Is Latvia the new Cyprus?

from Global Post…

By Charles McPhedran and Markus Kuokkannen

May 7, 2013

The newest destination for Russian money is worrying euro zone officials ahead of its adoption of the euro next year.

RIGA, Latvia — Tiny European country lures Russian cash by the suitcase before suffering banking crisis.

Sound familiar? But this isn’t Cyprus, whose financial woes unleashed a European political crisis just over a month ago.

An old playground for wealthy Russians, Latvia plans to join the euro zone next year, which has made it one of the newest causes of nervousness among euro zone decision-makers.

Not that you would guess by talking to Latvian officials. The economy is currently growing and the country meets the European Union’s economic criteria for joining the currency zone. Latvian officials say the euro’s benefits for business, the country’s budget and its financial credentials make adopting the single currency a good option.

“We have only heard positive [things] from other countries,” said Dace Kalsone, who oversees Latvia’s possible introduction of the euro at the Latvian Finance Ministry. “It’s been 10 years since we voted to be part of the European Union. And since that time, the euro was our goal.”

But many ordinary Latvians disagree: Only 27 percent favor adopting the single currency, a survey by Latvian pollsters SKDS found in January.

Latvia’s adoption of the euro has its critics abroad, too. The country has a history of huge economic booms and busts, they say. Some are warning that allowing Latvia into the single currency could create new headaches for Brussels.

“If we see another situation like Cyprus and Greece, that’s obviously of concern to the wider euro zone,” said Robert Palmer from Global Witness, a British group that researches financial corruption.

For critics, the similarities are clear. Like Cyprus, Latvia has earned a reputation as a “no-questions-asked” destination for Russian investors on the run from the taxman or the police, anti-corruption activists say.

European governments and institutions have repeatedly admonished the country for its failure to fight money laundering and tax evasion.

In a January report, the European Commission urged Latvia to “pay more attention” to investigating and prosecuting tax dodgers and criminals. The US State Department recently found that official corruption and a large illicit economy made policing money laundering “challenging” for Latvian authorities.

But Latvian financial regulators deny charges the country’s banking sector is being used to hide money of dubious provenance.

“Latvia’s banks go to extraordinary lengths to avoid even the appearance of impropriety [in relation to] all accounts, particularly those from the former Soviet Union,” said Laima Auza, a spokeswomen for Latvia’s Financial and Capital Market Commission.

If true, that would represent a change in the way that the country does business, activists say. Latvia’s banking system is “prone to dubious money from the former Soviet Union,” Global Witness’s Palmer said.

Bankers say that massive quantities of foreign money, much of it from Russia, flowed into Latvia before the global financial crisis. Banks lent on that money with few strings attached, EU studies show. The result was a heady era of booming house prices.

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