Latvia brings dirty money headache to euro zone as it enters monetary union
As nation joins monetary union, observers see its loose financial oversight as a problem
When Latvia adopts the euro today, it will bring with it a banking sector that is swelling with suspicious money from Russia and the east, just as the currency bloc is trying to clamp down on such havens.
It was just nine months ago that the euro zone had to rescue Cyprus, a similarly tiny member state that also specialised in attracting huge deposits from Russia. Since then, euro-zone leaders have vowed to crack down on financial sanctuaries.
But as the 18th member of the euro zone, Latvia is likely to see a greater, not smaller, influx of dirty money as the country will be viewed as safer than other former Soviet states while financial oversight remains loose.
The issue with Latvia is that you have a pretty permissible political environment
"Immediately after Latvia joins the euro zone, I imagine we're going to see an actual spike in dubious money flowing in," said Mark Galeotti, a professor at New York University who researches organised crime in the former Soviet Union.
For years, Latvia's political and financial leaders had hoped to create a mini-Switzerland in Eastern Europe, a place where capital in unstable countries such as Russia or Kazakhstan could either be parked for a while or channelled its way further west to banking meccas like Zurich or London.
After a slight dip during Latvia's financial crisis in 2008-2010, the amount of non-resident bank deposits has risen rapidly over the past two years ahead of the country's entry into the euro zone.
"The issue with Latvia is that you have a pretty permissible political environment, and you have the massive and quite efficient infrastructure for managing these funds from the east. The question is: why wouldn't you want to go to Latvia?" said Galeotti.
Latvia has 20 domestically registered banks, or one for every 100,000 residents, an extremely high ratio. Of these, about 13 are considered "boutique banks" that rely almost exclusively on foreign funds, mainly from countries of the former Soviet Union.