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Latvia as Another Cyprus?

Politicians and analysts consider whether Latvian banks could become the new destination for money ‘of unclear origin.’

by Martin Ehl 26 March 2013

The day after Europe attempted to grasp the idea that the clients of Cypriot banks will be required to share in the rescue of the island’s economy through special taxes, Latvian Prime Minister Valdis Dombrovskis tweeted, “LV will not join the competition for deposits fleeing from Cyprus. LV treats non-resident business as risky and has tough regulation in place.”

 

Latvia has been recovering from the deepest decline in GDP among EU member states during the crisis of 2009. Indeed, last year the country had the highest GDP growth and paid back – early – its emergency loan from 2009. Now Latvia is heading to the euro zone, and worries have grown among politicians that the country – known, thanks to its large Russian minority and active banks, as the Switzerland of the post-Soviet space – might come to be known as Cyprus No. 2. It could seem to some, after all, that Latvia would be the logical choice for Russian clients looking for a safe haven for their money inside the euro zone. Sketchy estimates of the share of Cyprus’ 68 billion euros ($87.5 million) in bank deposits held by Russians are around 30 to 40 percent.

 

Much of that has been described as having an unclear origin. 

 

One of the causes of the Latvia crisis was the huge expansion of the debt bubble, in which the banking sector also played a role until 2009. The bubble burst, but Latvian bankers have since recovered. Currently foreign clients (non-residents) have about 5.5 billion lats (7.8 billion euros/$10 billion) stored away in Latvia, which is around half of all deposits.

 

During the crisis and the reform period after 2009, banking’s share of the Latvian economy declined and monitoring increased. Unlike in Cyprus, banking supervision has toughened as a result of frequent suspicions of money laundering. Still, some Russian clients of Cypriot banks, in interviews with the media, have said bankers from Latvia have already reached out to them, offering their services. 

 

It should be noted that private Russian money is managed especially by smaller banks with a small number of wealthy clients, which constitute 20 percent of the Latvian banking business. These are banks that aren’t afraid of taking big risks. Large Scandinavian banks dominate the rest of the industry.

 

According to unofficial information from Latvian bankers, several transactions from Cyprus were already rejected in the past few months because of rules against money laundering. 

 

“There are no grounds to expect large inflows of unknown-origin funds entering the Latvian financial sector in the nearest days, as requirements for non-resident customer assessment in Latvia are among the highest ones, …” Kristaps Zakulis, head of the country’s banking regulator, told me in a statement.

 

“Also, the statements that Latvia could become Cyprus No. 2 are not true, because the sizes of the financial sectors in both countries and their significance to the economy are rather different,” Zakulis said. He noted that the finance industry, including banking, makes up 40 percent of Cyprus’ GDP, compared with 3 to 3.5 percent in Latvia.

 

Peteris Strautins, an analyst at the Latvian bank DNB, takes a similar view. “Additional influx is possible, but it’s unlikely to be significant. Large inflows of deposits from Cyprus occurred a couple of years ago when problems there became obvious. There are reasons why a lot of money stayed put in Cyprus despite obvious risks,” he added, alluding to Latvia’s stricter regulations against money laundering.

 

Prime Minister Dombrovskis also found it necessary, in an interview for the Die Welt newspaper this past weekend, to say he doesn’t expect an exodus of money from Cyprus after the introduction of the special tax disconcerted depositors.

 

The share of money from non-residents in Latvia has nevertheless grown recently – by nearly 20 percent in the year ending September 2012, according to a January IMF report. The country should become a member of the euro zone on 1 January 2014, and, although the role of its financial sector has been de-emphasized lately, EU member Latvia remains very attractive for Russian-speaking clients. 

 

In the eyes of both small-scale Russian depositors and the oligarchs, Latvia’s role as a financial bridge to the European Union will undoubtedly increase.

 

“Upon joining the euro, Latvia will be a part of the ‘hard bloc’ of euro members rather than a Mediterranean problem case,” Joakim Helenius, head of the investment bank Trigon Capital from Tallinn, told Bloomberg, predicting a wave of new clients.


So if the Cyprus crisis already has some winners, Latvia could be among them.
Ehl_small_1
Martin Ehl
 is the foreign editor of the Czech daily Hospodarske noviny, where this column originally appeared. He tweets at @MartinCZV4EU. He recently won the prestigious Writing for Central Europe journalism prize, awarded by the APA – Austria Press Agency in cooperation with Bank Austria.
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