The Democrats’ victory in the US congressional midterm elections could reduce long-term economic and security risks for Europe and the Baltic states, although no significant changes in US trade policy are expected. For Latvia and the other Baltic countries, the greatest risk in the coming months is a potential rise in oil and fuel prices triggered by an escalation of the military conflict in Iran, according to Kārlis Purgailis, Chief Economist at Citadele Bank.
The Democrats have secured majorities in both the House of Representatives and the Senate in the US congressional midterm elections. This will limit President Donald Trump’s ability to implement parts of his existing political agenda, but it does not signal a fundamental shift in US policy.
Congress controls the budget and can oversee the administration’s activities, but without a two-thirds majority, it cannot override a presidential veto. As a result, the United States is likely to face political gridlock rather than a dramatic change in its current direction.
“The US election results are moderately positive news for the Baltic states overall, particularly from the perspective of security and long-term economic stability. However, this does not mean that existing risks have disappeared. Trade tariffs will remain in place, while the greatest uncertainty over the next two months will be linked to the geopolitical situation and energy prices. For Latvia’s economy, monitoring oil, diesel and natural gas prices is currently far more important than waiting for changes in US tariff policy,” says Kārlis Purgailis.
One of the most significant risks in the coming months is the potential escalation of the military conflict in Iran.
Although the new Congress will be able to restrict funding for military operations from January, the President will retain considerable freedom to make decisions on military action until the new Congress convenes on the 3rd of January, 2027.
If the conflict escalates, oil and diesel prices could rise, creating additional inflationary pressure in the Baltic states.
Transport, logistics and agricultural businesses would be particularly affected, as their operating costs are closely linked to changes in fuel prices.
“The Baltic states are small, open economies, which means fluctuations in energy prices affect them relatively quickly.
If the conflict in Iran escalates and global oil prices rise, this will be reflected in fuel costs and create additional inflationary pressure. Conversely, if the new Congress succeeds in restricting funding for the military conflict from next year, this risk could diminish,” Purgailis explains.
At the same time, the election results could reduce the risk of US restrictions on diesel exports.
Europe imports significant volumes of diesel and liquefied natural gas from the United States, meaning an export ban could drive up fuel prices across Europe.
Although political pressure to introduce such restrictions may ease, the final decision will remain within the President’s authority.
Despite the Democrats’ victory, no significant changes in US trade policy are expected.
Most European Union goods continue to face tariffs of approximately 10%, while cars, automotive parts and medicines are subject to tariffs of 15%.
Furthermore, there remains a risk that additional tariffs of 25% could be introduced in connection with the European Union’s digital taxes, according to the bank.
The Baltic states’ direct dependence on the US export market is relatively limited.
Approximately 2.5% of Latvia’s goods exports, 3% of Estonia’s and just under 5% of Lithuania’s are destined for the United States.
Moreover,
exports to the US had already declined in the previous year, falling by approximately 5% in Latvia and Lithuania and by almost one-fifth in Estonia.
“The US election results bring neither significant relief nor new direct losses for Baltic exporters, as existing tariffs remain in place. The indirect impact is far more important. Latvian companies also experience the consequences of US trade restrictions through their customers and business partners in Germany and Scandinavia. Therefore, the pressure that US tariffs place on European industry will continue to affect Baltic businesses,” the economist notes.
For the Baltic states, one of the most important potential benefits of the election results could be a more predictable US security policy.
A Democratic majority in Congress is likely to support faster delivery of military assistance to Ukraine and strengthen oversight of any potential decisions to reduce the number of US troops stationed in Europe.
This is particularly important for the Baltic states given the uncertainty surrounding the continuation of US troop rotations in Lithuania and Estonia.
Stronger congressional oversight could increase pressure to restore the US military presence in the region.
“The security situation is also a significant factor in economic development. Greater confidence in US commitments to NATO and support for Ukraine could improve the Baltic states’ security outlook and reduce the geopolitical risks perceived by investors. This is important both for attracting investment and for the region’s long-term economic stability,” Purgailis emphasises.
At the same time, Europe must continue strengthening its own defence capabilities and reducing its dependence on the United States, as the composition of Congress could change again in two years, the economist stresses.