The Russian central bank ruled last week that Russian banks should create reserves for operations with off-shore residents as of Sept. 1. The list attached to the document names Liechstenstein, Luxembourg, Cyprus, Hong Kong, Latvia and other countries as off-shore zones.
The Foreign Ministry claims the decision, which violates both countries' bilateral agreements as well as international law and practice, should be revoked.
"The Russian central bank had once before made a similar decision about including Latvia in the off-shore zone that was revoked at the request of the Latvian Foreign Ministry, and the central bank then admitted it was a mistake," said Foreign Ministry's spokesman Janis Silins.
He said the Foreign Ministry had demanded an explanation for the motives behind the Russian central bank's decision.
The official explanation behind the decision is to combat capital outflow since off-shore banks are viewed as the biggest channel facilitating outflow of capital.
The Russian central bank believes it would make sense to introduce such restrictive measures following last year's crisis when some banks transferred idle funds, including stabilization loans received from the state, to off-shore zones. At this point, however, bankers view the move as "simply illogical."
Bankers believe the central bank's decision will result in a reduction in the volume of deals with banks located in territories named as off-shore zones.
Bank of Latvia official Janis Brazovskis said the decision of the Russian central bank to include Latvia in the group of off-shore countries is political in nature. "I see no other reasons except purely political," he said.
Latvian Commercial Banking Association President Teodors Tverijons predicted the Russian central bank's decision is destined to fail. Tverijons pointed out that from the legal point of view there are no grounds to view Latvia as an off-shore zone because Latvia's legislation does not meet the criteria of an off-shore zone's legislation.
He said this decision was undoubtedly taken jointly with the Russian government and is anything but an ordinary attempt to regulate economic processes in an administrative manner.
"On the one hand Russia is trying to reform and transfer to a market economy while on the other hand it is working with old Soviet style methods to interfere with the economy and in this case in particular to regulate the flow of capital," Tverjons said. "But as long as Russia fails to eliminate the circumstances prompting capital to run away from it, nothing will change there and this regular administrative instrument is destined to fail sooner or later."
He noted Russia's attempt to stop the flow of capital in the circumstances of a partially reformed market is definitely destined to fail and is only hindering work of Russian banks in circumstances when they are in need of support.
"By this decision Russian banks are placed in a disadvantageous position from a financial point of view because they will have to create reserves. In this case Russia itself is hindering the building of normal economic ties, which is incomprehensible and unacceptable in the current economic situation," said Tverijons.