Recovery hostage to election outcome

RIGA - The Harmony Center political alliance threatens Latvia’s financial stability and its road to economic recovery if it joins any coalition government after next month’s special elections, saying that it will try to renegotiate loan repayment terms with the IMF-led international group of lenders and cut next year’s projected budget deficit by less than that required by the lenders. SEB Bank President Ainars Ozols cautions that at this point, the country’s growth is fragile and Latvia still has a long way to go to achieve stable and sustainable economic growth, reports Nozare.lv.

The country has taken austerity measures in order to get its government budget under control, and to meet the requirements to join the eurozone. The risk to continuing efforts is that Harmony Center - Latvia’s Russian minority-dominated party - may join the government for the first time since the country regained its independence from the Soviet Union, threatening the austerity measures already agreed to and that are needed to adopt the euro.

This ethnic Russian party has been shunned so far because of fears its allegiance is to the government in Moscow, not to Latvia. Harmony Center is tied for the lead before elections on Sept. 17, reports Bloomberg. Its chances of being part of the next coalition improved as the fight against corruption made some parties untouchable after a referendum to dissolve parliament.

“I would welcome Harmony Center in government,” Elina Egle, President Andris Berzins’ economic adviser, said by phone. It has a pragmatic attitude on the economy and “tries to think outside the box,” she said.
Including Harmony Center in government would be a test of Latvia’s resolve to reduce the budget deficit - and of the political elite’s ability to overcome decades of tension between the two ethnic groups. Most native Russian speakers were settled in the country by the Soviet leadership after World War II, replacing Latvians who were killed by both Nazi and Soviet occupiers, were deported, or fled to the West. Russification of the country continued during the almost 50 years of Soviet occupation.
 The ratio of ethnic Latvians in the country fell to 52 percent in 1989 from 77 percent in 1935, according to the statistics office. They currently make up 60 percent of the population, preliminary data show. The Russian community of more than 600,000 people accounts for about a third of Latvia’s population.

Many weren’t granted automatic citizenship and have remained on the sidelines of politics since the Baltic country regained independence in 1991, with Russian-dominated parties continuing to lack the votes after European Union entry in 2004, which also increased tensions between Latvia and Russia.
 “It would be a big victory for Harmony Center to be accepted in government,” Zaneta Ozolina, a professor of political science at the University of Latvia, said by phone.

Latvian parties will find it difficult to ignore the Russian speakers. Harmony Center was backed by 17.5 percent of those surveyed in a Latvijas Fakti poll published July 22, tied with former President Valdis Zatlers’s Reform Party. Prime Minister Valdis Dombrovskis’ Unity party had 11.7 percent support, followed by its coalition partner, the Union of Greens and Farmers at 8.1 percent and the National Alliance at 6.3 percent. No margin of error was given for the poll of 1,000 people.

While Harmony Center’s participation in a ruling coalition may be a milestone for ethnic relations, it raises concern that economic policy may be derailed. The party’s leaders say they will target a budget deficit of 5 percent to 6 percent of GDP as opposed to the government’s plan, agreed with the lenders, to meet the European Union’s 3 percent limit next year. The party also seeks to delay repayment of Latvia’s 7.5 billion euro international bailout loan package by two years, to 2014.
 It has not explained how it would then bridge the substantial gap in the budget, or deal with a loss of trust from the financial markets.

“We will try to persuade the IMF that” economic “indicators don’t really reflect the situation in the country,” said Boris Cilevics, a member of parliament from Harmony Center.
Dombrovskis helped implement austerity measures equal to 16 percent of GDP after Latvia’s credit-induced property and consumer spending bubble burst in 2008, plunging the country into the world’s deepest recession, shaving 25 percent off GDP from 2008 - 2009. The economy has expanded for the past four quarters, accelerating to 5.3 percent growth from a year earlier in the second quarter, the fastest since 2007. The inflation rate was 4.8 percent in June, tied for the second highest in the 27-member EU, and the unemployment rate was the sixth highest at 12.6 percent.

Renegotiating the IMF agreement would send the “wrong signal” to international investors, said Lars Christensen, chief analyst at Danske Bank in Copenhagen. With looser fiscal policy, “all the pain that Latvians have taken over the last few years would basically be wasted.”

The cost of insuring Latvia’s debt against non-payment for five years increased 62 basis points (0.62 percent) since the July 23 referendum to 274 on Aug. 12, according to prices from data provider CMA. Neighboring Lithuania’s credit-default swaps advanced 64 basis points in the period to reach the same level.
Harmony Center’s prospects for entering government are “pretty good,” said Nils Muiznieks, director of the University of Latvia’s Advanced Social and Political Research Institute in Riga. “They really want to be in power. The party will sign on to any conditions, no matter what they are saying now.”

The party’s chances improved after then-President Zatlers called the referendum to dissolve parliament as he sought to curb the influence of “oligarchs” he says wield too much power in government and the economy. Almost 95 percent of voters supported the measure.
Zatlers and Dombrovskis said they wouldn’t work with political parties linked to the oligarchs. That probably excludes the Greens and Farmers from the next government because it is led by former Ventspils Mayor Aivars Lembergs, one of three men Zatlers named as oligarchs.

The list of those exerting undue influence in politics in Latvia is, however, longer than that containing just these three so-called oligarchs. Zatlers and Dombrovskis have also yet to discuss how they would be willing to work with Harmony Center when it is perceived as having close ties to Moscow, which is widely asserted that it interferes in the internal politics of its neighbors.
The National Alliance may be shunned after a member of the party’s board used his Twitter account to write that the victims of the attacks that killed 77 people last month in Norway are on the “conscience of multiculturalists” and their “Islamization policy.” Janis Iesalnieks resigned and said he wouldn’t run for parliament after the incident.
While Unity will talk to Harmony Center about forming a coalition, “nationalists are unacceptable,” said Justice Minister Aigars Stokenbergs, Unity’s co-chairman.

After topping the vote in last year’s October parliamentary elections, Dombrovskis offered to include Harmony Center in the new government if the party acknowledged that Latvia was occupied by the Soviet Union. Party leaders rejected the conditions.
Reconciliation is difficult as citizenship 20 years ago was granted only to people whose families held it before the 1940 Soviet occupation. Almost 327,000 Russians don’t have citizenship now, down from about 715,000 in 1991, according to the Office of Citizenship and Migration Affairs. The naturalization process is open to everyone.

“Admitting there was an occupation would have consequences for our voters,” Cilevics said. Putting politics ahead of truth and reconciliation in Latvia in explaining why he won’t admit that the Soviet Union occupied the Baltic nation, Cilevics added that “All people who came to Latvia after 1940 would then be considered as occupiers and may face limitations on their rights.”