External Macroeconomic Shocks and the Estonian economy:

How did the Russian Financial Crisis affect Estonian Unemployment and Foreign Trade?

Raul Eamets, Urmas Varblane, Kaja Sõstra

Abstract: In this empirical paper we examine how the Russian financial crisis affected Estonian unemployment and foreign trade. In our interpretation the Russian crisis caused depression in the Estonian economy, but at the same time it also caused a relatively fast reallocation of trade. Eastward export flows (largely foodstuffs) declined drastically while exports to Finland and Sweden largely increased. Several manufacturing firms went into bankruptcy and foreign investors benefited from relatively low stock prices and bought majorities in many Estonian firms. Although the main FDI inflow was connected with the banking sector, we can say that the banking sector was in crisis because of the poor performance of manufacturing (and other sectors). As a result of FDI, labour efficiency increased and labour demand declined. Employment declined in the sectors that were most affected by the Russian crisis, especially fishing, agriculture, manufacturing and construction. Unemployment remained relatively high even as GDP rose, largely because of increased productivity. From our empirical analysis we draw the conclusion that most of the suffering that resulted from declining demand was experienced by less productive blue-collar workers. We also found that low-educated groups are at an increasing risk of unemployment compared with people with a university education. These findings indirectly support our assumption about technological changes. Less qualified, rather than skilled, labour lost their jobs.

Key words: Russian crisis, transition economies, labour market, foreign trade

JEL code: F2, F40, J63