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.
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 euro single currency 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.
Credit ratings agency Moody’s also sees the dependence of small banks on such deposits as one of the vulnerabilities of the whole Baltic banking system.
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.
Latvia and Russia still have differences, particularly about history and the rights of a large Russian minority, but business links have stayed. That includes banks set up to cater to the financial needs of rich Russians and other former Soviet people.
“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 5.8bn Latvian lats ($10.78bn).