Great purge in the banking system of Latvia is in full swing: the government intends to reduce the share of Bank deposits of non-residents from the current 40% to 5%. The recommendation came from the United States, the Latvian authorities have publicly agreed with her. The plan is to transform Latvia into a “financial bridge” between the East and the West finally failed.
The portal Delfi tried to understand what economic consequences will this step and why is Washington so requires.
“The hope of the Latvian economy”
Bank non-residents, which with the filing of the US Treasury Department today decided to assess only in a negative way, a few years ago was considered almost as the main hope of the Latvian economy. In the official report of the Commission of Finance and capital markets (FCMC) from 2012 lists a long list of advantages of non-residents for the banking sector. Among them:
The relative stability. After the crisis, in 2012 the deposits of non-residents decreased by about the same amount as the deposits of local residents (20% residents, 16%).
Geographical diversity. Contrary to stereotypes that “non-residents” hiding only the Russians, half of all deposits in 2012 came from other CIS countries and the EU. Thus, after amplification of the economic crisis in southern Europe has significantly increased the flow of money from Cyprus.
Highly efficient asset allocation. Bank funds focused on the business of non-residents used the so-called highly liquid assets. The banks focused on the business of non-residents, to a lesser extent engaged in lending — the loan portfolio in respect of the assets they have about two times less than the universal credit institutions.
“The export of financial services with high added value, there is an obvious number of advantages, namely: improving the balance of payments, tax revenues, ensuring high-quality jobs with high added value”, — stated in the message of the FCMC. According to a study conducted by KPMG in 2011, the financial sector, serving non-residents, brought the country to 1.7% of GDP.
In the next five years under the influence of internal and external political factors and concomitant tightening of banking regulation, the participation of nonresidents in the structure of Bank of Latvia decreased markedly (see table). However, still the relative share of deposits by foreign customers in domestic banks is about 40% of the total. The U.S. Treasury needs to reduce this figure to 5%, i.e. eight times. It is noteworthy that the Organization for economic cooperation and development in its recommendations, indicates the rate of 20%. But the Latvian government has publicly agreed with the arguments of the American side. “Five percent is a goal that we must achieve,” — said Finance Minister Dana Reizniece-Ozola.
Eight times less: what does it mean for the economy?
“You have to understand that the money of non-residents not lie dormant on Deposit. These funds are always in circulation, benefiting the banking sector, providing jobs. If we reduce the export of financial services in eight times, the losses will be proportionate,” — said in a conversation with Delfi Director of the research center Certus Vyacheslav Dombrovsky. The expert is skeptical about the chances of Latvian banks to quickly shift to some other economic model. “It’s still that hope, like Latvian railway suddenly start transporting fruit from Spain to Sweden,” — said Dombrowski.
According to the FCMC, in 2016 the volume of deposits of non-residents in Latvia amounted to 9.2 billion Euro in 2017 — about 8 billion. Eight-time cut in the share of foreign customers will mean the loss of approximately 7 billion euros and almost 0.9% of GDP (now the financial contribution of exports to the economy equal to 1.01%). Chapter FCMC Peters putniņš on Tuesday cited other figures: a decline in the share of non-residents to 5% will lead to the fact that the amount of their deposits may be reduced by 4 to 5 billion euros. Anyway, downsizing is inevitable in banks: non-residents now spetsializiruyutsya ten credit institutions. Only with the elimination of ABLV, the work will lose nearly a thousand people.
To estimate indirect losses from such changes more difficult. But it is clear that primarily affected holders of residence permits and those Latvian industries that serve them (legal and financial advice, the real estate market, beauty industry, educational institutions, transportation, etc.). According to the interior Ministry, during the first five years of the program, i.e. 2011 to 2015, the residence permit in Latvia through a subordinated Deposit in the Bank got 1 thousand 158 people, that is, every tenth participant of the program.
In five years, Latvia has received from foreigners requesting a residence permit, a total of 1 billion 312 million Euro, of which 148 million euros provided it is the deposits in Latvian banks (the rest — buying property, investments in business, purchase of government bonds). Already declared that the elimination of ABLV will affect 70 of the holders of a residence permit.
From “money” to “white capital”: the cleaning will be a total
The official reasons for the refusal of Latvia from non-residents is called the need to fight corruption and the laundering of dishonestly acquired assets. In the discussions at the political level, carefully lowered the point that not all foreign clients use Latvian banks exclusively for illegal purposes.
Non-residents whose accounts are serviced by Latvian banks can be divided into four groups:
White capital (liquid assets). This is perfectly legal financial transactions that are made within the framework of international trade (export-import) and international concerns (paying bills, staff salaries).
Tax optimization. In fact, also a legal activity, businessmen are looking for opportunities to reduce administrative and production costs, bringing funds and registering branches in countries with more favorable tax laws.
Grey capital. A classic example is the Russian businessman wants to buy a house in London or a Villa in Spain, but given the negative attitudes in the West to the Russian capital payment is made not directly, but through a Latvian Bank. The operation is, in principle, meets all the criteria of free movement of capital. And the Russian businessman, of course, can be Chinese, Kazakh and Ukrainian Kommersant.
The withdrawal of illegally acquired assets. The operation resembles the above, but involved in it is not the owner of the factory or law office, and the Russian official who made his fortune on bribes. Only in this case we are really talking about the laundering of dishonestly acquired funds, which is worldwide accepted to fight.
It should be noted that in other Baltic countries, banks are less actively work with non-residents. In Estonia the share of foreign deposits is 11-12%, Lithuania — 2-3%. However, this does not mean that neighbouring States are trying to attract foreign businessmen in other ways. For example, Estonia offers foreign entrepreneurs the opportunity to issue e-residency, which opens access to all electronic services, and opportunities to conduct business in the country (to register a company, pay taxes, use banking services, etc.).
In the Latvian economic-political environment now discuss three scenarios of possible developments:
“Pure Latvian history”. Latvia is not the end point, where the deposited funds of non-residents. Local banks provide only mediation services. If Latvia under the pressure of USA leaves the export market of financial services, clients simply adopt other European countries. Currently, non-residents can open accounts in banks of Cyprus, Slovakia, Estonia, Germany, Hungary, Bulgaria, Poland, etc., are Usually required to fulfill a number of conditions, for example, have a residence permit in the country or to prove the legal origin of funds, but for most foreigners, given their high level of welfare, these conditions are workable.
“A blow to the mediators.” This scenario assumes that in the near future Washington will begin to tighten the screws in the sector of export of financial services throughout Europe. In a sense, this process has already begun. The recent scandal with the publication of “the Panama archives” provoked the pan-European fight against offshore companies (in Europe there are countries with more loyal tax and banking law in relation to foreigners, for example, Malta, Luxembourg, Liechtenstein, some of the island of great Britain). All of these countries and regions, like Latvia, have intermediary financial services, reducing risks and costs for clients. If for some reason “choke points” are closed, it is possible that the capital will try to translate on direct routes, say Moscow-London. Although it is clear that the volume of financial transactions in this case will be reduced.
“Big game”. Under this scenario, the suppression of Bank-residents of Latvia will be only part of a large-scale international operation for regime change in Russia by putting pressure on the business. Creating various obstacles for the Russian holders of capital (the limit of the ability of owning overseas property, investment of contributions, education of children in prestigious universities) should undermine the position of President of the Russian Federation. Inflaming scandal around the poisoning Sergei Skripal and this caused another round of tensions between Russia and the West, such a scenario does not contradict.