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BALTIC ECONOMIES SHOW PROGRESS, LINGERING SYMPTOMS OF SOVIET ERA

These days the best description might be they are not the Balkans. The Baltic nations of Estonia, Latvia and Lithuania offer peace and glimmers of prosperity nearly a decade after their independence from the former Soviet Union. But the pace is slower than many Western companies expected toward a healthy free-market economy, said Harley E. Johansen, University of Idaho Geography Department chairman.

"I think the Baltics have the best potential to maintain their path to a free-market economy and a successful economy," Johansen said. "They're more adept at marketing their products in the West and that's because they've been forced to look to the West for markets after their relationship with Russia cooled."

Companies that once made seat belts, radios and carpeting for Soviet cars are now making the same products for western manufacturers, he said. Johansen first began studying how Western business interests were expanding into the former Soviet Baltic region while on a Fulbright scholarship to neighboring Finland in 1992. Using contacts he had made on that visit, Johansen obtained funding for a three-year study to monitor the progress of over 100 Scandinavian companies that pioneered Western investment into the Baltics.

He conducted a survey of the firms and made site visits to many of these companies to obtain data for a report on western business ventures. Johansen visited Finland's University of Joensuu in March to lecture about his studies of development in the Baltics and St. Petersburg, Russia. Last August he presented his findings in Rome at the Regional Science Association of the 37th European Congress of the Regional Science Association.

Finns in particular are interested in the Baltics because of their physical closeness and their long cultural ties, particularly with Estonia, which lies just 50 miles south across the Gulf of Finland.

Their languages tie the two together as well. "Estonia is about the only other place where a Finn can speak and be understood," Johansen said. Even when Estonia was a Soviet republic, Finnish television broadcasts provided a window on western culture.

Johansen followed Baltic expansion efforts by western companies such as the accounting giants KPMG and Price Waterhouse, automaker Saab and appliance maker Electrolux, along with numerous smaller companies, many with Baltic partners. Among the companies Johansen tracked was the Finnish oil company Neste Oy, which launched an ambitious campaign to develop combination gas stations and convenience stores.

After the drab commerce of the Soviet era, the brightly lit and colorful stores with landscaped entries became instant hits, Johansen said, almost on par as gathering places with finer restaurants.

The selection of products far outstripped the selection Soviet stores had offered, Johansen said. Neste soon found, however, that each Baltic country was different and that rules and regulations on business would change rapidly as the countries developed their independent governments. In fact, the biggest problem facing most western companies as expressed in the survey, was not the famed "Mafia," but continually changing tax laws and rules and regulations on business, making long-term planning difficult.

As Neste learned, working with bureaucratic state companies as joint venture partners was also difficult, especially in Lithuania. Local employees, too, needed to learn how western retail worked, Johansen said. As a result of those factors, the oil company decided to slow the pace of its development.

Infrastructure, like telephone systems, also lagged decades behind. Johansen said a call from Aseri, Estonia, some 100 miles east of the capital of Tallinn took six hours to place in the early 1990s.

Estonia was the Baltic Republic most exposed to the West, Johansen said. Conditions in Latvia and Lithuania have taken longer to reverse.

He also studied development in St. Petersburg, Russia's major shipping port to the West and at 6 million people, the closest and likeliest major emerging market for the Baltic and Scandinavian countries.

The Russian financial crisis did not hit the Baltics particularly hard, Johansen said, because Russians had informally boycotted trade with the Baltics after their separation. Still, western companies like Gillette, Wrigley's and Caterpillar are locating operations in St. Petersburg in hopes that economic conditions will improve. But they also know they can ship their products westward if need be, Johansen said.

"Russia is the slowest to develop and the riskiest investment because of many factors," Johansen said. "And yet the payoff will be the greatest if it does succeed."