Cyprus Cash Snubbed as Latvia Seeks to Smooth Euro BidAaron Eglitis
Latvia is turning away money that’s fleeing Cyprus as the Baltic nation defends its banking credentials in the run-up to next year’s planned euro adoption.
Regulators in Latvia, where mainly ex-Soviet non-residents account for half of deposits, have told lenders not to ease standards to win Cypriot business. The island, which has imposed capital controls, is home to as much as $31 billion of Russian cash, Moody’s Investors Service estimates.
Latvia wants to quell unease that its banks pose a danger to euro-area stability after Cyprus, whose economy is about the same size, roiled markets with its rescue. European lawmakers have raised concerns over non-resident deposits and banking secrecy in a nation that took a bailout in 2008 after its biggest lender collapsed and whose banks were allegedly used in Russia’s biggest tax fraud.
“Latvia won’t enter a competition for deposits fleeing Cyprus,” Prime Minister Valdis Dombrovskis said last month via Twitter Inc. “We see the non-resident business as risky,” he said in a separate post April 11.
The cost to insure Cypriot state debt against non-payment for five years using credit-default swaps was 1,033 basis points today compared with 724 on March 1, data compiled by Bloomberg show. Latvian swaps have risen 6 points to 122.
Non-resident deposits in Latvia, a regional banking hub since getting the Soviet Union’s first private foreign-exchange license in 1990, surged 17 percent last year to $11.4 billion, 49 percent of the country’s total.
The nation of 2.1 million people has the highest share of Russian speakers among the three Baltic states and offers direct flights to Moscow, about 500 miles away, as well as Cyprus.
Some banks see the island’s woes as a chance to capitalize on Latvia’s role in the post-communist financial world and are willing to disregard the warnings for the opportunity to expand.
Latvia “can now start playing the leading role in the international financial concert,” Jaroslav Zamullo, head of Rietumu Banka AS’s legal department, said March 28 in a statement on its website. “The current unstable situation in the EU has to be seen pragmatically and selfishly.”
Closely held Rietumu, Latvia’s third-biggest deposit bank with offices in Kazakhstan and Ukraine, extended opening hours in March after an inflow of requests about Cyprus’s predicament. It has 1.7 billion lati ($3.2 billion) of assets.
Non-resident deposits grew 1.6 percent from the previous month in January and 0.4 percent in February, according to the bank regulator.
“We have already been seeing Russian banks shifting money to Switzerland, Luxembourg and the Baltic states,” Eugene Tarzimanov, an analyst at Moody’s in Moscow, said March 18. “That trend will likely accelerate.”
Euro adoption will grant access to ECB liquidity, making Latvia more attractive and helping double non-resident deposits by 2018, Ernests Bernis, ABLV Bank AS’s chief executive officer, told the Dienas Bizness newspaper in a March 14 interview.
Cypriot banking assets surged to about 800 percent of gross domestic product after the island adopted the euro in 2008, triggering soured bets on Greek debt and a 10 billion-euro ($13 billion) bailout. That compares with 129 percent last year for Latvia, below the 369 percent EU average.
Still, it’s the second-highest total in eastern Europe behind Slovenia, which is battling to avoid a rescue after one of its banks failed an EU stress test.
European officials have questioned the risks posed by Latvia’s banks before the proposed Jan. 1, 2014, euro adoption, saying lenders shouldn’t absorb outflows from Cyprus.
“I know that the European Central Bank has been in touch about non-resident deposits in the Latvian banking system and the Latvian side has given its assurances,” Martins Gravitis, a spokesman for the central bank, said March 26 by e-mail. An ECB spokesman declined to comment.
European Parliament political groups had previously accused Latvia of flouting International Monetary Fund warnings over the scale of its non-resident deposits.
“Latvia is still maintaining a favorable environment to non-residents and their money by offering residency permits in exchange for capital investments,” they said before a Feb. 26 hearing in Brussels as part of written questions seen by Bloomberg News and whose authenticity was confirmed by Lelde Kaunese, a spokeswoman at the Finance Ministry. “Latvia’s accession to the euro zone will only increase the trend, as evidenced in Cyprus.”
Latvia is familiar with non-resident deposit risks after a 2008 government rescue of Parex Banka AS, the country’s biggest deposit holder, forced it to take a 7.5 billion-euro bailout. This time, the banking regulator has written to lenders telling them not to lower standards to win business from Cyprus.
Banks were instructed to focus on the quality, rather than quantity, of clients and financial flows, Laima Auza, a spokeswoman for the regulator, said March 26 by e-mail.
Central bank Governor Ilmars Rimsevics has written to ECB President Mario Draghi and European Commissioner Olli Rehn to assure them that Latvia, which raised liquidity requirements for banks with non-resident deposits in March, poses no danger.
“Latvia cannot be directly compared with Cyprus with regard to the size and importance of non-resident business,” he wrote Feb. 5, according to a letter seen by Bloomberg News and whose authenticity was confirmed by bank spokesman Martins Gravitis. “Concerns about the sustainability of the Latvian banking sector have no grounds.”
As well as the size of Latvia’s financial industry, the source of some of the cash it holds has raised questions as euro-area accession increases the allure of a country with only a “small” number of money-laundering convictions even after improving legislation, according to a Council of Europe Moneyval report published in November.
Some of the proceeds from Russia’s biggest known tax fraud were transferred through accounts in Latvia, Lithuania, Moldova, Switzerland, Cyprus and Hong Kong, according to London-based Hermitage Capital.
Sergei Magnitsky, a lawyer for the fund who uncovered and reported the $230 million fraud, died in a Moscow prison in 2009 after being arrested on tax-evasion charges. Latvian police have opened an investigation into the matter. In Russia, Magnitsky faces a posthumous trial.
Otkritie Financial Corp., a brokerage part-owned by Russian state-run VTB Group, is suing several former employees including George Urumov over an alleged $183 million fraud, some of the proceeds of which were transferred through Latvian lenders, according to London court documents. Urumov denies wrongdoing.
“In my experience, the vast majority of cross-border disputes with an ex-Soviet element feature the Latvian financial system,” Daniel Hall, a director of London-based corporate-intelligence company Focus Ltd., said by e-mail. “It provides a seemingly risk-free laundry service.”
Latvian money-laundering legislation “fully complies” with international standards, according to Rimsevics.
The Baltic nation meets all criteria to become the 18th euro-area member, according to Dombrovskis, who’s scheduled to discuss joining the currency region with French President Francois Hollande today. Latvia won’t jeopardize its bid to grab money escaping Cyprus, said James Oates, chief executive officer of Tallinn, Estonia-based investment adviser Cicero Capital.
“The government wouldn’t want to risk the prospect of euro entry in January for the rather uncertain flow of funds the end of the Cypriot offshore banking dream seems to have thrown up,” he said in an interview.