Thursday, January 31, 2008

Breaking news

Latvian politics is unexpected. With all the problems in the governing coalition, people were expecting one of parties in it to splinter. And, now, a party is falling apart. But it's not a coalition party, it's the opposition's New Era Party, which has built itself on blasting everything that the coalition does.

2 members of parliament have quit New Era: its 2007 presidential candidate Sandra Kalniete and the former minister of education Ina Druviete. 3 more are about to quit: Kārlis Šadurskis (formerly, the chairman of New Era faction in the parliament), Ilma Čepāne (a high-profile judge of the Constitutional Court, before she joined New Era) and Uldis Grava (the former head of Latvian TV, also before joing New Era). Also leaving are mayors of 8 towns and villages and 14 other regional New Era leaders.

New Era has lost 5 of 18 members of the parliament and at least a half of its high profile members (Kalniete, Druviete and
Čepāne were all #1 on New Era candidate lists in the 2006 election in their respective regions). I didn't see this coming and I doubt if anyone else did.

The details of what happened are not known. The New Era's remaining leadership claims that the local leaders have been pressured into leaving by the coalition government denying funding to their local governments. (OK, this might explain the decision by mayors of towns but what about Kalniete, Grava,
Čepāne, etc.? They don't look like people who would give in to political pressure.) Those leaving are saying they wanted New Era to be in the new coalition of Ivars Godmanis and felt that their opinion was totally ignored by New Era's leadership.

Given the recent history, we expected another government crisis. Instead, we got a crisis in the opposition. Developing...

Wednesday, January 30, 2008

Latvian retail sales statistics

Latvian Central Statistics Office (CSB) has the retail sales statistics for December 2007. The sales in December 2007 grew 1.7% compared to December 2006. For most countries, this would be an ordinary number. For Latvia, it's not.

The graph below shows the change compared to 2006, for each month of 2007:
As you see, the first half of 2007 was a consumption boom, with sales growing at almost 30%/year. This boom had been actually going for several years. But the peak of the boom was in early 2007.

Now, we are seeing the boom receding and extremely rapidly. From 24.1%/year growth rate in July to 1.7%/year in December. Thisis probably related to the changes in credit policy of Latvian banks. If the trend continues, we will see a decline in sales in a month or two. And, by summer, it will be a very big decline.

This morning, the prime minister promised to stimulate the economy by more government spending if the slowdown turns out to be too rapid. In half a year, the government has gone from thinking how to slow down the economy to thinking how to stimulate it...

Developing... And I don't like the direction in which it's developing.

Tuesday, January 29, 2008

Airline competition

Today, FlyLAL, the Lithuanian national airline, announced that they will offer cheap flights from Riga to 14 European destinations via Vilnius, Lithuania.

For many years, each of the three Baltic airlines was content with serving its own country. Quite little competition and expensive air tickets.

Things started changing around the time when Baltics joined European Union in 2004. Because of EU's open airline market, the Baltic airlines were now free to fly wherever in EU they wanted (and every EU airline was free to fly to Baltics). Air Baltic, Latvia's airline, was the first to use that. One month after Baltics joining EU, they launched a number of flights from Vilnius, Lithuanian capital. Three and a half years later, Air Baltic is the biggest airline in both Latvia and Lithuania.

Lithuania's FlyLAL (formerly known as Lithuanian Airlines or LAL) looked confused for a long time. A few months ago, they tried to sue AirBaltic for an advertising stunt in which AirBaltic had paid Google to show AirBaltic ads to people googling for FlyLAL. It looks like that lawsuit went nowhere...

Now, FlyLAL is finally trying to outcompete AirBaltic in Latvia with cheap tickets. The airline competition (from Ryanair and others) has already lowered the ticket prices in Latvia substantially. With one more competitor entering the Latvian market, the cheap tickets are there to stay...

How complicated company names can you make?

Someone at "Heidelberga" (a Latvian law firm) felt like doing something amusing. And they decided to change the name of their firm to... "Viss mainījies skaļi klusēja migla virs pļavām aiz upes un jenotiņš to sajuta tik skaidri ka aizrāvās elpa un nosvīda uz ceļgaliem rātni uzliktās ķepiņas".

In translation: "Everything has changed loudly quiet fog over meadows on the other side of the river and racoon felt it so clearly that lost breadth and the paws put calmly on knees sweated".

Uzņēmumu reģistrs (the Latvian authority responsible for registering companies) did not like the joke and refused the name change. According to them, a 25-word name is too long for a company and, in any case, free-format poetry is not appropriate in this setting.

If they had allowed the name change, the courtroom reports would have become a lot more amusing...

Monday, January 21, 2008

Bank of Latvia cuts reserve requirements

On Thursday, Bank of Latvia cut the reserve requirements for Latvian commercial banks from 8% to 7%.

As I've written before, Latvia's monetary policy is largerly controlled by Scandinavian banks which own most of the banking sector in Latvia. In most countries, the central bank controls the monetary policy by raising interest rates (if the economy is overheating) or lowering them (if the economy is going into a recession). In Latvia, with the lat/euro exchange rate fixed, banks can borrow euros from abroad and this effectively sets the interest rates.

During the credit boom of 2005-2007, Bank of Latvia saw that there was too much credit handed out but there was nothing that they could do. Raising interest rates on lat loans just pushed people into taking loans in euros. Then, Bank of Latvia tried requiring banks to keep more money as reserves... which did not work, either.

Now, the situation has reversed. The major Latvian banks are cutting down on new loans in a major way. The Bank of Latvia thinks that the cutbacks are too big and will hurt the economy too much but what they can do? Decreasing the reserve requirements is about the only thing. It will free about 50 million of lats (70 mln euros) which banks had to keep as reserves but will it be enough.

The financial world is increasingly unhappy about what happened in Latvia during the lending boom and Moody's rating agency has cut the credit ratings of both Swedbank and its Baltic subsidiary Hansabank (the biggest bank in both Latvia and Estonia). The possible implication is that Hansabank&Co might not too do much new lending in months to come.


Friday, January 18, 2008

Defenders of Riga

Defenders of Riga. Rīgas sargi. Everyone in Latvia knows what it is. Hardly anyone outside does.

It's a movie that has been breaking all records. In 5 weeks, it became the most watched Latvian movie since 1991. In 8 weeks, it bypassed Titanic by the number of viewers and became the most popular movie ever in Latvia. I went to watch it a few weeks ago and the movie theatre was still full. I was lucky that there was someone whose plans had changed and who was sellling her ticket in front of the theatre. Otherwise, I'd have to wait for a few hours, because the ticket office was sold out.

Historical background. The movie takes place in 1919 when the newly independent Latvia is less than a year old and is fighting its War of Independence against two enemies at once. One is Soviets, the other is the Landeswehr, a remnant of the army of German Empire. It should have surrendered when the Germany capitulated in the World War I but it didn't. Rather, it started waging its own war towards turning Baltics into a "United Baltic Duchy", a satellite state of Germany, ruled by the local Germans.

In 1919, they were joined by Bermondt-Avalov, a former Russian Tsarist general. Together, they managed to assemble an army of 20,000-50,000 soldiers and attempted to overthrow the Latvian government and establish their government instead. They entered parts of Riga but were eventually defeated by the Latvian army.

The movie shows the battle for Riga between Bermondt-Avalov's forces and the Latvian Army. Just like Latvia, its army is less than a year old. Some units have officers who don't have any soldiers to command. It's not clear at all if they can prevail over Bermondt-Avalov.

The movie. The battle for Riga is shown from a perspective of Mārtiņš, a Latvian rifleman who left home 4 years ago, to fight in World War I. He fought for Tsarist Russia first and for Soviets after that. Then, he hears that Latvia is independent and decides to come back home. At home, he has his fiancee Elsa waiting for him. But Mārtiņš does not realize that the decisive battle - both for Latvia (against Bermondt-Avalov) and for Elsa's heart (she has started to lost her feelings for him) - is still ahead.

Overall, it's a feel-good patriotic movie. There is a clear line between the good (almost everyone on the Latvian side) and the evil (everyone on Bermondt-Avalov's side). The portrayal of the doubts and squabbles on Latvian side is, however, quite realistic. Latvians keep arguing up to the decisive battle and, less than 24 hours before the battle, someone introduces a no-confidence motion against the prime minister. Then, somehow, magically, Latvians pull themselves together and win the battle. In my opinion, that was a good depiction of Latvian character (both squabbles and the ability to pull together when the crunch time comes).

And watching a war movie in which bombs were falling on the familiar streets on which I've walked thousands of time, just a few hundred meters from the movie theater... was so much more intense emotionally.

The movie has come under fire for a lot of minor historical innacuraccies. Soldier Mārtiņš ends up talking a lot (and giving advice to!) prime minister Kārlis Ulmanis. Surely, that's not what happened in the real life! But I understand that the moviemakers wanted to show both the perspective of an ordinary soldier (Mārtiņš) and Commander-in-Chief (Ulmanis) and showing the entire chain-of-command in between the two would have made it too complicated... I think the most important thing was showing the moods and emotions of those days and the movie succeeded in that.

So, overall, I liked the movie. And so did most of the people who went to it. (A few of my friends complained it was too Hollywoodish but they were in minority.)

Thursday, January 17, 2008

Side effects of Shengen treaty

A woman from rural Lithuania tries to catch a ride to Kaunas, the second largest city in Lithuania. A miscommunication with the driver leads to ... her being dropped off in Tartu, Estonia!

One month ago, she would have realized the mistake at the borders between Lithuania and Latvia. Now, all three Baltic countries are part of Shengen zone, border controls have disappeared and one can easily cross from one into another (and then, the third) without even noticing!

Another sign of changing times: after being dropped off in front of a Maxima chain store in Tartu, she thought it was a Maxima store in Lithuania. Chain stores can make any two places in the world look similar...

Sunday, January 13, 2008

Hansabank (not) for sale?

As we wrote before, Swedbank (the Swedish bank that owns Hansabank) is having troubles with investors since they've invested a lot in Baltics and the financial world is worried about Baltic economies overheating. The latest reports are that Swedbank's stock has lost 29% in a half year and analysts from Citigroup are recommending Swedbank to sell Hansabank. (The chairman of Estonian Hansapank is denying the possibility of sale.)

This strikes me as a massive overreaction. I've written about the economic bubble in Baltics and I agree that the economic prospects for next few years look a bit precarious. And Hansabanka's profits will certainly be less than expected. But 29% fall in stock price of their parent bank because of that? Stock markets certainly don't look rational to me.

Thursday, January 10, 2008

Latvian economic statistics (with a puzzle at the end)

Here comes another post on Latvian economic numbers...

While the Latvian economy is doing well at the moment, the numbers have been showing possible dangers in the future. First, Latvia has been importing almost twice as much goods as exporting, for last few years, and paying for that by money borrowed from abroad. The common sense suggests that foreign banks will not be willing to lend ever-increasing amounts of money to Latvia forever. Second, for last year, the Latvian economy has been growing at 11%/year, while industrial production has been growing at 1%/year. Most of the economic growth has come from selling things one to another, financed by borrowed money, rather than actually producing something. Again, by common sense, this cannot last for long.

The most recent numbers suggest that the first of these two trends is now correcting. In November, Latvian exports grew by 24.8% while imports grew by only 4.8%. Here is the graph (red line is the import growth, blue is the export growth):So, Latvian trade deficit is finally shrinking and substantially. It's still huge, though, and it will take several years until it gets reduced to a more reasonable number.

The second set of numbers, also released this week, is less encouraging. The industrial production grew only by 1.1% in November, compared to last year. The average for January-November 2007 is 1.0%/year. So, it's not clear for how long the rest of economy can keep growing at a much faster speed...

The puzzle is how all those numbers fit together. On one side, we have
  • industrial production: +1.1%
  • imports: +4.8%
On the other side:
  • retail sales: +11.2%
  • exports: +24.8%
Where do the goods that are sold in Latvia or exported come from, if neither imports nor production show much increase?

Wednesday, January 09, 2008

Quotes of 2007

Riga Latvian Society is selecting the most amusing quote of the year ("Spārnotais teiciens") every year. In 2007, Latvian politicians provided them with a lot of candidates:
And, from Russia:
  • "They [Latvia] will only get ears of a dead donkey from us" - Vladimir Putin, when asked whether Russia will ever return Abrene district to Latvia.
Overall, people have submitted hundreds of quotes to the contest. And Riga Latvian Society is still accepting new nomination for a few more days...

Sunday, January 06, 2008

Latvian recognized as European Basketball Player of the Year

Anete Jēkabsone-Žogota has been named as the European Player of the Year for 2007 in women's basketball, by a jury of 100 writers, coaches and players from 28 different countries.

In October 2007, Jēkabsone-Žogota lead the Latvian national team into semifinals of European championships, in one of best performances by the Latvian team in any team sport. She averaged 17.2 points per game, the second highest number in the tournament.

During 2007, Jēkabsone-Žogota also won EuroCup Women with Dynamo Moscow and was named the MVP of EuroCup Women. It's a truly impressive list of achievements in just one year!

UPDATE (Feb 8): Jēkabsone-Žogota wins another European Player of the Year award from FIBA Europe!

Friday, January 04, 2008

Will the end of housing bubble be good for Latvia?

A commenter on my previous post writes:
Am I the only one who thinks that a slowdown in the Riga housing market will be beneficial to the economy? I purchased a flat in Riga 2 years ago and had to wait for 3 months to find builders for a minor job... Flipping apartments for a living had become a desirable aspiration.

Surely the future of the Latvian economy lies in its ability to compete in the knowledge economy, for instance as a Baltic hub or as a EU springboard to Russia, not to channel a entire generation of young Latvians into quick-buck speculation!
I agree with that. Basing the economy on housing speculation funded by loans from Scandinavian banks is clearly unsustainable. Hopefully, when this is over, Latvia will have both more affordable housing and a healthier economy.

Thursday, January 03, 2008

December real estate numbers

According to Latio, the average Riga apartment price in December 2007 was 1415 Euros/m2. This was 2.1% less than in November 200 and 17.8% less than in April 2007 (when the prices peaked). Compared to December 2006, the prices have declined by 7.3%.

So, Riga real estate is firmly on the downward trend. If 7.3% or 17.8% looks like a big decline, one should remember that it comes after a much bigger multi-year rise in apartment prices, to the degree that they became unaffordable to most Latvians.

For example, from December 2005 to December 2006, also according to Latio, the apartment prices increased by 69% (in one year!). Even combined with this year's decline in prices, we still have a 57% increase from December 2005 to December 2007, which is a lot.

Wednesday, January 02, 2008

Celebrating New Year in Riga...

Laimīgu Jauno Gadu! Happy New Year, everyone! All the best wishes for 2008...

I was in Riga for New Year this time. The big difference from America is that it's easy to buy fireworks for private use in Latvia (in contrast, some US states that ban private use of fireworks entirely, because of safety concerns).

So, in addition to the government-organized fireworks in the center of Riga, we have many smaller ones throughout the city, when people fire up the things they've purchased, from ground or from their windows. And it makes the New Year sky quite colourful.

In the predominantly-Russian suburbs of Riga (like the one in which I'm living), we actually see fireworks twice. First, at midnight Moscow time (since some people are watching New Year broadcasts on Moscow channels via cable or satellite). This corresponds to 11pm Riga time. Then, second time, at midnight Riga time.

In mid-1990s, my suburb would see roughly equal amounts of fireworks at 11pm and midnight. This year, there was a bit at 11pm but much less than it used to be. But, at the actual midnight, the spontaneous fireworks continued for an entire half an hour. Does New Year Moscow time no longer matter to people in Riga, even if their native language is Russian? Maybe...

And, after watching our new president Zatlers give a New Year speech, I'm quite sure that he needs some lessons in public speaking.