A decade of stagnation ahead, looking to Latvia 100

It was the 91st anniversary of Latvian independence on November 18, a day celebrated in somber, but somewhat hopeful circumstances by Latvians outside Latvia for 50 years. For all those years, Latvians mourned the loss of their independence, but held on to hope that the country would regain its freedom. That happened in 1991 with the collapse of the Soviet Union.

Eighteen years have passed since then, and Independence Day is a good time to reflect on what has become of the country since then and what may await Latvia in the next few years. Will country be better off on its 100th anniversary in 2018 than it was on the 90th in 2008 or the 91st this year?

Unfortunately, a detached and rational analysis of what is happening does not leave much room for optimism. Latvia is being devastated by a global economic crisis about which it was repeatedly warned, and for which it failed to prepare (as did, for example, Estonia). Boosted by reckless lending and borrowing, the economy seemed to boom right after Latvia joined the European Union in 2004, and the government, deaf to warnings, spend money as recklessly (pedal to the metal) as some of the Swedish banks sharing the blame for events here.

The government had no plan for what would happen when tax revenues from an artificially overheated economy no longer sufficed to support an inefficient and bloated state administration. A depraved culture of corruption and cronyism flourished almost from " day one" of the renewed independence, but during rapid economic growth, its depredations were not dramatically visible. Now we see the Riga Children' s Hospital plundered (or, perhaps, used as "black treasury" from other corrupt activities) to the tune of LVL 700 000 (more than USD 1.4 million).

Now the country has faced a choice between state bankruptcy or budget cuts that amount to reducing Latvia, with no prior planning or warning, to a minarchy where the state can barely maintain such services as police, national defense, and the courts. By 2012, education, medical care and personal security will largely be services available commercially, not as a result of spending tax revenues. Personal incomes will not increase sufficiently for most Latvians to be able to afford these services on a pay-per-use basis and still pay taxes that will be largely spent to repay the national debt, offering taxpayers practically zero return on taxation.

Another way to express this odd sounding concept is efficient and effective governance. By joining the EU, Latvian citizens have a defacto choice of governance -- that is, they can move to countries that offer a better return on taxation, but less political representation (no or limited voting rights). In Sweden, a Latvian paying taxes only slightly higher than those proposed for 2010 by the Latvian government (with a soon to be zero return), obtains a return in the form of tax-supported (there ain't no such thing as a free anything) education, reasonably efficient tax-supported police, tax-supported medical care and better, less corrupt or simply less dumb-ass public administration.

So what do I see happening? Tens of thousands of Latvians are going to choose places to live with better governance and, probably, better jobs, wages and "general attitude" (a factor often cited by Latvian emigrants to other European countries, mainly Ireland or the UK, who have already realized that the monetary gains of emigration aren't spectacular). Those tens of thousands, perhaps as much as another 100,000 or more, on top of those already living abroad, will drain the labor force of much of its best and brightest workers and potential managers.

When the rest of Europe recovers, Latvia will lack the skilled labor needed to meet export orders from Europe because those who could fill them will already be out there in Europe. The Latvian state has shattered, permanently, any trust or reliance it had among its citizens. This was accomplished by almost two decades of half-assed misgovernance, corruption, idiocy, provincialism, nothing-specialism and pedal-to-the-metalism. It is valid observation, for many Latvians, both the young, who do not want to waste the life ahead for them, and the old, who don't rationally see any change in their lifetimes, that if they (those running the country) haven't gotten it by now (almost 20 years), they probably won't.

So what will we see? A lost decade of third-world-lite economic stagnation, an aging population with a dwindling tax-base to support them, an elite living off of its sleazewealth until even that runs out (but hey, we're OK now, Jack) and their foreign educated children refuse to come back to the backwater their parents created. The best and the brightest of the Latvian nation -- look for them in Dublin, London, Stockholm, Munich, Sydney, San Francisco -- and, if they live in Europe, as most will, dipping into Latvia for relatively cheap home visits on a low-cost airline. The lat, by 2018, will still be the national currency, but hey, it's preferable to pay in euro.

Latvian labor in Latvia will be cheap -- among the cheapest in Europe, but also not very smart or productive. Part of the reason will be that most who finished school after 2010 will have had an education that decreased in quality from year to year and never was that great to begin with. So labor will be rationally cheap -- rated by its quality and productivity. The best value for money will be those kids with Latvian sounding names finishing some of the better schools in Ireland, Britain, Germany or Sweden, and they will be worth the higher going rate as skilled workers or management trainees.

In short, Latvia, thanks to almost depraved misgovernance and a hapless population unable to dislodge its political elite, faces a gloomy and stagnant decade ahead. Yes, one should celebrate independence, but not to the extent of sacrificing rational analysis for feel-good patriotic false optimism.

Limitless depravity -- Childrens' Hospital plundered

Latvia's Bureau to Prevent and Combat Corruption (KNAB) has arrested two officials of the Children's Clinical University Hospital (Children's Hospital) and three other persons in Riga for the embezzlement of at least LVL 700 000 in funds (more than USD 1.4 million) earmarked for renovations and improvements at the facility. Those arrested include a member of the hospital board. KNAB officers seized the funds, including LVL 500 000 in cash, in a series of raids and searches around Latvia.

The Children's Hospital has been the object of a number of charitable activities to raise funds for renovating its wards, and, while renovations have been made, it is reasonable to assume that some donated funds were also embezzled or used for bribes and kickbacks.

One of those arrested, Aivars Lisenko, a top administrator at the hospital, is also a member of and contributor to the Peoples' Party (Tautas Partija/TP), a member of the ruling coalition. With polls showing support for the TP well below 2 % ( 5 % is needed to be seated in the Parliament or Saeima), the party plans to bring back former Prime Minister Andris Šķēle in next year's elections. TP party officials are rushing to deny they knew anything of Lisenko's criminal activities, although his legally required state employee income declaration should have raised eyebrows -- he had huge cash and bank savings and had privately lent someone LVL 208 000. With official income of LVL 27 000 per year, it is hard to see how this accumulated money came from legitimate sources.

News of the Childrens' Hospital scandal has caused the usual temporary wave of public outrage. It remains to be seen if the accused will be convicted and what other similar scandals the KNAB will uncover in coming months. It appears that this kind of corruption, no matter how depraved, is endemic to Latvia.

Report: Desperate Latvians selling organs

In what may be a somewhat sensationalized report, the Latvian news portal www.apollo.lv is reporting that increasing numbers of apparently unemployed Latvians are offering to sell their organs, mainly kidneys, on the internet.
According to the website, the practice is not sanctioned by he Latvian Trasnplantation Center, but legal experts say selling kidneys is not forbidden (though in a legal gray area).
Prices asked for "healthy kidneys" on the Latvian classified ads site zip.lv range from LVL 5000 (USD 10 000) to LVL 50 000 (USD 100 000).
The kidney sellers interviewed by apollo.lv say they are in debt and unemployed, or in some cases, willing to sell the organ in order to "live, rather than exist" (an 18-year old) after paying off unnamed bills and debts.
While many of the organ sellers may be genuinely desperate, some may be using their kidneys as a substitute for the easy credit of a few years ago, when it was possible to borrow several tens of thousands of LVL to buy luxury goods, electronics, foreign travel or an apartment).
The reports of organ selling put Latvia, an EU member state, on the same level as some Third World countries, where the practice is widespread among the poor.

Microincidents and social decay

I may be wrong, but often a "sense of what is going on" arises from a series of what could be called microincidents that point to a broader pattern of developments in society. Trend analysts often look at this as forerunners of something that may become significant (small groups of trendsetter teens dressing like, eating or doing X, Y or Z). I also think that microincidents can start to add up to a pattern of social degeneracy in Latvia.

Let me just name a few. In two drives to and from my summer house (finally closing up and wired with burglar alarms), I saw several instances of what I called "traffic wading" -- persons simply, blindly stepping into a street wherever the fancy strikes them, then standing more or less dumbstruck on the white line or just zombieshambling along, since cars do stop for pedestrians and other large objects on the road, even in Latvia. One woman I saw was standing and smoking on a busy road. Most of those I saw were not drunk (the 9 am stumblebums encountered as I walk to work no longer register). They were just somehow --detached.

Then there was the a middle-aged female undead with huge shopping bags who, in a very narrow (and badly designed) place in a cafe in the Alfa Centrs shopping mall, simply squeezed and pushed by us, not saying a word, not giving us a chance to step aside. I remarked to my wife something to the effect that " the bitch could have excused herself" loud enough for the woman to hear, but she simply moved on, zombiefaced and deaf (a Latvian language paper folded in one of her bags seemed to show that she understood the language). This was not the first such encounter, sometimes these robo-bābas (for all you Latvian readers) or robo-bitches (not an exact translation) bump past you at street crossings and other places where there is pedestrian congestion.

What I am saying is that as the better educated and more adventurous (of economic necessity) population emigrates, what is left is an increasingly behaviorally deviant, strange, lumpenized, often intoxicant dependent contingent responsible for an increasing number of microincidents that add up to an emerging sense that society is degenerating as the ranks of an economically deprived or outcast and psychologically damaged underclass seem to increase day by day.

This is not just me. A local Latvian woman who I work with from time to time, and who moves around roughly the same streets as I do also told me recently that she was freaking out from all the strange and bizarre people she was seeing. Is that as the Eloi leave, we see the Morlocks better?

Swedish paper pulls a mindf**k on the Latvian media

Sweden's Dagens Nyheter has pulled off a successful mindfuck on the Latvian media, thanks to me, actually. The paper ran what appeared to be a letter to the Swedish prime minister Fredrik Reinfelt (Moderate Party) from the leaders of his three coalition partners. It raised very credible points, including Finance Minister Anders Borg's scolding of Latvia for failing to cut 500 million LVL from its budget.
The letter was written in a very Swedish informal style -- Dear Fredrik, etc. and signed with first names. This made it even more believable that it was not a fake opinion article, but most likely a leaked letter. The signature of Peter Wolodarski, one of the editorial page writers, lent credibility to this version. OK, it was Sunday afternoon, I was not at the office, I was surfing the Swedish press, so I wrote it up. But it was not fucking April 1, when you are on the lookout for such stuff.
OK, the squareheads* got me on this one, gotta write a correction on the LETA wire....

*a bizarre name for Swedes I heard in an American cowboy movie, where one referred to a Swedish prarie settlement as a place "with nothin' but squareheads living there". :)

The strange death of liberal "Diena"

NOTE: Corrected the spelling of the British family to ROWLAND in a few places.

October 10 turned into a day of written and video/audio soundbites amounting to obituaries for Latvia's (once?) leading daily "liberal" newspaper Diena (The Day). It was no wonder, as the chief editor of the Diena media group, Nellija Ločmele, the editor-in-chief of Diena, Anita Brauna, the editor of the editorial and op-ed page, Pauls Raudseps and several senior reporters announced their resignations after it was disclosed that Diena (along with Dienas bizness, a business daily) had been sold to the British Rowland family.

The Rowlands are said to have financed the transaction when the Swedish Bonnier publishing group and agreed to convert their loan into shares in a mutual fund that became the owner of both Latvian media companies. However, there are contradictory reports as to whether this was the actual sequence of events.

The departing editors said they could not work together with the new managing director of the Diena publishing group, a former executive at the company who returned to engineer and execute the transfer of Diena and Dienas bizness from the Bonnier group to the new owners.

Founded as a government-owned but independent newspaper in 1990, while Latvia was still a Soviet republic, Diena was "liberal" in the classic sense of standing for individual rights, freedom, Western-style democracy and values.

In July, it was announced that the Swedish Bonnier publishing group, the owner of Diena and the business daily Dienas bizness (this blogger worked for Dienas bizness for 11 years) since the early 1990s, was selling both newspapers to a Luxembourg-based company owned by Aleksandrs Tralmaks, a former executive with Diena (some years earlier) and Kalle Norberg, an Estonian financier. The transaction was financed (temporarily) by undisclosed lenders as part of a scheme to set up a Luxembourg based media mutual fund.

The transaction, with so many unknowns, set off a frenzy of speculation, much of it verging on paranoid fantasies that Latvian oligarchs, Russian intelligence services and other evil powers bent on destroying Diena or using it to brainwash the population were actually behind the deal.

To be sure, the transaction was hasty, largely because the Bonnier group was eager to get rid of their Latvian assets as quickly as possibly, while keeping their business newspapers in Estonia and Lithuania. It was going to take Tralmaks and Norberg a few months to set up their mutual fund, longer than the Swedes were ready to wait. In a move that would later be one of several reasons for things unravelling as they have, Tralmaks and Norberg raised funds for the purchase from undisclosed lenders. Tralmaks said the real owners of Diena and Dienas bizness would be disclosed on October 1, but later delayed the announcement until October 9.

By then, three months of secrecy, contradictory hints (at one point, the transaction was said to be financed by some of the founders of Skype)and internal recriminations and arguments about future business strategy had taken their toll. There was, in all likelihood, an irreparable rift between the top editors and Tralmaks by mid-September, when rumors of Ločmele's and Brauna's resignations first appeared.

Tralmaks had proposed drastic cuts in production expenses for Diena of around 55 %, which would have led to considerable staff reductions and salary cuts. Diena's editors proposed a less painful solution (according to a blog Cita Diena/A Different Diena set up to communicate about the breakdown of the newspaper as run by them) and at one point even proposed a management buy-out of sorts. Ločmele jas told Latvian media she had found potential investors to buy back Diena from Tralmaks and Norberg, but was rebuffed. That move also sealed her fate -- it was seen as disloyal to the owners of the moment.

The situation at present is that everyone seems to be standing at a smashed trough (pie sasistas siles) to use a Latvian expression (sort of meaning that the instrument by which all of the barnyard creatures could have been fed has been foolishly destroyed). Tralmaks (now merely the CEO of the Diena group, with no ownership stake) has seen his brand value walk out the door -- indeed, he had some of the top editors escorted away by lawyers and security guards who first searched boxes and briefcases of "the departed" to see that no confidential company documents were taken.

"The Departed" have strongly hinted that they will start a new media outlet, most likely an internet portal and some kind of print publication, but with the Latvian economy collapsing, this is a daunting task, no less than the challenge of keeping the "old" Diena afloat, with Tralmaks speaking of drastic drops in advertising spending already at the time the deal was announced in July.

Finally, Jonathan Rowland, the Rowland family member apparently most involved with the investment in Latvia, has seen his admittedly risky investment turn -- very risky. Rowland appears to have been a bit of a high-roller in the past, so three years from now, he'll probably be at his club and hear something like "Good on you with that Shanghai deal, pity about that...where was it... Latvia or someplace? Odd isn't it, it was some Latvian lads who put the new roof on my country place. Great job. You know, Colin got burned for about as much on that Swedish game console thing...win some, lose some."

500 m or 8.5 % --have we a failure to communicate?

I have not been following the seemingly shambolic (tax this, no, tax that, no, tax nothing, axe nearly everything) development of the 2010 Latvian budget in great detail. But it now seems that the main problem with the international lenders (the European Union/EU, the International Monetary Fund/IMF, the Nordic countries, etc.) is that there appears to be no common definition of benchmarks. There is the absolute number of LVL 500 million (that's more than USD 1 billion for those who want it in "real money") and the other figure of an 8.5 % budget deficit as a proportion of Latvia's GDP.

One is a fixed figure, the other is changeable (not in nominal terms, but in the underlying factors). LVL 500 million is 500 million. 8.5 % is 8.5 % of a figure that has already fallen by 18 % and will probably fall again in 2010. What was USD 8.50 out of a hundred dollar bill isn't USD 8.50 out of USD 82 or maybe USD 70 further down the line.

So what is the crucial figure? In terms of keeping government borrowing down as a percentage of total GDP, it is the percentage that counts and all (most?) of the other figures adjust accordingly. This is one way that you can interpret the Latvian government's proposal to cut the budget in absolute figures by only LVL 225 million, or maybe LVL 275 million, or maybe LVL 335 million. Which is it? But forget that, the important thing is that one of the "whiches" is an amount that brings the budget deficit close to 8.5 % and, in a sum of spending cuts and revenue increases, actually adds up to, or has the same effect as 500 million. Got it?

Swedish finance minister Anders Borg didn't, nor perhaps did the EU. Borg was speaking on behalf of the EU when he chided Latvia for not cutting LVL 500 million straight up from state expenditures, punkt, slut! as the Swedes would say. But maybe the EU really didn't mean 500 million, whatever it takes, but rather, whatever gets Latvia to 8.5 % without effectively stopping the core functions of the state, including education, pensions and health care.

A long IMF country report dated August 7 but made public only a few days ago in early October doesn't paint a very hopeful picture of Latvia's ability to live up to the IMF's conditions. It uses words like "daunting", "challenging", etc., seeming to say between the lines that Latvia lacks the political will and administrative capacity to get its act together. It also hints that the country might have been better off devaluing the LVL early on, as the unbendingly strong lat is named as one of the "challenges" in several parts of the report. Anyway, to devalue at this point would merely worsen the effects of a very harsh internal devaluation (wage cuts of 30 % and more) and replace falling prices with import price inflation. If the LVL is floated, there is talk that it would be very volatile and fall between 30 and 50 %, maybe to recover close to its current theoretical but unused band of plus or minus 15% of the "fixed" rate against the euro.

With some non-Swedish foreign papers interpreting the story of Borg's alleged confidential talks with Swedish banks as "warning of Latvia's collapse", it is a wonder that there has not been any pressure on the LVL as yet (Oct 7). The Swedish Finance Minister is in the challenging position of having to speak for the EU (it is the Sweden presiding) when the EU position (500 million or 8.5 %) is a bit ambiguous, and of avoiding a situation where Latvia actually cracks and hundreds of billions of SEK (as loans by Swedish bank subsidiaries in EUR) are put at great risk or lost.

As the rather harsh dialogue between Latvia and "the Borg" (not the Star Trek hive mind, but the Swedish FM with his dual role) continues, it is obvious that the basic problem is a failure to formulate the issue, which Latvia has tried to belatedly do, arguing that it is meeting the 8.5% target and should not be beaten with the 500 million cudgel. But it may be too late, and Latvia has created an almost irrevocable image of being an unreliable, vacillating and politically disorganized partner for its international lenders.