Heavy metal in Liepaja - catching up with the story

To those of you who have been following the Latvian media, the saga of  the rolled steel products company  Liepajas metalurgs  (LM)has been in the headlines. It has been building up to a crunch that may have come on May 3, when the company’s creditors’ club, which includes a state-owned bank, the state-owned electrical utility, the state treasury, state-owned Citadele Bank,  the Latvian subsidiary of SEB Bank, an Italian bank and a British steel trader, offered to buy out the company’s existing shareholders (for LVL 1 apiece or around six US dollar in total), replace its management and put LM in some kind of protection from creditors until it can be recapitalized and put on the path to profitability again. But more on that later…

That LM was teetering on the edge is clear from a confidential audit report by Ernst & Young  that also says that if the company is allowed to fail, it could have a knock-on effect of taking 1.2 to 1.5 percentage points off the Latvian GDP. Depending, or rather, regardless of whose data you use (the auditors say LVL 305 million, other

sources, perhaps adding in related companies, have a higher figure), LM is one of Latvia’s largest companies by sales. In addition, 98% of sales are exports.

With a slumping market for rebar and falling prices, it was the combined export markets of Europe and the world that killed LM’s profit margins and had it selling rebar products to a major market – Algeria – probably below cost, according to the extraordinary audit report.

As for the company’s official auditor, BDO Invest Riga , the Ernst & Young  report is unsparing – the auditors, by also making a valuation of LM’s assets were in conflict of interest and methodologically unsound – something which clouds the real risk associated with the assets pledged against the company’s loans and, ultimately, to protect the government’s risk with its loan guarantee.

Without going into detail, the officially “restricted access” document as stamped on each of its pages, is a litany of instance of corporate mis-governance, bad judgment and nontransparent dealings and transactions which, thereby, cannot be scrutinized. No one says the “f” word (fraud, what did you think?) other than saying that there was no evidence of fraud, given the no-one had any real evidence of anything in the obscure dealings of LM and some of its related companies. The situation was not helped with the apparently hapless and more likely feckless but royally-paid (some LVL 14 800 per month) management board/shareholders unable to deal with the deteriorating world market situation.

As it became obvious that LM had about a month left, if not less, before insolvency proceedings are filed against it by creditor UniCredit  (the Italian-owned bank), owed its regular payment on the government guaranteed loan on April 30. As things turned out, the government was forced to pay just over LVL 6 million in principal on the loan when LM indicated that it could not pay. LM did cough up the interest on the loan, without which things would have turned seriously south.

It seemed, too, that the electrical utility Latvenergo , initially blamed for the problems LM was facing because of the utility’s more than slightly deranged double charges for “green” electricity in line with government policy, would only be one of several creditors rushing to file insolvency papers against LM in court. Worse still, Latvenergo  could have  simply shut off electricity to the company’s brand new furnaces, something that you can’t turn on again without serious technical problems (like hacking tons of solidified slag out of the cold cauldrons, though not being an engineer, I could be wrong on that).

None of that has happened. Instead, the letter send by the creditor club’ s advisor, Prudentia Advisers (advisors?- spellcheck seems happy with both versions)

Politically, this is a situation where Prime Minister Valdis Dombrovskis coalition

government can do no right. Through Finance Minister Daniels Pavļuts it has indicated that LM’s problems must be solved by its feuding private owners and by more private investment, no politician will be forgiven for turning Liepaja into an impoverished ghost town by letting LM go under (2,800 jobs lost immediately,

thousands more indirectly). By giving the scale of financial assistance that LM needs to avoid insolvency and to recover, Latvia risks trouble with the European Union, if it uses taxpayer money to bailout and recapitalize the company.

So far two of the shareholders, Sergejs Zaharjins and Ilja Segals have agreed to sell their shares in LM. With production stopped and both management and the two aforementioned shareholder clueless as to what to do next, Zaharjins and Segals may be getting the best deal they can hope for.

The third shareholder, Kirovs Lipmans, who is also president of the Latvian Hockey Federation, heard about the offer while attending the World Hockey Championship in Helsinki. Despite blaming the other two shareholders, from whom he is estranged, for the pitiful state of LM, Lipmans rejected the offer and said the scheme put together by Prudentia would be a disaster for LM (as if the company was not already ruined). Lipmans may be bitter that he, who played no part in mismanaging the company, is being offered the same terms as the other shareholders. However, he has repeatedly said that he could get the company back on its feet, given a chance, and the offer by the creditors does include such a chance. Lipmans has said he has found potential investors for LM, but so far has not disclosed who they are nor even described them in general terms.

As things stand, it looks like the only serious player in the moves to avoid an end-game for LM is the British steel trader Stemcor, a company that knows the steel and steel products markets and would be taking over one of its suppliers. However, for the scheme to work, the puck, so to speak, is on Lipmans’ half of the ice, since he could swallow his pride, sell his shares and buy back into LM with his own money and/or that of his unnamed investors and then run the company in partnership with Stemcor.  Whether this scenario plays out remains to be seen. 

Act one of the "balagāns" ends

Act One of the balagāns seems to have ended. At square one, namely, the coalition that most people thought they were voting for – a center-right government consisting of Zatlers' Reform Party (ZRP), Unity (Vienotība/V) and the breath-taking (if you try to say the whole thing in one breath) All for Latvia/Fatherland & Freedom/Latvian National Independent Movement or simply the National Alliance (NA). It took just three weeks of acrimony, betrayal, reconciliation, adultery and the political equivalent of make-up sex to get back to where everyone started – at least everyone who could a) count the Saeima seats won after the September 17 election and b) compare and contrast the party programs of those elected to the Saeima.

Looking at things that way, one can say – good for you, Harmony Center (Saskaņas centrs/SC),you added two seats and became the single largest party in the Saeima! However, your program – at least up until the chameleon hopped up in front of a picture (symbolically speaking) of Valdis Zatlers and Valdis Dombrovskis and started to try to match its background – was completely mismatched with these guys. The ZRP and V are not populist social democrats. Nor is V “pro-Russian” in the same sense that SC appeals to its Russian electorate. Neither is it anti-Russian and much of what it says could appeal to middle-class ethnic Russian voters.

The same goes for the ZRP, which has proposed and may still get ethnic Russian economist Vjačeslavs Dombrovskis appointed to a ministerial position. He would be, technically speaking, at least the third ethnic Russian minister after Vladimirs Makarovs of the nationalist Fatherland & Freedom and Vasilijs Meļņiks (finance minister for five days in 1997). However, the ZRP has, for three weeks, clung to the idea of having the SC as a coalition partner almost like one of those attack dogs whose jaws, once they bite, cannot be opened without cutting off the beast's head. The news that the ZRP has agreed to what was obvious three weeks ago came the night of October 10, so there is still time for surprises before the new Saeima meets.

As for SC, their “exclusion” from government is not a “Russian vs Latvian” thing, at least not in rational terms. The ideology of SC and the other potential coalition partners didn't match. You cannot match shape-shifting “social democrats” who voted to protect an oligarch (Ainārs Šlesers) from the law with centrists, much less with nationalists. The ZRP was crazy trying to do so and persisting in its obsession for three weeks, discrediting (if that is at all possible) the Latvian political system even further.

The potentially loose cannon in the upcoming coalition is the NA, who know that they probably can test how far they roll around on the heaving decks of the coalition without any serious consequences. Unlikely that they will be dumped in favor of the SC, after all, but perhaps they should not tempt fate. On some points of logic, the NA does make sense. No one should accept the facile phrase that Latvia was occupied, but there are no occupiers. To say this, even in 2011, is like going back in time to 1965 (20 years after the war) in Germany and saying : “There was a Holocaust, but there isn't anyone around who shot or gassed Jews.” Of course there were such folks around, and they were found and put on trial.

The expression “there was an occupation, but there are no occupiers” is an illogical way of saying that most, perhaps the vast majority of non-Latvians who arrived during the occupation did not do so with the intent of actively enforcing the totalitarian regime. Clearly, those who were members of the security service (the KGB) and the military (the Soviet army wasn't just visiting Latvia for 50 years for vacation). Soviet army veterans have essentially been blanket pardoned for, technically, being “occupiers” under the treaty that ensured the removal of ex-Soviet Russian troops. There has not been a concerted effort to find and punish ex-KGB, a number have even become businessmen and politicians (such as social democrat Juris Bojārs).

What one really means by saying “there are no occupiers” is that one isn't going to make a big deal of it unless there is a clear case of someone being a “ripper of fingernails” (nagu maucējs in Latvian). Also, there is no point in going after second-generation “occupiers” or those who simply came along for the ride thinking that the “known world” for them was the Soviet Union. The country has already lost some 300 000 people of all ethnicities to emigration, and trying to get even more to leave simply because they are Russian is not going to help things, especially the economy.

Keeping the NA from going off the deep end on these issues is going to be a major concern for the new coalition (if it hasn't already fallen apart as I write this). The other concern is what Zatlers, who has proven himself somewhat of a whackbat (amalgam of wacko and batshit) may do if offended by the NA and tempted to seek solace with his “first love” the SC. Which is not to say that the center-right coalition that has apparently been stapled together couldn't get the support of the SC on some issues. That would almost be like normal European politics. Nice thought. But this is Latvia...

Ground control to the majors Valdis...

The political balagāns in Latvia has lifted off into new regions of outer space. Major Valdis Zatlers of the spaceship ZRP (Zatlers' Reform Party) has said it will take Imperial Star Cruisers (main battle tanks in Earth terms) to get him to undock from the Starship Harmony Center (SC). Now the other space major Valdis (Dombrovskis) has joined the orbital circus by proposing that all the spaceships dock and form a nice orbiting “ rainbow” with the Starship Unity (V), the Nationalist Falcon (NA) and even the almost launched into the Phantom Zone interplanetary garbage scow The Green Farmer (ZZS).

Ground control to the majors Valdis – this ain't gonna work, not in orbit, not on Earth.

The whole process of putting together some kind of workable coalition has gone far down the road to a total FUBAR (fucked up beyond all repair, in case you didn't know). It was probably heading there from the very start. Major “Big Wally” as I call him was determined from the start to link up with SC. Nothing was going to stop him, not even a deal with the other, “Little Wally” and V, to form the “core” of any coalition. Core meltdown. Bad in space, worse on earth.

So where does that leave things? The smart thing to do, to keep everything from de-orbiting and burning up, would be to let Major Big Wally remain docked and in orbit with SC. Everyone else stays on the ground, in gentle opposition and sees how many orbits the tandem can do by themselves.

This may be the only way out. Despite the fact that, programmatically, ZRP, V and the NA fit together, actually putting them together into a coalition has proven to be about as easy as the worst case scenario for assembling a piece of IKEA furniture. All the parts are there, just no one can fit them together and all attempts just fail.

ADDING THE LATEST

Well, maybe not. Now it is on again, yes, again, between V and the ZRP, who have, according to the latest news, both agreed to call for a kind of government of national unity minus the Green Farmer spacecraft, to be left in decaying oppositional orbit. That means that both the SC and the National Alliance will agree to sit in the same government. Yeah, right... Where is that cryptic IKEA diagram. Wait, these are parts from a different chair.

It is night, there will be real daybreak some hours from now, but this whole Saeima dismissal process, the referendum, now the latest elections, all point to yet another false dawn. The already totally cynical electorate will give whatever new government is cludged together a single digit rating even before it is formed.

Oh yes, then there is the little matter of the 2012 budget, with more spending cuts and the need to pour resources into what one can neither confirm nor deny is a rathole in the skyways – air Baltic. There, also, some kind of deal has been cobbled together and it will cost the state LVL 57 million in a first installment. Berthold Flick, who may well have been running the company against a merry mare's nest of revenue-suctioning parasite companies under his half-owned Baltijas aviacijas sistēmas (BAS), at least, is out of the picture. Whether he will sell his shares in BAS remains to be seen. In any case, it is starting to look like the biggest minority owner of air Baltic may be from the Russian sleazocracy.

Somehow I don't see the broad rattletrap coalition now being proposed as capable of getting much of anything, never mind the budget, done. Leaving the linked spacecraft of SC and ZRP to do it alone would be the test to quickly see whether they have the stomach (especially SC) to cut at least another LVL 100 million, if that is really the true figure. Just wondering, as 14 000 taxpayers, a record number, rising fast, have left the country this year to work and pay taxes where it actually counts and pays off. So I don't see tax revenues narrowing the budget deficit. Instead, the tax base will shrink by the combination of emigration and increasing tax resistance and evasion.

Let us see what marvels of outer space the next few days bring...

20 years of freedom – and?

OK, I will join the great chorus in saying how great it is that Latvia regained its independence in 1991 and nothing could have been worse that continuing to stagnate under the Soviets. The Soviet occupation was a truly horrible time, especially the beginning of it all, with deportations, war, deportations again and repression and fear that only eased very gradually toward the end of the 1980s. Add to that the bizarre economic deprivation, queues, shoddy products, blat-level corruption, dismal everyday life with little or nothing changed, no freedom to travel, etc. etc.

The occupation left indelible marks on the Latvian nation, and those are the reason that, at the end of the day, we are happy to have our freedom, we say we cherish our freedom (and we probably do), and we should never, never lose that freedom again. Of course!

But what have we made of that freedom? What did those of us who lived outside Latvia expect? We grew up as “refugee/emigres” wherever we were, a status that kept important, vital parts of our lives focussed on Latvia and on the impossible dream of Latvian independence. The dream came true, but we who grew up in freedom knew that freedom was the most important kind of opportunity, often the first step. Freedom is to be used, filled out with a vision, a path chosen together with other free citizens.

Yes, Latvia used its freedom. The country made its way into the European Union and NATO, two visions that it automatically adopted once free. But after that? There is no realistic, coherent vision for the future.

To be frank, Latvia achieved freedom from the Soviet Union, but is still far from free from being a nation of far too many homo post-sovieticus. It has lost up to 300 000 inhabitants to emigration, a good part of them, perhaps, for largely economic reasons, but also because what the political and economic elite of this country has done and failed to do has broken any trust they had in the government and any faith in the future.

I put myself among those who have lost this trust and faith – for reasons that I have argued many times over in this blog. Latvia could have done a lot better with its freedom over the last 20 years by making many choices not made. Many of these choice not taken involved actions and changes of behavior that would have cost very little money. It is not case of failing to do as old rich countries did with their wealth, but failing, with few exceptions, to behave as old rich countries did in order to become both rich and reasonably civilized.

Much of this I have described in earlier posts. There is really nothing new to say on the 20^th anniversary of the Soviet coup and independence. I don't regret spending much of my life growing up in the US, living and working in Germany and Sweden, while always trying to “be Latvian” and do things for “the Latvian cause”, even as a journalist. I can say, too, that I have also “served my time” here in Latvia, for better or for worse. We have what we have. Been there, done that, yet again. But I've had enough, too, in one sense. I want to be somewhere else and do something else next, before going even further into “advanced youth” where my options will shrink.

A political weathervane and a fine, bland little gathering

The first organized public reaction to the dismissal of the Saeima and subsequent “merriment” was a rally called by TV personality Viesturs Dūle and others on an isolated, semi-artificial island in the river Daugava. The idea was to protest against the oligarchs allegedly running Latvian politics and also to “bury the oligarch within each of us”.

The latter part very much put me off from the whole undertaking, because I don't feel a bit like wanting to make a great fortune by skimming tax funds and using other advantages derived from state capture. I have nothing against a great fortune, but please, let it come to me by my own efforts on a law-governed, free market.

If the message was that the citizenry of Latvia is also responsible for the dismal state of politics, then it has nothing to do with any oligarch in any of us. Instead, it is the inability to learn from past mistakes in voting, to hold politicians to their promises (at least the executable promises), and to be ready to organize a democratic, non-parliamentary opposition/resistance movement when one realizes that the whole system here in Latvia is, to put it precisely, fucked.

Aside from that and the fact that the whole event on June 8 can probably be best described by the Slavic-derived Latvian word balagāns, (a kind of cheapo, shallow but still entertaining little carnival), it was a weathervane event, since as many as 8 000 mostly young people gathered to listen to a few speeches and watch a huge wooden symbol of “corruption” set afire. The thought crossed my mind that something like that would have more impact if a real symbol of the oligarchs were burned, like a barn or toolshed belonging to one of them (naturally, harming no physical person, in the spirit of the 1960s German Gewalt gegen Sachen /Violence against objects/ debate within the Ausserparlamentarische Opposition/APO). But we are still a few steps away from something like that, which, for various reasons, I doubt would have any desirable effect.

Anyway, I hope that many of those on the AB Dambis island went away from the event committed to doing something more than just shooing away the oligarch within them and voting on hypothetical and real issues on an internet website. Heck, with a little help from some experts, I (or anyone else) could put up a website where we could vote on the merits of intergalactic flight or anything else. As far as the real oligarchs in Latvia are concerned, I am afraid that they best fit in with a bizarre Facebook event scheduled for exactly 10 days later, on June 18, National I Don't Give A Fuck Day. That is how the powers behind this country's bozo parliamentarians look at public opinion in Latvia, like it or not.

On an everyday basis, the social degeneration continues apace. I had to take a bus to the airport to retrieve the family car, since my wife had flown away to Sweden for a few days and left it in a long-term lot for me to pick up and use over the weekend. The first thing that happened on the good old No. 22 bus was that the traffic wardens or whatever you call them boarded the bus and checked everyone's electronic tickets. Then, knowing almost no English on the one bus route most frequented by foreigners, they hassled an air Baltic pilot (I think he did register his e-ticket) and got a LVL 5 pay-off from him. It was either that or delay his flight to Baku.

Next on board was a shirtless junkie who spent the whole trip up to the next to last stop before the airport nodding (actually bowing at times, almost to the floor) and leaning as he rocked back and forth on a young mother and her kid, or almost bumping into the already fleeced pilot standing across from him. The junkie was joined by two or three criminal looking friends at one of the last few stops before the airport, but then the whole lot proceeded to hop off at a stop in the middle of nowhere just before the airport. To what purpose, I don't know. Driving back in my car, I saw Joe the Junkie waiting for the bus back to town, still in his own quadrant of outer space.

Personally, I think you have to be pretty much a degenerate fuckwit to develop a heroin habit. Politically, I think they should legalize the stuff, register addicts, give them prescriptions, clean needles, shooting areas and decrease the crime rate from addiction related thefts, burglaries and robberies. None of this will happen in Latvia this century...

Another thing brought back to me at the anti-oligarch (but nice, please!) rally was the fact that even Latvians with some sense of purpose are unable to think through any issues that concern them. I don't think I am breaching any confidences by writing about someone who approached me as the rally was breaking up (a man of around 60, roughly my age) and wanted to talk abut some things. The core of it was that he wanted to set up an NGO for Latvian families. So I asked – fine, to what exact purpose? One of things bothering him was that ethnic Latvians had been given fewer opportunities to privatize their apartments than ethnic Russians (post-war migrants) who mainly lived in Soviet-era housing. Many Latvians lived in older buildings that were denationalized.

Assuming we cannot turn back the privatization or denationalization process, I then said that the issue was one of building housing. That didn't move the discussion ahead, as the person believes that there are ex-KGB and Communists everywhere whose specific purpose was to derail any such initiatives. I asked whether, perhaps, the former KGB, if still under control of Russian intelligence, might have other missions under present-day circumstances. Sabotaging initiatives to build housing for Latvian families did not seem to be at the top of the global priority list for anyone running stay-behind networks out of the Kremlin, IMHO. Neither did that move things anywhere.

I then suggested that some people could solve their family housing problems by working abroad, but then the person said that the people he was concerned about didn't even have 5 LVL to buy a cheap Ryanair tickets out of here. Well then, said I, the problem is really extreme poverty, which can have a number of personal and structural causes – lack of education, addiction/alcoholism, lack of jobs, etc. But that also didn't focus things. I am still not sure what this proposed NGO will do, how it will affect anything and how it will define the root problems that it wants society or the government to deal with. There seems to be a total lack of education in problem solving and the critical thought (what are the issues? what are the causes?) needed for it. To be sure, the person was sincere and not really a crackpot (not that public gatherings lack for those). But this is the level of things here. The ones who can get their heads around issues have already done the socio-economic math and are out of here. On that note, please look again at my video CV and spread it around, as I have serious doubts, very serious doubts, about staying on here: http://latviantelecoms.blogspot.com/2011/04/request-for-leads-tips-and-job-offers.html

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 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.

Valdis, Valdis, what the fuck?????

If high EU and IMF officials could write what they really thought about Latvia's political bardak*, the headline is how they might address Latvian Prime Minister Valdis Dombrovskis in a confidential e-mail. To be sure, neither the former MEP nor his party wewre involved in it, but basically, one of the coalition parties, the People's Party (Tautas Partija/TP) has opted out of the letter it signed with international lenders.
That would be bad enough -- the TP prevented a bill proposing a tax on housing from being moved into the legislative process in the national parliament, the Saeima. So instead of voting on some kind of tax on residential properties, there will be no vote or parliamentary discussion, essentially reneging on the promises made to international lenders to implement such a tax.
But there is more. The TP has expelled, without any hearing, the Saeima deputy and party member Dzintars Ābiķis, who voted against blocking the bill from the legislative process. He didn't vote for raising taxes, he didn't vote in favor of the residential housing tax, he simple voted for letting the legislature discuss, amend and put to a vote a bill drafted in an effort to comply with international lenders.
The TP has also suggested that it wants to talk to the IMF and other lenders in what very much sounds like an attempt to renegotiate a done deal, putting forth their own terms (whatever they may be). To be sure, the international lenders' terms are harsh, they allow absolutely no spending of the loaned funds for economic stimulation (that is left to EU structural funds, which Latvia has CharlieFoxtrotted** so far). And oh yes, the TP has a bit more current voter support (around 1.7 %) than Stalin would get. Just the guys to talk on behalf of the Latvian people.
And yet that is not the end of the story. The government has drafted a budget that simply doesn't cut spending by the amount agreed with international lenders (by around LVL 271 million instead of the required LVL 500 million).
So what is happening? EU and IMF honchos are soon descending on Riga to ask the headline question in person. The opinion, already widespread earlier -- that the Latvian government is a bunch of untrustworthy, capricious fuckwits-- is crystallizing even more. And that means, we may not get the next tranche of international loans no matter what anyone does. I mean, when the signature of a major coalition party amounts to goatfuck a few months later...
Where do we go then? -- probably devalue the lat, print cash (could have been done earlier to spare everyone the agony of salary cuts and firings) and buy time through the winter, possibly with Dombrovskis being pushed out of office or resigning (getting off the tracks before the train hits). After that, with the TP zoonoids in charge, you can write your own black comedy...

* Russian-derived word for total chaos, literally, a honky-tonk whorehouse in chaos
** clusterfucked

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.