Financial barriers coming down

Russia's Central Bank last week canceled two old regulations that for over three-and-a-half years had prevented Russian financial institutions and companies from doing business in Latvia.

Although other regulations preventing the free flow of capital between the countries remain in force, insiders say that this gesture by Russia's Central Bank is the first step in normalizing business relations between Latvia and Russia.

In May 1998, during a low point between the two countries, Russia's Central Bank adopted three regulations directed at Latvian and Russian banks that paralyzed cross-border monetary flows. In addition, one year later the Central Bank included Latvia into its list of offshore zones, effectively ending all financial transactions between Russian and Latvian banks.

No such punitive restrictions were implemented against Lithuanian or Estonian banks.

On Oct. 1, Russia's Central Bank annulled two of the three regulations, while also leaving Latvia's offshore status unchanged. Russian banks will now be able to open up correspondent accounts in Latvian banks, as well as take part in the capital of subsidiary banks in the Baltic country.

However, since Latvia's offshore status remains on the books, Latvian banks will have to wait before they can open ruble accounts in Russian banks.

Analysts say that the Central Bank's decision to cancel the regulations was largely due to the recent meeting between Janis Jurkans, head of the left-wing For Human Rights party, and Russian President Vladimir Putin in Moscow.

Jurkans, who was not cleared by Latvia's Foreign Ministry for the meeting, was criticized by many at home for the high-profile tete-a-tete with the Russian president in the Kremlin so close to Latvia's Oct. 5 parliamentary elections.

Both banking and government officials in Latvia were upbeat about the Central Bank's decisions but expressed reservations about the short-term effect on the financial industry.

"This is a good step forward," said Michael Bourke, president of Rietumu Bank, "But it is still not 100 percent."

Janis Placis, supervision director at Latvia's Finance and Capital Market Commission, expected "no big changes" after Russia's decision. The most important Central Bank order, on opening branches and subsidiaries and participating in the capital of other banks, remains in force. "That one was the death sentence for Latvian banks," he said.

Russian officials have hinted in recent months that all remaining restrictions may be removed. The deputy chief of Russia's Central Bank, Andrei Kozlov, is scheduled to visit Riga in late October in order to strengthen cross-border financial oversight and technical support.

Speaking last week in Moscow, Kozlov said that if Russian authorities received assurances that Latvia's anti-money laundering system was in place and working effectively, then it may be discarded from Russia's list of offshore countries.

Rietumu Bank's Bourke said that the offshore status was unfair to Latvian banks. "We are very transparent," he said. "We have nothing to hide."

Placis agreed. "Everyone in the world knows that Latvia is not an offshore zone."