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Books on Latvia
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Update No: 321 - (28/09/07)
The Hong Kong of the North
There is no doubt that Latvia is benefiting greatly from the falling out between
Estonia and Russia. This concerns events in April when the Estonian Government
agreed to the removal of a Soviet war memorial from central Tallinn to the
outskirts.
Local Russians of whom there are many 'stranded' originally, by the sudden
collapse of the USSR; and Russians in Russia, were outraged on the slur on the
victory in the Great Patriotic War. But of course it was a great patriotic
defeat for the Baltic States, every one of them. The Russians do not want to
know about that. They 'liberated' them from the Nazis and now face base
ingratitude for merely occupying them and giving them the benefits of soviet
life, complete with coddling by the KGB for the following forty-six years.
Putin was obviously simmering with rage at the Estonian impudence. He ordered
economic retaliation forthwith. Much of the transit trade that went via Estonia
is now going via Latvia, which already had the lion's share of transit trade
from Russia via the Baltic States anyway.
Geography markedly favours the Latvians here. Ventspils is an excellent ice-free
natural harbour, indeed so is the whole of the Gulf of Riga, and takes the bulk
of Russia's exports of oil across and away from the Baltic Sea. Other goods and
commodities are being shipped there, in the aftermath of the rift.
Latvia is a lacustrian and riverine bounty, with over 1,000 lakes in the Latgale
Upland alone, in the east of the country, and 12,000 rivers. It is a network of
natural waterways to the wider world, one that will now benefit from global
warming.
The Latvians have sensibly dropped anti-Russian rhetoric, unlike Tallinn. They
can look forward to the reward of becoming the 'Hong Kong of the North'.
But this is only for the long term. In the short run there are a host of
problems to tackle, stemming from massive economic over-heating. One can have
too much of a good thing. The long boom, with GDP expanding at nearly double
digit rates each year has left behind a train of deficits and financial
disarray.
Economy minister resigns
The man in charge of running the economy is clearly a key figure. Latvian
Economy Minister Juris Strods said on September 16th that he was resigning for
family reasons. Strods, a member of the nationalist 'For Fatherland and Freedom'
party, said he would leave his post after his party names a replacement.
"My family needs me more than ever before," Strods told reporters, but
declined to give details. Local media have reported that his grandson is gravely
ill.
Strods, 45, took office in October 2006 as a member of the four-party coalition
government that was formed after parliamentary elections.
Rumours had been circulating for months that Strods' departure was imminent, but
the minister denied any intention to leave his post, which plays a key role in
distributing hundreds of millions of euros in EU development funds to Latvians.
The macro-economy in deficit and turmoil
Strods is the second minister to leave the 19-member cabinet.
His successor will have a hard job on his hands. Latvia's economic record since
independence has been impressive, but the country's massive imbalances now risk
jeopardising these results.
September brought a fresh set of shocking macroeconomic data for Latvia.
Particularly notable was the rise in the current account to around 30% of GDP
and a rise in inflation to 10.1% year/year, - both in August.
Just to recall a few more terrifying macroeconomic data:
Wage growth: 34.5% y/y
Producer prices: 18% y/y
Credit growth to private sector: 47% y/y.
Some local observers and policy-makers in Latvia claim that Latvia is a special
economy and therefore normal economic rules do not apply. Latvia sure is special
-- no country in the world has larger imbalances, but unfortunately gravity also
works in Latvia and the kinds of imbalances being seen there are surely not
sustainable. The risk of a hard landing in the economy and financial distress is
very significant and no investor should ignore these risks.
Until now the Latvian government has failed to take the risks seriously enough
or to implement real measures to curb the massive imbalances in the economy. The
Latvian government in March put forward a "plan to combat inflation".
At that time inflation was around 7% y/y and the current account deficit was
around 20% of GDP. -The new numbers, six months on, show that the plan has
failed to reduce inflation and the current account deficit.
Urgent policy action to reduce the imbalances in the economy, therefore, is
needed.
Latvia and Bulgaria on the brink
The following is no surprise, therefore. After the US financial crisis the
markets of Bulgaria and Latvia are faced with the highest risk rate of all
Eastern European countries, a Standard and Poor's report says.
Among reasons for that are their strong dependence on foreign investments, the
changed crediting criteria and their low productivity. According to analysts,
investors are getting more cautious and direct investments will thin out. Next
come Turkey and Romania.
Russia, Ukraine and the Czech Republic have the lowest risk ratings. 15
countries with so-called developing markets have been analysed. Of them 11 are
in Eastern Europe.
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