Baltic Economies Caught Off Guard by Independence : Sovereignty: Hardships are foreseen as republics’ market reforms try to catch up to political changes.

TALLINN, Estonia — Bankers, business people and economists in the three Baltic republics were caught off guard when the collapse of last month’s Kremlin putsch sent their countries surging toward independence.

“Who could have predicted that it would happen so quickly?” Elmar Matt, director of the Bank of Estonia, the republic’s central bank, said in an interview Wednesday. “Our prognosis was that we would be completely free by 1995.”

After three years of struggling with Moscow to let them go, it was just in the space of a couple of days that the leaders of Estonia, Latvia and Lithuania found themselves staring independence, and all the responsibility it implies, in the face.

But their economies are still integrated with the dilapidated, highly monopolistic and centralized Soviet economy--they lack the infrastructure they need to stand alone.

“We were not prepared for it to happen so fast,” said Harry-Elmar Volmer, president of Estonia’s Land Bank, the republic’s largest commercial bank. “We want a market economy, but we don’t have the basic laws necessary--a law on bankruptcy or a law on monopolies. Our legislature also has not passed a law on land reform or on ownership.

“We don’t have a free-market economy, we have a bazaar economy.”

Volmer said that creating a separate Estonian currency, one of the necessities of independence, will be “very painful,” especially because the Soviet ruble is not convertible to foreign currencies and is rapidly declining in value.

In neighboring Latvia, authorities took a step earlier this week toward gaining control of the republic’s money by taking over the local branch of the Soviet state bank.

“We have suffered a lot by being part of the Soviet banking system, and unfortunately we will continue to suffer until we issue our own currency,” said Andreas Gutmanis, Latvia’s deputy minister of economics.

As in the other Baltic republics, a big problem with economic reform in Latvia has been a lack of trained professionals in business, banking and international finance.

“We have been working for just two years, and so far we have only begun to destroy the centralized economic system in our republic,” Gutmanis said.

Lithuanian economists, however, predicted that their country will have an even more difficult time during the first years of independence.

“We are far behind Estonia in starting up joint ventures and private businesses, in freeing state-controlled prices and in many other reforms,” Elena Leontjeva, deputy head of the Lithuanian Free-Market Institute, said in an interview in Vilnius, the Lithuanian capital. “We took the path of sensational political acts while Estonia was pragmatically preparing for economic independence.”

While Lithuania repeatedly made headlines across the globe for its defiant stance against the Kremlin, Estonia was busy making new business ties with foreign companies and opening their own private farms and businesses.

“If I am a businessman looking for a place to invest my capital and I read about tanks in the streets of Vilnius, I am sure not going to consider investing my money there,” said Eugenijus Maldeikis, head of the department of strategy and reforms in Lithuania’s Economics Ministry.

Although Lithuania cried loudest for immediate freedom from the Kremlin, its economists say it could suffer most without the Soviet Union because it has few natural resources and little heavy industry of its own.

“The Moscow revolution did not resolve a single economic problem for us,” Maldeikis said. “We expect a very profound crisis. There is no question that our economic situation will get much worse.”

Lithuania’s balance sheet with Moscow is also less favorable than Estonia’s. While Lithuanian officials estimate that in its case the two sides of the ledger are about equal, Matt at the Bank of Estonia said the Soviet Union owes his country about 6 billion rubles, or $3.5 billion.

Lithuanian economists said their trade gap with the Soviet Union is bound to grow because the state-controlled prices for Lithuanian agricultural products are closer to the real price than the prices for industrial goods, resources and materials that it traditionally bought from other republics.

“The prices on natural resources that we import from the Soviet Union, like oil, will increase a lot more than the prices on the agricultural products and the light-industry goods that we sell,” said Leontjeva of the Free-Market Institute.

As it stands, experts in Lithuania predict that they will have a $1.5-billion trade deficit with the Soviet Union in the first year of independence--and along with that, massive unemployment. Living standards, which have always been well above the Soviet average, will plummet, Maldeikis said.

“Lithuania is still a long way from being economically independent,” Leontjeva said. “Such a small country can only survive if it is integrated in a large economic market. For the foreseeable future, we will have to remain part of the Russian market.”

Latvia’s Gutmanis sees his republic similarly constrained.

“The fact is, we have to keep our ties with the Soviet market strong because, as with the rest of Eastern Europe, our goods will not be competitive on the world market,” he said. “But we must restructure our relations with the Soviet Union and, most importantly, resolve the problem of importing oil and oil products. We are not going to get them as cheaply as we get them now. The Soviet Union is having an oil crisis of its own.”

Because private industry in the Baltics is still in the incubation stage, there is no choice but to keep outdated state-owned enterprises running. Many such factories manufacture parts for products put together in the Soviet Union or else they produce goods from components supplied by the Soviet Union.

On the other hand, Lithuania makes 158 products not produced anywhere in the Soviet Union, according to Algimantas Cekuolis, editor of a weekly newspaper in Vilnius and an adviser to Lithuanian President Vytautas Landsbergis. All the small motors for refrigerators and other appliances and all fuel injectors for cars, trucks and agricultural machinery are made in Lithuania.

“Economic relations with the Soviet Union will not be severed,” Maldeikis said. “But all deals will now be made on mutually advantageous grounds.”

Although it is the envy of Lithuania, Estonia faces most of the same problems in trying to pry itself away from the Soviet Union. Volmer, from the Estonian Land Bank, said that perhaps Lithuanians have a more realistic estimate of how difficult independence will be because they suffered through a three-month economic blockade after they declared independence in March, 1990.

The head engineer of Tallinn’s Poogelmann Factory, which makes electronic components, said he has been dreading the day when Estonia becomes independent.

His products are made of Japanese plastic because the Soviet Union does not produce plastic of high enough quality. Until now, the Soviet government paid for the expensive imported plastic in convertible currency, but the high price of the material was not carried over into the shelf price of the electronic goods.

“I always thought when independence came, we would have to shut that factory,” Poogelmann’s Vladimir A. Zharikov said. “But now I realize we will just have to raise our prices high enough so we can afford to convert our rubles into dollars and buy the plastic ourselves.”

There is only one hitch, Zharikov said.

“If the price of my components goes way up, then the price of the tape recorders and other electronic goods they go into will have to go up, too. Then the price for a Soviet-made tape recorder will be almost that of a Japanese recorder, and no one will buy ours.”

Factories like Poogelmann that cannot compete in an open economy will probably have to close, economists say, leading to the first real unemployment in decades.

“We are trying to prepare ourselves for unemployment by studying how other countries deal with it,” Jaak Leimann, Estonia’s minister of economy, said. “We realize this will be one of the costs of a market economy.”

Despite all the difficulties, Estonia has already experienced successes in its economic reforms, Leimann said. More than 5,000 new private farms have been started, and about 1,000 joint ventures and corporations have been opened, mostly in trade and service industries.

“We have not had successes in industry yet,” Leimann said. “We are trying to decide how to privatize large factories, but we do not have enough capital. Of course, we have our hopes set on Western investments.”

Latvia, too, has been more successful with privatization in the countryside. More than 8,000 farms were opened last year alone, and soon the government expects to have 70,000 private farms in all.

“Unfortunately, privatization is still ahead of us in other parts of the economy like housing and industry,” said Gutmanis, the Latvian deputy minister. “It is very difficult because we have a 50-year history of the state owning everything.”

State-owned enterprises still account for more than 90% of the republic’s economy, he said.

Leimann said Estonia’s Parliament is trying to use the momentum of the recent political events to hasten privatization of industries, quickly pass laws to attract foreign investment and further free prices.

“We must quickly utilize this situation,” Leimann said. “Now that the political solution is achieved, and we know that the United States and many other large countries are with us, it is now possible to implement all of our ideas.”

Estonia’s cheap labor force, paper, pulp and furniture would attract foreign businesses, he said.

Latvians will also try to rely on the staples of their economy to help them through the transition to market economy, Gutmanis said.

“Our main strength is our port facilities and timber and textile industries. But we are also the monopoly producer of many products the Soviet Union needs--for instance, electric train cars,” he said.

Lithuanian officials, too, said they were optimistic that in the long run their people will profit economically from independence.

“Look at Poland and Czechoslovakia--people said it would be hard for them, and it has been,” said Aleksandras Abisala, Lithuania’s minister without portfolio. “But they are still working, they are still living, and they are free.”

A Pronouncer Guide to the Republics

Those hard-to-pronounce Soviet republics:

Kirghizia: kur-GEE-zee-uh

Tadzhikistan: tuh-JIH-kih-stan

Kazakhstan: KAH-zahk-stahn

Byelorussia: byeh-loh-RUHSH-uh

Uzbekistan: ooz-BEK-kih-stan

Azerbaijan: a-zur-BYE-gian

Turkmenistan: turk-MEN-i-stan