Latvia's economy: a corridor that lost its cargo

What Latvia actually sells abroad

Latvia exported goods worth 19.54 billion euros in 2025 and imported goods worth 23.19 billion, a gap of 3.65 billion on a total turnover of 42.73 billion euros. Turnover was 5.4% higher than in 2024 at current prices, and the gap widened over the year, because imports grew by 6.9% while exports grew by 3.7%.

The composition matters more than the totals. In December 2025 wood and articles of wood came to 14.5% of goods exports by value, worth 220.5 million euros in a single month. Electrical machinery and equipment came to 10.4%, mineral fuels and oils to 8.2%, machinery and mechanical appliances to 5.4%, and pharmaceutical products to 4.4%. That is a country selling a raw material, the things sawn and pressed directly out of it, and a thin layer of manufactured goods on top.

The buyers are close. In December 2025 Lithuania took 19.7% of Latvian goods exports and Estonia 12.3%, with Germany at 5.5% and the United Kingdom at 5.3%. European Union countries together took 72%, and the members of the Commonwealth of Independent States 7.3%. Getting to that pattern took three decades of legal work: Latvia joined the World Trade Organization on 1 January 1999, the European Union on 1 May 2004, and adopted the euro on 1 January 2014.

Why the railway runs on Russian gauge

The main network of Latvian Railway is 1,860 km long, of which 1,826 km is 1,520 mm Russian gauge and 251 km is electrified. Those tracks were not laid for the country now standing on them. Under two centuries of Russian imperial rule the ports were expanded and the railways built, and Riga's harbour grew into the outlet for a hinterland that ran a long way inland, a story told in more detail on Latvia: history. Soviet planners then added the manufacturing: a machinery works at Jelgava, electrotechnical plants in Riga, chemical plants at Daugavpils, Valmiera and Olaine, and oil and food processing.

What survived 1991 in usable form was the corridor. Latvia has four principal ports, at Riga, Ventspils, Liepāja and Skulte, and about half the transit cargo passing through them was crude oil and oil products. Ventspils was tied to extraction fields by two pipelines running from Polotsk in Belarus, an arrangement that held until 2022. The transport sector as a whole accounts for around 14% of Latvian GDP.

Who the corridor was built to serve

The clearest measure of whose trade it was came in May 2017. Russian transit made up 65% of all freight handled at the Free Port of Riga at that point, and rail deliveries from Russia to Riga and Ventspils fell from 1.2 million tonnes in March 2017 to 45,700 tonnes in the first half of May. The marketing director of Riga port said volumes of coal, petrol and fertiliser had dropped by 45 to 50% in six weeks, and raised the possibility that the entire Russian transit trade might be gone within one to three years.

None of this was a surprise to the industry. From the early 2000s Russia had been building and expanding its own Baltic ports at Ust-Luga, Primorsk and Vysotsk, with the explicit aim of not paying Latvian, Estonian or Lithuanian ports and railways to handle Russian exports.

How the transit trade came apart

The freight statistics record the collapse plainly. Rail carried 24.1 million tonnes across Latvia in 2020 and 11.1 million tonnes in 2024, a fall of more than half in four years. Road haulage barely moved over the same period, which is the tell: what left was the long-distance bulk traffic, not the domestic economy.

International rail traffic fell 32.8% in 2024 alone, and freight moving by rail to and from Latvian ports fell 35.2% to 6.9 million tonnes.

Why the ports fell at different speeds

Cargo loaded and unloaded at Latvian ports came to 36 million tonnes in 2024, 6.8% below 2023. The averages hide four different situations. Riga handled 18.1 million tonnes, down 3.9%; Ventspils 8.2 million tonnes, down 21%; Liepāja 7 million tonnes, down 2.5%; and the minor ports 2.7 million tonnes, up 20.7%.

The commodity figures explain the spread. Coal loaded at Latvian ports fell 68.4% in 2024 and coal unloaded fell 76.6%, while ores unloaded fell 74.2%. Ventspils, tied to petroleum products and eastern coal, took the worst of it. In the same year timber loaded rose 28.8% and wood chips rose 40.5%.

What the state pays to keep the tracks

The bill for a railway with no cargo now falls on the budget. In both 2025 and 2026 the state allocated almost 90 million euros a year to maintain public railway infrastructure and hold Latvijas dzelzceļš in financial balance, and the Latvian Stevedoring Companies Association has warned that support could pass 110 million euros a year if port infrastructure also has to be funded publicly.

The scale of what was lost had been calculated in advance. In 2014 the auditing firm EY concluded that losing Russian and Belarusian cargo would cost Latvia 1.4 billion euros in turnover, 1.9% of GDP, 1.7% of employment and 2.6% of tax revenue. In that same year, transit from Russia and Belarus alone generated roughly 174 million euros in annual tax revenue.

The gauge is now a second problem. Cargo cannot easily reach Ukraine from Latvia, because the route available runs through Lithuania and Poland, where the gauge changes and every wagon or load has to be handled again.

How wood took over from coal

Forest covers 51.3% of Latvia as of 2025, some 3,311,000 hectares, and roughly half of it is state-owned. That share is not ancient: forest cover reached a recorded minimum of 25.2% in 1929 and has climbed ever since, mostly by growing back over fields and meadows that were farmed before the Second World War. How that happened belongs to Latvia: geography; what it produced belongs here.

Timber processing has become the industrial base of the country. The sector accounted for roughly 20% of Latvian exports as of December 2025, and about 80% of its output is made for export. Wood processing represented 6.5% of GDP in 2021, with forest sector exports of 3.6 billion euros, 22% of all exports that year.

The substitution is visible on the same quaysides. The cargo Latvian ports lost was other people's coal and oil; the cargo they gained was Latvian sawlogs, boards, panels and chips. It is a smaller trade in tonnes and a better one in value added, because the country owns the raw material and does the sawing. It is also exposed in a specific way: exports of wood and articles of wood fell 10.4% year on year in December 2025, and exports of oriented strand board fell 66.3%, which is what a single product cycle can do to a concentrated sector.

Why the boom ended in a slump

Latvia grew quickly through the 2000s on domestic consumption financed by private borrowing. Real estate prices rose 150% between 2004 and 2006. The national account deficit for 2007 was more than 22% of GDP and inflation was running at 10%. The current account was in deficit by 27% in late 2006.

Then it stopped. Latvian GDP fell 18% in the first three months of 2009. Unemployment rose from 5.4% in November 2007 to 22.5% by April 2010. Public money went into the rescue of Parex Bank. Writing on 15 December 2008, the economist Paul Krugman put Latvia alongside the emerging-market crises of the previous decades and called it the new Argentina.

Why the currency peg survived the crash

The choice the government made was to hold the lats at its peg and force the adjustment through wages and public spending instead, a policy known as internal devaluation. By February 2010 the current account had swung into surplus, and a Moody's analyst told markets that the swing was evidence the policy was working. Real GDP grew 5.5% in 2011 on the back of exports and recovering domestic demand, and unemployment came down to around 9.3% by 2014.

The peg was held because it was the road to the euro, and the euro arrived on 1 January 2014 with the public against it. Surveys in late 2013 found 45% in favour and 52% opposed; by January 2014 support had moved to around 53%. GDP at current prices rose from 23.7 billion euros in 2014 to 30.5 billion in 2019, the employment rate from 59.1 to 65%, and unemployment fell from 10.8 to 6.5% over the same five years.

What Latvian factories make today

The manufacturing base turned over completely after independence. By the late 1990s furniture, foodstuffs, beverages and textiles had displaced machine building and metal engineering as the main activities, and chemicals and pharmaceuticals grew in importance through the 2000s. Privatisation is effectively complete: the private sector accounted for 70% of GDP as of 2006, and only a small number of politically sensitive large companies remain in state hands.

Services became the main component of output in the early 21st century, employing about one fifth of the workforce at that point. Riga International Airport handled 7.8 million passengers in 2019, with direct flights to more than 80 destinations in 30 countries, and airBaltic is based there.

What the land still produces

About a third of Latvian agricultural land is used for crops and about a tenth for pasture. Grain, mainly rye, is the principal crop, with wheat, oats, flax and barley also significant, while potatoes, onions, carrots and sugar beet are grown for export. Cereals were 2.6% of goods exports in December 2025 and dairy produce 3.6%.

The mineral endowment is thin: sand, dolomite, limestone, gypsum, clay and peat, with oil discovered on the Kurzeme peninsula. The country depends heavily on imported energy, which is why the fuel it re-exports shows up in the trade statistics on both sides of the ledger.

Who the recovery has not reached

The population is the figure that qualifies every other one. Latvia held just under 2.7 million people in 1990 and 1,845,096 on 1 January 2026, and the population was still falling at 1% a year as of 2025. An economy that loses a percent of its people annually can post growth per head without the country getting larger.

The measured position as of 2025 is a GDP of 48.6 billion United States dollars, 26,312 dollars a head at market prices and 46,137 at purchasing power parity, growth of 2.1%, inflation of 3.7% and unemployment of 6.6%. The Gini coefficient stood at 34 as of 2023. Those are the figures of a mid-sized European economy that has closed a great deal of ground since 1991.

How Latvia is rebuilding its corridor

The strategic answer to a railway pointing the wrong way is a railway pointing another way. Rail Baltica, a standard-gauge line linking Helsinki, Tallinn, Riga, Kaunas and Warsaw, has been under construction for years and is set for completion in 2026. It reverses the geometry of the past century: cargo moving north to south along the Baltic coast on European gauge, where the traffic of the past century moved east to west on Russian gauge.

Energy is the other rebuild. Latvia has three large hydroelectric stations on the Daugava, at Pļaviņas with 908 MW, Riga with 402 MW and Ķegums with 248 MW, and has added wind farms and biogas and biomass plants. In 2022 the government announced planned investment of 1 billion euros in new wind capacity, expected to add 800 MW. The Inčukalns underground gas storage facility, the only one in the Baltic states, sits on geology that suits it unusually well and gives the region a buffer no pipeline can provide.

Security has become an economic line item too. State fuel reserves are held for 92 days, funded by a charge of 81.26 euros per tonne of petroleum products from 1 January 2026, paid by every consumer at the pump. A country that spent a century earning money by letting other people's fuel pass through it now spends money on holding its own.