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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