Russia's invasion of Ukraine will negatively impact Latvia's economic growth through several channels: disruptions to exports to Russia and Belarus, unavailability of imports from those countries, higher global energy and commodity prices, and reduced confidence. GDP growth is projected to decline by around 2% in the first year due to lost trade, though about half the exports could be redirected to other markets. Higher oil and gas prices pose upside risks to inflation projections. Measures are being taken to boost energy independence, climate investments, labor market support, and public investment to help sustain economic growth in the face of these challenges.

1. Impact of Russia's
invasion of Ukraine on
Latvia's economic
growth and fiscal
developments
Santa Bērziņa, Baiba Brusbārde, Daina Paula
Macroeconomic Analysis Division
19 April 2022

2. GDP (y-o-y; %; s.a.) and expenditure side
components (contribution; pp)
GDP (q-o-q; %; s.a.) and expenditure side components
(contribution; pp)
In 2021, despite several pandemic episodes economy overpassed pre-pandemic
level
Source: Central Statistical Bureau of Latvia, Eurostat.
2
-1.5
-7.1
5.6
1.8
0.5
2.0 0.5
-0.2
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
Q1
2020
Q2 Q3 Q4 Q1
2021
Q2 Q3 Q4
Imports of goods and
services
Exports of goods and
services
Changes in inventories
Gross fixed capital
formation
Government
consumption
Private consumption
GDP
2.4
-3.8
4.4
-10
-6
-2
2
6
10
14
2019 2020 2021

3. 3
Russia's aggression
in Ukraine
will affect economy
via four main
channels
Main channels:
• Disruption of exports to the
aggressor countries;
• Unavailability of imports of raw
materials and components;
• Increase in global energy and other
commodity prices;
• Deterioration of confidence.

4. 11.7
5.7
0
2
4
6
8
10
12
14
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
RU BY UA
Source: Latvijas Banka, Central Statistical Bureau of Latvia.
Export of goods and services to RU, UA, BY (% of total)
Share of trade with Russia has fallen markedly since the annexation of Crimea
Main export product groups to RU and BY (% of total; in 2021)
Food and
agricultural
products
28%
Metal products
4%
Mechanisms,
electrical
equip.
26%
Chemical
products
12%
Other goods
30%
4

5. Real GDP (% deviation)
-2.5
-2
-1.5
-1
-0.5
0
1st year 2nd year 3rd year ▪ Disruption of exports to Russian and Belarussia -
4.3% of GDP;
▪ 50% of this export reorientation to other markets
during one year;
▪ GDP losses during 1st year close to 2% of real GDP
level;
▪ With ability to reorient to other markets, in the 3rd
year only 0.5% of real GDP level.
Assumptions and DSGE* model results:
Russia's invasion of Ukraine has a strong and immediate effect on Latvia's economic
growth due to shifting away from economic cooperation with Russia and Belarus
Source: Latvijas Banka calculations.
5
* Bušs, Ginters, Grüning, Patrick (2020). Fiscal DSGE Model for Latvia. Latvijas Banka Working Paper
No. 5/2020.

6. Source: Central Statistical Buerau of Latvia.
Selected goods with high RU and BY share (%; area of the circle – significance of the product group in total Latvian
imports; in 2021)
6
High exposure of some of raw materials’ imports from Russia and Belarus
Natural gas
Iron and steel
Electric energy
Fuel*
Bitumen
Fertilizers
Wood products
Nickel
Fats and oils
-
10
20
30
40
50
60
70
80
90
100
- 5 10 15 20 25
RU
and
BY
share
in
the
imports
of
the
product
group,
%
Share of the product group in total imports from RU and BY, %
*Adjusted to depict reliance of imports from other countries on RU raw
material.

7. Total energy supply: natural gas (TWh)
0
10
20
30
40
50
60
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
EE LV LT
Gas storage:
▪ the Inčukalns underground gas storage facility in Latvia.
Diversification of gas supply:
▪ Liquefied natural gas floating storage and regasification unit
terminal in Klaipeda, Lithuania (from USA, NO, QA).
▪ The construction of another liquefied gas terminals in the Baltic
region is under consideration.
Reduction of gas dependence and improvement of energy
efficiency:
▪ Wood-chips (domestic resource) are an alternative for heat energy
production in the combined power plants.
▪ Optimization of administrative procedures for implementation of
large wind farms.
▪ State support programs for companies and households to improve
energy efficiency (technology, equipment, buildings) and a support
for a transition to sustainable heating modes and renewable
energy (solar panels, wind power, biomass, heat pumps).
▪ In medium term - government agreement to set up joint venture
company to build wind power plants by 2027.
The war in Ukraine raises the issues of self-sufficiency of energy supplies and
energy efficiency
Source: Eurostat.
7

8. 0 10 20 30 40 50
Crude oil
Natural gas**
Copper
Aluminium
Nickel
Platinium
Palladium
Potash
Phosphate
Nitrogen
Rapseed oil
Sunflower oil
Rapseed
Corn
Barley
Wheat
Energy
Metals*
Fertilizers
Oils
Cereals
BY UA RU
70
90
110
130
150
170
190
210
230
250
270
03.01.2022.
10.01.2022.
17.01.2022.
24.01.2022.
31.01.2022.
07.02.2022.
14.02.2022.
21.02.2022.
28.02.2022.
07.03.2022.
14.03.2022.
21.03.2022.
28.03.2022.
04.04.2022.
Natural gas TTF Brent crude Wheat Industrial metals index (Al,Cu,Ni,Zn)
*Mining share in world ** Average import share in EU in last two years
Source: Refinitiv; Bloomberg; Food and Agriculture Organization of the United Nation (FAO), Latvijas Banka calculations.
Export share in global markets (%)
Concerns about market instability and the future supply of energy are driving up
prices
Commodity prices (01.01.2022 = 100)
8

9. Assumptions (CGE* model, index 2021=100)
Source: Latvijas Banka calculations, using CGE model.
The projections are associated with a high degree of uncertainty on energy price
developments
9
Changes in economic indicators, assuming a significant
increase in prices in oil and natural gas in medium term (%)
-5.3
-6.5
-3.6
-3.1
-7
-6
-5
-4
-3
-2
-1
0
GDP
Private
consumption Employment Real wage
100
130
160
190
220
250
2021 2022 2023 2024
Natural gas
Oil
Fiscal support is not taken into account
*Goluzins, E., Beņkovskis, K., Tkačevs, O. (2022, 13. apr.). Working Paper: CGE model with fiscal sector for Latvia.

10. Source: Central Statistical Bureau of Latvia, Latvijas Banka.
Public investment (cash flow; mil. euro)
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
75
80
85
90
95
100
105
110
2019
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
2020
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
2021
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
2022
I
II
III
Economic sentiment index
(monthly changes; RSA)
Economic sentiment index (long
term average = 100)
Economic confidence reacted on the war in Ukraine; public investment as
measure to sustain growth
Economic sentiment indicator (100=long term average)
10
0
500
1,000
1,500
2,000
2,500
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Local governments and other investments
State budget investments
EU funds, incl. RailBaltic
Total

11. Target audience Source Programm Funding
Households Rīga city Co-financing for multi-apartment houses (riga.lv): grant up to 50%
of costs for renewal (max 30 th €), energy efficiency (max 50 th €);
2023
NA
VARAM Support programme to facilitate the use of renewable energy
resources in households (varam.gov.lv) 2022-2023, grant up to
70%
20 MEUR
Altum Energy efficiency of private houses (altum.lv) for one - two
apartment houses; guarantee and grants; ~600 houses
5.5 MEUR
LG EU funds
2014-
2020
The third round for promoting energy efficiency and the use of
local renewable energy sources (em.gov.lv) 2022-2023
63.6 MEUR
(+103.2 MEUR
co-financing)
NA 2021-
2027
Ongoing consultions on the use of JTF 192 MEUR
Climate investments: additional 100 million EUR in the economy (per annum)
Additional State aid measures to achieve climate objectives
Source: Ministry of Finance; Latvijas Banka.
11

12. Unemployment rate, furlough support, wage subsidies
(% of economically active)
Average wage (y-o-y, %)
0
2
4
6
8
10
12
14
16
18
VII
VIII
IX
X
XI
XII
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I
II
III
2021
2022F
2023F
2024F
2020 2021 2022 0
Unemployment rate Furlough support
Wage subsidies Registered unemployment
Unemployment expected to increase due to the war;
wages increased strongly both in private and public sector
Source: Central Statistical Bureau of Latvia, State Revenue Service, State Employment Agency, Latvijas Banka forecast.
12
0
2
4
6
8
10
12
14
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2021
2022F
2023F
2024F
2019 2020 2021 0
Total
Private sector
Public sector

13. Share of entrepreneurs indicating shortage of labour
force as factor limiting production (sa; %)
Employment expectations (100- long term average),
unemployment expectations in next 12 months (balance,
% RHS)
There is still strong demand for employees, first reaction to Russia-Ukraine war is mild as
trade is still partially open and material stocks allowed to continue production
Source: European Commission.
13
0
5
10
15
20
25
30
35
Q1
2019
Q2 Q3 Q4 Q1
2020
Q2 Q3 Q4 Q1
2021
Q2 Q3 Q4 Q1
2022
Construction Manufacturing Services
0
20
40
60
80
100
120
0
10
20
30
40
50
60
70
I
2019
V IX I
2020
V IX I
2021
V IX I
2022
Unemployment expectations Employment expectations

14. Inflation (%; y-o-y) and contributions to inflation by
components (pp)
Inflation distribution by number of products (%)
Prices increase in almost all product groups;
the increase accelerates
Source: Eurostat, Latvijas Banka calculations.
14
-25
-15
-5
5
15
25
35
45
I
2018
IV VII X I
2019
IV VII X I
2020
IV VII X I
2021
IV VII X I
2022
90% product 75% product
50% product HICP
fuel
-2
0
2
4
6
8
10
12
I
2019
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I
2020
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I
2021
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
I
2022
II
III
2021
2022F
2023F
2024F
Services Food NEIG Energy Inflation

15. Transmission of global food prices to prices
in local economy
▪ Permanent 10% increase in global food prices
leads to 0.9% increase in Latvian HICP in the
medium term
▪ Price pass-through is different in product
groups (e.g., milk – faster, oils – slower)
▪ 2/3 of increase in 1st year
Transmission of global energy prices to
prices in local economy
Impact of global food price and oil price increase on other inflation components
Source: Bessonovs A., Krasanopjorovs O. Short-Term Inflation Projections Model and Its Assessment in Latvia, Latvijas Banka working paper 1/2020.
15
Global food prices
Prices of unprocessed
and processed food
Prices of catering
services
Global oil prices
Fuel prices
Transportation costs
Costs of package
holidays
Gas prices
Price of heat
energy
▪ Permanent 10% increase in global oil prices
leads to 0.6% increase in Latvian HICP in the
medium term
▪ Price pass-through is different in product
groups (the fastest in car fuel prices – 4-6
weeks)
*electricity price increase currently added by expert judgement
Costs of air
transport
Food prices
*Electricity
prices

16. Source: Bloomberg, ECB scenario assumptions about oil ang gas, Latvijas Banka calculations.
Oil price scenarios (yearly average, USD/bbl)
Inflation forecast is to large extent dependent on oil and natural gas price scenarios
Natural gas price scenarios (yearly average, EUR/MWh)
0
20
40
60
80
100
120
140
2021 2022 2023 2024
0
50
100
150
200
250
2021 2022 2023 2024
Baseline
Adverse scenario
Severe scenario
16

17. Source: Bloomberg, ECB scenario assumptions about oil ang gas, Latvijas Banka calculations.
Inflation base scenario (growth rates, %, contributions, pp)
The upside risks for the recently published inflation forecast dominate
Inflation under different scenarios (%, y-o-y)
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2022 2023 2024
Energy Other Total inflation
9.5
3.7
2.1
10.8
4.7
1.9
13.1
6.4
1.6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2022 2023 2024
Baseline Adverese scenario
Severe scenario
17

18. 4.4
4.2
4.0
3.3
4.4
1.8
3.2
4.1
0
1
2
3
4
5
2021 2022 F 2023 F 2024 F
dec.21 marts.22
GDP forecast (y/y; %; in real terms; sa)
Source: Central Statistical Bureau of Latvia.
Upside risks:
• In the manufacturing sector, an increase in demand from
the European countries (to replace the production of RU,
BY and UA);
• In the short–run, an increase in demand for rental
apartments and consumption (with the inflows of
refugees from Ukraine);
• In the long-run, an increase in foreign demand, including
restoration of infrastructure in Ukraine.
Downside risks:
• Difficulties with the alternative supplies of imported
materials;
• A neighbouring country of RU might seem less safe for
new investment;
• Increase in costs may lead to postponement of projects;
• Escalation of geopolitical crisis may amplify the
impact of the mentioned risks and hinder faster
economic rebound.
The downside risks for the recently published GDP growth outlook dominate
18

19. GDP (y-o-y; %; s.a.) and expenditure side components (contribution; pp)
2.4
-3.8
4.4
1.8
3.2
4.1
-10
-6
-2
2
6
10
14
2019 2020 2021 2022 2023 2024
Imports of goods and services
Exports of goods and services
Changes in inventories
Gross fixed capital formation
Government consumption
Private consumption
GDP
The growth of both domestic and external demand will promote growth in 2023-
2024
Source: Central Statistical Bureau of Latvia, Eurostat, Latvijas Banka forecasts.
19

20. -15
-10
-5
0
5
10
15
2018 2019 2020 2021 2022 F 2023 F 2024 F
Goods Services Primary income Secondary income Current account
Current account balance and components (% of GDP)
Slower merchandise imports growth improves current account in 2022
Source: Latvijas Banka.
20

21. Card-based payment transactions sent (millions of EUR)
latest data – week starting on 28th of March
60
70
80
90
100
110
120
130
140
30.12.2019
27.01.2020
24.02.2020
23.03.2020
20.04.2020
18.05.2020
15.06.2020
13.07.2020
10.08.2020
07.09.2020
05.10.2020
02.11.2020
30.11.2020
28.12.2020
25.01.2021
22.02.2021
22.03.2021
19.04.2021
17.05.2021
14.06.2021
12.07.2021
09.08.2021
06.09.2021
04.10.2021
01.11.2021
29.11.2021
27.12.2021
24.01.2022
21.02.2022
21.03.2022
Total except cash withdrawals Total except cash withdrawals (4-week average)
Economic activity remains at relatively high level
Source: Latvijas Banka.
21

22. Additional fiscal policy assumptions for 2022-2024 forecasts March 2022 (since December 2021):
Russian aggression in Ukraine will also influence fiscal policy
22
Covid-19 & Economic
recovery plan
(=)
• Sick-leave benefits (-)
• Other expenses related to 3rd wave
of Covid-19 (+)
• EU funds (+), but negative for the
economy
Energy price crisis
(-)
• New compensatory measures
related to the high energy prices
• Climate investments
War in Ukraine
(-)
• Measures related to helping
Ukrainian refugees
• Defence & Safety expenditures
• Impact of sanctions
• Russian pension receivers
(+) improving balance
(-) deteriorating balance
(=) balance neutral
at least +2.4% of GDP

23. Forecasts of main macroeconomic indicators
23
2021 dec forecasts 2022 mar forecasts
2022 2023 2024 2022 2023 2024
Real GDP
(y/y; %; sa)
4.2 4.0 3.3 1.8 3.2 4.1
Inflation (HICP)
(y/y;%)
6.1 2.9 2.1 9.5 3.7 2.1
Core inflation (HICP), excl. food and
energy cenas (y/y; %)
3.1 2.6 2.3 4.1 3.5 3.7
Unemployment rate (% of econ. active) 7.5 6.8 6.6 8.1 7.1 6.0
Average wage (y/y; %) 7.5 6.1 5.9 9.7 6.4 5.7
Budget balance (% of GDP) -4.1 -1.3 -0.4 -5.9 -1.8 -1.1
Government debt (% Of GDP) 49.7 47.1 44.6 48.3 45.8 43.1

24. Mūsu valsts, mūsu banka