Latvia: trends, events and people to watch in 2014

21.06.2013, 12:10

With the news of Latvia's successful eurozone bid, rising ratings and improving business environment, we are sure that we leave Latvia in the best shape it has been in years – possibly ever. Still, 2014 is to bring some key moments which will have a significant impact on Latvia's future. Therefore, we decided to prepare an overview of some of the things to look out for in 2014, writes Didzis Veinbergs, editor of news2biz LATVIA.

No doubt, the single most important event coming to Latvia on 1 January 2014 is the introduction of EUR.

The public support for EUR is low and it is unlikely to change drastically. PM Valdis Dombrovskis has stated that his government aims to get majority support for EUR by the introduction day, and it indeed could be possible, but the majority probably will still be quite close to the 50% mark, as the introduction will bring its own challenges.

Most Latvian companies are not yet reporting that they have started preparing for the switch, so it is likely that there will be increased switch frenzy in the second half of the year. Latvia is also one of the few European countries where the national currency is worth more than EUR. This means that, even if the prices do not rise due to EUR, numbers on price stickers will still be higher than Latvians are used to, contributing to the perception that everything is more expensive.

As to the advantages, the most obvious ones are better credit ratings – which mean cheaper loans – and increased foreign investment. This would be not so much due to EUR itself, which, it is fair to say, is not in the best possible shape, but more because the switch is a sign of European confidence in Latvian economy. Coupled with such remarkable statistics as the fastest GDP growth in EU, this will surely highlight Latvia's place on the investment map.

Another advantage (at least if you are not in the currency exchange business) are much easier trans-European transactions: there will be no conversion costs, and a wire transfer to any Eurozone bank will cost just as much as a transaction in Latvia. This is not just for companies: most mortgages are in EUR, so, despite the notable popular opposition to EUR, people have already accepted it to a large extent.

The Dombrovskis factor
But EUR itself is no guarantee for economic growth and success, as several Mediterranean countries have shown; it needs economic policies to back it up, and the same government that brought Latvia to EUR stands a strong test in 2014: the 12th Saeima elections.

So far, the ruling party Vienotiba and PM Dombrovskis have managed to stay in power and survive two elections even though they have pursued some deeply unpopular policies. The answer to this seeming paradox is the fact that Dombrovskis, despite the fact that you could not call him extremely charismatic, is one of the most popular Latvian politicians. He is often seen as a honest, hard-working and dedicated politician – something that cannot be said about many of his party members. This helps accept Vienotiba as "the lesser evil", even if the voters are not exactly enthusiastic about its policies.

Indeed, the recent local government elections clearly show that, without Dombrovskis, Vienotiba has trouble enlisting enough supporters.

There have been persistent rumours that Dombrovskis is in line for some big EU job in Brussels, promoted by such EU heavyweights as the Bundeskanzlerin Angela Merkel. If he indeed leaves Latvia for Brussels, Vienotiba will have a serious problem convincing voters they should vote for it without Dombrovskis.

Any loss for Vienotiba would most directly benefit the nationalistic Nacionala apvieniba (NA) and the pro-Kremlin Saskanas centrs (SC); both are seen as "the Latvian party" and "the Russian party", respectively, and people in Latvia are still extremely keen to vote along the national lines.

For years, NA rhetoric was marked by generous amounts of chauvinism, leaving economy far behind. In 2013 Riga elections, however, NA presented a remarkably different candidate: Baiba Broka, well-educated, tolerant and paying surprisingly little attention to the national questions. If this is a new trend for NA, the party could be expected to continue with the economic reforms if it increases its power. It also should be noted that, for all the angry rhetoric, NA has actually supported most of Vienotiba's economic policies.

SC is a different story entirely. Emboldened by its success in Riga, it is now claiming that the next target is the government. In Riga, it has not even attempted any fiscal discipline: the budget deficit runs rampant, and SC is gladly handing out freebies such as free public transport to the elderly to gain more popular support. If it reaches any position of power in the government, there is little reason to believe that it would suddenly start behaving any different.

Finally, almost all Latvian elections have had their "white knight" parties, that is, a popular person who comes up with his or her political party which gains impressive support. In 2011 elections, it was the former President of Latvia Valdis Zatlers who founded Zatlera Reformu partija (later renamed as Reformu partija). This time around, it could be the former Auditor General Inguna Sudraba. Her second four-year term in office ran out this year (see no 351 page 14), and she is more popular than most Latvian politicians, making her the perfect candidate for this role.

Keeping all this in mind, it is likely that Latvia will indeed continue with its reforms after 2014; how they will look like and whether they will be under PM Dombrovskis is another question entirely.

Which way, Latvia?
The growing popularity of Saskanas Centrs highlights another trend: the growing influence of Russia in Latvia, both politically and economically. Increasingly often, news2biz has been reporting about Russian takeovers of Latvian companies, Russians opening new companies in Latvia and Latvians seeking exports to Russia.
First, often enough it is by no means a bad thing. Many of the Russian investors that we have spoken to admit that they chose Latvia precisely because it does not have the Russian business culture. Another popular reason is Latvia's EU membership, which, no doubt, will be even more appealing once Latvia introduces EUR. 

news2biz has no reason to doubt the good will of the Russian business people we have spoken to. Still, there have been increasingly loud reports that Latvian banks are actively used to launder questionable Russian money and Russian intelligence is extremely active in Latvia (see no 351 page 15). In other words, some Russians are bringing the very same business culture to Latvia that others avoid by coming here.

This could become a very serious issue for Latvia and a trend worth following.
Ultimately, the best way to make sure Latvia stays on its track towards increased European integration is for Europe-oriented investors – both European and Russian – to keep working and investing in the country, a trend we are sure will only increase with time.