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Feb 26, 2018 | 23:02 GMT

4 mins read

What to Watch for as Two Banking Scandals Unfold in Latvia

Ilmars Rimsevics has denied wrongdoing after being accused of bribery by the Russian owner of a Latvian bank.
Stratfor's geopolitical guidance provides insight on what we're watching out for in the week ahead.
The Big Picture

In the 2018 Annual Forecast, Stratfor outlined that Moscow would ramp up its campaign of hybrid warfare, pursuing political, economic and financial avenues to oppose the West. Two recent banking scandals in Latvia, combined with the vulnerable state of the country’s financial sector, will hand Russia plenty of fodder for those activities.

Two separate scandals have shed light on the controversial state of the Baltic country's banks, which have been the subject of concern over their financial well-being and over indications of corruption within the sector. As the scandals unfold, it will be important to watch how they play into the bigger picture of Latvia's strategic role in the standoff between Russia and the West.

On Feb. 17, the Latvian anti-corruption agency detained the head of the country's central bank, Ilmars Rimsevics, after Grigory Guselnikov, the Anglo-Russian owner of Latvia's Norvik bank, accused him of taking bribes. Rimsevics has denied any wrongdoing, and Latvia's Defense Ministry said that the allegations were part of a "massive information operation" by an external actor. Latvian Finance Minister Dana Reizniece-Ozola said that the corruption allegations would be investigated "so that we can better judge whether there is some active hybrid warfare (being) carried out here in Latvia."

In a separate case, Latvian Prime Minister Maris Kucinskis said that the government would hold an emergency session Feb. 26 to discuss the looming closure of ABLV Bank, the country's third-largest in terms of assets. A statement issued by the European Central Bank (ECB) on Feb. 24 said ABLV is "failing or likely to fail." Its characterization followed a report issued Feb. 13 by the U.S. Treasury Department detailing the results of its investigation that found ABLV had facilitated transactions linked to "large-scale illicit activity connected to Azerbaijan, Russia, and Ukraine" as well as activities circumventing sanctions on North Korea. In the wake of that report, significant assets were withdrawn from ABLV. Furthermore, the ECB's Single Resolution Board has rebuffed ABLV's efforts to seek financial assistance, determining that shoring up the bank "was not in the public interest."

What's at Stake

While Latvia's anti-corruption agency has said the two scandals are unrelated, taken together they could represent a threat to the country's banking system and its economy. While ABLV is relatively small in absolute terms — the bank reported $3.3 billion in deposits and $4.4 billion in assets in 2017 — its failure could have a contagion effect on Latvia's other banks. However, Reizniece-Ozola has said that the other banks in the country are stable and that the roughly $25 billion in deposits in the Latvian banking system had not significantly changed. In the meantime, even if the accusations against Rimsevics prove to be unsubstantiated, they certainly have added uncertainty to the country's financial picture.

Latvia's broader geopolitical position — in the European borderlands with Russia and on the front lines of the Russia-West standoff — adds further weight to these scandals. The large ethnic Russian minority population living inside Latvia's borders, as well as Russia's strong links within the country, make it one of the most susceptible members in both the European Union and NATO for Russian influence and hybrid warfare tactics. This is especially true economically, with Russia known to maintain shady financial and organized crime links into the country. Foreign shell companies — many of them thought to be Russian — hold bank deposits in Latvia.

What to Watch For

It will be important to monitor further developments in the two banking scandals, whether or not they prove to be interlinked. As they unfold, watch for signs of their financial impact on Latvia and whether any indications of Russian involvement are uncovered. Even if investigations do not prove a direct connection between Russia and the scandals, Moscow maintains an interest in playing up any scandals to undermine the Western-oriented Latvian government as parliamentary elections approach in October.

As such, it will be important to track the evolution of Russia's hybrid warfare tactics in Latvia, as well as in the other Baltic countries and vulnerable states on the European borderlands.

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