LATVIA METEORITE REPORT 2009

In general, Latvia has survived better this year than many pundits, including me, would have thought possible. But the trends have not been good and some of these may come back later with a vengeance

Politically the Dombrovskis government has held firm against all critics with leather-suited finance minister Repse as the backbone. The other parties in the coalition have acted like spoilt children, refusing to sign papers for the IMF they agreed upon previously, and even bringing back the hated Skele to "save the country". Thankfully President Zatlers has improved dramatically over the year and shows new found confidence. Time will tell if he has the personal and political strength to face up to the election challenges created by Skele, Lembergs and Slessers next year. His predecessor VVF had a 5 minute rush into politics again as a possible EU Council President and then promptly disappeared. Former PM Kalvitis went to Russia and raised Latvian national hackles by having longer at dinner with Putin than Zatlers had with Medvedev

The working half of the government managed to deliver the 2010 Budget on time but still tried to cheat by not creating the cuts that were asked for by the EU and IMF. Instead they intend to raise dodgy taxes that most independent financiers think will never create money. The Constitutional Court has already ruled the pensioners cuts illegal so the budget is 100m Ls short before the year has even started. And the tax receipts continue to fall making the budget figures even more suspect. Conspiracy theories abound about the IMF and EU, and about anyone else who can be blamed for the crisis.

Business has steadily declined although there would appear to have been a welcome levelling out from September onwards. Christmas sales were apparently 25% down in the shops from last year. The shops are dropping prices daily and new "cheap shops" are springing up, and doing good business. Some observers see signs of business and export improvement. It is probably too soon to call.

The real weakness this year has been public service. The ministries have simply failed every test thrown at them. The grand plan of employing highly educated professionals and promoting only those with the right political allegiance has become a burst balloon. The appalling results show that the current civil service leadership structure needs a total rethink.

The real estate market has bombed. Flat prices for rent and sale are gradually dropping all over the country. There are still some companies with deep pockets holding out for a rich Russian to save them. Some bizarre prices are still apparently being paid. But there are few signs yet of real international investors. The prices have further to drop before anyone with common sense is tempted. The risk of failing to find paying tenants for all the empty flats and offices is just too great.

Socially the country has entered a strange time warp. Everything looks OK on the surface but people are going about their business in a robotic fashion with little joy to be seen. Understandably, many people are now fleeing the country, for UK, or anywhere that will either employ them or marry them. But these are mainly low paid workers. The wandering, coffee drinking executives are becoming unemployed in growing numbers as companies either fail, or thin out the management. There are too few tax incentives and too little investment funding to coerce them back into business again yet. Judging by the joke jobs on offer on CV online, if they are waiting for paid employment, they could be standing in line for a long time.

One good thing is that the crisis has put nationality and language onto a back burner, except that is, for the few language bigots who still see anyone not speaking fluent Latvian as evil. Thankfully the Russian speaking Riga Mayor Ushakovs has turned out to be a likable and normal human being with both good and bad sides who just wants to get the job done properly. Businesses of course don't care at all about language, they just want the cheapest worker for the job (I wrote "best" and then realised that this was not true at all - talent still has no meaning here!). Lets hope that a 3 language state is a true bonus from the crisis.

But Russia deserves a mention. As a country it seems unable to behave sensibly when dealing with the Balts. The queues of lorries delayed at the Russian border crossing is a Russian national disgrace. Sending a spy plane to overfly Latvia was also stupid and frankly childish. Lets hope that 2010 sees some common sense and graciousness from the big neighbour. But I won't hold my breath.

And Latvian servicemen and women continue to serve abroad with great distinction and praise. We all owe them a great deal.

The highlight of the year was of course the spoof Mazsalaca meteorite. It brought fame - and a large muddy hole to Northern Latvia. On TV, Interior Minister Linda Murniece tried hard and failed to defend the overserious actions of the police and customs. Everyone enjoyed the very good and funny joke perpetrated by Tele 2 except her. It nearly cost her her job. Tele 2 now totally dominate the airways with outstanding adverts showing that the best of Latvian business is as good as anywhere. If more companies could deliver this vitality, Latvia would soon leave recession.

But what about trends. The black market is back with a vengeance, partially forced there by sheer determination of people and companies to survive and partly because of the incompetence of the government tax structure penalising work and effort. It will be hard to recover honesty. The loss of people from the country will also further reduce tax income and may stunt growth later as firms fight for good workers. Morale is also low but the nation seems set on enduring rather than protesting. If it continues calm as the 2010 budget bites it really will be a miracle. And there are still a few people hell bent on screwing the country for every penny they can get. Corruption is becoming less acceptable but there are still large numbers who either do not care or don't recognise it as wrong at all. But at least shops seem to have stopped closing.

What marks the year for me - I think the friendships gained in common adversity. As I try to make my business work, I am surrounded by friends and colleagues working to reduce the effects of the crisis. Many are unemployed or are trying as hard as me to survive in business. Latvia is full of good people and I am meeting more every day. Lets hope 2010 works for those who deserve it.

THE BUDGET

The Latvian Government 2010 budget has been passed by Parliament. It contains many unpleasant tax rises. As you would expect, most of these are being blamed by politicians on the unreasonable demands of the IMF. The IMF team are in town for talks and they are clearly unhappy Bunnies. The key reason is that the budget is a fudge. The Government was supposed to cut 500m off their huge running costs but have wimped and only cut about 350m. This means that the other 150 has to come in tax rises, and this from a national tax base that is shrinking rapidly. Even with this extra blood money, there will still be a 600m shortfall (about 8% GDP I think that is) and of course the money for this has to come from somewhere too. In comes the IMF and EU with their duffel bags of dosh.

On the daily news, the budget sounds as though it balances and quite likely on the surface citizens will think that if the IMF accepts it this it is OK. And if you accept that it is right to run a huge deficit each year then it does appear on paper to balance. The figures technically look as though they work. But that deficit will not go away after the budget and nor will the public suddenly find more money to spend.

The IMF team is between a rock and a hard place. The Government knows this and is playing on it. If the IMF accept this weak and rotten budget they will be blamed when it fails (and it probably will unless God has told Finance Minister Repse something he has not told the rest of us). If they reject it ( and of course they actually have no legal power to do that), it would have to go back to Government and the Parliament again and the Government will fall - In that case a new budget from, for example the Peoples Party, would just give away pre election money in a wave of corrupt populism to win the elections next year. So bad though this budget is, it may be the best of the worst.

And if the IMF withhold their loan (not free gift remember), they will be seen as evil Americans (of which most of them are not of course) and the country could implode socially for lack of ability to pay pensions and unemployment money. And unpaid and hungry Russians suddenly becomes a security issue not to be played with at any cost. And of course there will be no magic money in the next 12 months from a sudden improvement in business, so the overlarge government structure, and the debts from this year will carry over to next and still have to be paid somehow. How this is to be done is of course never discussed.

In recent weeks I have been amazed by the stoicism of the Latvian nation. I knew that they had endured much before under the Soviets but now I can see this character trait in its full glory. But this Government (and those of Kalvitis and Godmanis) has also destroyed any basis for national honesty and decency by unfair tax policies, refusal to accept responsibility for their actions, and by the self seeking way most Parliament members behave and vote. Avoiding paying, and living outside of the rules is growing as a national sport(typically not paying for public transport), and this is very very sad.

What is clear to me is that like Italy in the 70s the country is beginning to work and exist totally independent of authority. Many people I talk to just want to leave, and leave quickly because they simply have no appetite for the fight. I am glad that I joined the SCP. They have stuck to their principles throughout all this, and I have been proud of the way many of the younger members have grown into fine politicians. Our day is probably not yet, but it will come.

What to do now though?