Latvia downplays risk of attracting Cypriot money

RIGA - The influential British business newspaper The Financial Times reports that amid the rush from rival banking nations to attract Russian cash stuck on the stricken island of Cyprus, one name stands out: Latvia. Cypriot lawyers with Russian customers say Latvian banks contacted them within hours of the announcement of a bailout for the Mediterranean island.

According to the newspaper, Latvian authorities are desperate to downplay the prospects of an influx of money from Cyprus, especially as they are seeking to become the 18th member of the euro – against the reservations of some already in the single currency.

“Currently we do not see any rush of Cypriot money into Latvia. This country is being watched and we are not going to be competing for this money,” Prime Minister Valdis Dombrovskis told the business daily.
But in some ways a flood of money from Cyprus has already entered Latvia’s banks. Latvia does not resemble Cyprus by having a large financial sector or a big government debt burden, having taken care of its public finances following a 7.5 billion euro international bailout package in 2008. Where it does look somewhat Cypriot is in its thirst for Russian bank deposits.

Non-resident deposits, those from non-Latvians, represented 49 percent of the 12.7 billion lats (18 billion euros) total at the end of February, one of the highest in the EU. About 80-90 percent of those non-resident deposits come from the former Soviet Union, according to the International Monetary Fund. And they have been growing fast: non-resident deposits increased 17 percent in 2012.

“The recent acceleration is believed to be mainly due to CIS [ex-Soviet countries] depositors relocating their funds from countries with banks under stress in the euro area, mainly Cyprus,” the IMF said earlier this year.
“Latvia has had a free ride for some time,” says Tom Mayne, an analyst at Global Witness, a London-based anti-corruption group. “Latvia seems to be very happy to accept this money coming from the former Soviet Union, places that pose a high risk of money laundering. That has to be a matter of concern after Cyprus.”

The authorities in Riga counter that they have toughened anti-money laundering rules in recent years, while banking regulators imposed stricter capital and liquidity requirements on those banks with high levels of non-resident deposits.
The matter is a delicate one, not just after Cyprus’ bailout, but also because Latvia is applying to join the euro from January. The European Commission and European Central Bank are due to give their opinion on Latvia’s suitability in June, but there is unease among some euro members.

On the strict entry criteria such as low inflation and public debt, Latvia passes with flying colors after undertaking one of the biggest austerity programs of any country following the 2008 financial crisis. But some existing euro members are worried about “sustainability,” a catch-all phrase for worries about inflation after a possible euro entry as well as the banking system.
“We want to be sure that we are not creating another trouble zone in Europe. But I do not think that will be the case,” said one EU ambassador in Riga.

France is seen by many as potentially the biggest objector, not least because of Latvia’s status as a hardcore supporter of austerity. Dombrovskis is heading to Paris this month to meet the French president and prime minister in an attempt to shore up support for euro entry.

The Financial and Capital Market Commission (FCMC) notes that Latvia’s role as a financial center in global banking should not be exaggerated, reports Nozare.lv. There are such financial centers as Great Britain, Luxembourg and Switzerland, which have not lost their appeal to foreign investors, and the scale of their operations is incomparably larger, says FCMC Communication Department head Laima Auza.
FCMC specialists believe there is no reason to expect large investment amounts flowing to Latvia after the re-opening of Cypriot banks.

According to statistics, Latvia has not been the main destination for Cypriot money so far. Money from Cyprus began fleeing the country in the summer of 2011; the last outflow was registered last January, when rumors reemerged on the troubled Cypriot financial sector. 1.7 billion euros flowed out of Cyprus. In Latvia, the total surplus of non-resident deposits from all countries increased by nearly 130 million euros in January.

But European Central Bank (ECB) officials have contacted Latvia to warn authorities against taking in Russian money fleeing Cyprus, two sources familiar with the contacts said. “It was made clear to our Latvian friends that if they want to join the euro, they should not provide a haven for Russian money exiting Cyprus,” a eurozone central banker said last month, reported Reuters.

“There is a very, very minor inflow of Cypriot money,” Latvia’s Finance Minister Andris Vilks said in late March. “If we are talking about non-resident deposits [in Latvia], the money from Cyprus accounts for something around 10 or 15 percent only,” he added.

Kristaps Zakulis, the head of Latvia’s FKTK, echoed Vilks. “We are looking at the statistics [on new deposits] and we don’t see any movements right now,” Zakulis told AFP in Riga.
Latvian officials are trying to play down any suggestion their banks may be vulnerable and insist their financial system complies fully with EU rules. Both the IMF and European Commission have warned Riga that high levels of non-resident deposits in local banks bring liquidity and money laundering risks.

But amid the crisis in Cyprus, eyes are on Latvia with other offshore destinations such as Luxembourg and Switzerland as its banking sector already attracts a large number of depositors from Russia and other CIS countries, largely due to the fact that there is a significant Russian-speaking community remaining from Latvia’s days as a Soviet republic.
“In Latvia we are talking about tens of millions [of euros in Russian deposits]. In Cyprus, we are talking about tens of billions - it is not comparable,” Zakulis observed.