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Wednesday 21.03.2018 | Name days: Una, Unigunde, Dzelme, Benedikts

Economic Diary of Latvia. On the poor, the rich and why they never cross paths

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThis week it became clear that Latvia’s entry into Organisation for Economic Co-operation and Development, otherwise known as the rich countries club, will be likely put off by at least one year. OECD believes the country’s banking sector still does not meet standards accepted in a respectable society. Unfortunately, OECD’s concerns are not unjustified.

Even though Latvia has yet to enter OECD, the country is expected to pay for talks in accordance with the rules and – in advance. This week, Latvia’s government approved the request of the Foreign Ministry to allocate EUR 1.3 million for the negotiation process with OECD in 2016.

Because joining OECD is one of the priorities set by the Latvian government and the road map for the negotiation process (approved in May 2013) states that Latvia is obligated to pay in advance, refusal to satisfy Foreign Ministry’s request would have been impossible. It was previously assumed that talks would conclude before the end of 2015. However, the assessment process of different sectors of Latvia’s economy has taken too long. It has been decided it will continue in 2016. With that, Latvia has received a bill from OECD for EUR 1.323 million for the continuation of talks in 2016.

Following the entry in OECD, Latvia will also have to pay a membership fee, which will become known after the OECD Council announces its decision in 2016.

In October 2015, the organization published a report in which it expressed certain concerns over the level of corruption in Latvia’s banking sector. OECD experts are worried that 14 out of 20 banks registered in Latvia service foreign clients. Foreign deposits make up more than half of the EUR 30 billion deposited in Latvia’s banking system, which puts it on the market as the gate to Europe. Deposits of this kind are applied with insufficient financial regulations and insignificant fines, OECD notes in its report.

Laundering reputation

Experts’ concerns are not without reasons. One other confirmation to that surfaced this week. Russian Corruption Prevention Fund of Aleksey Navalny published a documentary in which assets owned by Prosecutor General Yuri Chaika in foreign countries and his ties to organized crime are detailed. In addition, the documentary also tells about some Latvian bank that is allegedly involved in money laundering activities associated with Chaika and structures owned by his family.

Elina Aotina, spokesperson of Latvia’s Finance and Capital Market Commission, has said Latvian authorities are checking this information, adding that ‘every report of this kind increases the potential risk for Latvia’s banking sector’s reputation’.

In particular, CCB suspects Artem Chaika, Yuri Chaika’s son, in illegally taking over state-owned Verkhnelensky River Shipping company and pulling at least 12 river-sea class vessels from state ownership. According to information from Navalny’s fund, after the company’s takeover, five vessels were sold to a fake company and several others – to a Maltese offshore. The documentary reports that money earned from selling those ships then underwent a classic laundering process: ‘They were transferred to a Latvian bank. From there, the money moved from account to account until finally being transferred to a Swiss bank account owned by Chaika family’.

The documentary also reports that Artem Chaika owns a luxurious Pomegranate hotel in Greece and a home in Switzerland worth nearly USD 3 million. Artem Chaika also owns a holding of companies with turnover measured in hundreds of million dollars. He owns companies that harvest sand and salt, construction companies, brick-production companies and legal firms.

Something about capital in the 21st century

This is where we come to the interesting topic of family fortunes, which has received a new name in Latvia thanks to the publication of a book by Professor of the Paris School of Economics, Academician Thomas Piketty ‘Capital in the 21st century’ in Latvian language. This book is praised by businessmen and representatives of academic circles. It was published for the first time in August 2013 in French. Its English localization was released in April 2014 and Russian – in 2015. Now the book is available in Latvian language.

The main thesis of the book is that a person’s welfare depends not on talents, determination and skills. A person who is certain he will acquire material wealth using those qualities will only face long, hard work for many years. Best case scenario in this case is that this person will only be able to barely make ends meet. A truly rich person, according to the author of the book, is one that inherits family wealth. Only this lets a person enjoy all advantages of personal wealth without working for it. According to Piketty’s theory, the volume of wealth will increase if the level of capital yield is higher than the level of economic growth.

Simply put – if average capital yield is 4-4.5% annually and economic growth is 1-1.5% (which is currently noted in most countries of the world), the wealth of heirs will grow on its own. The author says the world is slowly coming back to ‘inheritance capitalism’, when the major part of economy is controlled by inherited capital, and its power continues growing. Piketty predicts a world with low economic growth. He refuses the idea that technological leaps will help return growth to their levels noted in XX century.


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