be easy, but if we are active enough and learn to exercise between export markets, we can increase production volumes this year.

Your industry collects the components needed for production all over the world. Or have you been affected in any way by the escalation of the situation in the Red Sea?

Since we have segments that produce industrial equipment, we also need electronic components in production. Supplies from East Asia, for example, have become more problematic. But this is nothing new. Supply chains were already undermined by covid, then they were undermined again by geopolitics. Solutions were found then, and they will be found this time as well. It is also important here how big stockpiles of components have also been built up by support suppliers in Europe.

I have heard that during the covid crisis, along with further and more uncertain supplies from China and other Asian countries, the Latvian textile industry had received new orders. Perhaps the uncertainty of long-distance deliveries and the need to produce more in Europe could bring additional orders and growth to your industry as well?

This has undeniably already happened. In fact, even before covid, when evaluating long-distance deliveries, for example, the Nordic countries came to the conclusion that they can provide an appropriate price and high quality right here in the Baltic Sea region. Many things that were previously moved to China due to low prices have now returned to the Baltic Sea region, including Latvia.

So the future is positive for Latvian industry?

An industrialist is an optimist by nature. You will not build a factory in one day and you will not close it in one day. Therefore, the industry segment is represented by “residents”, who think ahead and try to find a solution in any situation. For example, if we look at labor problems. There used to be a severe shortage of welders in manufacturing. Nowadays there are many welding robots. We manufacture production equipment for woodworking. If once ten people worked on the production line in woodworking, now two, maximum, three are needed to service it. Thus, we create a solution for a different industry. However, if we talk about development, education is a very serious issue. Technologies remain more complex, demands on employees are higher. We use different training programs to raise qualifications, but we have to think about those who are currently starting first grade at the national level. Let them learn mathematics, physics, chemistry during the further learning process. So that they have technical clubs and that they have an interest in technology.

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2024-02-24 04:16:08
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