SCENESETTER FOR CODEL VOINOVICH

UNCLAS SECTION 01 OF 02 RIGA 000345 SIPDIS E.O. 12958: N/A TAGS: OREP PGOV ECON PREL LG SUBJECT: SCENESETTER FOR CODEL VOINOVICH ¶1. Your visit to Riga - the first Codel in nearly three years - provides an opportunity to demonstrate our strong support for Latvia at a time when it faces serious economic difficulty. Your visit will show our appreciation of Latvia's efforts to maintain their NATO commitments during the current financial hardships, support the government as they take steps to restructure government fiscal policy and functions to comply with commitments to international lenders, and encourage officials to begin movement on resolving Jewish property restitution issues. Background and issues -------------- ¶2. Economic situation: After years of double-digit GDP growth, the Latvian economy has experienced a dramatic contraction which requires a massive fiscal correction that hampers Latvia's ability to participate in NATO missions and could cause social tensions. Due both to previous economic and fiscal policies, and worsened by the global economic downturn, Latvia's GDP has fallen by 18% in the last year. In late 2008, the government was faced with the bursting of a real estate bubble and deposit flight from the largest Latvian bank which resulted in government takeover of the institution. These drains on government revenues and treasury funds, coupled with speculation of devaluation of the national currency, forced Latvia to seek international assistance, and the IMF, European Commission and others, created a 7.5 billion euro ($10.5 billion USD) assistance package. As the economy has worsened, the government has been forced to make even greater budget cuts to ensure compliance with the agreement. On June 16, the parliament passed amendments to the budget equating to a cut of about 4% of GDP. These included cuts in government wages, pensions, and social supportpayments. While inflation has been going down, unemployment is nearing 15%. The government's aim is to join the euro-zone by 2013. To meet the required 3% budget deficit, additional measures will be needed in 2010 and 2011 to shrink the deficit. These will be painful and likely require some combination of tax increases and cuts in entitlements. We have been supportive of international assistance to Latvia, but we have also stressed to the government that it needs to follow through with commitments to make meaningful fiscal alterations and restructure government operations. Your support in this area would be helpful. ¶3. Foreign Affairs and Security: Latvia has truly been a reliable friend and ally, but its economic situation is straining its ability to play an active role. Through multiple deployments in Iraq, and now, Afghanistan, Latvia has demonstrated its support for trans-Atlantic security missions. It has taken casualties in both operations, most recently when 2 Latvians were killed fighting alongside Americans on May 1. Budget cuts have caused the Latvians to cease participation in the NATO mission in Kosovo, the EU mission in Bosnia and the NATO Response Force. The government says it is committed to remaining in Afghanistan. Latvian cooperation in developing a northern route to bring non-lethal supplies to support the NATO mission in Afghanistan has been commendable. The Government of Latvia has also been active in supporting democracy and rule of law issues in ex-Soviet nations in the region, such as Belarus, Ukraine, Georgia and Moldova, but has had to eliminate all funding for these programs in the current environment. Given your long support on NATO matters, we urge you to encourage the Latvians to maintain their NATO commitments and to express America's gratitude for the sacrifices they have made. ¶4. Political overview: The economic crisis is straining the political fabric of the country; a stress that will only grow. Latvia saw its first real political violence since regaining independence in January following a demonstration against the worsening economic situation. The government fell in February amid public dissatisfaction with management of the economy. The current government, in office since March, is led by Valdis Dombrovskis, a former European Parliament Member and finance minister. He leads a center-right coalition of five parties. Political maneuvering prior to June 6 local government and European Parliament elections hampered the government's ability to take decisive action on the economy. None of the coalition parties did well in the election. They now look to weather the coming discontent as cuts in pensions, public salaries, health care and education are implemented. Latvia remains split along ethnic lines, with the 35% of the population who have Russian as their primary language still not fully integrated into society. About half of them are not citizens, although they have more rights than stateless people. June 6 elections resulted in the first ethnic Russian mayor of Riga since the restoration of independence, which provides a new opportunity to address ethnic issues. This will be harder, though, in the current economic environment. ¶5. Energy security: Latvia relies entirely on Russia for natural gas imports, and will be losing a source of imported electricity when the nuclear plant at Ignalina, Lithuania is shut at the end of ¶2009. Thanks to large underground natural gas storage facilities, and a relatively good relationship with Russia on energy issues, Latvian gas supplies have not been an immediate concern. The RIGA 00000345 002 OF 002 Latvian government has made plans to build two new electrical generation facilities to help with short term needs, and is seeking construction of links to the Nordic electrical grid in the longer term. Plans for a shared Baltic/Poland nuclear plant to replace Ignalina have not made progress. Your encouragement of Latvian cooperation with its neighbors on energy interconnection issues would be useful, as regional squabbling has been a challenge. ¶6. Jewish Property Restitution: While Latvia has an overall good record on property restitution issues, including for the Jewish community, the restitution of a remaining number of communal and heirless private properties has been slowed by a combination of politics, economics, and even some anti-Semitism. A 2006 agreement on this issue fell apart at the last minute. The government has created a task force to study the issue of communal property, but we have repeatedly urged that they move from study to action. We recommend that you raise this issue in appropriate meetings, as you visit presents an opportunity to highlight the importance of concluding such matters. ¶7. Economic and trade ties: Strengthening economic ties between Latvia and the United States has been one of the top priorities for the US Embassy in Riga. The United States is the 8th largest investor in the country, and in 2008, American companies had invested approximately 440 million dollars in Foreign Direct Investment. Latvia has created a business-friendly environment that is attractive to foreign companies, although recent developments in Latvian economy has made the process of attracting U.S. companies to Latvia more difficult. In addition to this corruption and rule of law issues are still major concerns in Latvia and can affect an American business's decision to invest or do business here. You will meet with members of the American Chamber of Commerce in Latvia, and we hope that the discussion may generate ideas for further trade and investment. ¶8. All of us at Embassy Riga look forward to welcoming you on June 30, and wish you safe travels. ROGERS