Russians Come In From 20-Year Latvian Freeze as Austerity Plan Threatened

Latvia’s Russian minority may join the government in September for the first time since the country regained its independence from the Soviet Union, threatening the austerity measures needed to adopt the euro.

Ethnic Russians have been shunned because of fears their allegiance was to the government in Moscow. Harmony Center, the party that represents the Russians who make up a third of the population, is tied for the lead before elections on Sept. 17. Its chances of being part of the next coalition improved as the fight against corruption made some parties untouchable after a referendum to dissolve parliament.

“I would welcome Harmony Center in government,” Elina Egle, President Andris Berzins’ economic adviser, said by phone from the capital, Riga. It has a pragmatic attitude on the economy and “tries to think outside the box,” she said.

Including Harmony Center in government would be a test of Latvia’s resolve to reduce the budget deficit — and of the political elite’s ability to overcome decades of animosity between the two ethnic groups. Most native Russian speakers were settled in the country by the Soviet leadership after World War II, replacing Latvians who died during Nazi and Soviet occupation, were deported, or fled to the West.

The ratio of ethnic Latvians in the country fell to 52 percent in 1989 from 77 percent in 1935, according to the statistics office in the capital, Riga. They currently make up 60 percent of the population, preliminary data show. The Russian community of more than 600,000 people accounts for about a third of Latvia’s population.

Many weren’t granted automatic citizenship and have remained on the sidelines of politics since the Baltic country regained independence in 1991 and continued to be excluded from power after European Union entry in 2004, which also increased tensions between Latvia and Russia.

“It would be a big victory for Harmony Center to be accepted in government,” Zaneta Ozolina, a professor of political science at the University of Latvia, said by phone. “People have voted for them in large numbers.”

Latvian parties will find it difficult to ignore the Russian speakers, including ethnic Belarusians, because of electoral arithmetic. Harmony Center was backed by 17.5 percent of those surveyed in a Latvijas Fakti poll published July 22, tied with former President Valdis Zatlers’s Reform Party.

Prime Minister Valdis Dombrovskis’ Unity party had 11.7 percent support, followed by its coalition partner, the Union of Greens & Farmers at 8.1 percent and the National Alliance at 6.3 percent. No margin of error was given for the poll of 1,000 people.

While Harmony Center’s participation in a ruling coalition may be a milestone for ethnic relations, it raises concern that economic policy may be derailed.

The party’s leaders say they will target a budget deficit of 5 percent to 6 percent of gross domestic product as opposed to the government’s plan to meet the European Union’s 3 percent limit next year. The party also seeks to delay repayment of Latvia’s 7.5 billion-euro ($10.7 billion) International Monetary Fund bailout by two years to 2014.

After Greece persuaded the EU to delay loan repayments and lower interest rates, Latvia can “at the very least” expect a postponement, Nils Usakovs, Harmony Center’s prime ministerial candidate and mayor of the capital, Riga, said by phone.

Running a wider budget deficit would allow the government to provide more support to businesses and increase social spending, he added.

Dombrovskis helped implement austerity measures equal to 16 percent of gross domestic product after Latvia’s property bubble burst in 2008, plunging the country into the world’s deepest recession.

The economy has expanded for the past four quarters, accelerating to 5.3 percent growth from a year earlier in the second quarter, the fastest since 2007.

The inflation rate was 4.8 percent in June, tied for the second highest in the 27-member EU, and the unemployment rate was the sixth highest at 12.6 percent.

Renegotiating the IMF agreement would send the “wrong signal” to international investors, said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. With looser fiscal policy, “all the pain that Latvians have taken over the last few years would basically be wasted.”

The cost of insuring Latvia’s debt against non-payment for five years has increased 62 basis points since the July 23 referendum to 274 on Aug. 12, according to prices from data provider CMA. Neighboring Lithuania’s credit-default swaps advanced 64 basis points in the period to reach the same level. A basis point is 0.01 percentage point.

Harmony Center’s prospects for entering government are “pretty good,” said Nils Muiznieks, director of the University of Latvia’s Advanced Social and Political Research Institute in Riga. “They really want to be in power. The party will sign on to any conditions, no matter what they are saying now.”

The party’s chances improved after then-President Zatlers called the referendum to dissolve parliament as he sought to curb the influence of “oligarchs” he says wield too much power in government and the economy. Almost 95 percent of voters supported the measure after Zatlers and Dombrovskis said they wouldn’t work with political parties linked to the oligarchs.

That probably excludes the Greens & Farmers from the next government because it is led by former Ventspils Mayor Aivars Lembergs, one of three men Zatlers named as oligarchs.

The National Alliance may be shunned after a member of the party’s board used the Twitter Inc. microblogging service to write that the victims of the attacks that killed 77 people last month in Norway are on the “conscience of multiculturalists” and their “islamization policy.” Janis Iesalnieks resigned and said he wouldn’t run for parliament after the incident.

While Unity will talk to Harmony Center about forming a coalition, “nationalists are unacceptable,” said Justice Minister Aigars Stokenbergs, Unity’s co-chairman.

After topping the vote in last year’s October parliamentary elections, Dombrovskis offered to include Harmony Center in the new government if the party acknowledged that Latvia was occupied by the Soviet Union. Party leaders rejected the conditions.

Reconciliation is difficult as citizenship 20 years ago was granted only to people whose families held it before the 1940 Soviet occupation. Almost 327,000 Russians, who had to go through a naturalization process, didn’t have Latvian citizenship in January, down from about 715,000 in 1991, according to the Office of Citizenship and Migration Affairs.

“Admitting there was an occupation would have consequences for our voters,” Cilevics said. “All people who came to Latvia after 1940 would be considered as occupiers and may face limitations on their rights.”

To contact the reporter on this story: Kira Savcenko in London at (August 15, 2011)