The Fall and Rise and Fall Again of the Baltic States

The smugness not only fueled the boom, but it allowed for the dodging of decisions on issues ranging from corruption and cronyism in politics to structural economic problems. In Latvia and Lithuania particularly, politics stank. Lithuanian President Rolandas Paksas was forced out of office in 2004 amid allegations of extortion and links with Russian organized crime. Another high-ranking Lithuanian politician, Viktor Uspaskich, fled to Russia when his bookkeeper turned over evidence to the authorities of serious breaches of party finance laws. Latvia was run by a bunch of party bosses with strong business ties, irreverently dubbed the "Politburo." On repeated occasions they tried to fire the heads of autonomous public bodies, such as the chief of the anticorruption authority, who had come dangerously close to uncovering how the country was run behind the scenes.

The first clear sign of trouble came when the one big bank in the region not owned by a foreign parent, Latvia’s Parex Bank, got into difficulties in mid-2008. Parex had always been a questionable success story. In the late 1990s the bank used to advertise on Russian television with a spot showing a $1 bill and the slogan "We are closer than America." The clear implication was that Parex was a convenient means for rich Russians to get their money out of the country. Parex strongly denies that it ever broke any Latvian law, and it has never been prosecuted. However, the bank has come under intense scrutiny from international officials seeking to combat money laundering.

Parex’s weakness was that its depositors were mainly offshore and highly mobile, while its lending had mostly been to construction projects inside Latvia, many of which soured simultaneously. After depositors withdrew nearly $430 million in the course of six weeks, the bank was nationalized in November for the token price of a couple of dollars. It also received a bailout in excess of $380 million from the Latvian state and the European Bank for Reconstruction and Development.

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