Advantages of Latvia as A non-Resident Banking Center

1. Advantages of Latvia as A non-Resident Banking Center Eriks Plato October 13, 2006 Riga

2. The Financial Sector Today • 41% of Baltic banking assets are in Latvia (13 billion LVL) • 5.5% of GDP, but about 10% of the service sector • Earnings of the Bank sector were 193 MLVL in 2005 • Estimates vary from 10-70% contribution from non-resident business (10-15% is probably most realistic) • Non-resident lending is only 10% of the portfolio • Non-resident deposits have dropped from 51% to 42% of total deposits, but 75% of those are demand deposits • This is a potential source of financial instability, but has also raised concerns of EU and US regulators

3. Psychological Profile Conducive to Business • In the Baltics, socialist block “collectivism” managed to build a society of individuals that: • Do not depend too much or tend to believe the government • Do not put a lot of faith in trade unions • Are individually active and rely upon themselves • Believe they know better what to do with their euros than the government does • Are not programmed in pre 1990s business models • Baltic independence was completely wiped out: • Many government agencies were built from scratch • All banks and almost all businesses started from nothing • New organizations and foreign investors hired new people • Property was not squandered, but frozen until denationalization

4. The Attitudes are an Asset • In short, people are hard working, entrepreurial, and young • The generational change during the early 1990s is not to be underestimated • The active business population is still young enthusiastic and ready to learn (tabula rasa) • Of course, business morals and ethics have yet to undergo sufficient development, but this can be managed • They are also loyal to their employer rather than to the government

5. Latvia in the USSR • Latvia was one of the most industrialized Soviet Republics, but this industrialization required the import of labor (also skilled) • Like other non-Russian republics export dependency was 50% of GDP • Riga has been an important industrial center since the late 19th century and was a major industrial center in the USSR • Riga was also a military center for the Baltic region and a place where a great number of military personell retired to • About 29% of the population is ethnic Russian, many of whom still have ties to Russia • The Latvian communist party was arguably more Soviet than local • When the Soviet Union collapsed many of the informal networks (communist party, industrial, scientific, military, KGB) remained

6. Advantages to Relationship Banking in the CIS • The informal networks are alive and have great potential for generating business, if they can be harnassed • Ethnic Russians can communicate with Ethnic Russians better than non-Russians (communication beyond language) • It is not only the bank staff, but communication in Russian is possible anywhere in the country (at least equivalent to Latvian) • Access to Russian media

7. Future Prospects • Non-resident business will no longer be as important as historically, but it still has great earnings potential • Difficulty is with transparency • EU and US regulators will continue exterting pressure on business being more transparent • Solving the issue of transparency would allow the Nordic banks to come back into the market

8. Thank you for your attention!