Latvia, which wants to join the euro region next year, will become increasingly attractive for Russians seeking to redirect investments from crisis-struck Cyprus, according to pan-Baltic investment bank Trigon Capital.
“Latvia is in infinitely better macroeconomic shape than Cyprus and this will not be lost on Russians looking for safe places to deposit capital,” Joakim Helenius, executive chairman at the Tallinn, Estonia-based company, which has about $1 billion under management, said yesterday in an interview. “Upon joining the euro, Latvia will be a part of the ‘hard bloc’ of euro members rather than a Mediterranean problem case.”
European officials from Brussels to Moscow are involved in talks to agree on a bailout for the Mediterranean island nation after its parliament rejected a levy on bank accounts. Russian companies and individuals have an estimated $31 billion of wealth in Cyprus, according to Moody’s Investors Service. Non-resident deposits in Latvia, mainly from neighboring Russia, make up about $10 billion, or half of the country’s total.
The former Soviet republic exited a 7.5 billion-euro ($9.7 billion) International Monetary Fund-led bailout last year, helped by the fastest economic expansion in the 27-member European Union. Latvia meets all conditions for the Jan. 1, 2014 switch, which would make it the 18th euro member after Estonia joined in 2011, Prime Minister Valdis Dombrovskis said last month.
The yield on Latvian government bonds due 2018 was little changed at 1.93 percent at 5:40 p.m. in Riga, compared with 4.14 percent a year ago. Five-year credit-default swaps were one basis point lower at 116, compared with 108 basis points for neighboring Lithuania, which plans to join the euro in 2015.
“Latvia’s banking sector is fairly small in relation to GDP” and “the risk of another debt crisis is small,” Richard Segal, the head of international credit strategy at Jefferies Group Inc. in London, said by e-mail. “Latvia is well placed to outperform” its emerging-market peers this year, he added.
Latvia’s credit rating was raised one level to Baa2, the second-lowest investment grade, by Moody’s on March 15. The ratings company cited economic expansion that averaged 5.5 percent a year in 2011 and 2012 and government progress in narrowing the budget deficit to 1.5 percent of gross domestic product last year from 9.7 percent in 2009.
Financial services in Cyprus equal about 40 percent of the country’s gross domestic product, while Latvia’s amount to about 3 percent to 3.5 percent of economic output, Kristaps Zakulis, chairman of the Latvian bank regulator, said in a statement on the watchdog’s website today.
There is “no reason to expect that large cash flows of an unknown origin will enter the Latvian financial sector in the next few days,” he said.
While Latvia has “strong fundamentals” and should benefit in the long term from adopting the euro, currency-union membership may be less of a boon for deposit inflows in light of the Cypriot bank plan, according to Mohammed Kazmi, a London-based economist at Royal Bank of Scotland Group Plc.
Potential Russian depositors “will now think twice before taking their money to Latvian banks,” he said by e-mail.
The Baltic nation’s economic overhaul stands it in good stead to lure more Russian cash, according to Helenius.
“Joining the euro would make Latvia even more attractive to Russians seeking a safe haven for their capital in a politically stable and economically solid economy,” he said. “I’m bullish on Latvia’s prospects and therefore see the possibility of Latvian financial instruments outperforming versus peers.”