RUSSIA AND ITS REGION IN THE BALTIC REGION ANALYSING THE DYNAMICS OF THE BALTIC STATES’S PRODUCTION LINKAGES WITH RUSSIA

Russia and the Baltic States have a long-standing relationship of industrial specialisation, cooperation, division of labour and trade exchange, all dating back to the Soviet Union. Today, this relationship is facing a tough test amid political and ideological challenges and risks. The last two years have seen a profound and large-scale crisis caused by the global COVID-19 pandemic. Overall, the production linkages between Russia and the Baltic States have adapted in response to the existing problems, remaining resistant to the geopolitical and pandemic shocks. This article examines the production linkages between Russia and the Baltic countries, investigating the export-import flows of consumer and intermediate goods in 2003—2020. A comparative study of the Baltic States’ production linkages with Russia and their main partners in the EU — Germany and Finland — is carried out. It is concluded that, before the introduction of sanctions in 2014 and the world trade crisis of 2015—2016, Russia was a more promising market than Germany and Finland for the Baltic States’ companies trading in intermediate goods.


Introduction
While Russia and the Baltic states have been developing rather tense political relations over the recent years, thanks to several factors, production and trade linkages between numerous economic entities on both sides remain stable and mutually beneficial. First, it was not so long ago (from a historical perspective) that all the countries in question were part of the same whole, the Soviet Union. Second, political concerns and even sanctions are often inferior to the pragmatics of profit, economic expediency and the need to maintain economic growth in con ditions of intensified competition, rising global economic crises and increasing uncertainty of development prospects. Third, Russian companies and their peers from the Baltic states have a perfect operational understanding of their business environment, so they strive to keep mutually beneficial production linkages and remain important bilateral trade partners even though their respective countries may experience political disagreements or discord in mutual relations. This ap plies to ensuring the sustainability of established production relations, supply chains (SC), and global value chains (GVC) where Russia and the Baltic states serve as important links.
This paper aims to analyze the dynamics of production linkages between Rus sia and the Baltic states between 2003 and 2020 by using comparable data on bilat eral trade in intermediate goods and to conduct a comparative study of the afore mentioned linkages between the Baltic states and their most prolific intermediate goods import export partners, Germany and Finland. Thus, in 2020 intermediate goods trade turnover between Estonia and Finland amounted to $ 2,414 million (with Germany as a runnerup with $ 1,283 million); the same indicator between Latvia and Germany reached $ 1,382 million (for Latvia and Poland, $ 944 mil lion); and $ 2,858 million between Lithuania and Germany ($ 2,796 million for Lithuania and Poland) 1 . Adding more countries to the analysis would not affect the results in any significant way, and, given wordcount restrictions, would only detract from a detailed cross country comparison.
The study confirms the hypothesis that since the moment the Baltic states ascended to the EU and up until the introduction of sanctions against Russia, our country presented a much more perspective intermediate goods export market for the Baltic states than Germany or Finland. Sanctions and the world trade slow down of 2015-2016 hampered the expansion of production linkages between Russia and the Baltic states. In 2017 the situation started to recover; and, while not straightforward, the general trend is that of progressive development.

State of Research
Over the last decade, analysis of international production linkages based on the data on intermediate goods trade has become an important feature of academic, applied and statistical research. Such studies are needed to assess the level of in dustrial cooperation; to determine priority areas for boosting competitiveness of industrial sectors, activities or manufacturing initiatives; and to develop measures ensuring sustainable growth of trade and access to new resources, primarily to innovations and investments. It is thus significant that the Organisation of Eco nomic Cooperation and Development (OECD) specifies intermediate goods as a statistical category in both imports and exports sections of its BTDIxE Bilateral Trade in Goods by Industry and Enduse, ISIC Rev. 4 dataset 2 .
At the end of the 1990s, at the peak of globalization, indepth studies on the role of intermediate goods in international trade and economic development picked up. At the time, the global economy saw a rapid increase in transbor der flows of goods and services, and bilateral trade expansion was significantly (roughly 2.1-2.3 times 3 ) more intensive than the growth of the global gross do mestic product (GDP) [1, p. 53]. Thus, the need arose to calculate import export flows not only by gross value, as it had been traditionally done, but also by the value added. One result of this situation was a sharp increase in the volume, quality and depth of economic research on the topics specified above, as well as advances in relevant scientific and methodological approaches.
Since then, several terms and concepts that characterize different aspects of the international division of production and evaluate international trade by value added have been introduced to the economic discourse: international fragmentation of production, global value chains, vertical specialization, trade in valueadded, trade in operations (functions, tasks), etc. (see, for example [2][3][4][5][6][7][8][9][10] and major methodological papers published by international organisations 4 ).
As the Baltic states became more integrated into the global economy after joining the EU, they triggered the emergence of studies into their role and place in global value chains (GVCs) [11][12][13][14]. Some major studies analyze interme diate goods, among other things. Thus, one study uses the example of Latvia to demonstrate how a more active participation of hitech manufacturing in GVCs creates possibilities for faster output growth thanks to intensified use of interme diate imports [15, p. 10].
Another study shows that Latvian companies starting to export intermediate goods or knowledge-intensive services have significantly bigger performance gains than those exporting final goods or transportation services [16, p. 27].
With the COVID19 pandemic, the number of papers dedicated to GVCs sky rocketed 5 , papers analyzing the Baltic states being no exception to this trend (see, for example: [18; 19]). This analysis relies on the data on volumes of interna tional intermediate goods trade and confirms some previously made conclusions; specifically, it shows that neither the Baltic states' accession to the EU nor the sanctions imposed against Russia in 2014 have led to "value chain shrinkage between Russia and the Baltic states" [19, p. 128].

Method
Imports and exports play different roles in economic reproduction. The same value of imported goods can bring about different economic effects depending on the category and type of imports as well as on their place in the reproduction cycle. 3 Author's estimate. 4 5 See, for example, a 2021 WTO paper on the subject listing more than 130 sources [17].
Thus, goods supplied through international trade can go directly to final con sumers. In this case, there is no added value, and the total effect of such imports may not be so significant in terms of economic reproduction.
However, if the imported goods are intermediate, that is, if they are to be fur ther processed by the importing country, they become a part of the reproduction cycle. Such goods have a much greater positive impact on the economy by adding value and creating jobs. At the same time, intermediate imports are also an im portant factor in joining GVCs and introducing new technologies. Valueadded products may: a) go to final consumption in the importing country; b) be exported to third countries as part of the GVCs; and c) return to the country of origin with value added.
International trade of intermediate goods and global value chains are meth odologically similar concepts since import-export flows of intermediate products are formed within global, regional, bi and multilateral supply chains. The joint OECDWTO report on global value chain development states that "GVCs' are basically 'trade in intermediate products" 6 .
However, nobody really trades in value added; goods are traded at the price formed by the market, and the market equilibrium of supply and demand is deter mined by gross value. At the same time, calculating international flows of goods and services in value added remains a useful tool for economic analysis, repro duction cycle research and trade policy development. The emergence of a new methodological approach to evaluating and studying international trade in value added, Trade in Value Added, or TiVA, does not take away from the importance of traditional gross value indicators for economic analysis, policy making and international cooperation.
The term global value chains, or GVCs, also requires some clarification. The word "global" here is a hyperbole, an exaggeration, in other words, a trope. Glo balization, by definition, requires participation of the entire world, so a value chain can only be truly global if it involves, in its production linkage, all the world's countries. Such value chains simply do not exist. Typically, a value chain for a particular product consists of only a few links (i. e., countries). Dozens of publications cite the example of Apple iPod, which boasts six countries partici pating in its production: the USA, China, Japan, the Republic of Korea, Singa pore and Taiwan [20, p. 6]. This is a lot: an average value chain, depending on the sector, of course, will only include two or three countries [21, p. 9, Fig. 4]. Such lowlevel fragmentation of production is optimal for most goods manufactured at the current stage of economic development and globalization. It is also highly unlikely that a value chain with links in 200 countries can be at all efficient. Thus, each value chain is localized, but together they produce a global value added net work. The concept of global value chains should be understood in this context, in our opinion (see [22] for more details). This paper relies on the country's Index of Production Participation (proposed by the author). This indicator represents the share of intermediates in a country's total commodity exports and is calculated by the formula: where I is the index of production participation; P is the volume of intermediate exports, E is the value of exports, and t is years. This indicator is used to analyze GVCs by OECD, European Central Bank (ECB) and other international organisations (see, for example, [23, p. 13]).
When making calculations with the formula (1) specified above, we must also make sure that the initial statistical data is correct; this methodological is sue is of principle importance for the current study. The problem is that official country issued statistics for any two countries will differ in their reporting on bilateral import and export flows 7 . In other words, exports from country A to country B (as reported by country A) will differ from imports to country B from country A (as reported by country B), often by several orders of magnitude 8 . This is particularly true for statistics on trade flows between Russia and the Bal tic states.
To minimize calculation errors, all the data were cross referenced with com parable OECD statistics, including data for Russia. OECD, WIOD, Rosstat and other databases were used in the preparation of this article.
The OECD database (OECD DB), BTDIxE Bilateral Trade in Goods by In dustry and Enduse, ISIC Rev. 4, was used as a source for country level statistics on bilateral imports and exports, including that of intermediate goods.
The World Input Output Database, WIOD 9 , was commissioned by the EC and developed by a consortium of 11 European universities and research centres. It covers 56 industrial sectors, 43 countries (28 EU member states, 15 non EU countries, including Russia, and "the rest of the world", for balance), and a time period from 2000 to 2014. In this study, dynamic series of output, imports and exports of both intermediate and final goods are used for calculations. The WIOD database is quite often used for other economic calculations (see, for example: [25; 26]).
The Russian Statistical Yearbook (by Rosstat) and reviews of Russian foreign trade published by russian trade.com based on the data provided by the Federal Customs Service of Russia were used as the sources of information on Russia's foreign trade flows and their sectoral structure.

Results
Since the accession of the Baltic states to the EU, two stages can be distin guished in the dynamics of their production linkages with Russia: before and after the introduction of sanctions against our country in 2014. The first stage, spanning from 2004 to 2013, is characterized by accelerated growth of trade in intermediate goods compared with Germany and Finland, the main trading part ners of the Baltic countries. The second stage, which started in 2014, showed a slight decline in export-import flows of intermediates in 2014, followed by a se rious drop in 2015-2016, prompted by the synergy of the world trade slowdown and the sanctions. In 2017-2020, production linkages between the Baltic states and Russia were gradually recovering from the turmoil, and there was even a prospect of reaching the level of the early 2010s in some areas (e. g., exports from Lithuania to Russia).

Exports
Joining the EU gave a powerful impetus to the economic development of the Baltic states; it opened new channels of free trade with other members of the Union and boosted trade with Russia. Commodity export was doing particularly well in terms of growth pace (Fig. 1).    Table 1 shows that the growth of exports from the Baltic countries to Germany was significantly slower than that to the Russian Federation: thus, in 2003-2013, the volume of exports in intermediates from Estonia to Germany grew 1.3 times, from Latvia -1.9 times, and from Lithuania -3.2 times. Similar dynamics was characteristic for exports to Finland in the reported period: 1.8fold growth for Estonian exports, 4.1fold for Latvian and 5.6fold for Lithuanian.
Thus, in 2003-2013, the vector of exports in intermediate goods from the Baltic states was mainly directed towards Russia: over the entire period under discussion our country represented a market that was 2 to 3 times more perspec tive for the Baltic states than that of Germany or Finland.
Exceeding growth of production linkages in 2003-2013 significantly in creased the Russian share in the gross commodity exports from the Baltic states, including exports in intermediates (see Table 1). While in 2004 Russia accounted for only 9.5 % of all commodity exports, and for 8.9 % of intermediates exports, in 2013 the Russian share grew to 17.6 % and 14.1 %, respectively.
These trends are largely substantiated by our calculations based on the WIOD DB (Table 2).  Since 2014, trade dynamics between the countries under consideration changed dramatically. Sectoral sanctions introduced against Russia in July 2014 together with countermeasures implemented by our country hampered bilater al trade flows. Although suffering less than imports, overall, the Baltic states' exports to Russia stagnated, with each country showing its own trend: Estonian exports shrunk by 25 %, Latvian -by 6.8 %, while Lithuanian export flows in creased by 10.5 % (Table 3). In 2015, total exports of intermediate goods from the Baltic states to Russia dropped by 41.5 % compared to the preceding year. Sanctions were to blame, as well as a significant global trade decline. As Table 3 shows, export flows to Germany and Finland also dwindled in 2015, shrinking by 17.9 % and 15.9 %, respectively.
The years 2015-2016 brought about a global slowdown in commodities trade, which resulted in a 13.2 % decline in global exports (from $ 19.0 billion in 2014 to $ 16.6 billion) in 2015, and in 15.8 % decline (to $ 16.1 billion) in 2016, as compared to 2014 11 . Experts believe that the drop in prices of oil and other mineral fuels and raw materials was responsible for the crisis (see, for ex ample: [27][28][29][30][31]). However, there were other reasons, such as: slower economic growth; sluggish increase in global investment; a slowdown in Chinese economic development; increased protectionism; shrinking volume of global trade in in termediates within GVCs; decreasing demand for imported goods in developing countries; and so on 12 .
This sharp decrease in global markets became the chief factor that influenced the decline in bilateral trade between the Baltic states and Russia in that period. Further on, in 2017-2019, total exports from the Baltic states to Russia steadily increased, having led to a 37.7 % growth in commodities export against the crisis ridden 2016, which was indicative of recovering production linkage.
The COVID19 pandemic and global recession of 2020 had practically no effect on intermediate exports from the Baltic states to Russia: Estonia and Latvia slightly increased such exports to our country, while Lithuanian indicators went down (Table 3).

Imports
Overall, in terms of intermediate imports, the development of production linkages with Russia displayed similar trends for all Baltic states, although there were some country-specific features. In 2003-2013, it was true for all the coun tries under consideration that their commodities imports from Russia, including incoming trade in intermediates, had a slower growth pace than exports to our country. The gains in intermediate imports were different: for Estonia, the growth was 2fold, for Latvia, 3.2fold, and for Lithuania, 4.8fold (Table 4). On the one hand, higher growth rate demonstrated by Lithuania can be ex plained by substantial deliveries of Russian oil to the only oil refinery in the Baltic states located in the city Mažeikiai. On the other hand, it was stimulated by a spike in the global oil prices: in some years during the period under review oil traded at $ 150 per barrel.
At the peak of trade relations (in 2011-2013), the Baltic states imported about $ 11-13 billion worth of intermediate goods from Russia each year, which roughly translated into a third of all annual intermediate imports into the Baltic states. As in the case of exports, this shows that without sanctions or restrictions of noneconomic type, in a situation of free competition, the Baltic states saw Russia as an important partner in bilateral trade in intermediates.
Sanctions against Russia made the Baltic states seek alternative suppliers of inter mediate goods, and the volumes of such exports from Russia drastically decreased (Table 5).  There were 8-10 times more intermediate goods than final products in the structure of commodity exports from Russia to the Baltic states, which would make this one of the highest proportions in the world. Over the entire analyzed period, the Russian index of production participation in the Baltic states' econom ic reproduction, understood as the share of intermediates in each country's total commodity exports from Russia and calculated by formula (1), steadily exceeded 80 % for Latvia in Lithuania, reaching 90 % for the former and 98 % for the latter in some years (2011)(2012), and rose to 70 % in 2020 for Estonia (Fig. 2).  Figure 2 shows that the sanctions and a significant decline in the volume of Russian imports into the Baltic countries had little impact on its structure and the Russian index of production participation in the Baltic states' economy.

Discussion
What is the reason, then, for the rapid development of trade and, more im portantly, production linkages between Russia and the Baltic states in the first decade after their accession to the EU; a trend especially pronounced in exports as compared to the Baltic states' traditional trade partners, Germany and Finland?
Political and ideological talk aside, our analysis of import-export flows be tween the Baltic states, Russia and the two EU countries, Germany and Finland, does indicate that the main vector of bilateral production linkages of the Baltic states was directed at Russia.
In 2003, the levels of trade relations in terms of exports of each of the Baltic States to Russia, Germany and Finland were, on average, comparable to each other (Table 1). Latvia and Lithuania, for example, supplied fewer intermediate goods to Finland than to Russia, while Estonia supplied more. At the same time, Estonia exported fewer intermediates to Germany than to Russia, and so on. We believe that there were several factors explaining intensified export rela tions between the Baltic states in Russia, especially compared to a more mod est progress of export links development with Germany, Finland and other EU members.
1. More profitable production linkages with the Russian enterprises. Profits being the end goal of any business, buying Russian intermediates turned out to be more cost-efficient for Baltic companies than purchasing similar goods from European -Finnish or German -manufacturers. Relatively low cost of pro duction equipment used in Russia coupled with the comparable quality of the resulting product allowed the Baltic enterprises to increase their profit margin.
2. Unsaturated Russian market was characterized by unsatisfied demand, while access to Western European and Scandinavian markets was restricted for many companies from the Baltic states. These markets have their own competition, suppliers, linkages spanning decades of cooperation, so the vast Russian market was especially attractive to its relatively small neighbours. The Russian demand for imported intermediates, including those coming from the Baltic states, was growing over the entire period under consideration, mainly due to accelerated growth of the national economy and purchasing power of the population and enterprises.
3. Advanced level of Russian manufacturing facilities, comparable with that of the developed countries. With the sharp depreciation of the ruble after the 1998 default and the spike in the global oil prices at the beginning of the 2000s, Russia was able to launch an update of its production base: not only in the energy and extractive sectors but also in the processing industry. According to Rosstat, in 2000-2013, the country's total imports increased 9.3 times (from $ 34 billion to $ 315 billion). Specifically, the import of machinery, equipment and transport grew 14fold (from $ 11 billion to $ 153 billion); the share of non CIS countries in imports rose from 66 % in 2000 to 88 % in 2013; the number of advanced produc tion technologies used increased from 70,000 in 2000 to 192,000 in 2013; finally, of 2,842 production technologies imported by Russia in 2014, 1,910 were used in processing and only 103 in mineral extraction 13 . 4. Spatial linkages and production technologies comparable to those of the Baltic countries. Already at the beginning of the 21 st century, many Russian in dustrial enterprises would purchase modern western technologies and machinery to revamp their manufacturing and processing bases, develop production linkag es, both global and regional ones, and win against Finnish and German competi tors in open markets, including those of the Baltic states.
5. Established production linkages and personal connections going back to the Soviet times; joint regional and trans border value streams; familiar business environment; connected infrastructure; clear and understandable logistics.
In the highly competitive global markets for intermediate goods, Russia re mains an important partner to the Baltic states. The introduction of anti Russian sanctions had a relatively little negative impact on the Baltic Russian trade in intermediates, which was more affected by the global trade slowdown of 2015-2016.
For their internal development as well as for incorporation into the GVCs, the Baltic states need strong links with the Russian industry built through im porting minerals, crude iron ore, semi-finished products and other intermediates. Their proximity to the Russian raw materials and primary processing products, the ability to take advantage of a welldeveloped infrastructure connected with the Russian territory, the similarity of technical and technological approaches, and other factors allow the Baltic states to import Russian intermediates, further process them and export value added, in other words, to participate in the GVCs.
After 2014, despite political and ideological problems, sanctions, restrictions and other negative factors, there was no sign of Russian Baltic business commu nication halt; the countries' trade and production linkages remained unbroken. In 2017-2020, in some spheres, these connections became even stronger.

Conclusion
Historically and technologically, industrial production of the Baltic states has been largely oriented towards Russia. Even after the Baltic states joined the EU, the newly created market conditions and open competition have not managed to reroute export flows of intermediates from the Baltic states into other members of the Union, such as Germany or Finland. Instead, their exports to Russia intensi fied thus reaffirming the trend that had already existed. The global trade trends of 2003-2013 specified in our study created favora ble conditions for the active inclusion of the Baltic states in the production coop eration with Russian companies. Further on, it might allow for the creation of sus tainable regional production linkages, supplemented by cross border production cooperation with possible access to other EU countries. However, this scenario did not play out.
The period was also characterized by enhanced possibilities for the Baltic states to build longterm strategic relations with Russia, including the develop ment of GVCs through increased industrial cooperation and joint manufacturing with the possibility to enter European and Asian markets in the future. This didn't happen either. Political and ideological ambitions trampled over common sense and economic expediency. The tenyear trend, positive for the economic develop ment of both the Baltic states and Russia, was broken by the introduction of sanc tions and the subsequent global trade slowdown of 2015-2016, which further exacerbated the decline in bilateral trade between the Baltic states and Russia.
In 2017-2019, production linkages of the countries in question stabilized, began to gradually recover, and even develop, yet this was not a linear trend, and it did not affect all countries equally over the reported period. Thus, in 2018 and 2019 Lithuania managed to exceed the 2013 volume of intermediate exports to Russia, and Estonia and Latvia were able to supply, respectively, 5.2 % and 7.4 % more intermediate products to Russia in 2020 than in 2019, which translated into increased support to the Baltic states' economies from the Russian industrial buy ers in the time of the global economic crisis.
That trade flows from the Baltic states shifted structurally in favor of Russia during the first decade of the Baltic states' membership in the EU and in more recent years, can be accounted for by the higher profitability of the huge Russian market and by difficulties the Baltic companies have been experiencing when en tering already established, wellbalanced and highly competitive markets of the European Union (at the same time, Russian markets were in their earlier stages of development and had good prospects of growth). Historic connections with Russian enterprises, wellestablished infrastructure, logistics, transport accessi bility and other institutional factors were also of great importance for the Baltic enterprises.
Overall, the results obtained in this study point to the fact that production linkages between companies in the Baltic states and Russia within the frame work of bilateral relations, as well as those built within global and regional value chains are characterized by significant resistance capacity to shocks of geopo litical (sanctions or trade restrictions) or economic (global trade slowdown of 2015-2016; global economic crisis of 2020) nature. Mutually imposed sanc tions and restrictions introduced after 2014 caused a decline in commodity flows but did not lead to a complete wipeout of Russia's industrial ties with the Baltic states or to the destruction of manufacturing infrastructure; nor were they able to stop bilateral business activity. For the Baltic states, Russia remains an important foreign trade partner.
Significant differences in the structures of economies of the Baltic states and Russia, as well as access to resources and the sufficiency of these resources to ensure the uninterrupted economic reproduction translate into intensive trade in intermediate goods between the countries in question and into their mutual in terest to further develop already established production linkages. Economic con siderations and comparative competitive advantages of both the countries them selves and their business entities will continue to have a stronger influence on the formation and preservation of their production ties than geopolitical factors. While this can only continue until a certain line is crossed, our study shows that this point has not been reached by either party.