(FORTUNE Magazine) – FROM THE HOT WAR of the 1940s through all the Cold War years, the three Baltic states have remained almost a fixation in certain quarters of what we used to call the free world. In Western Europe and the U.S., where pockets of Estonian, Latvian, and Lithuanian immigrants dot many big cities, the deal between Stalin and Hitler that annexed the three tiny countries to the Soviet Union has never been forgotten -- or forgiven. Now they are suddenly free again. Now what? Can they regain anything close to the prosperity they enjoyed in their brief years of independence between the world wars? With a total population of less than eight million, the countries are mere blips on the map of Europe. Yet they occupy lush forest land studded with warm-water ports on the Baltic Sea that has been fought over for centuries by Swedes, Teutonic Knights, and Russian hordes. Like former Soviet satellites in Eastern Europe, the Baltics are hoping foreign investors will come to their rescue. Technocrats speak confidently of creating a ''corridor'' or ''bridge'' between Western investors and a Russia rich in natural resources. Under this scenario, foreigners would set up Baltic factories that would transform cheap raw materials from Russia into manufactured goods for export back to Russia and to the rest of Europe. The advantage would be access to the Baltics' highly motivated, well-trained -- and low-paid -- work force. Productivity is nearly 10% higher than in neighboring Russia. This could be a successful formula if products made in the Baltics were good enough to be sold for hard currency in Western Europe. That's a fairly large uncertainty. The Baltic states have always maintained a leading trade position in the Soviet Union, where their clothing, furniture, and electronics were better than anything the Russians could produce. But, isolated as they have been from the West for more than 50 years, much of what they make is not competitive in today's European market -- even at drastically reduced prices. What to look at in the Baltic states:

-- ESTONIA. Of the three countries, Estonia is the smallest, with 1.6 million people (Lithuania has 3.8 million; Latvia, 2.7 million). Yet it shows the most promise. Like East Germans who saw what they were missing on West German television, Estonians have for a generation watched Finnish TV and hungered for a better life. The dominant Lutheran church has instilled a strong Protestant work ethic. Says one entrepreneur: ''Some of us still know what a market is.'' Estonia also leads in economic reform. The government has freed prices on most goods and held the top business tax rate to 35%. Recent foreign investment totals some $80 million, mostly from Finland, Sweden, the U.S., and Germany. -- LITHUANIA. Vytautas Landsbergis, chairman of parliament, wants his country to become the Hong Kong of the West, a link between Russia and Europe. In some ways his vision has already come true. Every day, in a parking lot at an abandoned strip mine just outside the capital of Vilnius, some 3,000 people trade goods in one of Eastern Europe's biggest, most freewheeling outdoor markets. In more conventional businesses, 222 joint ventures have been registered in Lithuania, most in the past nine months. Foreign partners are typically from Poland, the U.S., and Germany. In one deal Saulius Anuzis, an ethnic Lithuanian who lives in Michigan, teamed up with the country's largest state- owned paper producer. The new Lithuanian company, called Grigishkes, did a brisk business last year selling low-cost hardboard for residential construction in Finland, Sweden, Denmark, and Germany. Its toilet paper, though, has been less successful as an export item. The rough, brown rolls sell well only in Russia, where back issues of Pravda represent their chief competition. Among Lithuania's minuses: Landsbergis has yet to cut business taxes, which can be as high as 65%. -- LATVIA. Tourism could be to Latvia what crude oil is to Saudi Arabia. With 310 miles of sandy beaches on the Baltic Sea opposite Sweden, Latvia has been a favorite vacation spot for Russians, from the Czars to Boris Yeltsin. (Estonia's rocky coast is more than twice as long, but it has less desirable beaches. Lithuania has only 25 miles of seacoast.) The Russian President takes his annual holiday in Jurmala, an old seaside resort. If Latvia can lure Finns and Germans as well as Russians, it can earn lots of hard currency. To do so, though, it needs foreign investment. The trouble is that Jurmala, along with similar Latvian resort towns, has a special hangover from the Soviet era. Since the independence movement began two years ago, more than 1,500 families have come forward to claim that their homes were nationalized by Communists after 1940 and should now be returned. The uncertainty caused by such claims has discouraged investors. Yes, problems abound, but Balts are fond of pointing to the example of neighboring Finland. With five million people, Finland is bigger than any of the Baltic states individually but smaller than the three together. Like the Baltics, Finland gained independence from Russia in the chaos following World War I. But the Finns managed to stay independent. While the Baltic states are among Europe's poorest, Finland has grown to be one of the most prosperous, with a per capita GDP of $28,100 per year, higher than that of the U.S. or Japan. The trick will be finding the right set of policies. In addition to lowering taxes and developing a new system of property and commercial law, the Baltics will have to preserve their ties with Russia and whatever form of Soviet Union emerges. All three states want to abandon the ruble for their own currencies, which will make it harder to trade with Russia. One of Finland's secrets has been its good trade relations with Moscow. At the moment, emotions are running high. The talk in the Baltics is of separatism, not integration. Even so, there are plenty of opportunities for Western investors with deep pockets and ambitious dreams. If you run a manufacturing or service company and have visions of a comfortable niche in the emerging Soviet market, think hard about the prospect of bargaining with iron-butted Russians. You might prefer allies with a proven track record and lots of experience in dealing with old Ivan. You might think about investing in the Baltic states. They would be happy to have you.

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