Arnolds Antanavičs: Is Latvia at the Beginning of a New Growth Cycle?

When discussing the economies of the Baltic States, Latvia has long been regarded as the laggard, trailing behind both of its neighboring countries in terms of development. Initially, Estonia took the lead, followed by Lithuania’s remarkable breakthrough. In recent years, Lithuania has experienced the fastest economic growth, reflected in rising wages and increasing real estate prices.

However, economic cycles do not last forever. Just a few years ago, Latvia was in a very challenging position. Compared to its neighbors, its economy was significantly weaker, people had negative expectations about the future, and caution and pessimism prevailed.

Today, in my opinion, Latvia has the greatest growth potential among the Baltic States, as evidenced by several economic indicators and trends in the real estate sector.

Why Did Latvia Fall Behind?

One of the main reasons, in my opinion, is the amount of money circulating in the economy. Economists use the M1 indicator, which can be simply described as the amount of money actively circulating in the economy - money that is spent, invested, and generates new economic activity.

In Lithuania, this indicator exceeds EUR 45 billion, while in Latvia it amounts to just over EUR 20 billion.

Latvia fell behind because there was less money circulating in its economy - more precisely, considerably less than in its neighboring countries. Before the COVID-19 pandemic, Latvia and Lithuania were in relatively similar positions. However, following Russia’s invasion of Ukraine, the flow of capital in the two economies began to move in different directions.

Latvia’s economy was much more closely connected to Russia and more dependent on Russian capital. Once sanctions came into force, Latvia rapidly severed its economic ties with Russia, and Russian capital left the country. Part of the capital flowed out, economic links were broken, and as a result Latvia’s economy grew much more slowly than Lithuania’s for several years.

European funding and foreign investment were only able to partially offset this substantial capital outflow. Consequently, the economy as a whole - including the real estate sector - experienced a period of stagnation.

Lithuania Attracted Belarusians and Ukrainians

Lithuania’s dependence on Russian capital was considerably lower. Moreover, following the political crisis in Belarus and Russia’s war against Ukraine, numerous Belarusian and Ukrainian companies relocated to Lithuania. Businesses moved together with their employees and their families.

One of the most notable examples is the globally recognized video game developer Wargaming, which completely closed its historic office in Minsk and rapidly expanded its operations in Vilnius. Along with the company, hundreds of highly qualified professionals and their families relocated to Lithuania. They required offices, housing, schools, and various services.

Wargaming was not the only example. Other Belarusian technology companies followed a similar path. Lithuania gained new capital, highly paid professionals, and significant additional demand in the real estate market.

But Economic Cycles Change

Today, Vilnius has become one of the most expensive cities in the Baltic region. In many segments of the new residential housing market, property prices are nearly twice as high as in Riga. Wages and business costs have also increased substantially.

Comparing real estate prices in Vilnius and Riga reveals significant differences. The average price per square meter in Vilnius is considerably higher and, in some cases, almost double that of Riga. In premium developments, prices reach as much as EUR 12,000 - 13,000 per square meter, while larger apartments can cost up to EUR 3 - 4 million.

From a Latvian perspective, such prices seem almost unbelievable. Last year, the largest apartment transaction in Riga amounted to EUR 1.6 million, while in Vilnius even the tenth-largest transaction exceeded EUR 2 million. The difference is substantial.

Lithuania’s rising cost of living is also beginning to influence investors' decisions. For example, the international automotive company Continental has announced the closure of its manufacturing facility in the Kaunas Free Economic Zone. One of the key reasons cited is Lithuania’s increasing cost of living.

Rapidly rising wages, housing prices, and overall living costs are gradually reducing the country's competitiveness. As a result, more and more investors are looking for alternatives, and in this respect Latvia currently appears significantly more attractive than it did just a few years ago.

Latvia’s Opportunity

While Lithuania is finding it increasingly difficult to attract investors, Latvia last year succeeded in attracting more than EUR 1 billion in foreign direct investment for the first time in its history.

If Lithuania is currently at the peak of its development cycle, then, in my opinion, Latvia is only at the very beginning of a new growth cycle, with considerably stronger growth prospects.

Therefore, I expect Latvia to set new records in the coming years, both in attracting foreign investment and in the development of its real estate sector.

Housing in Riga remains significantly more affordable than in Vilnius. Office and industrial premises are less expensive for businesses, while employees find it easier to buy or rent homes. These are important factors when making investment decisions.

We can already see this in practice. On the PROFITUS platform, the majority of investors financing projects in Latvia come from Lithuania. In fact, it can be said that Lithuanian capital is already helping finance Latvia’s real estate development.

If Latvia continues to experience positive trends in attracting foreign investment, borrowing costs decline, and wage growth remains strong, the real estate sector could become one of the main drivers of the country’s economic growth.

Latvia spent many years in the shadow of the Baltic economies. However, economic history often shows that countries which have lagged behind for a prolonged period are the ones that experience the strongest subsequent wave of growth. In my opinion, Latvia now has every opportunity to become the fastest-growing economy in the Baltic region.

At the same time, domestic economic indicators are also improving. Despite unfavorable demographic trends, employment remains stable, wages continue to increase, and people are becoming more confident about the future.

This is also reflected in lending data. During the first five months of this year, the volume of newly issued housing loans increased by 14.3%, while in 2025 the volume of new housing loans grew by almost 40%.

This indicates that people are willing to make long-term decisions - to purchase homes and invest. Developers are once again launching new projects, and optimism is returning to the market.

In my opinion, Latvia is currently at the beginning of its growth cycle, while Lithuania has already reached a more mature stage of development in many areas. This does not mean that Lithuania’s growth will come to an end, but it does suggest that Latvia currently has greater potential to grow at a faster pace.

Article link: https://www.delfi.lv/898102/versijas/120126409/arnolds-antanavics-vai-latvija-atrodas-jauna-izaugsmes-cikla-sakuma

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