Latvia's Tiger Economy Loses Its Bite
AKIM AGINSKY FOR THE PULITZER CENTER
View a slideshow of images from Latvia, with photographs by Akim Aginsky and captions by Kristina Rizga.
Despite his 33 years, Valdis Novikovs still radiates teenage energy and a hunger for adventure. Latvia is a small country (population: 2.2 million), and like a lot of young people who felt suffocated and needed to get out, Novikovs left for England in 2005. He worked as a sous-chef at the Hard Rock Cafe in Birmingham and shared a studio apartment with a Polish roommate. When he went back to Latvia two years later, he barely recognized his own country. The moderately ticking postcommunist economy he'd left behind had turned into a booming engine, propelling rapid changes almost everywhere he looked.
"I come back and everyone around me is buying and selling properties," Novikovs says. "People have two luxury cars. They are traveling all over the world. I'm laboring overtime like a fool in England, but I can't do any of that." Sitting in his apartment in Riga, Novikovs speaks animatedly: "I felt like something gigantic was happening in Latvia, and the train was leaving without me!"
In fact, "something gigantic" was happening in Latvia: sweeping across the country was the biggest real estate (and luxury car) bubble in Europe. Less than a year after Latvia joined the European Union in 2004, its growth rate topped all of Europe. As global stock markets overheated and competition for investment opportunities intensified, Scandinavian banks showered Latvia with cheap credit. Eighteen years ago, when Latvia was under Soviet rule, the vast majority of the population had no experience with banking, investments or credit; no one owned property. But by 2005 Latvians could buy everything they ever dreamed of on credit--from teakettles to Bentleys to luxury apartments. As hundreds of office and apartment towers reached skyward, some construction workers started earning more than doctors. Novikovs, who had no experience in construction, got a job as a "plumber's assistant," in addition to managing a Jamaican-inspired restaurant, Coco Loco, at night. He was making more than $2,800 a month in construction alone, twice what he made in England.
Increased earnings and easy credit fueled a hunger for owning property. Oskars Kurdeko felt anxious that by 2007 he still didn't own a home. "All of my friends had already bought their apartments," Kurdeko explains. A percussionist for two local pop-rock bands, Putnu Balle and Tumsa, Kurdeko saw his income shoot up 70 percent that year, fueled by corporate gigs. He took out a $272,000 mortgage on a two-bedroom apartment in Riga with no down payment.
But as the global financial storm swept across Europe, the dreams of Latvians like Novikovs and Kurdeko were blown apart. By the end of 2008 Novikovs had lost both his jobs. Kurdeko's monthly mortgage payment now exceeds his pay, and his apartment is worth a fraction of what he owes on it. He's not alone: almost a third of all Latvian households have mortgages for homes or apartments that have dropped 50 percent in value since last year--the deepest plunge in the world, according to the Global Property Guide.
Novikovs now runs a business selling off remnants of other businesses that have closed or gone bankrupt, including his former restaurant. In May his headquarters--a small, dark rental space in a dilapidated Soviet-era building--was packed to the ceiling with more than 800 pairs of imported shoes, which used to sell for $40 but now go for $5. In one room, Italian sports bras piled up on top of a steel refrigerator. Recently, he and his partner started selling wood processing equipment and other machinery, as local manufacturing output continues to drop.
Latvia's economy has been among the worst hit by the global economic crisis, and it is now coping with Europe's second-deepest recession, after Lithuania. Its GDP dropped by an annual 19 percent in the second quarter of 2009. In February 2008 its government requested an emergency bailout loan from the International Monetary Fund. The IMF, with the help of the EU, approved an emergency aid package of more than $10 billion. Per capita, it is estimated to be one of the IMF's largest bailout loans.
Outside Riga, among the hardest hit are the large farms, which increased by 25 percent between 2005 and 2007, fueled by easy credit. "It's very hard for large farmers right now, who focused on producing one thing, like milk or grain, and took out large loans to expand their facilities," explains Liga Martuzane, a small farmer in Adazi. Now that the prices of grain and milk have dropped, many farmers are drowning in debt. Martuzane mentions the tragic suicide last year of her friend Gatis Karlovs, who operated a large farm. In February more than 1,000 farmers blocked the streets of Riga with their tractors in anger over the government's failure to protect them from the onslaught of subsidized EU imports, which they believe contributed to their bankruptcy. The protesters forced the resignation of Martins Roze, Latvia's agriculture minister.
The IMF and EU emergency loans have their own downside--they are given on condition of drastic cutbacks in government spending. The Latvian government has agreed to cut about $1 billion from its budget each year until 2012, the year it hopes to adopt the euro. Government officials waited until the day after the June 6 municipal elections to announce 10 percent cuts in pensions and 50 percent cuts to teachers' salaries. They feared the same public reaction that shook the country on January 13.
On that day more than 10,000 people took to the streets to protest spending cuts. What started as peaceful protests turned into the worst riots Latvia has seen since the collapse of the Soviet Union in 1991. Prime Minister Ivars Godmanis dissolved his center-right government coalition and stepped down in February, but his successor, Valdis Dombrovskis, assembled another center-right cabinet, which has pursued the same fiscal austerity policies. Latvia has since seen four more massive protests, as many Latvians feel that the cuts are arbitrary, without any clear vision or planning, and are directed disproportionately at the masses.