Bank Scandals Sap Latvia's Belief It Can Be East-West Bridge

(Bloomberg) -- Once an unwilling member of the Soviet Union, Latvia tried to position itself as a business link between east and west after communism collapsed.

That idea has all but died.

Banking ties between the Baltic euro-area nation and foreign clients predominantly based in Russia are crumbling following a spate of scandals. On top of that, Russian shippers of oil and coal are shunning Latvian railways in favor of domestic terminals.

Commercial connections helped smooth bilateral relations after Latvia regained independence in 1991, even as moves such as joining NATO irked Russia. For Foreign Minister Edgars Rinkevics, the turning point in the arrangement came in 2014, when President Vladimir Putin annexed Crimea from Ukraine, prompting a wave of speculation he’d go on to target Russian-speaking communities in the Baltic region.

“We should abandon this kind of illusion that there could be bridges or gates or anything,” Rinkevics said in an interview in Riga, the capital. “These past four years have been quite a wake-up call for everyone. Not everyone still has grasped it, but I think this understanding is slowly coming even to those who’ve been talking about this kind of bridge concept or gate concept for many years.”

Latvia was hit in 2014 by Russia’s ban on European Union food imports, retaliation for the sanctions that followed Crimea. The Freeport of Riga, Latvia’s largest, may see cargo-handling volumes drop this year by about 4 million tons, or 12 percent, because of the “escalating geopolitical situation,” Chairman Andris Ameriks said last week. Cargo at the port, mainly Russian coal, has dropped by about a fifth from a record in 2014.

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For Latvia’s economy, the developments aren’t disastrous -- thanks to the emergence of new drivers. While exports of financial and rail-transport services fell to five-year and 10-year lows in 2017, IT services stepped in with record foreign sales and road transit also advanced.

These new business areas must continue delivering. Swedbank AB, Latvia’s biggest lender, warned last month that measures to address malfeasance in the financial industry will trim 2018 economic growth to 3 percent from 4.2 percent.

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