BALTIC BLOG: Latvia at a crossroads

By bne IntelliNews September 8, 2010

Mike Collier in Riga -

Occupying an important location "where east meets west" is one of the commonest - and cheesiest - claims in Central and Eastern Europe. Listen to marketing departments and development corporations and you could think the intersection between occident and orient lies anywhere from Augsburg to Almaty.

Latvia's claim to such a vital strategic position has usually been one of the shakiest. But a general election on October 2 seems to bear it out, with the country facing a clear choice between the enthusiastic embrace of Russia to the east or the cooler affections of Nato and the EU to the west. "These elections are the most important since independence. The question is where will we turn?" MEP and former foreign minister and EU commissioner Sandra Kalniete tells bne.

Having been sent to Siberia with her parents, it's hardly surprising that Kalniete is in favour of maintaining and strengthening Latvia's western orientation. That means extending the 18-month tenure of Prime Minister Valdis Dombrovskis, who comes from the same Vienotiba (Unity) political bloc as herself.

But Kalniete admits that the elections are finely balanced. "Political consensus is very fragile. There is one-third that is pro-Russian, one-third that is for Unity, and one-third that is undecided and open to populism. If we turn our strategic choice to the east, the influence of Russia will increase to a quite dangerous level," she warns.

Her general prognosis concerning the three-way split in popular opinion is spot on: though her opponents in the Saskanas Centrs (Harmony Centre) party would disagree about Russian influence necessarily being a bad thing.

Around one-third of Latvia's population is ethnic Russian and can be relied upon to back the Harmony Centre (which has already inked a cooperation agreement with Vladimir Putin's United Russia party) with a smaller number supporting the even more pro-Kremlin For Human Rights In a United Latvia party (PCTVL).

The Harmony Centre's prime ministerial candidate, Janis Urbanovics, is gaffe-prone and temperamental, recently causing a storm by warning of a "Bishkek" scenario if his party did not take power. He quickly back-pedalled, saying that he was not threatening bloodshed like that in the Kyrgyz capital, and has been quieter since.

Polls suggest Harmony Centre will be the biggest party in the new parliament, but unless the margin of victory is large, that won't guarantee President Valdis Zatlers asking them to form a government. Mild-mannered Zatlers - himself up for re-election next year - could find himself faced with Hobson's choice: ask Harmony Centre to form a government and be accused of destroying Latvia's sovereignty, or ask a party with fewer seats to form a government and be accused of thwarting democracy.

Lack of harmony

If the Harmony Centre does make it into government after 20 years of trying, the consequences would be enormous. Their promises to make Russian an official state language and concentrate on eastward rather than westward trade links might see huge sums of Russian investment - and jobs - flow into the country in the short term, offsetting some of the outrage such a move would be greeted with by nationalists.

The Kremlin won't be slow to exploit the potential of a virtual Russian proxy state within the EU. A wedge would be driven between Estonia and Lithuania's opposition to the Nord Stream gas pipeline (particularly if rumours of a Latvian link materialised) and indeed all efforts at pan-Baltic cooperation, such as the proposed Ignalina nuclear power plant, which is designed to wean the region of Russian energy, would end. Latvia's status as a Nato member would also be in question and the country's €7.5bn bailout deal from the International Monetary Fund and EU placed in serious jeopardy.

Yet ultimately the "golden ticket" to forming a government will be held by one of the smaller parties. The most likely kingmaker is the Greens and Farmers' Union (ZZS), which despite its eco-friendly name is to a large extent the vehicle of Aivars Lembergs - oligarch, newspaper magnate, perpetual mayor of the port of Ventspils and defendant in a never-ending trial on charges of fraud, embezzlement and money laundering. He is the ZZS candidate for prime minister even though he isn't bothering to stand in the election.

Polls suggest Lembergs, who resembles a sort of pocket-sized version of Italian PM Silvio Berlusconi, is the most popular prime ministerial candidate, probably due to the fact that his Ventspils fiefdom is a very clean and family-friendly place thanks to all its oil transit cash. Many Latvians hope he can do the same for the whole country.

The pre-election period has been enlivened by the appearance of a website publishing what appears to be Lembergs' bank statements, revealing an extravagant lifestyle including a tailoring bill for £83,000 from a single visit to gents' outfitters Rossini of London, W1. The bill is particularly remarkable given Lembergs' very modest inside leg measurement.

The rest of Latvia's once-mighty oligarchs can be found huddled together for company in a "new" political bloc called For The Good Of Latvia! (PLL), headed by two more of the country's richest men: motormouth former transport minister Ainars "The Bulldozer" Slesers and two-time PM Andris Skele. Casting itself as business-friendly, PLL is essentially an experiment in rebranding and mass hypnosis. Its aim is to make people forget that these are the same people responsible for Latvia's cataclysmic crash from double-digit growth to an 18% GDP collapse in 2009. To do so, all manner of populist goodies are being offered including cash payments and VAT exemptions for having kids.

Formed by the unholy union of Slesers' LPP/LC and Skele's People's Party, PLL is calling for the "renegotiation" of Latvia's bailout loan, painting the country as a victim of economic occupation despite the fact that the 2008 deal was signed by then-finance minster Atis Slakteris (People's Party) and Prime Minister Ivars Godmanis (LPP/LC).

Remarkably, their attempt to depict themselves as the solution rather than the problem might just work. After jumping ship with the Latvian state on the verge of bankruptcy and leaving Dombrovskis to clear up the mess by introducing brutal but much-needed austerity measures, PLL is having some success depicting him as the cause of all the pain. If the electorate is daft enough to be shanghaied, expect to see an alliance formed with the Harmony Centre (they already collaborate effectively on Riga city council) and the return of state-sanctioned self-enrichment.

Whatever the outcome of the election, investors should find something to interest them. With the need to source extra money to service the international loan (or replace it), a series of privatisations is a near-certainty. The government is already performing an audit of state assets with the most tempting propositions likely to include the telecom (Lattelecom, Latvian Post), forestry (Latvian State Forests) and transport (airBaltic) sectors, as well as state-owned Citadele bank which is already on the market.

With the country preparing to choose between east and west, folklore-rich Latvians would be well advised to remember that a crossroads is traditionally where you sell your soul to the devil. Better make sure you get a decent price for it.

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