The Baltic nations are moving further away from an East-West alignment with Russia, to a North-South alignment with Western Europe. The annexation of Crimea by Russia is troubling for the Baltic states, nonetheless, trade opportunities abound for the Baltics. In early March, Latvia, Lithuania and Estonia jointly petitioned the European Union to begin funding a high-speed rail linking the three Baltic nations. Rail Baltica is a significant effort to improve the region’s land transport. It also represents a continued realignment toward Western Europe and away from Russia. This shift pivots the countries from an axis that historically ran east-west, to one that now moves more and more north-south. It reflects both economic trends and political realities for the three Baltic nations. Russia’s forcible annexation of Crimea last year and its ongoing efforts to destabilize Ukraine weren’t a direct impetus for this project. The rail link has been planned for more than a decade, with implementation stalled after the global financial crisis. (See sidebar on page 16) However, Russia’s actions in the Ukraine underscore for many the need for the Baltic countries to continue distancing themselves from their former communist master. The three countries, with a total population of less than seven million, aim to further integrate with Western Europe and to pay better attention to each other. “Integration with the Nordic market is the biggest change” for the Baltic countries, says Peeter Saks, managing partner of BaltCap, a venture capital and private equity firm based in Tallinn. “Integration among ourselves, yes, there’s room for improvement. But there’s more and more pan-Baltics business integration as well.” “Emerging Nordics” is the term of choice. Saks cites one of his firm’s own investments, a medical laboratories company called Medicap Holding AS, which began in Estonia, acquired labs in Lithuania, expanded to Finland and then sold to Germany’s synlab in 2013. Better rail links are only one element of this European reorientation effort. Historically dependent on Russia for oil and gas, the Baltic nations are taking huge steps at energy diversification as well. Late last year, a mammoth floating natural gas arrived in the Lithuanian port of Klaipeda. Operational this year, the South Korean-made terminal has the capacity of supplying about 4 billion cubic meters, more than enough to satisfy the gas needs of the three countries, which lack a pipeline connection with the rest of Europe. In addition, the Baltic countries are aggressively pushing renewable energy projects to further wean themselves away from dependence on Russia. Late last year, for example, a Lithuanian company called GECO Investicijos broke ground on a biofuel power plant in Vilnius, one of several the company is building throughout the country. BaltCap last year invested in Eurakas, a Lithuanian wind farm. Lithuania has felt especially vulnerable. It has fought with Russia’s Gazprom over control of a gas pipeline and forced to pay more for its gas than any other EU member. “The [Lithuanian] government is making every effort to diminish dependency on Russian electricity and Russian gas,” says Ligita Ramanauskaite, managing partner in Vilnius, Lithuania, with Magnusson law firm. The Baltic nations have ample reasons to distrust Russian intentions in the region. Memories of Soviet rule are long. They aren’t helped by current Russian bellicosity. Last October and November, NATO jets scrambled almost daily to counter Russian fighter jets and bombers buzzing the Baltic countries. (All three have been members of NATO since they joined the EU in 2004.) “Our mood is we’re not feeling very safe,” says Ramanauskaite. “No one wants to go back to the way it was 25 years ago,” she says. That sense of insecurity has discouraged some outside investors into the Baltic region, although others are forsaking Russia for the Baltics, says Saks. “Overall, it hasn’t affected us much at all.” What has impacted the three countries is Russia’s own economic woes. Falling oil and gas prices have slashed Russian export revenues. Western sanctions have further hurt. The Russian ruble has plummeted. Russia retaliated against Western sanctions and the Baltics got caught in an economic crossfire. Last year, Russia banned several agricultural products from the EU, US and Australia. Baltic exports were hit, including dairy products, fruits and vegetables. But as Saks points out, “agriculture has been a problematic matter [for the Baltics economies] forever.” According to Ramanauskaite, Baltics agricultural producers are looking at new markets for their products, including the Mideast. Information technology, machinery and electronics are much more important to the economies of the three countries. These are solidly focused on the EU, especially Scandinavia. Currently, Russia accounts for 21% of Lithuanian exports, 12% of Latvian exports and 10% of Estonian exports. Russia’s refusal to abide by international customs agreements is a further complication. In 2013, Russia scrapped participation in an international protocol that underwrites duties for goods transiting a country, the Transports Internationaux Routiers, known by its acronym TIR. Russia installed a regime of its own, throwing customs brokers and truck drivers into a state of confusion and frustration. “I won’t deny that it’s a problem,” says Martynas Kersys, general manager of Gefco Baltic, a subsidiary of the European logistics provider, Gefco Group. He hastens to add: “We are following the rules.” According to Kersys, some 80% of his company’s business remains east-west in orientation. That’s not just Russian trade, which is declining, he says, but increasingly his company and others handle cargo bound for Kazakhstan, Azerbaijan and Uzbekistan. While European business is growing, “I wouldn’t say it is overtaking our business to the East,” he says. For the Baltics, “transportation has been very much an east-west transit trade,” says Morten Hansen, who heads the economics department at the Stockholm School of Economics in Riga. That’s not about to disappear overnight. While the three Baltic nations are moving to diminish trade and reduce energy dependence, that doesn’t mean they are completely turning their backs on Russia and Russian money. Russian investors poured into the region in the aftermath of the global financial crisis and especially Latvia welcomed them. “Russian investors are here throughout the economy,” says Hansen. Following the global financial crisis, Latvia began to sell residency permits for as little as the equivalent of about $100,000. About 75% of all takers were Russian. Most invested in real estate. The Baltic economies will continue to grow this year, despite the decline in Russia trade. EU economists project Estonia’s GDP will gain 2.3% in 2015, and Lithuania 3.0% this year. A year back, economists projected Latvia to grow by 4.5% in 2015. That’s been reduced to 2.1%. While the EU’s own woes are in part responsible, Russia certainly doesn’t help. The Baltic economies experienced Europe’s most robust growth from 2000 to 2007. Then, the 2008 global financial crisis hit the Baltic countries hard. In 2009, Estonia’s economy contracted 14.1%. Lithuania lost 14.8%. Latvia fell a whopping 18%, the worst contraction in Europe. Many feared that Latvia would follow Greece and default on its debts. Foreign investment evaporated. The governments were forced to initiate strict austerity programs. However, the three nations recovered nicely and growth began by 2010. “We came down fast, but reversed ourselves quite quickly,” says Saks.