Latvian Cabinet

YMGE 2018

Letter from the Director

Dear Delegates,

Welcome to Yale Model Government Europe 2018! My name is Neelam, and I could not be more thrilled to serve as your Committee Director for the Cabinet of Latvia. I am so excited to facilitate your YMGE experience; I hope to make it as fulfilling, engaging, and inspiring as possible. I believe that the opportunities YMGE provides are incredible, and can only be limited by our collective imagination as a committee. Together, during the conference, we have the chance to immerse ourselves in an amazing learning experience, and I hope we can all learn not only from the content we debate, but also from each other.

Currently, I am a sophomore planning to double major in Global Affairs and History at Yale University. I am from the cold New England state of New Hampshire, and have lived and skied there my whole life! At Yale, I am a member of the Yale International Relations Association (YIRA), and have been involved with conferences like SCSY and YMUN. Additionally, I am a member of Model UN Team at Yale, and on the board for the Yale Undergraduate International Policy Competition. When I am not binge-watching Netflix series, I race for the Yale Ski Team and love to write travel journals when I explore new places.

I look forward to being your Director, and want you to know that I will be your resource at all times. If you have any questions, comments, or concerns, I am more than happy to assist you via email up until the conference, at neelam.sandhu@yale.edu. If you have any hesitations or inquiries about the topic guide, content material, or the conference in general, I will do my best to get back to you as soon as possible, so that we can all enter our YMGE journey with excitement and enthusiasm!

Can’t wait to see you all in Budapest!

All the best,

Neelam Sandhu

neelam.sandhu@yale.edu

Topic Blurb

Nearly twenty years since switching to the standard European Union currency, the euro, the nation of Latvia has faced multiple financial crises. In addition to experiencing rising unemployment, increased inflation, and a deteriorating health and social care system, Latvians have most recently been shaken by the accusations of extensive money laundering against one of the largest Baltic banks, the ABLV bank. Having ties to the European Central Bank, the ECB, an institution overseen by the EU, the ABLV crisis has many implications not only on the Latvian economic situation, but also the nation’s status in the European Union. With growing distrust in the EU amongst the Latvian population, sentiment to leave the EU has been growing not only within the nation, but in the Baltic region as well. This Latvian Cabinet will focus on how to approach the growing banking crisis and money laundering issues in the country, as well as the tangential problems of inflation, migration, unemployment, and EU involvement that continues to destabilize the Baltic region.

Committee Background

History

The current structure of Latvian government operates under a system of parliamentary representative democratic republic, where the Prime Minister serves as the head of both the central government, and of the nation’s multi-party system. Currently, the Latvian Prime Minister is Māris Kučinskis. While Latvia has a President, this individual, currently Raimonds Vējonis, holds a primarily ceremonial role as Head of State. Executive power is primarily exercised by the government. Legislative power rests in the hands of both the government and the parliament, the Saeima. The judicial branch lies independent from the executive and the legislative branches.

The highest executive power of Latvia lies within the Latvian Cabinet of Ministers. The modern structure of the Cabinet had its inception close to when the former Soviet state became independent, and has been revised numerous times since. In spring 1990, the Supreme Council passed the Law on the Structure of the Council of Ministers of the Republic of Latvia, stipulating that 19 ministries there had to be developed in the composition of the Council of Ministers. The Council of Ministers consisted of the Chairman of the Council of Ministers, two deputies, ministers and a Minister for Government Affairs who was in charge of the government apparatus. Following complete restoration of independence of Latvia in August 1991, the reorganization of the government took place.

During this transitional period, the number of ministries was reduced to 16. The posts of a Deputy Chairman of the Council of Ministers and a Minister for Government Affairs were removed, while the post of the State Minister was established. The Supreme Council imposed a transitional period for de facto restoration of the statehood, which ended with the convening of the Saeima parliament of the Republic of Latvia. Following the elections of the 5th Saeima in 1993, the Satversme (Latvian Constitution) of 1922 was completely restored; thereby the government regained the name “The Cabinet of Ministers” and the grounds for work within the framework of a traditional parliamentary system.

Structure/Function

The cabinet itself largely is formed by an individual, the Prime Minister, who is entrusted by the President. The Prime Minister candidate has the power to decide the other members who comprise the Cabinet. When the members of the Cabinet of Ministers have been selected, the Parliament has a vote of confidence to confirm the choices of the Prime Minister candidate. If the voting is positive, the person who has been entrusted to form the Cabinet becomes the Prime Minister, and the other ministerial candidates are confirmed. Currently, the cabinet is spearheaded by Prime Minister Māris Kučinskis. Other positions within the cabinet include the Minister of Economics (also the Vice Prime Minister), the Minister for Finance, the Minister for Foreign Affairs, the Minister for Defence, the Minister for the Interior, the Minister for Education and Science, the Minister for Culture, the Minister for Welfare, the Minister for Environmental Protection and Regional Development, the Minister for Transport, the Minister for Justice, the Minister for Health, and the Minister for Agriculture.

The Cabinet of Ministers holds a portion of legislative initiative within the government structure, despite being the default body for executive power. It has jurisdiction over any question and unresolved issue for which the Parliament has not reached a formal decision. In strictly defined situations, according to Article 81 of the Latvian Constitution, the acts of Cabinet of Ministers have a power of a law, greatly expanding the reach of this body. As such, the Latvian Cabinet has a great deal of power over the decisions and policy implemented within the nation. The centralization of power to the cabinet enables this body to have significant influence over social, political, and economic policy in the nation.

Māris Kučinskis took office in February 2016, after being nominated by the Latvian president to replace the outgoing Prime Minister, Laimdota Straujuma. Straujuma, the nation’s first female Prime Minister, resigned in December 2015, largely due to an inability to resolve internal disputes within the ruling coalition, many of which stemmed from differing views on how to address domestic corruption and the growing European migrant crisis. Kučinskis heads the same coalition as the previous government: two center-right parties - the agrarian Union of Greens and Farmers and the Unity party - and the more conservative National Alliance party. Together they command a clear majority in parliament. Kučinskis, from the party the Union of Greens and Farmers, has continued the policies of the previous government, attempting to strengthen the economy and address the growing concerns about Russian influence within the nation.

Māris Kučinskis took office in February 2016, after being nominated by the Latvian president to replace the outgoing Prime Minister, Laimdota Straujuma. Straujuma, the nation’s first female Prime Minister, resigned in December 2015, largely due to an inability to resolve internal disputes within the ruling coalition, many of which stemmed from differing views on how to address domestic corruption and the growing European migrant crisis. Kučinskis heads the same coalition as the previous government: two center-right parties - the agrarian Union of Greens and Farmers and the Unity party - and the more conservative National Alliance party. Together they command a clear majority in parliament. Kučinskis, from the party the Union of Greens and Farmers, has continued the policies of the previous government, attempting to strengthen the economy and address the growing concerns about Russian influence within the nation.

Latvian Political System

Due to a complex history of ownership, occupation, and migration, Latvia has a population with a unique ethnic makeup that creates complex political dynamics within the country. The resident population of Latvia includes a number of ethnic and linguistic minorities, with ethnic Latvians make up approximately 59 percent. Among Latvia’s primary national minorities, ethnic Russians comprise 27 percent of residents, Belarusians 3.6 percent, Ukrainians 2.5 percent, Poles 2.3 percent, and Lithuanians 1.3 percent. Several other national minority groups make up less than one per cent of the population each, and have not demonstrated notable influence in national politics. According to the 2000 census, Latvian was the first language of 58 percent of residents, and Russian was the first language of 40 percent of residents. Russian speakers are especially concentrated in the east of the country, close to Latvia’s border with Russia. Additionally, Russians have a fairly high population in the capital Riga and some other larger Latvian towns.

The linguistic and ethnic divisions in Latvia strongly correlate with political divisions within the country. Amongst the Baltic states, cultural and political identity is largely determined by whether or not a populus associates with or diverges from Russian influence. Groups with cultural, linguistic, and ethnic ties to Russia often advocate for more lenient Latvian citizenship laws and migration policies, whereas those that identify in a more nationalist Latvian manner tend to have stricter views with regards to immigration laws. Ultimately, such divisions have an immense impact not only on the social and political atmosphere of the nation, but also on the future of Latvian economic policy.

While Latvia’s politics are divided broadly along linguistic lines, some election contestants had candidates from both Russian and Latvian linguistic communities on their ballots, and tried to appeal to speakers of both languages. The provisions of the Official Language Law were interpreted as prohibiting printed voter education and information in any language other than Latvian, thus disadvantaging voters with a low proficiency in the State language. Nevertheless, the Latvian Central Election Committee website provided some information in Russian. In some cases, election officials were flexible about accepting complaints in Russian.

Identity politics in Latvia have created highly divisive and controversial citizenship laws in the nation, which continue to be hotly debated at the national level. Such laws have a significant impact on migration policy, national identity, and foreign policy. After the restoration of Latvia’s post-Soviet independence in 1991, citizenship was granted automatically to holders of Latvian citizenship prior to 1940, as well as their descendants. As the law grants the right to vote and to stand to citizens, an estimated 321,000 non-citizen long-term residents of voting age did not have the right to participate in the elections. The status of non-citizenship was intended to be a temporary one, so that a person may obtain the citizenship of Latvia or some other state.

Under current Latvian law, citizenship may be obtained by children whose parents are non-citizens, if the parents initiate an application process, and by adults through a naturalization process. Naturalization rates peaked in the years immediately before and after Latvia’s accession to the European Union in 2004, but have declined since 2006, which is highly reflective of a general shift towards nationalist and populist tendencies in Europe. Non-citizens have the right to join political parties so long as they do not make up half or more of members, and they may make financial contributions to political parties. Such a system caps limits the influence and outreach of “non-Latvian” residents, which has been criticized in the past as an oppressive policy.

While citizenship is recognized as an admissible restriction to suffrage, in particular in elections for national office, the fact that some 17 percent of voting age long-term residents cannot participate even in local and European Parliament elections remains a challenge for Latvia. In the June 6th, 1993 elections, in which more than 90% of the electorate participated, eight of Latvia's 23 registered political parties passed the 5% threshold to enter parliament. The centrist party, Latvia's Way, received a 33% plurality of votes and joined the Farmer's Union to head a center-right-wing coalition government. The September 30-October 1, 1995 elections resulted in a deeply fragmented parliament with nine parties represented and the largest party commanding only 18 of 100 seats. Attempts to form right-of-center and leftist governments failed; seven weeks after the election, a broad but fractious coalition government of six of the nine parties was voted into office under Prime Minister Andris Skele, a popular, nonpartisan businessman. Among other issues, Latvia’s identity politics remains the greatest underlying source of contention in the nation, impacting not only how individuals vote, but also who has the power vote in the first place.

The desire to create cohesion in a fragmented system has become one of the primary concerns for the Latvian parliament for decades. In the 1998 elections, the Latvian party structure began to consolidate, with only six parties obtaining seats in the Saeima. Andris Skele's newly formed People's Party garnered a plurality with 24 seats. Though the election represented a victory for the center-right, personality conflicts and scandals within the two largest right-of-center parties--Latvia's Way and the People's Party--prevented stable coalitions from forming. Two shaky governments quickly collapsed in less than a year. In May 2000, a compromise candidate was found in the Latvia's Way mayor of Riga, Andris Berzins. His four-party coalition lasted until parliamentary elections in October 2002. Those elections left Latvia's Way, for the first time since 1993, with no seats in parliament. The New Era Party, which ran on an anti-corruption platform, gained the most seats and formed a four-party coalition government until the abrupt resignation of the Prime Minister in February 2004 over issues relating to personalities and management of the ruling coalition.

In 1999, the Saeima elected Vaira Vike-Freiberga, a compromise candidate with no party affiliation, to the presidency. Though born in Riga in 1937, she settled in Canada during the years of the Soviet occupation, becoming a well-respected academic on the subject of Latvian culture and psychology. Following her election, she became one of the most popular political figures in Latvia. She was overwhelmingly re-elected by parliament for another four-year term in June 2003. She was also credited with bringing Latvia to the world's stage and serving as an important check on the ruling coalitions.

With the tacit support of leftist parties, a minority government led by Greens and Farmers Union leader Indulis Emsis took office on March 9, 2004. The new government focused on smoothing Latvia's entry into NATO and the European Union, which took place in the first half of 2004. The government collapsed on October 28, 2004 after parliament voted against the 2005 budget. A new coalition government, led by Prime Minister Aigars Kalvitis, took office on December 2, 2004.

At YMGE, the fragmented politics of the Latvian people will likely impact the decisions made by the Latvian cabinet. Such cultural divisions should be remained cognizant of by cabinet members, however, should also be addressed and alleviated to the best of the cabinets ability if possible.

Banking Crisis

Since the Soviet Union collapsed in 1991, Latvia, which joined the EU in 2004, has built itself into a banking centre for citizens from other former Soviet states. Its reputation as a financial hub was established early in its independent history, when in 1988 two Riga-based entrepreneurs founded a private bank, Parex Bank, that two years later became the first in the USSR to receive a private licence to trade in hard currency.

“Latvia has been for many years a banking capital of the east,” according to a Latvian economist. It has “obvious advantages — [the] Russian language is widely spoken, business connections have existed since Soviet times, people know each other. People in Russia, Ukraine or Belarus look at Latvia and think it is super-safe because it is part of the EU and EU law applies.” Non-resident deposits grew rapidly, eventually almost matching domestic deposits.

Before Latvia joined the EU, Swedish banks also bought heavily into Latvia’s banking system, flooding the country, and its Baltic neighbors, with cheap credit that fuelled an economic boom. But in 2008 the global financial crisis struck and cheap credit flows from western Europe went into reverse. Parex, then Latvia’s second-biggest bank, needed a $1.9 billion state bailout and was nationalised. Latvia itself sought a €7.5 billion IMF rescue.

Determined to keep its currency pegged to the euro and its dreams of joining the single currency alive, Latvia was forced to undergo a brutal “internal” devaluation, lowering prices and wages. In 2009 its economy shrank 18 per cent, one of the largest contractions ever seen in peacetime.

Since the economy recovered, Swedish banks have dominated the domestic banking market, but some Latvian and other foreign-owned banks have specialised in the non-resident market. They received a boost in 2012 when the financial crisis in Cyprus, another offshore centre for money from Russia and other former Soviet republics, left investors seeking alternative havens.

Recently, the European Central Bank has brought claims against one of Latvia’s largest money lenders, the ABLV bank. The ECB said it had “determined that ABLV Bank was failing or likely to fail in accordance with the Single Resolution Mechanism Regulation.” Additionally, the ECB also said in its statement that the lender’s subsidiary ABLV Bank Luxembourg was “failing or likely to fail” in March 2018.

In a statement by an official, the ECB claimed that “due to the significant deterioration of its liquidity, the bank is likely unable to pay its debts or other liabilities as they fall due. The bank did not have sufficient funds which are immediately available to withstand stressed outflows of deposits before the payout procedure of the Latvian deposit guarantee fund starts.” The scandal has rocked the ABLV banks in addition to other major Latvian financial institutions, causing officials to question the legitimacy of financial infrastructure in the nation.

Corrupt money flows in and out of the country (primarily through ABLV transactions) have been linked to supporting authoritative regimes, with evidence supporting accused connections to North Korea. Latvia’s authorities long insisted that most of the ex-Soviet money was legitimate, however many Western nations continue to accuse Latvian officials of money laundering and defying Western sanctions. Of the accusers is the United States Treasury, and such major concerns have heavily halted economic development and investor confidence in Latvia. Such deeply rooted corruption  came shocked the citizens of the country, which has long-advertised itself as somewhat of a “financial bridge between Europe's west and east.”

Current Situation/Questions to Consider

In Latvia, wealthy businessmen and high-ranking banking officials often have significant political weight within the country and the European Union, being appointed as officers in domestic financial  commissions and international committees. For example, Latvia's central bank chief, Ilmars Rimsevics, also sits on the European Central Bank's rate-setting committee. Consequently, the banking scandal has led to major doubt not only in the efficacy of current Latvian financial figures and institutions, but also in the efficacy of EU financial practices as a whole.

As it stands, our cabinet must address the accusations made against many top-ranking officials in the Latvian government and banking sector, and decide from a legal standpoint what next steps must be taken. Additionally, the banking scandal has exposed major cracks in the Latvian system, and has demonstrated how corruption in the nation is reaching a tipping point and can no longer be ignored. The financial fallout has exacerbated social tensions in the nation, not only amongst differing political parties but also among minority ethnic groups and non-citizen populations that are most greatly harmed by financial declines. As a cabinet, it is our role to not only alleviate immediate financial pressures, but also to begin solving the greater sources of social and political tension in Latvia to build a stronger political infrastructure for years to come.

Questions to Consider:

  1. What next steps can the cabinet take to swiftly end the scandal, and remove any associated figures from major positions of authority? Keep in mind that hasty changes of power and major ideological shifts could lead to further tension and fragmentation in the country.

  2. How can corruption be addressed in Latvia’s financial sector? Should monetary flow be more strictly monitored, and should the government be more transparent with its actions? Bear in mind that more transparency and monitoring could lead to public exposure of internal political issues and motivations, which may harm the reputation of current cabinet members.

  3. What long-term plans can the cabinet make to address wide scale government corruption? Should major institutions be changed? How would this impact the cultural and ethnic divides that already exist in the nation? Would balances of power need to be shifted?

  4. Ethnic minorities and non-citizens are often the most heavily affected by financial strains. With this in mind, it is not surprising that fringe minority political parties (Latvian Russian Union, etc.) are on the rise and gaining traction fast. Such parties may threaten the current composition of the cabinet and are creating instability in major cities. What, if anything, can you do to retain political stability?

  5. Russia has been watching the Latvian situation closely, bearing in mind that instability could create opportunities to expand influence in post-Soviet Baltic climates where tensions already exist. What can Latvia do to combat the expansion of Russian influence in the nation without creating outwardly aggressive policies towards ethnic minority groups?

Future Research

For your research, it is crucial that you understand the dynamics at play in not only the Latvian economy, but in Latvian politics and society as a whole. While economics and banking is a major component in this issue, I do not expect any in depth prior knowledge of banking structures and economic models. This committee will be focused on how banking crises affect politics, as opposed to purely the economic bailout side of the issue. Thus, you should focus your research on the political structure of Latvia (how much power major banks have in Latvia, which banking officials have influence in politics), Latvia’s relationship with the EU, Latvia’s relationship with Russia, and the internal social dynamics in Latvia.

Some links to get you started include: