HOW MUCH CAN LATVIA'S NEW GOVERNMENT EXPECT TO

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000152

NOFORN
SIPDIS

E.O. 12958: DECL: 03/16/2024
TAGS: PROV ECON EFIN PREL LG
SUBJECT: HOW MUCH CAN LATVIA'S NEW GOVERNMENT EXPECT TO
ACHIEVE?

REF: A) RIGA 102 B) RIGA 142

Classified By: Charge d'affaires a.i., Bruce D. Rogers. Reason: 1.4 (d
)


1. (C/NF) Summary: The Dombrovskis government is an uneasy
coalition that faces very difficult economic choices that
will strain political support and heighten personality
conflicts within the government. At the same time, leaders
seem to understand that continued political instability will
only exacerbate the economic situation and are likely to
muddle through at least until local government elections June

6. While several political observers here believe that this
government could survive through scheduled national elections
in October 2010, we are less sanguine. There are plenty of
opportunities for missteps along the way. The President is
unlikely to move to dismiss the parliament, which also would
give the parties some room to maneuver because he cannot
credibly make the same threat of dismissal again. The key
player is the People's Party. Their acquiescence to staying
in the backseat is the key to the survival of the Dombrovskis
government. Foreign and defense policy are likely to remain
unchanged, but take on a lower priority as the government
focuses on economic issues. End summary.


2. (C/NF) The approval of the new Latvian government led by
Valdis Dombrovskis marks a pause in the political turmoil
that has disrupted Latvia for several months, but it does not
mark a resolution. The government faces many challenges,
most notably a deepening economic crisis. If Latvia is to
meet the terms of its agreements with the EU, IMF and other
donors, it must cut roughly another 1.3 billion USD from the
budget. Dombrovskis says he will seek agreement from lenders
to allow a higher budget deficit and lower cuts, but there is
no guarantee that will happen. The initial cuts he has
proposed are largely mechanical and reliant on borrowing from
the pension surplus. There is still no strategic approach to
decide what core functions the state must provide and how
much to allocate to each one. Moreover, both Dombrovskis'
own finance minister and the head of the central bank oppose
a higher deficit. In either case, the needed cuts will be
painful; it is only a question of how painful. In that
context, the comprehensive reforms in education and health
care promised in return for international assistance will
require politically difficult school and hospital closures in
depopulating rural areas. To date, no political leader has
really been able to explain to average Latvians why these
cuts are needed and how they will benefit in the long term.
While Latvians are a patient people, we expect that there
will be increased opposition to the cuts as they are unveiled
and implemented. Already, there is a constitutional court
case to reverse the decision to deny pensioners a cost of
living adjustment in 2009.


3. (C/NF) The government also faces challenges largely born
of personalities. One of the coalition parties, Civic Union,
is made up of people who left two other coalition parties,
New Era and Fatherland and Freedom. The bitterness of those
splits still lingers. Dombrovskis is also not the head of
his own New Era party, but rather the consensus choice among
the party's various factions. In fact, he was not even
involved in the negotiations with People's Party on forming
this new government. Having been out of Latvia in Strasbourg
since 2004, he lacks personal connections with many of the
other ministers and political leaders. As a result, his
ability to knock heads and drive agreements, the way Godmanis
and Kalvits could, is limited.


4. (C/NF) The biggest wild card in the new government is
Finance Minister Einars Repse. As PM in 2002 - 2004, Repse
had a reputation for being unable to work with others and for
failing to consider opinions other than his own. He was also
famously forced to announce "I am not from Mars" in response
to complaints about his unusual personal behavior. Since
being appointed to this new job, he has been on his best
behavior, but many observers wonder how long that can last.
Repse has had a series of failed business deals in recent
years and whispers of personal scandals. These, along with
his well known ties to controversial banker/publisher Valery
Belokan, will doubtless provide fodder for political
opponents.


5. (C/NF) While the above are all reasons for concern, there
is some reason for optimism. Politicians seem to finally
understand the gravity of the crisis. A number of maximalist
positions staked out during the coalition negotiations, such
as those by People's Party to retain control of distribution
of EU structural funds or to draw a "red line" on cuts in the
health sector were rejected without reprisal. Also, as one
of its first acts after approving the new government, the
parliament voted overwhelmingly to eliminate advisory

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6. (C/NF) Several political observers have told us that they
could easily see this government lasting through scheduled
parliamentary elections in October 2010, but we are less
sure. Local government elections on June 6, especially the
results in Riga, will be a key indicator of the mood of the
country. The results of those elections could easily force
some changes in the makeup of the government. Even after
that, the pain of the decisions facing Latvia and the
disruption likely to be caused by reductions in government
services will create incredible strain on the coalition and
could drive it apart as easily as draw it closer together.


7. (C/NF) It seems likely that President Zatlers will decide
that by March 31 enough has been done to meet the conditions
he set out January 14 that he will not seek to dismiss the
Saeima. Indeed, the only remaining major issue is passage of
constitutional amendments allowing the public to initiate a
dismissal of Saeima, which now seem likely to pass. But if
Zatlers decides not to initiate a dissolution, it is not a
threat he can use again. With that threat lifted and once
local government elections are past, the parties will have
more room for political maneuver.


8. (C/NF) The key to stability of this government is the
People's Party (TP). They still have the largest number of
seats in parliament and if they leave the coalition, they are
very hard to replace. We agree with one former TP advisor
who said the party is in an ideal situation at the moment.
Early elections (where they would have faced big losses) seem
unlikely, they don't have any of ministries saddled with
making politically difficult cuts (except health, but they
can blame Repse for those),and it is likely that infighting
will break out among others in the coalition. At the same
time, TP will likely do well in local government elections in
the countryside and they have the ministers of foreign
affairs, culture and justice where they project a positive
image of their work for Latvia. Once they think the worst of
the cuts are done, they could very easily decide that they
are ready to return to leadership, especially as the 2010
elections get closer.


9. (C/NF) A final word on the government's foreign and
security policy. While we expect it to remain
trans-atlanticist, it is largely an afterthought. These
sections of the government declaration were largely copied
from previous ones and, unlike in previous cases, no
bureaucrats from MFA or MOD were invited to help in the
drafting. Given the budget situation, Latvia simply cannot
afford to take on new tasks in these areas and will struggle
to meet the obligations it has. Two positive signs, though,
are that the government declaration specifically cites the
primacy of the mission in Afghanistan and at the inaugural
meeting of the government, President Zatlers was strongly
supported when he said that is in Latvia's own interest to
fulfill its international obligations despite the economic
challenges of doing so.
ROGERS