What will Latvia do next?

What will Latvia do next?

Liene Dambe investigates how Latvia’s rapid growth can be built upon

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The growth is back - what’s next for Latvia? That was the theme of a major business forum held at the European headquarters of Bloomberg in the heart of the City of London in October, in which VIPs and business leaders from Latvia and the UK gathered to assess the new possibilities offered by the country’s imminent Eurozone membership.

Hosted by the Latvian Embassy, the Latvian Development Agency (LIAA) and the leading Latvian private bank Baltic International Bank, the morning session was an efficiently-conducted and fast-paced tour on the ‘roller coaster’ of the modern Latvian experience, focusing on the extraordinary post-financial crisis achievements of the middle Baltic state, as well as - more importantly - a practical guide to potential investors on how best to obtain a stake in the contemporary Latvian success story.

The tone was set in introductory remarks by H.E. Andris Teikmanis, Latvia’s recently-appointed new ambassador to the UK, who raised the ‘crisis’ issue only to consign it to history. He noted that the country has been the EU’s strongest economic performer for the past three years. A track record like this, he said, should encourage outsiders to look closely at the ingredients of the country’s success and ask where there business fits in.

“Maybe it’s our ability to adapt quickly to the dynamic changes of the global economy?” he suggested. “Maybe it’s the ability of our business people to adapt to market trends.” In any case, he suggested, Latvia’s skills at effecting dramatic transformations have much to offer the wider EU and Eurozone as it struggles to implement reforms.

For the first session, Bloomberg managing editor John Fraher teased out some of the questions on the minds of investors about the sustainability of Latvia’s journey from the post-crash casualty ward to positive and confident aspirant for Eurozone membership.
His distinguished panel included Ilmars Rimsevics, governor of the Bank of Latvia, Ilona Gulchak, chairperson of the board and compliance director of Baltic International Bank, and Dr Dagmar Linder, Deutsche Bank’s managing director for Central and Eastern Europe.

Asked to explain Latvia’s extraordinarily rapid recovery from an 18% fiscal consolidation, and for the lessons learned, Rimsevics was admirably blunt. The lesson? “Don’t get carried away with growth and don’t overheat your economy as we did in 2004, when many people didn’t realise that a growth rate of 6-7% was not sustainable,” He said.

Latvia, he conceded had “paid a big price” for the mistakes leading up to the bursting of the bubble in 2008-9, but “the most important thing is to correct imbalances as soon as
you can.”

“The Latvian lessons are speed, ownership, commitment and solidarity – especially speed. If you can apply these things, especially speed, you can take a very strong stance and a very strong grip on the actions you are taking.”

Appearing somewhat impatient with the persistent themes of the Western media coverage of Latvia’s journey, and the effects of Latvian popular morale of what he portrayed as excessively negative anticipation of Euro entry (only 42% of the population actively support the move he conceded), Mr Rimsevics also had no time for half-baked newspaper theories about the Latvian cultural tolerance of pain and the legacy of Soviet rule. “Cut it out!” he said at one point, perhaps having heard one journalistic cliché too many, “I repeat, it’s speed, ownership, commitment and solidarity”.

Although Rimsevics noted that “Estonia did it even faster”, there were strong hints that other countries that are effecting slow-motion corrections of gross fiscal imbalances – the UK springs to mind – might watch and learn from the Baltic example.

It was the task of Ilona Gulchak to show how Latvia’s banking system was geared to aid investors, and also to attempt to correct what the panel clearly believed was undue emphasis on the country’s relationship with non-native deposits, another staple of recent coverage of the country, particularly since the Cyprus crisis. She pointed out these comprised only 49.4% of the LVL12.93bn (a18.2bn) of total deposits. This figure, less than previous totals, should be compared to Luxembourg (263%). Malta (121.3%), Cyprus (116%), and the
UK (67%).

Baltic International Bank (BIB), which manages funds of around a500m, is unusual in the region dominated by Scandinavian and other foreign players, being a local, family-owned concern. Celebrating its 20th anniversary this year, BIB has ridden out more than one Latvian crisis to provide a bespoke and steady niche service as personal and business bankers, and expert guide to businesses wishing to take advantage of the country’s myriad opportunities. Ms Gulchak outlined Latvia’s uniquely strong strategic position at the ‘crossroads’ between east and west, its recognised ease of doing business, its strengthening credit rating and its export-oriented, pro-enterprise environment, which includes enticing tax relief mechanisms and other incentive programmes, also a corporate tax rate of 15%, one of the lowest in Europe.

Business Forum

Latvia’s well-capitalised (capital adequacy rates of 18.6%) banking sector, she said was back in profits, benefiting from increased commissions and a “comparatively high interest rate spread on loans and deposits as well as the stabilization of the amount and quality of the loan portfolio.”

She also outlined recent beneficial changes to corporate tax law, including multiple tax treaties, and exemptions from tax dividends, which make Latvia ideal jurisdiction for holding companies. “Latvia has it all” she said “the location, the historical ties, the knowledge, the infrastructure, and most all the people who are willing to grow and develop and [provide] opportunities for the whole of Europe.”

Speaking from a transnational banking perspective rather than that of a local lender, Deutsche Bank’s Dagmar endorsed the picture of a healthy and enterprising financial climate in Latvia, and gave a glowing picture of its ability to cope with the imminent accession to the Euro – which she was happy to admit would lose her bank some of its transactional currency businesses – and also illustrated with some examples of Deutsche Bank operations in Latvia:

“We issued a bond for the Republic of Latvia, twice in 2012. The second bond which was issued in December 2012 actually achieved the lowest coupon, the lowest interest rate that Latvia ever achieved, 2.7% for a seven-year bond issue is incredibly low and shows how the capital markets judged the success of Latvia.”

“This year we actually issued a high-yield bond for a telecoms company that’s active in two Baltic countries. That really speaks to the possibilities an investment bank has in the Baltic region, and it speaks to how the companies have recovered, how positively it has recovered, and how positively the capital markets have responded.”

Deutsche Bank is not an “on-the-ground” lender, she admitted, “but from the interaction we have with banks and companies in the region, we do hear that the big companies in the Baltic countries have no problems accessing timely finance, all the banks want to offer their funds to the best and biggest clients.”

For the second session of the day, introduced by the Economist foreign editor and distinguished Baltic-watcher Ed Lucas, the focus turned to Latvia as an inward investment proposition. The session began with a star turn of a “sales pitch” by Latvia’s Harvard-educated economics minister Daniels Pavluts. To begin with, he urged the audience not to think of coming to Latvia – Riga in particular – to
access the local market, any more than you would open operations in Singapore or Hong Kong with no wider horizons than those two
micro-markets.
Latvia, Pavluts argued persuasively, is a place where all the heavy lifting of structural reform has been done, indeed he suggested it has been done more thoroughly than almost anywhere else. The picture he painted was that of a place of strong regulation, a highly educated and hard-working workforce, good services, and a can-do officialdom who have managed to create a place where business can be established in a day. The great linguistic facility (which the quadri-lingual not quadric-lingual Pavluts exemplifies) makes it ideal for doing business with east and west, and particularly with Russia (“we can really speak that language!”).

In the context of emphasising the country’s excellent communications links stretching far into Eurasia. Pavluts made much of Riga – the second biggest city in northern Europe after Stockholm – as a mighty engine of global trade, its ice-free port shipping out six million tonnes of cargo a year. “It’s always been a strategic gateway.”

He even had time to squeeze in praise for the Latvian lifestyle offering, the quality of life offer emphasised by a recent survey that ranked the country the second greenest country in the world.

“We are the fastest growing economy in the EU, and what we are happy about is that there is no external account imbalance to speak of, there is no credit bubble, or any bubbles to speak of. This is an exciting new economic model that is far more sustainable than any
we have had in the past.

“As minister of economics let me tell you this. We are really tired of boom and bust cycles, and we will do everything we can to prevent them from happening again. Sustainable growth is something we mean rather than just say.”

Away from the theory -  what about practice? The conference heard from a pair of businessmen who could attest first hand to Latvia’s advantages as a base for manufacturing and exports. Ugis Grinbergs, export director of UPB Holding, a firm with over 20 years of experience in the construction industry, spoke about the qualities of Latvia as a base for managing a full portofolio of services, including engineering, production, delivery and assembly. Also bringing an international perspective was Dutchman Egbert Boerrigter, commercial director of US multinational materials and chemicals giant Cytec Industrial Materials, who has led the group’s business services operation in Riga since 2010, and was well-placed to endorse and exemplify the practical and attitudinal advantages of a Baltic base.

As Pavluts admitted, Latvia’s international reputation and profile has yet to catch up with the reality of its offer, and Riga, with a history that far pre-dates the birth of the Latvian state, is perhaps a more recognisable brand than the country itself.

It was therefore fitting that one of Latvia’s other port cities, Liepaja, should be given the opportunity to set out its wares before a London audience. This task fell to Janis Lapins, deputy chief executive of Liepaja Special Economic Zone. A former Soviet naval base, Latvia’s third largest city is now a magnet for infrastructure and industrial investment, offering distinct cost advantages in areas such as transport and logistics, metalworking, electronics, tourism and ICT: “the industries of tomorrow with the potential for exponential growth” as the minister described them.

Finally, after a lively Q&A in which potential City investors were able to explore questions ranging from the country’s risk profile to the degree of interaction between the three Baltic states, it was left to the British Trade Minister Lord Green to sum up.

Although not present for most of the morning’s session, Lord Green’s themes showed a significant overlap with the discussion of the morning, proof if any were needed that Her Majesty’s Government considers Latvia as a “like-minded”, pro-growth, pro-business, outward-looking business culture, perhaps looking on with envy at a growth rate over double that of the more sclerotic UK economy.

As well as pointing out the frequent ministerial and prime ministerial visits to Latvia, where 800 British companies from Techhub to Costa Coffee, have already made investments,
he said: “In many ways we are like minded about the way we think about what’s important in growing European connectivity, we both care about EU growth agenda, the single market, the digital single market and full-blooded implementation of the single market.”

Looking forward to Latvia’s 2015 Presidency of the Council of the EU, and the opportunities this gives to promote this agenda, he extolled a British government hymn to prosperity through trade that was exactly in tune with the Latvian-inspired themes of the day.

Not least through the country’s role as a “gateway to the more complex markets to the East” as well as being “a great opportunity in itself“.

“As we come out of financial and economic crisis, we have to move away from a model which relied on the domestic consumer taking on more debt, and we know we can’t rely on government spending to drive demand, it’s all about investment and more importantly trade.

“The truth is that the traditional markets [of Western Europe] may continue to be slow growing. We need to encourage companies
to look further afield.

“While I encourage British business to go to the Middle East, to Asia, to Africa I also advise them to remember eastern Europe.

“These are younger economies like Latvia which have big opportunities and are more familiar territory, they are part of the EU, which helps to de-risk the decision of entering them.”

Those who take his advice, and that of the rest of the day’s persuasive speakers, will form their own opinion about whether the reality matches the rhetoric. If it does, the country’s current wave of growth will swell exponentially – but sustainably.

What Latvia’s day in the City spotlight underlined is that this nation of two million has come by its current growth story the hard way, and will do everything that a small, nimble nation with human resource whose quality is recognised the world over can do to nurture it.Although no-one at the session pretended that Latvia does not have challenges, its successes are obvious. What’s next for Latvia is likely to be more of the same.