As Latvian economy falters, unrest grows

The Herald Tribune

David L. Stern

February 25, 2009

SEJA, Latvia: Dressed plainly in a gray, down-filled coat and faded black jeans, surrounded by his 130-odd milking cows, the soft-spoken Normunds Kalnins hardly strikes a radical pose.

But among the multitudes of increasingly disaffected people in this small, crisis-stricken Baltic nation of 2.3 million, Kalnins stands out - and not only because he is 2 meters, or 6 feet 6 inches, tall.

Kalnins was one of a 1,000-strong army of angry farmers who blocked the capital of Riga with their tractors this month, leading Latvia's agriculture minister to resign.

Latvia, a former Soviet republic sandwiched between Lithuania and Estonia, has been wracked by demonstrations in recent weeks over its imperiled economy. In January, an initially peaceful gathering of some 10,000 descended into rioting when, a handful of protesters, after the crowd had mostly dispersed, attacked police and looted stores. About 40 people were injured in Latvia's worst violence since the breakup of the Soviet Union.

And just last week, public discontent pushed Prime Minister Ivars Godmanis to hand in his resignation, contributing to further political instability. Like Iceland, Latvia is a prime example of how economic woes are being translated into a public backlash against the excesses of market capitalism and what is seen as the failure of various governmental institutions to mount an effective response.

After posting Europe's highest growth figures just two years ago, the Latvian economy is collapsing. It shrank at over a 10 percent annual rate in the fourth quarter of 2008 and economists estimated it could contract 12 percent or more this year, which would almost certainly be the worst in Europe. The country's credit rating, already the lowest in the Baltics, was cut to junk status by Standard & Poor's on Tuesday.

Unemployment is climbing, reaching 8.3 percent in January from 7 percent in December and 5.6 percent as recently as October.

"Everyone has lost their job - my mother, my best friend and my boyfriend," said Tatyana Makshtareva, 32, who herself was out of work for two months before finding a job at a Riga café. "I was very lucky," she added.

People in Latvia are not sure who to blame, but they have plenty of candidates to choose from.

The government, strapped for cash, petitioned international financial institutions for aid and introduced a stringent austerity program, cutting some public expenditures to the bone. While perhaps unavoidable in return for the bailout from the International Monetary Fund, the tighter fiscal policy is the opposite of the Keynesian stimulus programs being pursued in the United States and Western Europe.

"I don't see a way out of this," Makshtareva said. "There is not one capable person in the government."

Then there are the banks, many from Scandinavia, which have provided plenty of easy credit in recent years but now are moving to collect on debts gone bad.

And an increasingly popular target - at least among farmers - is the European Union.

When the three Baltic nations - Latvia, Estonia and Lithuania - joined the EU in 2004, it helped push their freewheeling economies into overdrive by offering a broader market for goods and making it easier to keep interest rates low.

But now Brussels is often viewed as an overweening bureaucratic structure that pressured Riga to sign off on policies not in the nation's best interests.

Latvian dairy farmers say that they have been among the hardest hit. Milk exports, which account for more than 60 percent of sales, dried up, while the average domestic price for a liter, or 1.06 quarts, of milk dropped to just under 15 santimi, or 27 U.S. cents, from 27 santimi, or 49 cents.

Farmers have borrowed heavily to finance expansion but are now finding it hard to keep up with their obligations. Many are hanging on only because their suppliers are not demanding immediate payment because they know it would drive the farmers out of business.

"If the suppliers asked for payment right now," said Kalnins, the dairy farmer, "one-third, maybe one-half of the farms would shut down immediately."

Farming representatives contend that they are being undercut by low-cost imports from other EU nations, like Germany, which provide greater assistance to their farmers. The problem, they say, is that the Baltic subsidies were set too low when they entered the EU because they were based on average figures from the late 1990s, when market prices were strong.

"Farmers are saying, 'We were tricked,"' said Uldis Krievars, a dairy farmer and deputy chairman of the Farmers' Parliament, a group that helped organized the tractor demonstrations this month. "We were told we would get into the EU and get fair prices."

EU officials, however, insist that the opposite is true: the country's agricultural program when it joined the bloc was proposed by Latvian officials themselves. And they say they are working closely with the government to try to extricate the country from its economic difficulties.

According to Krievars, the Latvian government has cut the farm subsidy budget by 40 percent to 50 percent. To compensate, the government promised a 27 million lat, or $49.6 million, bailout, but that all but 10 million of that is in the form of guarantees to banks against defaults by farmers, while the remaining money is tied up in an protracted debate in Parliament.

"I also voted for joining the EU for security reasons - to get out from Russian influence," Krievars said. "But we were very naïve to think that we would be invited to this big table and have a seat at it."

As the situation worsens, economists fear that the public - which had been led to expect endless prosperity - may turn to those promising more radical solutions to the crisis.

"It's clear that sharp falls in living standards are inevitable this year," said Peteris Strautins, chief economist in Riga for Swedbank. "I just hope that people accept it."

They may not. Kalnins says he is barely keeping his head above water at a milk price of about 15 santimi a liter. But there is widespread fear among dairy farmers that the price may fall further.

"If the price drops to 12," Kalnins said, "we would all meet again in Riga with tractors."

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