Latvia: Cobbling together a "kludge" of a government

It looks like Latvia may have managed to cobble together a fragile coalition of Unity/Vienotība (V), the tatters of the Zatlers Reform Party (ZRP), six ZRP defectors and the National Alliance (NA). By now it should be obvious that the bright sun of change some Latvians have expected since the founding of New Era (Jaunais Laiks/JL) almost ten years ago, and that they expected, yet again, with the V alliance in 2010, and yet again with the dismissal of the Saeima and the new elections, has slipped back below the horizon. Another false dawn.

So what can we expect? Valdis Dombrovskis will continue at the helm of a listing ship with six loose cannons on deck (perhaps more, one can't say that the disintegration of the ZRP has ended with the mere loss of 27% of its parliamentary strength). There is already talk that oligarch influenced Green/Farmers Union (Zaļo Zemnieku Savienība/ ZZS, which neither particularly green nor agrarian) could be called out of its political leper colony to boost the coalition should all else fail.

That, of course, would be a symbolic death blow to the ZRP, which was built, overnight in political movement forming terms, on the idea of opposing the “oligarchs” and the practice of state capture. The six loose cannons have indicated this could be fine with them, providing that no direct representatives of Ventspils mayor Aivars Lembergs (from his Ventspils based “sub-party”) are involved. Dombrovskis, too smart not to be aware of the kind of crew he is sailing with, has also hinted that the ZZS might be let in the back door. After all, they are weaker than in the last Saeima, when they did everything to disrupt V's attempts to govern coherently. But then coherent governance has never been and is unlikely to be a Latvian priority in the foreseeable future.

The Harmony Center (Saskaņas Centrs/SC) has forecast – motivated by some bitterness – that the coalition will be lucky to last until next spring. They may be right. They have also indicated that as a harsh and firm opposition, the SC will continue to advocate social democratic policies. When it was offered a chance to govern together with the center-right, the SC quickly abandoned the social democratic populism that got it elected. More evidence that the SC are chameleons, never mind inexperienced (maybe a virtue where “experience” is being part of two decades of misrule) at national government.

After the “Sunday morning surprise” popped on everyone by the chief loose cannoneer Klāvs Olšteins (who burned through two political parties this year so far), it is safe to say that anything can still happen by the time the Saeima has to vote on the new government on October 25. But it seems likely that the present kludge (to use IT slang) of a government will get approved. Then the whole company of 100 merry pranksters will have to pass yet another austerity budget for 2012. How much more will have to be cut, and will the cuts keep up with the deterioration of the tax base due to emigration and the drift of the population into the gray economy is an issue that no one has talked about yet in and depth. Everyone has been watching the political circus or balagāns of the past five weeks. The real horror show may start with the budget. 

Admitting a wasted vote in a failed state lite

I voted for Zatlers' Reform Party (ZRP) in the September 17 out of a sense of duty to vote for an “electable” political party, also to express my dissatisfaction with Unity (Vienotība/V) for letting their coalition partner, the Green and Farmers' Union (Zaļo un Zemnieku savienība/ZZS) walk all over them. I decided that voting for the party I most sympathized with, the semi-anarchist Last Party (Pēdējā partija) would be a waste of my vote.

It now turns out that voting for the ZRP, even though they came in “second” with 22 seats in the Saeima, was also a waste of my vote. Others may be happy with their choice, I am not. It not seems that the only goal of the ZRP is to bring the Harmony Center (Saskaņas centrs/SC) into government, no matter what other disruptive effects this may have. These may include tearing apart the other parties it is trying to bring into the coalition, including itself.

The idea of making the SC one of the building blocks of a future government with its 31 Saeima seats has freaked out Latvian society in many ways at at many levels. It has also been reflected in the foreign media in distorted and nonsensical ways. For instance, saying that the SC gaining two Saeima seats for itself is a “social-democratic” victory is simply wrong. The SC is not a classic social democratic party, its populism sounds social democratic at first glance. It has voted with the oligarchs, it did not act to let anti-corruption police search the homes of Saeima deputy Ainārs Šleser, suspected of corruption. One of SC's candidates for prime minister, Riga mayor Nils Ušakovs, partnered with Šlesers in running the city until the politician was elected to the Saeima in 2010.

For me, these are reasons enough to be skeptical of bringing the SC into government. I would also be worried about the somewhat chameleonic nature of the SC. Within days of the election, they were ready to abandon their pre-election promises concerning the indexing (raising of pensions)and to soften their skeptical stand on joining the euro (considering what is happening with the European sovereign debt crisis, there was some merit to this view) as well as on attempting to re-negotiate and extend Latvia's arrangements with the IMF and other international lenders (a crackpot idea, IMHO).

Also, the SC is actually an alliance of two parties – the SC and the Socialist Party, which is an unreformed, hard-line Communist organization that justifies the deportations of Latvian citizens under Soviet occupation in 1941 and 1949, and calls the 1991 restoration of Latvian independence as a “ reactionary coup”. In a sudden move after the election and as coalition talks started, the SC said it would disassociate from the Socialists. What were they thinking earlier?

Meanwhile, the other parties in the talks were also showing rifts. Valdis Liepins, a Canadian-Latvian who “defected” from V to enthusiastically join the ZRP has been circulating e-mails expressing his opposition to any deal with the SC. He is a potential defector from his new party, which could bring the SC/ZRP majority to 52 (should both parties try to go it together).

V, meanwhile, has been deciding on-again-off-again that it won't/might go into coalition with the SC or maybe with everyone (except the ZZS, a party consigned to a kind of political leper colony). Except that “everyone” doesn't get along with “everyone” else, and the country is not at war or in any other extreme situation requiring a government of national unity. The National Alliance (NA) has declared it will never join a coalition with SC in it, nor is the SC ready to sit in the same government with the nationalists. V is also showing little unity in that some of its components (the former Citizens' Union) are also threatening to split off if there is a coalition with the SC.

Which means there are really “one and a half” possible combinations – the ZRP, V and the NA in a center-right coalition with programmatic similarities and a ZRP/SC coalition of two inexperienced and programmatically mismatched parties that would satisfy former president Valdis Zatlers' ambition to finally bring some ethnic Russians into government (at all costs, if need be).

As for the “Russian” issue, that has been raised yet again in all of its paranoid glory, with at least some parts of society sincerely believing that the SC will move rapidly toward moving Latvia into Russia's sphere of influence and making Russian an official language. Dampening these views has not been helped by Janis Urbanovics, a ethnic Latvian SC leader and its second candidate for prime minister, hinting that Russians would use “extra-parliamentary” means of protest if the SC was kept out of government.

In short, with President Andris Bērziņš setting a deadline for some kind of resolution of matters this Monday (October 10), there is some pressure for the parties to get their act together. But since this is Latvia, that may not happen. The continued bickering, bumbling, “betrayal” and shape-shifting will only confirm the totally cynical attitude the vast majority of the population has toward politics and politicians in general. While Urbanovics may not succeed in getting people into the streets, the continued failure of Latvian politics will lead to more external and “internal emigration”, in the form of passive resistance to taxes and any dealings with a system of governance much of the population sees as corrupt, incompetent and hostile to their interests. 

One "balagāns" is over, the next one starts

And so the big balagāns (slighty tawdry carnival) of the extraordinary Saeima elections is over and the outcome is much as could be expected. The only thing that did not happen is that Harmony Center (SC) didn't get the big gain in seats that some pollsters predicted, and that would have allowed it to make a coalition wih the severely depleted Green and Farmers' Union (ZZS) of the “oligarch” Aivars Lembergs. The SC, which has been called both “ pro-Russian” and “social democratic”, gained only two seats for a total of 31. The ZZS was cut down to 13 seats in the Saeima, but with the SC failing to make the gains that some had predicted for it, there is no way that the two of them together can make the populist, corruption-tolerant coalition that would have been possible if the list led by Riga mayor Nils Ušakovs had gained at least 38 seats (for a bare majority together with ZZS).

What is possible now is a number of unstable coalitions. One is to put together 51 seats with prime minister Valdis Dombrovskis' Unity (V) and SC, which would need a good reason for excluding the Zatlers' Reform Party (ZRP). It would also put the strongest member, SC, in a technically dominant role against the more politically experienced, but “defeated” V. A strong coalition in terms of numbers would put the top three winners together and gather 73 seats, making it possible to pass almost any “reforms”, including changes to the constitution (Satversme).

In such a coalition, the two centrist-liberal parties with 42 votes among them would be dominant, though perhaps as a two-headed alpha dog. If one “discounts” the SC, then the ZRP has good reason to consider itself the real “winner” of the election, having come from nothing to 22 seats in the Saeima, ahead of V with its depleted 20 seats. Vienotība, itself an amalgam of three parties, can still consider itself most experienced at government (which ZRP is not), and besides, ZRP is just an accidental clone of itself, isn't it? Seeing things that way, the real winner is the center-liberal block, the unintentional seeming twins V and ZRP, with 42 votes, just a few short of a majority.

That is where the Nationalist Alliance (NA) with is long title of All for Latvia!-For Fatherland & Freedom/Latvian National Independence Movement could fit very nicely to make a government backed by 56 votes in the Saeima. There is just one problem – the NA knows they are the keystone that holds together the edifice of a “non-Russian” and nominally non-leftist (the NA actually supports protectionism and state ownership, but nevermind...). This gives the nationalists undue leverage, which would be problematic enough if the NA could keep some of its loose cannon from rolling around the deck and firing at the wrong time.

For a while it looked like one of the cannon, a young lawyer named Jānis Iesalnieks, had been lashed down after stating in social media that multiculturalism in Norway was really to blame for the bombing and massacre staged in July by Anders Breivik. Iesalnieks agreed not to run for the Saeima on the NA ticket, something he and All for Latvia (VL) had intended. But just after the election, Iesalnieks resurfaced and engaged SC's candidate for prime minister, Riga mayor Nils Ušakovs, in a duel on Twitter, saying that most of the people who voted for SC (as Latvian citizens) were really an illegitimate colonial population. Ušakovs wrote to VL's leader Raivis Dzintars, who was elected to the new Saeima, demanding an explanation. Dzintars responded that Iesalnieks arguments, based on the Geneva Convention articles about settlers in occupied territories were sound, but that VL and the NA did not support acrimony between the Latvians and Russians on an everyday level. This was a position that could effectively exclude the NA from any coalition with V and the ZRP, especially as the latter has said one of its purposes was to bridge the ethnic rift in Latvian society.

While the NA is unyielding in its hard-line position, the SC has apparently show readiness to retreat from its contrarian, populist or as some politely called it – social democratic policies. In order to join a possible grand coalition, the SC has indicated it will go along with a 2012 budget deficit that will get Latvia into the eurozone under the Maastricht criteria in 2014. It also has, by implication, backed off from suggesting that it wants to extend repayment (by refinancing on the market) of Latvia's loans from the International Monetary Fund (IMF) and other lenders. Ušakovs also made a low-key concession over the weekend, telling a conference that he considered Latvia to have been an occupied country during the Soviet era, but that no one today should be considered an occupier (Latvians use the term okupants or “occupant” – the biggest single addressee for junk mail in the US until /not-so/ sophisticated computer mailing systems personalized each letter). If you ask me, you will see cows dancing ballet on their hind legs by the Freedom Monument in Riga before Nils Ušakovs statement on “occupation” gets the NA to join any government with the SC in it. The reason for this was more likely to make a gesture toward the ZRP and V, who are also sensitive to anyone treating 50 years of totalitarian rule as some kind of mistake in international affairs or an “annexation” agreed to by a government in 1940 terrified by thousands of Soviet tanks and soldiers at (and to a great deal, within) its borders.

Having said that, the quick retreat from apparent “principles” (pasted to the backs of half of the busses in Riga) does not bode well for the SC as a reliable partner to the ZRP and V. Shapeshifters never are. As one former Riga hand said recently over a beer while visiting town, it's all about getting into power for the SC, never about any principles. That makes it a very much “Latvian” and old-style party, much like the sordidly defeated ZZS.

Oh yes – Vienotība and the ZRP are already kicking each other under the table while still trying to smile, because ZRP apparently went to a meeting with the SC without taking its slightly smaller twin along. And already during election eve, a carrot-topped iron lady from V was ranting that Zatlers was a liar because he had extended feelers to the SC even as the ballot boxes were being being sealed and taken away to be counted and exit polls were hitting the newswires showing who would be boss.

A merry few weeks are ahead for all. Book your Ryanair seats now for the opening of parliament (air Baltic may well have gone to the dogs by then, the government may just dump it on the mysterious minority shareholders rather than put up to LVL 60 million, maybe more, into a rathole in the skies).

Harbingers of a new false dawn?

Three newly-elected and sworn former political-emigré Latvian parliament or Saeima deputies met informally with other ex-diaspora (the new terminology) Latvians living in Riga on a Friday evening and spoke with general optimism about what they expected the new Saeima and government to achieve.

Rasma Kārkliņa of Vienotība/Unity (as were the others, Atis Lejiņš and Imants Lieģis) talked about her hopes for reforming and speeding up the system of justice and fighting corruption. The others (Lieģis, minister of defense in the previous government, arrived late because of another engagement) were also upbeat.

Atis Lejiņš took some mild flak for purporting to belong to two political movements at once – Vienotība and the Latvian Social Democratic Workers' Party (LSDSP in Latvian). Its glory days as an exile movement in Sweden under its then leader Bruno Kalniņš long gone, the LSDSP is a borderline crackpot (my personal view) party that ran and lost in the October 2 election as part of the Atbildība/Responsibility ticket. Atbildība plastered Riga trolley-busses with the image of a woman (one of their candidates) putting her head in a noose (because of mortgage debt). This prompted the observation – “ticket number 9 – for hanging yourself”.

Lejiņš said he hoped the LSDSP would elect new leaders in January and then be able to possibly join or align with the Sabiedrība Citai Politikai/Society for a New Politics, a “social democratic lite” member of the Vienotība alliance. We shall see if the younger members of the LSDSP succeed in unseating party leader Jānis Dinēvičs, featured in the election poster campaign dressed and made up as a homeless beggar.

Harking back to 2002

The whole scene reminds me of 2002, when the Vienotība member party (and the party of prime minister Valdis Dombrovskis), Jaunais Laiks/New Era got elected and off to a promising start, speaking of clean and efficient government. The new government's Minister of Health, “Mr. Golden Hands” (as an undeniably good spinal surgeon) Āris Auders was exposed as a double dipper who received state health insurance payments for operations while also soliciting gratuities from his patients.

The new government of Einārs Repše then went on to consolidate remuneration for government ministers in a way that looked like (unless carefully explained) granting a huge pay raise to all ministers without them having a,chieved anything to show that they merited this apparent raise. Things did not go well after that and the Jaunais Laiks-led government proved to be a false dawn for anyone hoping to see an end to corruption and incompetance in the governance of the country.

I bring this up because the euphoria surrounding the victory by Vienotība in the recent elections has been shattered (or should have been shattered) by revelations that Vienotība deputy Silva Bendrāte has been in the pay of Latvia's richest man, Ventspils mayor and oligarch Aivars Lembergs, who faces criminal charges for money laundering and other economic crimes. Among other things, Lembergs used Bendrāte as a straw man (lady?) to buy a radio station in western Latvia.

To be fair, Bendrāte got economically entangled with Lembergs in the the late 1990s, before it was glaringly obvious that he was probably accumulating/skimming/extorting millions from lucrative transit-related (oil, fertilizer) businesses in and around Ventspils. Lembergs is another long story, but as a millionaire mayor, he is anything but Latvia's Michael Bloomberg.

Economy still comatose?

The economy also got mentioned in the Friday night discussion, with discussion moderator and one of the editors of perhaps Latvia's last independent publication, Ir, Pauls Raudseps talking of many signs of recovery. Harvard graduate Raudseps basically quoted from his own column in Ir where he talks of a more than 40% rise in exports and a 10 % increase in retail sales as indicating that both the external and domestic segments of the economy were recovering.

I don't doubt Pauls' mastery of the figures, but it must be remembered that these figures come against a background of month from year-earlier-month declines in retail turnover of more than 30 % in September through December of 2009. So, at best, this is a bottoming out at a level well below that of 2008 (where, of course, we were experiencing consumer spending on crack). Nonetheless,  the Latvian central statistics agency website shows the curve significantly below 2006, which is before the party leading to the crash of the past few years was fully pumped-up. So it is nothing to get excited about, sort of like detecting slightly higher heartbeat, blood pressure and other vitals in a comatose patient. It doesn't really change the comatose state, does it?

Gray economy or anarchistic improvisation?

Another issue raised in the informal discussion with deputies Kārkliņa, Lejiņš and, later, Lieģis, was the problem of the “gray economy” and tax evasion. The very word “gray” defines the problem, because what we are talking about is economic activity that is non-criminal (not drug trading, laundering of stolen goods, fraud, counterfeiting) but fails to pay full taxes.

I think the reason why there is such a gray economy in Latvia goes to the core of my failed state thesis. As I have repeatedly written, Latvia is not a classic failed state, like Somalia where whacked-out gunmen careen through the streets in “technicals” randomly shooting automatic weapons at stray dogs and yelling the equivalent of “yee-haah” in the local dialect. Latvia is a failed state lite because the trust of the population in the state (not really there to begin with) has been irreparably broken by the behavior of those charged with governing the state and by the behavior of the socio-economic elite in general.

So what is the gray economy? Certainly, much of it, the big-money part of it is “grabbers” who simply are accumulating personal fortunes by breaking the law that says one has to pay taxes (I will spare you anarchist arguments on the legitimacy of taxation, because I don't believe these people are even aware of them). I think that another significant element of the gray economy is the spontaneous, chaotic formation of alternative structures to the state that has “failed” the population and lost its trust. In other words, many entrepreneurs evade taxes and pay their employees in envelopes because they know the money will be better used this way. It will not contribute to paying for the world's most expensive (per meter of span) bridge across the Daugava river or other boondoggles. It will not maintain largely useless and hostile bureaucracies, such as a State Revenue Service that (the example is a lady who spoke up Friday night) harass a small, tax-paying private child-care center over petty matters while millions in taxes are owed by the “grabbers”. To contnue paying taxes under such conditions is a form of law-abiding masochism.

In short, a good part of the gray economy is an anarchistic improvisation to make up for what the state cannot, will do, or is and will be incapable of doing for the foreseeable future.

I have previously brought up the concept of “return on taxation”, which, in Latvia, is negative and getting worse as public services are cut and underfunded. But this is a general case of everyone making economically-motivated decisions, even when it comes to obeying the law (at least in case of malum prohibitum – not doing forbidden things that are not evil in themselves). Thus, in breaking speed limits or jaywalking, we take a risk of a fine in exchange for getting somewhere a bit faster. We also pull out of poor investments to avoid economic loss. So it is also logical that we pull away from non-performing “assets” such as the Latvian state, even if there is some risk of penalty (against the strange background of – the larger the sum we rip off /or deny getting ripped off by the state, the less likely we are to suffer for it. The risk is greater being a day late with the pendanticly calculted social tax on four employees at a day care center).

At the end of the meeting with the three former exile Latvian deputies, it was agreed to give the new government 100 days to set its course before making a judgement. Fair enough. However, I have already drawn my own conclusions about the Latvian state and I will not be holding my breath for anything dramatic.  

Some thoughts about the new Latvian government

I sat down late at night and recorded some ramblings on the new/old  Latvian government, partly to test my new HD webcam.

Latvia patches together a two-party coalition government

Outgoing and incoming Prime Minister Valdis Dombrovskis Vienotība or "Unity" party alliance has managed to patch together a two-party coalition government that clearly reflects the emerging political tensions inside both the alliance and the coalition as a whole.
Vienotība will get seven of thirteen ministries, including Defense, the Foreign Ministry, the Ministry of Interior and the Ministry of Finance, with the remaining posts going to the Zaļo Zemnieku/Green Farmers alliance, a political faction strongly influenced by Ventspils mayor Aivars Lembergs, an oligarch under criminal investigation for money laundering, bribery and other crimes.
The two-party coalition was formed after effectively pushing aside the nationalist Visu Latvijai/Tevzemei un Brīvībai LNNK (All for Latvia/Fatherland and Freedom) alliance, which was included in coalition talks immediately after the election. This was a result of internal conflicts in Dombrovskis' alliance, with the centrist Sabiedrība citai Politikai/Movement for a Different Politics objecting strongly to the present of what it considered radical nationalists in the government.
This development confirms predictions this blogger has heard for months that once in power, "Unity" would soon dissolve in "disunity" as latent political and personal ambitions rip apart the fragile electoral alliance. It is also unclear to what extent Lembergs, threatened with prosecution for numerous economic crimes (but still the Green/Farmer choice for Prime Minister in the recent election campaign), may use his influence to disrupt the new government. A "worst case scenario" could be that the Green/Farmer coalition deserts Dombrovskis to ally with the second place, pro-Russian Saskaņas Centrs/Harmony Center, leaving (dis?) Unity in opposition with its spurned partner, the nationalists and the Par Labu Latvija/For a Good Latvia alliance representing oligarchs Andis Šķēle and Ainārs Šlesers.
The choices for ministers that have come to light so far are not impressive. Despite tens of thousands of negative (minus) votes, Linda Mūrniece has been nominated to continue as Minister of Interior. In the outgoing government, she angered police unions, sent the riot squad against protestors in Bauska and was caught driving her children to school in a government car.
Artis Pabriks, a former foreign minister, has been suggested as minister of defense, replacing the otherwise competent British-Latvian Imants Lieģis, who, after working hard on reforms and spending controls at the ministry, is now returned to a seat in the parliament or Saiema, thank you very much... Ģirts Valdis Kristovskis, a former nationalist and former defense minister, has been nominated for the post of foreign minister.  Artis Kampars, whose English-language skills proved second only to "Nothing Special"  former finance minister Atis Slakteris,  has been nominated to continue as minister of economics a outward facing ministry if anything.
The emerging government also faces its first major scandals. The website "Pietiek.com" (meaning "Enough, already") led by hatchet-job journalist Lato Lapsa, has disclosed that Silva Bendrāte, a "Unity" parliamentarian, has been secretly financed by Lembergs, who used here as an intermediary to buy a radio station in the western Latvian district of Kurzeme. Bendrāte says she didn't know of Lembergs' possible criminal activities when she agreed to the deal some 13 years ago, having perceived the Ventspils mayor as a dynamic, capable politician.
Also under attack from "pietiek.com"  is newly-elected "Unity" candidate Lolita Čigāne, a former head of the anti-corruption group Delna (the Latvian affiliate of Transparency International). Čigāne and her husband Nils Students, who own a boutique in Riga, paid an administrative fine several years ago for bringing items such as kerchiefs and other textiles from Turkey through customs without paying import duties. Čigāne says this was inadvertent and the matter was settled after she paid a fine, Moreover, the fact of having an administrative violation does not create a dependency on outsiders, as may be the case with Bendrāte's relationship with Lembergs.
"Pietiek.com" is a strange website, using the skills of investigative journalist (formerly of Diena) Baiba Rulle and Agnese Margeviča, as well as the controversial Lapsa. The site publishes copies of documents backing its allegations of corruption, duplicity and incompetence, and it seems to show no political favoritism, especially considering Lapsa's almost foaming-at-the-mouth editorial attacks on Bendrāte and Čigāne. He accuses both women of ethical depravity and calls them liars.
This is a bit harsh -- I would give the benefit of the doubt to Bendrāte's claims that, back in the late 1990s, Lembergs was not seen as an evil, manipulative oligarch. If Lapsa's harsh judgement of Čigāne were to be applied across the board, then no one with a parking ticket, a speeding violation or a youthful citation for public drinking or littering should every run for elected office. "Pietiek.com" is doing a remarkable job of publishing documentation of corruption and depravity -- it is a sort of Latvian "Wikileaks", but its editorializing crosses the line as far as being fair, balanced and giving some leeway to  the possibility that people in politics can make honest mistakes.
As for my take on the new government -- it is starting to look a bit half-assed, to use an American term, and I don't see it lasting the next four years. Dombrovskis faces the almost impossible task of cutting another LVL 1 billion from the budget over the next two years, turning Latvia into a nightwatchman state at best, with drastic cuts (public statements notwithstanding) in pension, medical care, education, as well as sharp tax rises just around the corner.
The government still believes it can join the Eurozone in 2014. I think this is highly unlikely. 2020, perhaps. The pauperization of the population by wage cuts and unemployment will negate any effect from tax increases (who can afford them?) and the targets for a reduced budget deficit will not be met. Emigration is on the rise -- official statistics indicate that over 7700 Latvians left the country in the first nine months of 2010, which is probably only the tip of the iceberg (I would guess that in reality, two or three times as many have left and will not return in the foreseeable future).  There is also an economic logic to tax avoidance or evasion -- the population has experience and will continue to experience a drastically falling "return on taxation" -- more taxes, worsening public services.  So why, purely in terms of economic calculation, should anyone make an effort to pay?
The new government, most likely, will be formed in the next few days, but it will continue to preside over a failing state lite. I see nothing that will change that.

A happy turn in Ziggy's grave? Not really...

With some glaring mistakes corrected.

Sorry about the flippant and irreverant reference to a true Latvian national hero, the nation's first foreign minister, Zigfrīds Anna Meierovics, who earned de facto and de jure recognition for the young and beleaguered Republic of Latvia. Sarmite Elerte, the former editor-in-chief of Diena, the national daily sold last year to the British Rowland family, has started an organization called the Meierovics' Society for Progressive Change, gathering many Latvian intellectuals and semi-celebrities. The aims are well-meaning and, indeed, Zigfrīds (Ziggy starts to sound wrong) can turn to the other side in his resting place with a little more confidence that all is not lost and he is at least well remembered.

However, this looks like yet another society for the betterment of all that is somewhat removed from the realities and depravity of political life in Latvia. Even as the ink was drying on the new organization's founding documents, Riga mayor Nils Ušakovs was telling reporters that around LVL 1 million had been embezzled or otherwise vanished from the accounts of the bankrupt municipally-owned health insurer RSK. Par for the course in Latvia, where stealing from the Children's Hospital came as naturally as breathing for some folks.

Of course, there are plenty of reasons (if the above doesn't suffice) for other kinds of turning in the grave, should anyone care to... Current ministers, instead of heros, have a talent for being buffoons, such as outgoing Minister of Justice (not Interior, my mistake) Mareks Segliņš, who handed in his resignation from the post of Minister of Heath. Prime Minister Valdis Dombrovskis kindly asked Mareks to get it together and resubmit a proper resignation. It is not known whether Minister of Health Baiba Rozentāle resigned from the Justice Ministry. Four ministers, all from the Peoples' Party (Tautas Partija/TP) have left the government after the party leader Andris Šķēle ordered his people into opposition.

Dombrovskis of the New Era (Jaunais Laiks/JL) is holding together a minority government that may bumble along until the elections. Whoever has the misfortune of winning that contest is going to face cutting at least another LVL 500 million from the state budget, something that is unlikely to happen without drastic cuts in pensions and other already meager entitlements.

Unfortunately, despite whatever well-meaning organizations with nice people that are set up, the country has been pushed past a number of tipping points, and I see no other possible future for Latvia except as a stagnant, corrupt, hapless and hopeless, increasingly depopulated territory on the margins of the European Union. At least for the rest of the decade. For that, we have the political elite and our tolerance of it to thank.

The last days/weeks of Dombrovskis the fall guy?

Valdis Dombrovskis, like the summer weather in mid-September in Latvia, is on borrowed time. It is hard not to see and hear that the knives are out for him. Both his own coalition partner, the People’s Party (Tautas partija/TP), and the loyal opposition (no ministers, but hitherto behind the government) of Latvia’s First Party/Latvian Way (Latvijas pirmā partija/Latvijas ceļš LPP/LC) are shaking the coalition so hard that pieces are sure to fly off.

The LPP/LC said at a recent party leadership conference that they would not support Dombrovskis’ government. with Riga vice-mayor Ainārs Šlesers calling for the Prime Minister to step down in so many words.

Guess who will step up?

Not even a few months had passed since the June municipal elections put the twins Nils Ušakovs (of the pro-Russian Harmony Center/Saskaņas centrs/SC) and Šlesers in charge of the Latvian capital when the “alpha twin” Šlesers started talking of taking up the call to head a government after the 2010 elections. Now, it seems, the trumpet is sounding in his ears a bit earlier.

The People’s Party has been quarreling with Dombrovskis on economy policy and accusing the government (here one must agree with Latvia’s most unpopular party in voter polls) of poor communication both within the government and with the general public. It looks like they are ready to jump as well, but hoping that the 2010 elections will boost their ratings significantly beyond the present 1.5 to 1.7 % the TP has gotten in recent polls (one thinks that given the historical ignorance of some young people plus the spin that he is actually a nice guy from Purvciems could get Vjaceslav Molotov an higher rating than the TP).

The TP wants to draft “ businessman” and ordinary rank-and-file member Andris Šķēle to make a come-back as Prime Minister (unless he trips and falls under the Bulldozer -- one of Šlesers’ municipal election symbols). Interestingly, when asked what business Šķēle had been doing on a TV talk show, Vineta Muižniece, the TP parliamentary faction leader, said that it was a private matter for Šķēle.

Certainly, whatever it is he has been doing has gotten little publicity compared to other business figures, such as Mārtiņš Bondars, ex-chairman of Latvijas Krājbanka (The Latvian Savings Bank), who have hinted at entering politics. We can read the bank’s annual reports. We can look at the track records in private business of people such as Vitālijs Gavrilovs, who ran the brewery Aldaris for many years. Other than peripheral involvement in some windpower project and alleged involvement in the failed first attempt to start digital terrestrial television, I really don’t know what Škele has been doing as a businessman these past few years. Does anyone else?

I don’t believe the “Šķēle factor” will revive the TP, which is widely and accurately blamed for its blind and deaf belief that the “fat years” would continue forever. What is more worrisome is that if fall guy Dombrovskis falls, “pedal to the metal” Šlesers may step up to the Prime Minister’s chair even ahead of the 2010 elections (it is anybody’s guess what may happen to the economy and the social fabric of the country over the next year, but it won’t be anything good). The LPP/LC, to my mind, is a cryptofascist party backed by religious fanatics who have repeatedly attempted to restrict the free speech rights of sexual minorities in Latvia. The authoritarian mind set of these people may then treat other dissidents -- such as angry spontaneous demonstrators -- no differently.

Another sign that Dombrovskis has expended his usefulness is the fact that the ink is dry on a number of critical international lending agreements and the cash is rolling into Latvia’s state coffers. There is no need to have guys hanging around whose party leadership (Dombrovskis is from the New Era/Jaunais laiks/JL) pledged in church to be committed to clean and honest government (many saw this as a balagāns/cheap show, but maybe not the Main Man up there). The international loans (and the lenders will not have armed auditors standing next to every bureaucrat) are the biggest opportunity for corruption and state capture, dwarfing the infamous G-24 credits of the early 1990s, where mere tens of millions vanished down the rathole.

Knowing what a Charlie Foxtrot (cluster f**k) the Latvian government (any Latvian government) can be, there was a substantial risk that the whole international borrowing process could have been bungled, leaving Latvia at least temporarily insolvent. Better to have had Dombrovskis and the JL guys at the wheel for that. Since it didn’t happen, we can clear the bridge and put a real pirate crew on deck now that the ship didn’t sink.

However, that doesn’t change the fact that another LVL 500 million will have to be cut from the 2010 budget in the next few weeks, with equally much coming out of the 2011 budget. So even if he gets a premature shot at the Prime Minister’s chair, Šlesers will face some real challenges as well as likely social unrest and a noticeable bleed-off of the potential workforce as economies recover in countries that Latvians can easily emigrate to.

Latvian PM--wave of emigration inevitable

Latvian Prime Minister Valdis Dombrovskis has told reporters (item in Latvian) that a wave of emigration is inescapable as European economies recover ahead of Latvia and the wage gap between Latvia and Western Europe is widened by recent sharp wage cuts.

Dombrovskis said the problem was no longer emigration, which was inescapable, but how to get migrant labor back to Latvia. While some people returned from abroad at the height of the credit-fed boom in 2007 and early 2008, I think such efforts will fail. In any case, with what I would call a "drooping L" scenario likely for the Latvian economy, the return of emigres is a problem for the late 2010s at the earliest (say, 2015 -2018 at the earliest). By drooping L, I mean a sharp drop followed by stagnation with a noticeable downward slide.

The PM has essentially confirmed (at least in general) the analysis posited by this blog and others, that the errors of earlier governments have pushed society past some tipping points and further irreversible decline is inevitable. What Dombrovskis didn't say much about was the profound destruction of trust and reliance on Latvian governance caused by the policies he has been forced to implement -- cutting funding for education, implementing de facto health care for cash only, and cutting pensions.

PM denies Latvia will become a failed state

Latvian Prime Minister Valdis Dombrovskis denied Latvia was becoming a failed state in an interview (Latvian language) with the news portal Apollo. My reader Mr. Key pointed this out to me in a comment.
I don't know if Dombrovskis was referring to this blog (who knows? the man reads English) or, more likely, to a prominent Latvian political scientist's article which seems to have borrowed the title Failed State Latvija? from here.
In any case, I have always argued that Latvia was, if anything, a kind of failed state lite, with no Somalia-style dramas at street level (stoned competing militias driving around in technicals, shooting cattle for amusement, no public services whatsoever, etc.). The lights are on, public transportation runs, there is radio, TV, and if the shit going down is serious, the police will probably show up.
The reason I call Latvia a failing state or failed state lite is because the administrations prior to Dombrovskis allowed state finances and bureaucracy to bloat and private lending to run wild beyond a number of tipping points, so that most of what has happened in terms of budget cuts, international beggar-bowling, etc., was inevitable and unstoppable. Valdis Dombrovskis, the smart MEP with a cool, calm style, was the man chosen to be the fall guy for the economically lethal bungling of the administration of Aigars Kalvitis and, to some extent, Ivars Godmanis (who stayed around long enough to "save" Parex Bank and figure out that, indeed, the train of the state was runway and it was time to let someone else take the controls).
I don't know what Dombrovskis sees as a failed state. He seems to lean toward the definition that talks of a collapse of the monopoly on legitimate force. This isn't happening here, yet, but a lot else is, such as the de-facto collapse of public services and the widespread total mistrust of political power. It is, of course, a dramatic case of state failure when the population takes up arms against the police and military, but is it less a failure when folks simply ignore the alleged legitimacy of the state by ignoring it, evading taxes, dispensing rough justice and proclaiming (as in many parts of the countryside) that they see no evidence of state power or service.
It may not get widely publicized or reported, but there are probably communities kilometers down the pitted dirt road from the nearest policeman and his Soviet-clunker jeep, where drunks (and most of the population sometimes qualifies as such) who overstep certain boundaries are simply taken for a remedial walk in the woods, where what little business there is takes place as untaxed barter of goods (often alcohol) and services, and where the local school, admittedly a luxury with many teachers and staff for few pupils, will be closed with no way for children to reach the next district school, and where the district hospital will be closed as well. It is an interesting question as to whether there people abandoned the state, or the state failed them.
I can still walk about Riga safely, I can buy all necessities and (if I wanted to) a wide range of luxuries (flatscreen TVs are getting cheap, so are slightly used SUVs), but I am not at all sure that there will be anyone teaching my child at his underfunded school. I am resigned to having to pay full cost for any acceptable level of private health care (some is covered by insurance from work) and I assume that I will not be paid any reliable pension by the Latvian state. In other words, given the choice of another system of governance where these things worked, I would personally rank Latvia as failed and go there instead if and when that becomes a viable option.
In a broader sense, the scenario for Latvia is probably an L -shaped or even a drooping L scenario of stagnation for much of the next decade. One contributing factor will be that a large number of skilled and qualified workers will leave -- for all practical purposes, permanently --once EU labor markets revive. Recent TV spots about Latvians in Ireland indicate that those who have moved there --especially those making the psychologically and socially wise step (for all involved) of bring their families along -- are very unlikely to return. Even unemployed Latvians (laid off from construction work) say they are far better off and have better prospects in Ireland than they would ever have in Latvia.
Another contributing factor is that hasty cuts will collapse public services such as education and health care, leading to a decline in the skills of the younger generation and hastened mortality among the old. What impact this will have, I leave to other bloggers such as Edward Hugh, to comment on.
So I will respectfully disagree with Valdis Dombrovskis and say again -- Latvia is a kind of failed state and will continue to fail for the foreseeble future.

Dombrovskis hopes for the best after 19.6 % GDP drop

Despite a 19.6 % drop in second quarter GDP, Latvia's prime minister Valdis Dombrovskis does not believe the country is heading into a so-called L shaped recession, the portal Delfi reports (in Latvian). In an L-shaped recession, there is a sharp drop followed by prolonged stagnation.
Unfortunately, this is unwarranted optimism. The problem is not the presence or lack of stimulus (although mechanical and largely chaotic budget cuts of over LVL 1 billion are a considerable "anti-stimulus"), but one of trust in the Latvian government as an institution. This, I believe, has completely and irrevocably failed. The past governments have allowed the country to spin into a recession and crisis that is far more severe than had some preventive measures been taken over the past two or three years. The present government has irreparably broken the compulsory social contract by effectively shutting down health care and education and cutting pensions (by 70 % for working pensioners). It has raised and plans to additionally raise taxes as the tax base contracts, thereby stimulating only the gray economy.
Don't get me wrong -- there is a lot of waste in the way Latvia is governed and in the way medical and educational services are delivered, but to chop them off and toss this into the "care"of society with little warning is not a solution. The right thing to do would have been to carefully analyze (by independent third parties) the gross inefficiencies of Latvia's government and public services and to start a gradual downscaling (privatizing hospitals, but setting up a credible private/cooperative health insurance network, cutting taxes and allowing broader use of private pensions, setting up private/cooperative schools with tax reductions and deductions). I suppose it would take some 10 years to move Latvia toward a night-watchman state with minimal taxes and a core of police, judiciary and defense services. Instead, the government has announced no plan, it has broken implied social promises and it has demoralized the able, working parts of the population ensuring that, as soon as the rest of the EU starts to recover, tens of thousands of Latvians will emigrate. This will ensure the stagnation of the economy as labor skills and entrepreneurial talent go elsewhere.
I am afraid that L is where we are going.

Little hope to bend the IMF

Although Finance Minister Einārs Repše has spoken of a successful start to Latvia's talks with a delegation from the International Monetary Fund (IMF), these talks will mainly focus on technical matters, agreement on accounting procedures and budget methodologies. It is difficult to imagine that there would be any serious problems with agreement on "how to count the beans".

The fundamental problem is "do we get any more beans" and that depends on cutting the budget deficit to 5 % of GDP, not the 7 % that the Latvian government thinks it can cajole from the IMF. Whatever sympathies the IMF may feel for Latvia's situation (harsh public sector wage cuts of 20 % or even more), the international agency basically has its hands tied by a number of factors. One is that other East European countries (Romania is the latest) may be seeking loans, and easing Latvia's terms would set a bad precedent. The precedent could also carry over into other countries outside of Europe. Unfair though it is, the IMF is unlikely to accept the argument that other, bigger European countries are pushing the envelope beyond the 5 % limit, nevermind the US.

So it appears that Latvia's budget cuts fall far short of what the IMF demands in order to continue paying out its line of credit to Latvia, and the government will have to cut spending to beyond the bone or risk government insolvency by the summer. Those deeper cuts may well have close to the same effect as insolvency, as public services could be reduced to the point of collapse at the same time as pensions may be reduced, something that could be the last straw before new social disorders (taking to the streets by the unemployed or by youths tossing paving stones on behalf of their grandparents).

One knowledgeable source I encountered by chance recently  says that the IMF might cut a deal with the Latvian government in return for a devaluation of the lat, something the IMF brought up in its initial talks with Latvia late last year, but which the government rejected and its position was respected by the IMF. However, being allowed to boost the budget deficit to, say 6 % of GDP in return for letting the lat float in a 15 % range from its current peg wouldn't solve very much. The thousands of mortgage paying (in EUR) public employees would, in addition to their 20 % pay cut, see a rise of as much as 15 % in their monthly payments. Eventually, the devaluation would also boost input prices for domestic goods (energy, raw materials) and sharply increase the price of imports, including many essentials (wintertime fruits and vegetables) for which there is no domestic substitute, not to mention fuel prices.

Faced with these two impossible choices, Prime Minister Valdis Dombrovskis, in my mind, still stands as " the fall guy" for the previous (mis)governments. Perhaps this is meant as a final death stab to the reformist New Era (Jaunais Laiks) party, which had already done a fairly good job of slouching toward its own grave after splitting and losing some of its people to the new Civil Union (Pilsoniskā Savienība). The reason for this --bizarre and irrational as it may seem -- is to protect, at almost any price,  the current ruling elite (elites?) from serious challenge by a political force that at least to a large extent believes in clean, efficient governance.

Billions in debt service well into the 2010s?

If anyone has any illusions about a recovery of the Latvian economy in the foreseeable future,  they should check out some figures obtained from the State Treasury (Valsts Kase) by a researcher for the popular TV discussion show Kas notiek Latvijā? (What is happening in Latvia?). The Latvian version is here. 

Without getting into a whole muddle of numbers, by 2014, even based on current state borrowing (and, as I understand it, excluding the 7.5 billion EUR the government has obtained from the IMF and the EU), Latvia will be paying at least 1 billion LVL per annum in credit servicing (interest and repayment of principle) costs. Adding in the foreign credits, these payments will be almost 10 billion LVL up to and including 2020.

With economic growth stagnating for any number of reasons -- higher taxes, poor productivity, corruption, confused and clueless policies -- the debt load will probably prevent Latvia from joining the euro zone (you must have government debt below 50 % of GDP) in the foreseeable future. At some point, too, the lat will have to be decoupled from its 1 % corridor against the euro. although with such a huge euro debt, a devaluation will have an even more devastating effect on the ability of the country to repay its international borrowing (as well as on all domestic and household borrowing in EUR).

Add to this the fact that it appears Latvia will not even get its next payment from international lenders, since the new Dombrovskis government has agreed to only less than 300 million LVL of the 700 million LVL budget cuts required by the lenders as a precondition to continued payouts. It is very unlikely that the EU and IMF will cut Latvia any slack on this, and the 700 million cut will probably end up reducing public services below some critical minimum. That is not to say that Latvian government could not be run much, much more efficiently, but there has been too little effort (none practically) to think in terms of smart government and of a very careful prioritizing of cost cuts.

Quite the opposite-- a recent story  (in Latvian) on the State Audit examination of the huge cost overruns on the so-called Southern Bridge in Riga, boosting its cost from an initial just over 108 million LVL to 570 million LVL. That is the kind of money that India is spending on its next Vikrant class aircraft carrier. Of this cost to the municipality of Riga, 264 million lats (or some 0.87 santims for every lat spend on actually building the bridge) constitute debt service (cost of borrowing). Indeed, the entire project is one gigantic clusterfuck of cost overruns and waste probably repeated on a smaller scale in the way other municipalities and government institutions do business. Indeed, one figure of 27 million LVL pissed away by the idiot city fathers amounts to the money scraped together recently for support to dairy farmers. This bridge boondoggle will also have to be paid off, along with the debt servicing mentioned above.

The bridge story fits in well here, because it is a story of how money is misspent through Latvia's third-world rathole level of corruption, incompetence and idiocy in government. The idea of lending Latvia some 7.5 billion EUR is that it will keep the institutions of governance funded so that the economy can start recovery (maybe not even drawing down the credit line in full).  However, 7.5 billion is also the largest embezzlement, waste and corrupt diversion of funds opportunity ever presented to Latvia's ruling elite. Looking at how this country builds bridges for the price of an aircraft carrier, and how it wasted the so-called G-24 loan of a few tens of millions, of how it cluelessly beggared itself rather than saving its tax surpluses as warnings of an economic downturn multiplied, it is likely--bordering on certain-- that the EU and IMF funds will also be wasted and decimated by corruption and mismanagement.

New crew on the bridge of the Titanic

The government put together by Valdis Dombrovskis of the New Era (Jaunais Laiks/JL) has been affirmed by a large majority of the Saeima (parliament). It has published a declaration of policy that can only be described as a long list of largely commendable and reasonable tasks, for which no funding exists. Indeed, the fatal error of the present government is that it has proposed (including a 20 % pay cut for all public employees except in health care) budget reductions that fall far short of the 700 million LVL that must be reduced in order to narrow the budget deficit to the limits required by the International Monetary Fund (IMF) and the European Commission. Hopes of negotiating an exception are illusory -- the wealthier and older EU member states are already spooked by the possible bill for the present stage of bailing out Eastern Europe (see a recent issue of The Economist with a cover story on this).

Unfortunately, the Dombrovskis government is but a crew change on the bridge of the sharply listing Titanic. If the full 700 million LVL cuts are made, public services as presently organized and delivered in Latvia (efficiency and productivity, of course, have been alien concepts) will disintegrate. There will be strikes by schoolteachers as well as labor market actions by police. If Edward Hugh's prediction of a V-shaped recession for "Old Europe" and a U-shaped recession for Latvia comes true, it means that as soon as recovery starts in Western Europe,  labor emigration will pick up. Teachers and police whose standard of living was drastically reduced will seek unskilled and semi-skilled work abroad, because the pay will significantly exceed anything they can hope to make in Latvia.

However, before that happens, there will probably be significant social unrest and disintegration -- more street disorders -- police trying to control mobs of  "there but for luck, go I" unemployed and desperate demonstrators and rioters, increased street crime and massive "economic crime" as entrepreneurs simply drop out of the "legitimate" economy and pay their remaining productive employees in envelopes.

None of this can be avoided because it is the result of governments prior to Dombrovskis'  merrily crashing into the iceberg and fatally damaging the Latvian ship of state and society. This government, it almost seems, was lured into being at the helm for the final stage of the sinking. Historians will blame earlier governments, to be sure, but the record will show that when the Latvian state was bankrupted, when the lat had to finally be devalued, and when unemployment (later emigration) soared into double-digit amounts, it was Valdis Dombrovskis and his team who were formally in charge. 

Right man(?) too late

Imagine that someone had stepped up to the bridge of the Titanic, relieved the captain and said: "The biggest mistake on this voyage was setting out with too few lifeboats and it was wrong not to sail south of these icebergs, as we just bumped one."
The next thing the replacement captain says is : "Of course, as things are now, we will sink and more than half the passengers will drown."
That is about how I see the nomination of the New Era (Jaunais Laiks/JL) Europarliamentarian Valdis Dombrovskis to form a new government.
Dombrovskis, 37, is a pretty smart guy (degrees in engineering and economics, including both education and research work abroad in the US and Germany) and probably honest and straightforward. That is why he said that one of the first tasks of his new government would be to reduce spending(i.e. the budget deficit) by 700 million LVL in order to comply with International Monetary Fund (IMF) terms for its loans to Latvia.
The Prime Minister designees statement comes on the heels of a report that Latvia's so-called social budget will have a shortfall of 300 million LVL. Unless Dombrovskis has added this into his figure (and Latvia has separated the "social budget"which is funded by social taxes on payrolls from the "state budget"), it looks like the country will be at least 1 billion LVL in the hole this year.
If the budget deficit is not cut by 700 million LVL, the country will essentially be bankrupt, Dombrovskis said. Although he called cutting pensions a "red line" that his government will not cross, the possibility has apparently been brought up by the IMF. Pot banging little old ladies in the streets -- thousands perhaps-- anyone? Or how about real wild in the streets riots with kids throwing stones and burning cars in support of their grannies?
In order for Dombrovskis to form a government, he will need the support of the largest parliamentary party, the People's Party(Tautas Partija/TP) plus a few other parties. In other words, most of the Ugly Humpty Dumpty that presided over the complete clusterf**k of the Latvian economy will have to be put back together again. That does not bode well, but probably there is no alternative.
JL also doesn't have a spectacular record. Formed as a clean government, new approach party that ran in the 2002 elections and won big support, it almost immediately stumbled when Prime Minister Einārs Repše appointed a Minister of Health, Āris Auders, who proved to be a double-dipping sleaze bag who had done state financed orthopedic operations while taking big-time tips in envelopes from his patients (for "his golden hands".) The new government in 2002 also sharply raised ministerial salaries without having done very much (in was only in office a few weeks).
Repše as PM also came across as more than flakey, with a penchant for odd-ball, home made light aircraft, a series of wacko investments with loads of (borrowed?) money and business ventures with one of his series of girlfriends (a 500 000 LVL yacht that would repay itself from rich charter customers sailing the smooth sunny waters of the Baltic -- well, not in February, nor eight or nine other months). Some of these ventures came after Repše was forced from office, but they reflect on his judgement and strangeness. It is rumored Dombrovskis wants him as Minister of Finance.
In addition, JL is a weakened party, with some of its leading members splitting off to form the Civic Union (Pilsoniskā Savienība/PS). Parts of the hatchet that was used for the chopping are still protruding above ground, rather badly buried out of the necessity of the present economic crisis.
Unfortunately, it appears will will, instead of the idiots running the country up t0 now, a non-idiot who can do almost nothing to prevent the inevitable consequences of his predecessor's actions. The captain of the Titanic, perhaps the last man to sign off on the log-book of the ship, can be formally held responsible for the sinking. Now the TP has passed the log book to Dombrovskis and the JL, so they can sign before the waves close over their heads. Smart move??