Latvia prepares for three-way split

By bne IntelliNews August 19, 2011

Mike Collier in Riga -

Just 11 months after Latvian voters won international plaudits for backing the austerity-driven leadership of Valdis Dombrovskis and his Unity electoral bloc, they have a chance to do so again on September 17. Only this time, they probably won't.

The reasons the election is taking place are too convoluted to recount in full, but involve raids on MPs' homes, a president who called a referendum to dissolve parliament over its links to oligarchs, and a parliament that returned the compliment by replacing that president - enjoying record-high approval ratings at the time - with a 66-year-old former banker known mainly for being on the country's biggest pension and using EU funds to build himself a very nice house.

Against that backdrop it's hardly surprising that the election itself promises to be an entertaining affair, not least because the spurned president, Valdis Zatlers, has formed his own party - the modestly-titled Zatlers Reform Party (ZRP) - and according to current polls is likely to be fighting with the Russian-flavoured Harmony Centre party for top spot come election day.

Going it alone

To the surprise of many, Zatlers rejected an unconditional offer to join Dombrovskis' now-unified Unity party as its number one candidate. It was a serious blow to Unity and one that threatens to split the centrist vote right down the middle, giving Harmony Centre a better-than-even chance of finishing election day as the largest single party for the first time ever.

Early signs from ZRP weren't promising. Zatlers is no rabble rouser and his initial party meetings were shambolic affairs in which a selection of fruitcakes aired irrelevant opinions on random topics. The selection of a red cross as his party logo (a nod to his former profession as a doctor) raised concerns from the Red Cross itself and it started to seem he had miscalculated badly. But in the last couple of weeks, ZRP has got its act together. Zatlers has roped in some of the country's brightest brains to work on his manifesto and they have added some much-needed original thinking to Latvia's political landscape.

Young, articulate economist Vyacheslav Dombrovsky has put together a smart financial package that seeks to co-ordinate economic policy with the business cycle. "This is a radical departure from the usual way programmes are presented," Dombrovsky tells bne. "What we do is offer a few things that will have the maximum effect on the economy in both the short and long term. It's very important to reduce the level of public debt, but we realise it's hard for politicians to do so because they want to spend money once it's there. So our solution is a so-called Fiscal Council - an institution that would make it harder for politicians to go into reckless spending.

Dombrovsky says the party's number two area is the need to reduce the huge tax burden on employees, which is currently about 45%. "That's one of the highest in the world with lots of nasty side effects such as tax evasion. Our aim is to reduce it by 9% over three years. Part of it will come from real estate taxes and eliminating reduced rates of VAT," he says. "We also want to experiment with a new idea being advanced by Professor Danny Roderick at Harvard called the New Industrial Policy, which is an institutionalisation of the dialogue between business and the state."

Asked if he would like to be finance minister, Dombrovsky told bne he was "95% sure" he didn't - then became ZRP's nominee for the post a few days later.

But the answers ZRP is not providing are in some ways as important as their actual plans, according to another contributor to the programme, academic Roberts Kilis. "A politician thinking medium term in Latvia would be a definite public good," he says. "The public might welcome someone like Zatlers who is not a charismatic macho guy but an ordinary, decent person with good intentions who has shown some sort of ability to decide. The public may respect someone who openly says 'We may not always know what to do, so you have to come and help us'."

"Latvia has been acting like someone with bi-polar disorder - it's either extremely excited or extremely depressed," Kilis says. "What you usually do in terms of treatment is stabilise the mania to avoid deep depression. At the moment we are economically on the up, so we have to start treating possible mania that will be in place in 2013 and 2014."

Coalition controversies

Whatever the outcome, the new President Andris Berzins - a former banker from the oligarch-influenced Greens and Farmers Alliance (ZZS) - will face a difficult choice when he has to nominate a prime ministerial candidate.

Asking a pro-Russian party like Harmony Centre to head a government 20 years after independence was restored would cause outrage and probable demonstrations from Latvian nationalists. Ignoring a victorious Harmony Centre would provoke a similar reaction from the other end of the political spectrum and Russia wouldn't be slow in pointing out Latvia's democratic deficiency.

Asking Aivars Lembergs, the candidate of ZZS, to head the government would make Latvia an international laughing stock, as the mayor of the port of Ventspils is a bizarre individual fighting a never-ending series of corruption trials and recently had his offshore assets frozen by a UK court. He also believes financier George Soros is engaged in a shady conspiracy against himself and Latvia, by dastardly acts such as donating money for the construction of educational facilities and backing civil society groups.

Current PM Dombrovskis is another option, but if his party is only the third or fourth largest in the new parliament as seems likely, his current authority will have been undermined even more than might be expected in what is effectively a mid-term election.

Ironically, Berzins' best escape route might be to ask his old adversary Valdis Zatlers to act as an honest broker between Unity and Harmony Centre in a ground-breaking three-party coalition. Even here though, Zatlers has done the unexpected by nominating political novice Edmunds Sprudzs, a 31-year-old entrepreneur, for the PM's chair.

Leading Unity politicians such as parliamentary speaker Solvita Aboltina have already aired the possibility of three-way split, while Harmony Centre leader Janis Urbanovics has made encouraging noises too, floating the idea of a three-year moratorium on the most divisive issues such as acknowledgment of Latvia's occupied status during the Soviet years and mention of Russian as a possible second state language.

What is clear is that two of the three main oligarchs will be making a long-overdue exit. Former Prime Minister Andris Skele has already disbanded his People's Party. It marks a remarkable decline in his political (if not financial) fortunes as a little over two years ago People's Party was the largest in parliament with 23 out of 100 seats.

Skele's former ally Ainars Slesers - the MP whose home anti-corruption officers were blocked from searching by fellow lawmakers - continues to believe in his own omnipotence. He took Latvian politics into the realms of farce on August 5 when he renamed his LPP/LC party the "Slesers Reform Party - LPP/LC" in a move even long-term allies such as Andris Berzins (not the current president, but a former prime minister) said was ridiculous.

Imitation may be the sincerest form of flattery, but in this case it is also an effective way of telling the electorate you think they are stupid.

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