Economist: Latvia to lose 600mn EUR per year due to finance market crash

Former economy minister of Latvia Vyacheslav Dombrovsky believes that actual elimination of financial services export sector will cost the country 592 million EUR per year. Talking to Dienas Bizness (Daily Business), he said this evidently political decision was adopted for lack of any impartial economic analysis and due to inferiority complex in the country at large.

“We should admit that we have an impartial economic analysis, real answers to specific questions – it is a very rare phenomenon. For instance, answers to such questions as - Has policy of sanctions had any effect? Is there any effect from ‘switching-off’ financial services sector? Answers to these questions are received almost always, but they are politicized,” said Dombrovsky, currently director of Certus think tank.

Reasonable people understand that when an entire sector collapses, it cannot but have consequences, he said adding that some high-ranking officials claim that money outflow from Latvia is good. “People do not understand how can outflow of capital from the country, closedown of banks and layoffs be good. Recently one of the candidates for prime minister said outflow of capital from Latvia makes the country more attractive and will raise foreign investments. Who believes in that? Evidently, it leads to public distrust, to put it mildly,” the expert said. He believes that Latvia is a country with a high inferiority feeling that used to live as others tell it to do, and experiences difficulties with thinking and relying on itself. “When we are told to do something, we do it by 150 percent. If we are not told to do anything, so we do not need to do anything. This is a fact, I think,” Dombrovsky said.

A month earlier, Prime Minister of Latvia Māris Kučinskis said the dream about Latvia linking East and West is over like the dream of Latvian Switzerland is over.

Earlier this year, Latvian government committee for finance market and capital banned one of the largest banks in the country – ABLV from carry out debit operations with accounts of clients. Not so long before that, U.S. Financial Crimes Enforcement Network (FinCEN) accused ABLV of “laundering” money provided for financing of North Korean nuclear program as well as of “laundering” doubtful money transferred from Azerbaijan, Russia and Ukraine. ABLV Management refuted the reports immediately and blamed the Latvian government of failing to verify information. However, ABLV had to suspend its membership of the Latvian Association of Commercial Banks. Within a week after the Bank’s statement, 600 million EUR were transferred from the bank. On February 26, ABLV shareholders assembly adopted a decision about voluntary liquidation. However, Assistant Secretary of Finance Ministry of U.S. for Terrorism Financing Marshall Billingslea said in Riga, Latvian banking sector still faces risks, including connected with services to non-residents.

According to him, Latvia needs a strong and well-managed financial sector for positive long-term development. He said U.S. will help Latvia fight corruption and money laundering.

Finance Minister Dana Reizniece-Ozola, in turn, warned that any of the ten Latvian banks that have not managed the work with foreign clients may face problems. Committee for Finance Market and Capital adopted a decision that permissible volume of services provided to non-residents by Latvian banks is about 5%. In March, the Committee members met with representatives of all banks operating in Latvia.

They give them two weeks to think over restructuring. Banks had to close “risky accounts” belonging to offshore companies and cut staffs.

This intensified outflow of capital from Latvia – since mid-February, over 2.5 billion EUR were transferred from Latvian banks. The total damage may reach 4-5 billion EUR and even more. In late April, Latvian parliament approved promoted amendments to ban the banks registered in the country from cooperating with the so-called shell companies and serving their accounts. Authors of the amendments required banks to inform such customers about termination of contracts within two weeks or decline cooperation requests, as well as close accounts within 60 days. According to the Committee, in Q1 2017, shell companies accounted for 27.8% of turnover of credit organizations in Latvia. It was reported that with the law banning cooperation with shell companies coming to force, 2 billion EUR savings may be withdrawn from the banking sector.

Experts, including former minister of economy Vyacheslav Dombrovsky, alarm that all these “reforms” will have a negative impact on economy, including reduction of financial turnover and taxes from banks, as well as staff reductions. For the time being, about 500 wealthy foreign citizens reside in Latvia. Under Latvian laws, they received residence permits making deposits with local banks in the amount of at least 280,000 EUR. Reportedly, 70 of them invested in ABLV and may lose their residence permits now.

Ventspils Mayor Aivars Lembergs complains that Americans that sanctioned reforms in the financial sector of Latvia have scared away investors. “How to invest, if they are not allowed to open an account here? It is very hard to work in such conditions. The decision to check all the money of non-residents is a severe blow upon investments,” Lembergs says. At the same time, he says, investments by Americans in Latvia are extremely low.