INTERVIEW: Latvia's PM talks about life after loans

By bne IntelliNews January 16, 2012

Mike Collier in Riga -

It would be enough to make most politicians lose their temper. Ever since Latvia brought to an end on December 22 its three-year, €7.5bn bailout loan from the International Monetary Fund that helped avert bankruptcy, Prime Minister Valdis Dombrovskis has been trying to get across how optimistic he is about the country's prospects. But all the foreign media want to talk about is a referendum that could make Russian the second official state language alongside Latvian.

With similar IMF bailout programmes in Hungary and Ukraine in turmoil, the 40-year-old Latvian leader was hoping to show the markets how disciplined and trustworthy Latvia is in comparison and maybe win the odd ratings upgrade. But the February 18 referendum that - in theory at least - could make Russian the second official state language alongside Latvian is hogging the headlines. "I think it is a waste of money," Dombrovskis tells bne. "It's very unfortunate that it's happening, but since it is happening, we are calling on all citizens to go and vote against this idea. We don't feel it will facilitate the cohesion of society. Latvian language is the basis of integration while respecting minority rights and cultural diversity. We are not keen on this idea of challenging the constitutional basis of the state."

For all the coverage the referendum is getting, it is ultimately a pointless exercise. More than half the total electorate is required to back what would be a major constitutional change, but with only a third of Latvia's population counting Russian as their mother tongue and the whole thing serving to provoke rather than mollify Latvian nationalist sentiment, there is no chance of Cyrillic script being seen on official documents anytime soon.

Nevertheless, the language issue does allow the leaders of the pro-Russian campaign - self-styled "National Bolshevik" Vladimir Linderman and Jevgenijs Osipovs, a scowling ultra-nationalist with a penchant for black polyester uniforms - to fill column inches with the woes of Latvia's poor, oppressed Russians rather than the fact that Latvia does seem to have achieved what many said was impossible - a return to growth (of around 5% in 2011 and with 2.5% predicted for 2012) via a policy that Dombrovskis describes as an "internal devaluation".

"What is fundamentally important is to continue with this strong fiscal position and keep using it to reduce the deficit, because that will determine the refinancing rates on our international loan. This year we have to repay some part of the loan, but the bulk of repayments will be in 2014 and 2015," Dombrovskis says, noting that in the end only €4.4bn of the money supplied by the IMF and EU was actually used.

"The [growth] figures for 2012 will be more modest for two basic reasons: first, the Eurozone crisis will affect our exports. The other reason is that we are already above pre-crisis levels and our industrial production is reaching its capacity levels. It's easy to grow very quickly when you're coming out of deep recession with under-utilised capacity, but once you reach the potential level you can't expect 30% growth to continue each year," Dombrovskis says.

"It's important that we put a new emphasis on increasing competitiveness, attracting new investment and using EU funds to improve and expand productivity and capacity so we can grow in a sustainable way," he adds.

Bank bumps

Not that reaching the end of the loan was without a few bumps along the way. Towards the end of 2011, the collapse of Latvijas Krajbanka - a subsidiary of Lithuania's Snoras Bank owned by Russian tycoon Vladimir Antonov - and a rumour-led run on Swedbank deposits a few weeks later showed that public faith in Latvia's crowded financial sector remains fragile, whatever the balance sheets say. "The lesson we need to draw there is that we need to strengthen bank supervision," Dombsovskis admits. "When we talk about investment it is important to consider the quality of investment we are attracting. It is important that the [banking regulator] Financial and Capital Markets Commission scrutinises potential investors."

"We have the big retail banks and then boutique banks which are less of a concern in that they do not have such a broad deposit base. We are following the financial stability and capitalisation of the banking system and our banks already meet the increased capital adequacy requirements with Eurozone banks need to meet by mid-year."

Beneath his mild-mannered exterior, there is just a hint of annoyance that other EU members have been so reluctant to take the same bitter-tasting, but ultimately beneficial, medicine as the Baltic states. "Financial stability is a precondition for economic growth," he argues. "As soon as we restored financial stability we returned to economic growth, because it doesn't just mean the possibility to refinance state debt but also means the availability of credit to citizens and businesses, and investment flows both to and from the country. Without financial stability you cannot return to economic growth; like it or not, that's what countries like Greece and Portugal will have to implement - they will have to restore financial stability one way or another. There is no easy solution to postpone austerity until things get better because things will not get better if you don't deal with the problem."

"You can stimulate your way out of recession only if the markets are willing to finance it - as is the case in the US or Japan. In Latvia, Greece, Portugal and other countries it's not the case. The budget deficit in the US or UK is not much smaller than in Greece, yet somehow they are easily refinanced and Greece is in big trouble."


The coming months should see progress made on Latvia's participation in Lithuania's much-delayed Visaginas nuclear power plant , notwithstanding Poland's decision to forget the whole thing. Latvia is committed to a share of "15 to 20%" of the project, Dombrovskis says, and is also hoping that the European Commission will decide that Riga is the best location to build an liquefied natural gas (LNG) terminal to serve all three Baltic states when it takes into account its "obvious advantages."

In March, Dombrovskis will mark three years in power at the head of three different coalitions. That's good going by Latvian standards, and he says he still has plenty of energy and ambition to continue. But there's a danger that as the economic situation improves, the public may decide they are tired of mere technocratic competence and demand someone with a bit more pizazz.

To give him a shot at a sound bite, bne asks Dombrovskis for a catchy buzzword or two on Latvia's signature industrial sector for the future. "Export-oriented industrial production is our buzzword," he deadpans. Is he joking? Probably not.

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