Kristina RizgaThe
NationOctober 28, 2009Riga, LatviaDespite his 33 years, Valdis Novikovs still radiates teenage energy and
a hunger for adventure. Latvia is a small country
(population: 2.2
million), and like a lot of young people who felt suffocated and needed
to get out, Novikovs left for England in 2005. He worked as a sous-chef
at the Hard Rock Cafe in Birmingham and
shared a studio apartment with a
Polish roommate. When he went back to Latvia two years later, he barely
recognized his own country. The moderately ticking postcommunist economy
he'd left behind had
turned into a booming engine, propelling rapid
changes almost everywhere he looked. "I come back and everyone around me is buying and selling properties,"
Novikovs says.
"People have two luxury cars. They are traveling all over
the world. I'm laboring overtime like a fool in England, but I can't do
any of that." Sitting in his apartment in Riga, Novikovs
speaks
animatedly: "I felt like something gigantic was happening in Latvia, and
the train was leaving without me!"In fact, "something gigantic" was happening in
Latvia: sweeping
across the country was the biggest real estate (and luxury car) bubble
in Europe. Less than a year after Latvia joined the European Union in
2004, its growth rate topped all of
Europe. As global stock markets
overheated and competition for investment opportunities intensified,
Scandinavian banks showered Latvia with cheap credit. Eighteen years
ago, when Latvia was under
Soviet rule, the vast majority of the
population had no experience with banking, investments or credit; no one
owned property. But by 2005 Latvians could buy everything they ever
dreamed of on
credit--from teakettles to Bentleys to luxury apartments.
As hundreds of office and apartment towers reached skyward, some
construction workers started earning more than doctors. Novikovs, who
had no
experience in construction, got a job as a "plumber's assistant,"
in addition to managing a Jamaican-inspired restaurant, Coco Loco, at
night. He was making more than $2,800 a month in
construction alone,
twice what he made in England. Increased earnings and easy credit fueled a hunger for owning property.
Oskars Kurdeko felt anxious that by 2007 he still didn't own a
home.
"All of my friends had already bought their apartments," Kurdeko
explains. A percussionist for two local pop-rock bands, Putnu Balle and
Tumsa, Kurdeko saw his income shoot up 70
percent that year, fueled by
corporate gigs. He took out a $272,000 mortgage on a two-bedroom
apartment in Riga with no down payment. But as the global financial storm swept across Europe,
the dreams of
Latvians like Novikovs and Kurdeko were blown apart. By the end of 2008
Novikovs had lost both his jobs. Kurdeko's monthly mortgage payment now
exceeds his pay, and his apartment is
worth a fraction of what he owes
on it. He's not alone: almost a third of all Latvian households have
mortgages for homes or apartments that have dropped 50 percent in value
since last year--the
deepest plunge in the world, according to the
Global Property Guide. Novikovs now runs a business selling off remnants of other businesses
that have closed or gone bankrupt, including his
former restaurant. In
May his headquarters--a small, dark rental space in a dilapidated
Soviet-era building--was packed to the ceiling with more than 800 pairs
of imported shoes, which used to sell
for $40 but now go for $5. In one
room, Italian sports bras piled up on top of a steel refrigerator.
Recently, he and his partner started selling wood processing equipment
and other machinery, as
local manufacturing output continues to drop.Latvia's economy has been among the worst hit by the global economic
crisis, and it is now coping with Europe's second-deepest recession,
after
Lithuania. Its GDP dropped by an annual 19 percent in the second
quarter of 2009. In February 2008 its government requested an emergency
bailout loan from the International Monetary Fund. The IMF,
with the
help of the EU, approved an emergency aid package of more than $10
billion. Per capita, it is estimated to be one of the IMF's largest
bailout loans. Outside Riga, among the hardest
hit are the large farms, which increased
by 25 percent between 2005 and 2007, fueled by easy credit. "It's very
hard for large farmers right now, who focused on producing one thing,
like milk or
grain, and took out large loans to expand their
facilities," explains Liga Martuzane, a small farmer in Adazi. Now that
the prices of grain and milk have dropped, many farmers are drowning indebt. Martuzane mentions the tragic suicide last year of her friend
Gatis Karlovs, who operated a large farm. In February more than 1,000
farmers blocked the streets of Riga with their tractors in
anger over
the government's failure to protect them from the onslaught of
subsidized EU imports, which they believe contributed to their
bankruptcy. The protesters forced the resignation of Martins
Roze,
Latvia's agriculture minister.The IMF and EU emergency loans have their own downside--they are given
on condition of drastic cutbacks in government spending. The Latvian
government has
agreed to cut about $1 billion from its budget each year
until 2012, the year it hopes to adopt the euro. Government officials
waited until the day after the June 6 municipal elections to announce 10percent cuts in pensions and 50 percent cuts to teachers' salaries. They
feared the same public reaction that shook the country on January 13.On that day more than 10,000 people took to the
streets to protest
spending cuts. What started as peaceful protests turned into the worst
riots Latvia has seen since the collapse of the Soviet Union in 1991.
Prime Minister Ivars Godmanis dissolved
his center-right government
coalition and stepped down in February, but his successor, Valdis
Dombrovskis, assembled another center-right cabinet, which has pursued
the same fiscal austerity policies.
Latvia has since seen four more
massive protests, as many Latvians feel that the cuts are arbitrary,
without any clear vision or planning, and are directed
disproportionately at the masses. "It just doesn't look to me like the top is making the same sacrifices
while they squeeze the bottom," Dagnija Kamerovska, the director of a
local homeless shelter, said in May. The Latvian
state controller,
Inguna Sudraba, came out with a preliminary report in September that
found that most large state bureaucracies, which swelled in the boom
years, hadn't made the required 20 percent
cuts in their salaries.In the meantime, budget cuts are affecting areas like education and
healthcare. On September 6 more than 400 protesters blocked two bridges
to oppose the closing of
the only hospital in Bauska, a rural city about
an hour away from Riga. "Bauska's hospital has been here since the
nineteenth century. It lived through both wars, all regime changes.... I
don't
understand why we have to close it," Bauska's City Council
chairman, Valdis Veips, told the Latvian newspaper Diena. Instead
of explaining the closure, government officials sent in a
special unit
to break up the protest. A Bauska newspaper reported the next day that
city residents had received a government fax stating that financial
support for the hospital, though reduced, would
continue.As Latvia prepares to receive the third installment of the $10 billion
package from the IMF and the EU, the British Telegraph reported
on October 5 that Sweden's finance
minister, Anders Borg, had told banks
secretly to prepare for the collapse of international talks. According
to the Telegraph, Latvia's government had failed to deliver a 20
percent cut to
pensions and a 15 percent cut to public wages, as
requested by the lenders. Meanwhile, the pain and suffering in Latvia continues. Unemployment has
already doubled this year, and the IMF
reports that more than 10 percent
of Latvia's borrowers are over ninety days late on their mortgage
payments. Although banks have resisted evicting homeowners, they haven't
been totally idle; in June,
on an unused airstrip at the Riga airport,
more than 500 cars, trucks and bulldozers sat idle, all repossessed by
the banks.Since my mother and I emigrated from Latvia to the United States
in
1994, I have visited my homeland every year. As I traveled around Latvia
in May, I wondered, How did it get so bad? How did Latvia go from being
one of the most developed regions in the Soviet
Union to an area
experiencing one of the worst depressions in the world?The trajectory began in 2004, when Latvia formally joined the EU after
nine years of negotiations. Credit rating
agencies blessed the deal,
with Moody's upgrading Latvia from a "stable" to "positive" grade in
2005. According to the Bank Association of Latvia, loans and cheap
credit quadrupled
from 2004 to 2008, reaching 95 percent of Latvia's GDP
by early 2008. Most investment went into the construction of new luxury
condos and office buildings--rather than export capacity--under theassumption that real estate values would grow indefinitely. The rest
went into buying imported goods, many of them subsidized, weakening
Latvia's local manufacturing and export base. By 2007 Latvia
had the
second-highest trade deficit in the EU, after Bulgaria. To make matters worse, the real estate bubbles in England and Ireland
sucked away local labor. At the same time Valdis
Novikovs left for
England, an estimated 1.5 percent of Latvia's labor force went abroad.
Unemployment dropped to an unprecedented 5 percent in Riga, and from
2006 to 2008 the cost of labor doubled. As
inflation tripled, Novikovs
noticed that local clothing and food cost almost twice as much as in
England. "Latvians were traveling to Germany and Finland to buy cheaper
clothes and
furniture," he recalls with outrage. In 2007 Latvians had
the lowest household savings rate in the EU. The Latvian government didn't do much to stop this economic
transformation. If
anything, it stepped on the gas. Riga's new deputy
mayor and millionaire Ainars Slesers, who served in the Latvian
Parliament during the boom years, coined a phrase that is sure to become
a symbol of
the prevailing government attitude at the time: gazi
grida (pedal to the metal). Enabled primarily by foreign banks,
Latvia's government created a bubble economy financed by debt withoutdeveloping sustainable means to pay off these loans. Now Latvia's
economy looks like a race car that has smashed into a concrete wall.While economic indicators are a crucial part of Latvia's
story, they
don't fully explain why its bubble was the biggest in Europe or why its
citizens so fully embraced extreme, gazi grida neoliberalism.
Latvia's Soviet legacy still drives much of
its politics. For centuries,
the territories where Latvia, Lithuania and Estonia are located served
at best as stable colonies and at worst as bloody battlegrounds where
major Western and Eastern
empires like Germany, Sweden and Russia fought
for control. The Soviet occupation of Latvia in 1940 is the most recent
and painful scar. As many as 200,000 Latvians were imprisoned or
deported to
Soviet gulags, and for the next fifty years Russian was made
the sole official language in all political and economic spheres. In
this context independence often took the form of culturalresistance--language, traditions and cultural heritage. My family
celebrated summer solstice and Christmas in secret. I grew up in the small, rural city of Livani, about 100 miles south ofRiga. My late father, Peteris Rizga, helped build a new factory, Livanu
Majinas, in the early 1970s that helped move Soviets from bloc apartment
buildings into modern, single-family houses. My Jewish
mother, Fruma,
worked in the glass factory Livanu Stikls, which produced some of the
most coveted vases and glass in the Soviet Union. Thanks to these and
other new factories, rural Livani was
transformed into an industrial
center. A similar trend of Moscow-driven strategic industrialization
took place across Latvia, absorbing laborers and military personnel from
other Soviet republics.
These waves of migration changed the Latvian
share of the population from 75 percent in 1935 to 52 percent by 1989.
Today, Latvia has the highest proportion of Russian-speaking minorities
in the
Baltic states, raising the fear of cultural extinction more
acutely than in neighboring countries. In the '80s my mother became very active in the Independence Movement of
Latvia. On January
13, 1991, she packed sandwiches, made hot coffee in a
thermos and said, "We are going to defend Riga from the Soviet tanks."
Thousands of farmers drove their tractors from across the country
to use
them as shields. Small fires flickered throughout downtown Riga at
night, as my mother and I passed out hot coffee. On March 3 of that
year, 70 percent of the Latvian public voted in a
referendum to support
independence, and on August 21 Latvia officially regained its
independence. I was 14 then, walking around with an inflated sense of
pride and self-importance. My mother and I had
helped defeat Russian
tanks without any guns. At the time, Latvians feared that in a full democracy, the
Russian-speaking minorities might elect Russian communists back to
power. In Riga
only about 40 percent of residents were ethnic Latvians;
the rest were Russian-speaking minorities--Russians, Belarussians,
Ukrainians and other ethnicities. In 1991 the party my mother supportedinitiated stringent citizenship laws, naturalizing only those who could
prove their residence in Latvia before 1940, as well as their
descendents. Under these laws, my mother, who had come from
Ukraine in
1956, could not become a citizen. She felt betrayed. In 1994 she and I
packed our entire life into two suitcases and came to the United States.
In the late 1990s the Latvian government
started gradually reforming its
citizenship laws--and now they are similar to those of the United
States--but for years citizenship laws that favored ethnic Latvians kept
Russian-speaking minorities
from joining the country's political elite.In its drive to contain Russian influences, the Latvian government also
prioritized entry into the EU and NATO, a policy goal that overshadowedother domestic priorities, like stimulating local manufacturing or
supporting agriculture. As in most Eastern European bloc countries,
Latvia's politicians looked to the West, and the United Statesespecially, for economic models. The resulting reform strategy of the
ruling Latvia's Way government during the '90s is often characterized by
Western analysts as "soft shock therapy."
Latvia has had a flat tax
since 1997, and until this year progressive taxation has never been on
the agenda of any ruling coalition. The Latvian government also refused
to tax capital gains, which
turned real estate trading into one of the
most lucrative professions in the boom years. This unique confluence of
nationalism and neoliberalism took Latvia from the extremes of communism
to the
extremes of capitalism in less than twenty years. Nil Ushakov, the newly elected mayor of Riga, believes that Latvian
nationalism has allowed politicians to pander to their base and ignoreimportant economic issues. "What is easier, reading EU documents in
French and English on how to protect our local sugar refinery, or talk
about nationalism?" he asks. "What we have as
a result is an economy
that's based too heavily on transit, finance and imports, while our huge
potentials, such as an educated workforce, manufacturing and
agriculture, have been lost."Unlike its neighbors Estonia and Lithuania, Latvian left-opposition
parties have not been a part of the ruling coalition in Parliament since
1991. That has meant that neoliberalism has dominated
Latvian politics
virtually unchallenged since 1991. Two decades of this unchallenged
center-right rule have also fueled high levels of corruption. From 2000
to 2002 several international studies found
that Latvia had one of the
worst corruption records among its high-ranking government officials in
the post-Soviet states. In 2004, when Latvia joined the EU, it received
more than $1 billion in
"structural funds," aimed at developing Latvia's
infrastructure--modernizing schools and building roads and bridges,
among other things. But along with those funds came a resurgence of theold Soviet-era affliction of bribery. Delna, an anti-corruption watchdog group, believes there are widespread
but hard to trace kickbacks from contractors vying for lucrative
government
projects. In her stylish glasses and short, spiky hair,
Delna's 26-year-old Aiga Grisane looks more like a musician than a legal
analyst. Grisane sees direct connections between government corruptionand the Latvian real estate bubble. When Grisane monitored land
development for two years, for example, she discovered that there was
essentially no government regulation of construction development.
"In
Estonia, if you are building a bunch of skyscrapers, you have to submit
a plan for roads, kindergartens, stores. In Latvia, you could do
whatever you wanted." Grisane believes such
unregulated development
inflated Latvia's real estate bubble more than in neighboring Lithuania
or Estonia. She observed many cases in Jurmala, a small city near Riga,
where city officials passed laws
erasing regulation at the last minute
without any public scrutiny.Although the media cover government corruption scandals regularly,
high-ranking officials are rarely caught or prosecuted.
As a result,
many Latvians don't feel like giving their taxes to arrogant and corrupt
state officials. Grisane also believes that a widely accepted
underground cash economy helped inflate Latvia's
bubble. "Most of these
construction workers were getting salaries under the table. That
definitely contributes to inflation." A 2004 report by the European
Commission estimated that about 20
percent of the Latvian workforce
operates off the books, compared with only 9 percent in Estonia.The economic crisis of recent months, along with the January protests
and the resignations of
two ministers, has been a boon for the left
coalition party called the Harmony Center. It now holds the largest
share of seats in Riga's City Council, the first time since Latvian
independence that
the most left-leaning major party has done so. And for
the first time since 1991 an ethnic Russian, Nil Ushakov, is the mayor
of Latvia's capital, home to 700,000 people, almost a third of thecountry's population. The Harmony Center owes its success in large part to the charismatic
33-year-old Ushakov, who represents a new generation--young,
progressive, cosmopolitan--with no
record of scandals or corruption. A
former journalist, Ushakov studied economics in Denmark and speaks five
languages. "You can't run your country like a business; you have to
treat your country
like your family," Ushakov explained in campaign
videos.Ushakov's main opponent for mayor was Ainars Slesers, the millionaire
entrepreneur who had coined the phrase gazi grida.
Riga's
residents--ethnic Latvians and Russian-speaking citizens--clearly
rejected Slesers's philosophy of unregulated capitalism, and gave
Ushakov's party twice as many votes (Slesers became deputy
mayor). The
People's Party, considered among Latvians the most corrupt, and For
Fatherland and Freedom, the most extreme on issues of nationalism,
suffered significant losses in the country's June 6
local elections. But
the right-wing People's Party still holds the largest share of seats in
Parliament, for which elections take place in October 2010.These changes may signal a new era in
Latvia, one in which ethnic
divisions become less relevant, nationalism is not a campaign mantra,
capitalism is tempered with regulation, and government helps stimulate
local businesses while reducing
red tape and corruption. In a sense,
hope has arisen from crisis. "I like this crisis," says Dagnija
Kamerovska, director of a homeless shelter. "People forgot that you need
to produce
something valuable to get paid. I hope it will change
people's attitude toward labor." From entrepreneurs to teachers to
farmers and the unemployed, a surprisingly high number of Latvians
(about
80 percent) said in May that for the past five years, they've
felt that their country was headed in the wrong direction. And despite
the hardships of the past year, there is a sense that the currentsituation will "correct a lot of wrongs."Kristine Drevina, a 34-year-old member of a new Latvian left-opposition
party called Jaunlatvija (New Latvia), sits in a cafe and talks
about
why she got involved in politics. For the past six years, Drevina worked
at the European Central Bank in Frankfurt. But it dawned on her in early
2008 that "the country is going in the
wrong direction, and I have no
right to complain if I'm not doing something about it." Her party wants
to reorient Latvia away from blindly following neoliberalism and
focusing on ethnic
tensions. "In the current situation, we have
definitive proof that you can't let the markets run completely free. The
state has to be involved to assure fair rules for everyone and provide
safety
nets for the most vulnerable." Like Drevina, most members of the new party are in their 30s and have
studied or worked abroad. "New Latvia will be a test for our democracy.
Can we
rise to power without a long [money] tail behind us?" Drevina
says. The party was founded only two months before the municipal
elections and has made minimal gains. But it is determined to boost
its
visibility and membership before the October 2010 parliamentary
elections. Another new entrant into politics is Laura Mikelsone, Delna's director,
who stayed away from politics until
last year. She worked in the
Ministry of Economics and also as a human resources consultant helping
colleagues start a business in China. Now, as part of a team of mostly
young women who work at
Delna, Mikelsone wants to see leadership that is
capable of going beyond nationalism and embracing the full complexity of
Latvia's history. "I want a Latvian Obama," she laughs.As
new leaders, activists and artists are charting a more sustainable
political and economic agenda, a new generation of entrepreneurs is also
emerging to seek ways of creating sustainable businesses.
One such is
the green cosmetics company Madara, founded by three women in their 30s,
which makes its products using local resources, from plants to labor.
The women launched the company in 2006,
raising small amounts of capital
through friends, and have opened a new store in the thick of an economic
recession. While these green shoots are springing up across Latvia, the austeritymeasures imposed by foreign lenders threaten to slowly burn them out,
raising the specter of more social unrest this winter. A growing number
of ordinary Latvians are criticizing the ways their
government is
handling the crisis. They point to the fact that while the United States
and the European Union are growing their deficits to provide economic
stimulus, Latvia is still pursuing the
opposite strategy.I called Valdis Novikovs in October, four months after I left Latvia, to
see how his company that sells off the assets of bankrupt businesses was
doing. "Our business
is growing, and we recently started negotiating
sales with Lithuanians and Belorussians," Novikovs says, catching his
breath after a long day of work. Will Latvia survive this crisis?
"Latvians will be fine," Novikovs says
with confidence. "The thing is, even when you ask a Latvian how he is
doing in the best of times, they always say, just 'OK.' They don't shinewith optimism like Americans, but that's deceiving," Novikovs explains.
"We have seen worse things than this crisis, and we always survived."Kristina Rizga reported from
Latvia on a grant from the Pulitzer
Center on Crisis Reporting. Gatis Visnevskis contributed research for
this story.
See this story as it appeared in The Nation. Learn more about this
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