Offshore funds flowing from crisis-hit Cyprus have helped boost bank deposits in Latvia, strengthening the small Baltic state's position as an offshore banking centre for neighbouring Russia and other ex-Soviet states, recent data reveal.
Non-resident deposits are near 50% of total bank deposits, a record high, with Latvia's location next to Russia its key advantage. It has drawn funds from both businesses and rich individuals, who see it is as a stable proxy for Western banks, with the added attraction that Russian is widely spoken.
Regulators are keeping a wary eye on the development as Latvia, which aims to join the eurozone in 2014, suffered a deep crisis after the crash of a bank with heavy non-resident business in 2008, and some of its banks have been implicated in alleged money laundering.
"The same way as we export logistics services, we also export financial services," Kristaps Zakulis, chairman of the FKTK banking sector regulator, told Reuters in an interview, referring to ports, railways and transit traffic.
"We are close to that eastern market. We can speak the same language with them, not to mention all the historical nostalgia," he added.
A European Union source said Latvia had improved supervision of its banks after a crisis that lopped 25% off its output over 2008-2010, and the country was now attracting funds as a gateway to the EU, and, potentially to the eurozone, which Latvia wants to join in 2014.
"There are signs that some of the money and business, which until recently were at the Cypriot banks, have moved to Latvia," said Baiba Melnace, a spokeswoman for the Latvian Association of Commercial Banks.
FKTK data show that while domestic deposits fell between the end of 2010 and July 2012, non-residents' deposits have risen 25% to a record 5.8 billion Latvian lats (€8.28 billion).
In contrast, data from Cyprus, which suffered from Greece's woes and has requested a bailout, shows bank deposits by businesses resident outside the EU fell from €13 billion in August 2011 to just over €11 billion in August this year.
The coincidence is striking but does not make it possible to quantify the hot money leaving Cyprus is flowing into Latvia.
Latvia increased its attractiveness for foreign depositors by passing a law in 2009 allowing anyone who invests 100,000 lats (€144,150) to get a residency permit.
The measure was aimed mainly at Russian clients, for whom a residency permit would allow them to move more freely around the EU, but it also prompted interest from Chinese and Indian investors, the newspaper Diena reported.
While the growth in deposits is good news for banks, which say it will help an economy still recovering from a deep depression, the banking sector has had its problems.
Latvian banks have been implicated in money laundering in the past or had crises due to fast moving foreign money.
Money laundering allegations arose afresh this month, when prosecutors launched a probe into whether banks handled funds from alleged tax fraud in Russia.
A nation of 2 million people, Latvia boasts 29 banks, down from 61 in 1993. Scandinavian banks - Swedbank, SEB, and Nordea - dominate the retail market, while non-residents are served by often small, boutique banks.
Several Russian banks have offices in the Baltic states.
The 2008 failure of Parex bank, which had a lot of non-resident business, was one reason Latvia had to take an IMF bailout, which entailed austerity measures that contributed to a cumulative 25% economic contraction over 2008-2010.
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