20 years ago..

The Economist carried a marvellous cover story called "The Bullies of Vilnius"

(not by me)

You can read it here

Lithuanian diary

Here is a short (three-day) diary from last week's trip to Lithuania

Lithuania

Back on the map
Mar 16th 2010
From Economist.com


How an invisible country rocked the world


Day one

EARTHQUAKES are a horrible way of changing the physical landscape—but geopolitical ones can have marvellous results. Lithuania has just celebrated the 20th anniversary of its declaration of renewed independence, when late in the evening of March 11th 1990, deputies of the “Supreme Soviet” of the Lithuanian Soviet Socialist Republic voted unanimously to dump the symbols of Soviet rule and to restore their country’s independence.



It seemed a hopeless gesture at the time. But the seismic shocks shattered the Soviet Union, bringing freedom, or at least the chance of it, to 15 new countries. It put Lithuania—literally—back on the world map, from which it had been wiped by its forcible annexation by the Soviet Union in 1940.


A poignant exhibition in the parliament building shows the mass murder, deportations, collectivisation, forced atheism and unrelenting propaganda inflicted on Lithuania under Soviet rule. It also shows the determination to resist. Particular moving are the souvenirs created by Lithuanians in the Gulag, bearing national symbols and the red-green-yellow colours of the national flag. Possession of that flag, or let alone humming the old national anthem, was a criminal offence.


Yet that flag, along with those of Latvia and Estonia, was visible in in the lobby of the American State Department throughout the period of Soviet occupation. (America, like almost all western countries, never formally recognised the Baltic states’ incorporation in the Soviet Union). Thanks to that non-recognition policy, a dwindling handful of elderly diplomats in moribund embassies, chiefly in Washington, DC, the Vatican and Britain, retained their diplomatic status, living and working in a kind of limbo which all too easily seemed futile. One of their few real jobs was issuing passports, carried with pride by Lithuanian emigres, though seldom used in practice.


As the Soviet Union crumbled, old Lithuania stirred: neither gone, nor forgotten, just buried. Huge demonstrations began to challenge the Soviet occupiers. Political prisoners returned from Siberia. Independent media emerged, and began overturning the systematic lies and propaganda of the past. In late 1989 the Communist Party turned against its masters in Moscow and then split. In elections to the Supreme Soviet, the candidates endorsed by the pro-independence “Sajudis” movement (pictured in 1990, above) swept the board. On March 11th, barely 24 hours after they first convened, the new members restored the pre-war coat of arms, ripping down the hammer and sickle from the building’s entrance. Then—to the amazement of the outside world—they declared the pre-war republic re-established with immediate effect.


Had it all gone wrong, those men and women would have been the first to suffer. Some of them had been born in Siberia, the children of parents deported there for no other reason than that they had been officials in the prewar republic. But bravery aside, what the gesture meant in practice was unclear. Lithuania had no money, no state institutions, no experience, no means of defending itself. The KGB was still a threatening presence, housed, appropriately, in the building that had once been the Gestapo headquarters. The Lithuanian authorities’ power was dependent on the Soviet military staying in their barracks. Initially, only a few hunting rifles and sandbags defended the parliament. Lithuania’s borders were still under Soviet command. Anyone wanting to cross them needed a Soviet visa. There was one exception. On March 28th, your correspondent managed to enter the country, gaining Lithuanian visa 0001. Using visa 0002 had to wait for more than a year, until the Soviet Union collapsed in August 1991.


The effusive congratulations for the 20th anniversary belie the fact that at the time most outsiders reacted not with cheers but a mixture of caution and outright horror. The top priority for most countries was not supporting a forgotten country’s quixotic quest for freedom. It was to keep the embattled Mikhail Gorbachev in power in the Kremlin, and his hardline opponents out of it. Following the fall of the Berlin wall, Germany was gingerly negotiating the terms of reunification. That depended on Soviet consent.


Foreigners counselled the Baltic states to play it slow and soft. Better to be autonomous in a Soviet Union where glasnost and perestroika (openness and reform) were ascendant than to aim for the seemingly impossible goal of restoring full statehood. Lithuanians disagreed. As Vytautas Landsbergis, the first head of state of the reborn republic, put it during the celebrations, “they offered a reform of the prison regime. We didn’t want to be in the prison at all”.

Yet the gamble paid off. Barely 14 months later, a failed putsch in Moscow left the Soviet Union in ruins. The Russian leader Boris Yeltsin displaced Mr Gorbachev in the Kremlin. He wanted independence for his country from the Soviet Union too. Almost overnight, the Baltic states were back on the map. It was as if Atlantis had reemerged from the depths of the sea and applied to join the United Nations. A lot to celebrate indeed.


Day two

THE centre of the celebrations was the parliament. Most senior positions there and in the government are still held by people who featured prominently in the independence struggle. They look a lot less tired and worried now. They are also a lot better dressed. Sleek designer glasses have replaced clunky Soviet-era spectacles. Dreadful dentistry has given way to shiny white teeth. Grey shoes and white socks—once a common combination—have vanished. Shabby polyster suits are in the same dustbin of history as the Soviet Union.


In those days the “Supreme Council” building (pictured, right) was rank with cigarette smoke, sweat, cheap Soviet perfume (seemingly applied by the litre) and the lingering smells of boiled cabbage and stewed tea from the cafeteria. All that has gone, along with the improvised defences that used to ring the building. These were built, Lego-style, out of huge prefabricated concrete structures from a nearby building site, under the direction of a mysterious and energetic American who was rumoured to have a military engineering background. They were backed up by what purported to be a minefield. The sign “Stop-Mines!” was in Lithuanian only—a language that attacking Russian soldiers would be unlikely to understand.


The parliamentary guards of those days—twitchy, unkempt and armed with only rudimentary weapons—were the nucleus of what later became Lithuania’s armed forces and security service. Both outfits are in a mess. Swingeing defence cuts have left Lithuania’s military able to do its NATO duty in Afghanistan, but not to defend the country—something that infuriates the Estonians, who still spend the NATO-mandated 2% of GDP on defence. Lithuania, like the other Baltic states, is now gaining formal contingency plans from NATO and big American land exercises are planned for later this year. But outsiders’ willingness to risk blood and treasure in the Baltic may fade if the locals show so little desire to provide their share.


In the security service, the VSD, a huge political row is raging over the so-called “Valstybininkai”—a tightknit group of hawkish senior security officials and advisors. Their nickname is all but untranslatable into English, but could be rendered as “Men of State”. They played a key role in deposing an elected president, Rolandas Paksas, in 2004, supposedly because of ties (which he denies) with Russian intelligence and organised crime. Now they are enmeshed in a scandal over a CIA compound in a suburb of Vilnius, which may have been a secret prison. News of its existence was leaked in America, to the despair of Lithuanian officials. Not that it was very secret: the Americans had acquired the building through a shell company in Panama, engaged in highly conspicuous and unusual construction work, and asked the electricity utility to wire the building up with an American-style 110-volt power supply. Short of putting a neon light on the roof saying, “CIA—your security in safe hands”, it could hardly have been more conspicuous.


Some of the Valstybininkai may face criminal charges relating to abuse of power; others have been exiled to postings in faraway countries. Lithuania is a hugely pro-American country, and many might think that turning the odd dirty trick for the country’s most important ally was nothing to get too excited about. Though the group may have got overly self-important, they still enjoy great respect in many quarters (not least abroad) for their brains and patriotism. Some scent a vendetta by Lithuania’s president, Dalia Grybauskaite. Since her election last year she has seized on the issue. She also wants to improve her country’s ties with big European states such as France and Germany—and with Russia. Nobbling the VSD could be part of that, say her critics.


But what worries even the most solidly Atlanticist Lithuanians is the mystery around the presumed murder of a senior VSD officer, Vytautas Pociunas, in Belarus on August 23rd 2006. His family and friends believe that his death (falling from a hotel window) was covered up in order to forestall an investigation into a scandal in the VSD. Conspiracy theories abound, involving secret cabals of homosexuals, Russian penetration and high-level corruption. Others think that he was murdered by the Russians, or the Belarussians, in order to sow confusion in Lithuania. If so, that certainly succeeded. More than three years after his death, the issue continues to sow mistrust, and a certain amount of fear.


Day three

CENTRING celebrations around Lithuania’s parliament leaves Ms Grybauskaite in an unusual position: off stage. A former European commissioner, she trades on her image as a political outsider, running against the old-boys club that dominates public life. Without a political machine behind her, she needs to keep her popularity high. Many Lithuanians appreciate her boldness and bluntness, as well as her squeaky-clean image. Unmarried and childless, she has no relatives to embarrass her with dodgy business dealings. Her success in a big job overseas gives her credibility. In a country where politicians are prone to self-enrichment, she does not even draw her full salary. Her tactical skills are formidable—she fought and won a sharp battle to get rid of the country’s high-profile foreign minister, Vygaudas Usackas (who is now the European Union’s envoy to Afghanistan).

That leaves her (at least in her own eyes) as the unquestioned leader of Lithuania’s foreign policy. But to what end? By Lithuanian standards, she is not a great Atlanticist. Her priority is to develop the country’s ties with the EU, especially France and Germany. She shows little interest in causes that have been at the centre of Lithuanian concerns in previous years, such as promoting Georgia. To the displeasure of Georgia’s friends in the region, she did not invite President Mikheil Saakashvili to the celebrations (though the parliament invited heavyweight Georgian lawmakers). Instead she invited Alyaksandr Lukashenka, the autocratic president of neighbouring Belarus—and Dmitri Medvedev of Russia. 


The reasoning behind this is interesting. Ms Grybauskaite said she would go to Moscow on May 9th for the 65th anniversary celebrations of the end of the war if Mr Medvedev would come to Lithuania to celebrate the events of March 11th. He said no, quite politely, and in turn invited her to come to Russia at a time of her choosing. That could be quite a victory: May 9th is not a great day of celebration for the Baltic states, where many see it as irredeemably tainted with the Soviet (and Stalinist) view of the war, in which the three little countries bounced like shuttlecocks between two totalitarian empires. So Ms Grybauskaite avoids the embarrassment of being pictured against the pictures of Stalin which are likely to adorn the Moscow streets. And she gets a chance to talk properly to Mr Medvedev in more congenial surroundings.


But if the price of good relations with Russia is snubbing Georgia, many Lithuanians will balk. Georgia’s plight—divided and part-occupied—could easily have been the Baltic states’. Even those who bemoan Mr Saakashvili’s flaws still care about the country he leads. The speaker of the Georgian parliament, David Bakradze, gained a rapturous reception from a big crowd at an outdoor concert in Vilnius on March 11th. Mr Saakashvili would have had an even bigger one.


Ms Grybauskaite’s invitation to Mr Lukashenka, oddly, was less controversial. Lithuania has rather good relations with Belarus, despite being a base for efforts to aid the opposition there. (Another scandal around the VSD concerns the alleged misappropriation of American money paid to that cause). Lithuania was the only NATO country to be invited to observe the big and threatening military manoeuvres mounted last autumn by Russia and Belarus. Showing the Belarussian authorities that close ties with Russia are not the only option is a good idea: it is strongly supported by neighbouring Poland.


That is another priority for Ms Grybauskaite. Poland and Lithuania should be great friends. They share a long history. From a cultural point of view, they are in some ways indistinguishable (Poland’s best known poem starts, “Lithuania, O my fatherland”). But ties are oddly tense. Lithuanians, with unhappy memories of past Polonisation, have never delivered on repeated promises to sort out an arcane dispute about spelling. That infuriates Polish officials. The Conservative Party, which leads the governing coalition, is deeply divided on the issue. But it may have to swallow its pride: the votes of two Polish deputies are essential if it is to have a working majority.

Estonia and defence spending

Why does Estonia spend so much more on defence than Latvia and Lithuania? And is it a good idea? Cynics say that Estonia can't be credible in defence if the other Baltic two have in effect given up. Estonia should stop bothering with even vestigial territorial defence and concentrate solely on international obligations. I think that would be a big mistake. Defence spending is about credibility, both in military and political terms. Trying to meet the 2% of GDP target shows the Estonian people that the state is serious about defence (and therefore serious about other things. It also signals that to the outside world. Here Kurt Volker, the former US Ambassador to NATO, praises Estonian defence thinking. And in this speech
he gives some general thoughts about the Atlantic alliance.

Estonia ahead

Baltic economies

The Estonian exception
Oct 29th 2009 | RIGA AND TALLINN
From The Economist print edition


Estonia gets a boost, but worries persist about its Baltic neighbours
SMUGNESS is Estonians’ least attractive feature, at least in the eyes of their Baltic neighbours, Latvia and Lithuania. A surprise endorsement by the International Monetary Fund of Estonia’s plans to join the euro in 2011, coupled with gloom about the other two countries, will only make that worse.

All three Baltic states are facing double-digit economic declines in GDP this year, following the collapse of credit bubbles created by reckless lending and spending. Many outsiders have wondered if the three countries can maintain their fixed exchange rates, which peg the national currencies to the euro. A currency or banking collapse in the Baltic would spook markets elsewhere in the region, threatening wobbly economies such as Hungary’s.

So for the past year the focus has been on averting disaster. Plunging tax revenues made the chances of any Baltic states meeting the criteria for joining the euro look slim. In Latvia, for example, the government is struggling to keep next year’s budget deficit down to 8.5% (see chart)—a condition for the continuation of a €7.5 billion ($11 billion) IMF-led bail-out package. To join the euro, the deficit must be sustainably below 3%.



But it now looks as if, barring upsets, Estonia by the middle of next year will have met all the criteria for joining the euro. Inflation is low; government debt is negligible (indeed the country still has net public assets) and next year’s budget sets a deficit of 2.95%. That is thanks, the IMF says, to Estonia’s thrifty habits in public finances. The government has cut spending hard and early. It sped through modernisation projects financed by the European Union. This acted as an economic stimulus. Latvia and Lithuania have found it much harder to follow the same path. Lithuania has dodgy banks and spiralling debts; Latvia has lost credibility among outsiders because of its failure earlier this year to cut spending as promised.

For safety’s sake, the IMF still wants Estonia to raise and broaden taxes a little. Car-owners, for example, pay no car or road tax. But Andrus Ansip, the prime minister, already feels vindicated. He says the prospect of euro adoption will boost investors’ confidence and speed the country’s recovery.

Attention now shifts back to Latvia, where the IMF and EU are holding up a new budget, due to be passed on October 28th. They worry that the precarious governing coalition lacks political will, and that the crisis is unfairly hitting the poor. They want Latvia to dump its flat tax for a more progressive system. But Latvia says higher taxes would discourage entrepreneurs and that chaos in the state revenue office means that the higher rates would bring in little extra cash. No reason to feel smug there.

NATO and Russia

War games
Oct 29th 2009 | RIGA AND TALLINN
From The Economist print edition


Jitters in eastern Europe over Russia’s military manoeuvres

SCAREMONGERING is where defence-planning and politics overlap. Big military exercises in western Russia and Belarus, which finished earlier this month, were based on the following improbable scenario: ethnic Poles in western Belarus rise up and “terrorists” from Lithuania attack the Russian exclave of Kaliningrad. More than 10,000 troops from Russia and Belarus countered them, reinforcing Kaliningrad from the sea and sending special forces behind the enemy lines. Three NATO–like brigades, one visiting, one Estonian and one Latvian, then invaded western Russia, where they were successfully rebuffed by the elite Pskov-based 76th air assault division, reinforced by a motorised rifle brigade.

Military exercises need a notional enemy and, from Russia’s point of view, NATO is the obvious choice. Because the alliance has expanded to Russia’s borders, taking in a dozen ex-communist members over strenuous protests from the Kremlin, it is all the more desirable to send a strong signal. What is more, Western countries have been urging (and helping) Russia’s military forces to become more professional. That requires practice drills.

The main aim of the Russian exercises may indeed have been to measure progress on military reform, particularly the creation of more Western-style autonomous brigades. And, plainly, Russia is neither willing nor able to fight a real war with NATO. Yet the war-games look alarming to neighbours. They recall that the war in Georgia in August 2008 followed many years of exercises, and they point out that NATO has no formal contingency plans to defend its vulnerable Baltic members. Nor has the alliance held land drills on the territory of any of its new members. Indeed, until two years ago NATO’s threat assessments explicitly discounted the idea of conflict with Russia.

Russia faces many security problems within its borders, and its armed forces are still rusty. It is hard to see why preparing for an implausible armed attack from the West should be a priority; these days America and its allies have little time to rehearse big-war manoeuvres because their soldiers are too busy fighting, or training to fight, insurgencies in Iraq and Afghanistan. Similarly, the idea of Lithuanian-based “terrorists” invading Russia is risible.



Western military analysts have noted Russia’s use of destroyers and landing craft from the Black Sea and Northern Fleets to back up its feeble Baltic-based naval forces. They also noted the deployment of Russia’s most advanced S-400 air defence system in Belarus and a parallel drill conducted by the Strategic Rocket Forces, the guardians of the Kremlin’s nuclear arsenal. “The scope of the exercises, the weaponry used, the troops involved and the scenarios rehearsed all indicate unequivocally that Russia is actually rehearsing a full-scale conventional strategic military operation against a conventional opponent,” says a report by Kaarel Kaas, an analyst at an Estonian security think-tank, the International Centre for Defence Studies.

Dividing the exercise into a northern war-game (called Ladoga) and a southern one (Zapad-09) brought each below the 13,000-troop threshold at which Russia is obliged to invite outside observers. Some neighbouring countries were not able to monitor the manoeuvres (Lithuania, with a handful of observers in Belarus, was an exception). That does not build confidence.

From what outsiders can gather, the performance of Russian forces was patchy. A joint Belarusian-Russian headquarters worked poorly. Drones—a big feature of Western armies—seem to have been used mainly for show. Moving large numbers of troops and equipment around, a weakness during Russia’s war in Georgia, took too long.

Polish, Baltic and other officials will meet in Warsaw shortly to discuss the significance of the exercises. NATO will assess them next month. America certainly took careful notes: the USS Cole, a guided-missile destroyer, visited Estonia. NATO warplanes mounted a modest air exercise. A planned exercise in the Baltic states next year is likely to be beefed up, perhaps with the involvement of part of NATO’s new mobile Response Force.

Russia’s armed forces may be ramshackle, but many European members of NATO are in poor shape too. The alliance’s ability to defend the Baltic states depends almost wholly on American involvement. NATO hawks complain that members such as Germany and Italy are blocking attempts to draw up formal contingency plans for all its members—something that President Barack Obama has demanded. The doves retort that NATO’s Article 5, which says that an attack on one member is an attack on the whole alliance, is deterrent enough; new members who question its worth are hurting their own cause.

Yet easterners are raising their voices in talks about NATO’s new “strategic concept”, a document to define its purpose that will be adopted next year. With NATO focused mostly on the fighting in Afghanistan, they want a clear statement that old-fashioned collective defence of NATO territory is still a priority. Only that, they say, will convince their voters that, with Russia flexing its muscles nearby, sending troops to Afghanistan is worth it.

Latvia (from Economist website

Ailing fast

Oct 7th 2009
From Economist.com


Bad news from Latvia raises fears of contagion across eastern Europe

THE patient emerges from intensive care, hurls the medicine at the doctors and bites his blood donor. That may be an unfair characterisation of the recent news from crisis-stricken Latvia, but it is pretty much how outsiders see it. The prime minister, Valdis Dombrovskis, is refusing to make the spending cuts mandated by international lenders and has floated a new law that would partially expropriate foreign banks’ loan books.

It would be worrying enough if the European Union’s weakest economy defaults, devalues or implodes. But what scares outsiders more is the effect of Latvia’s latest wobble on other ex-communist economies, which until this week seemed to be surviving the financial crisis with less trouble than some had feared.

In recent weeks, the news from Latvia had seemed mildly encouraging, after a year during which the country has been kept afloat thanks to an $11.1 billion international bail-out. The breakneck decline has slowed: the economy is expected to contract by 17.5% this year, but by only 3% in 2010 and to return to growth in 2011, according to a forecast by SEB, a Swedish bank (and big lender to Latvia). The current account, which showed a yawning deficit of 1.42 billion lats ($3 billion) in the first seven months of last year has been transformed to show a 581m lats surplus in the same period of 2009.

The main outstanding issue is next year’s budget deficit. International lenders had softened the target to a mere 8.5% of GDP; the government still had to push through spending cuts of 500m lats to meet this.

But this week Mr Dombrovskis startled outsiders by saying that cuts of only 225m lats would be necessary. He has pencilled in a further 100m lats in better tax revenues—counting, apparently, on a faster economic recovery than anyone expects. The hesitation has brought stern warnings. Sweden’s finance minister, Anders Borg, said outsiders’ patience was “limited”—his country is due to provide SKr10 billion ($1.45 billion) in a loan tranche in early 2010. The EU’s monetary affairs commissioner, Joaquín Almunia, has publicly rebuked the government too. Mr Dombrovskis has now backtracked, saying that if the cuts are necessary, they will be made.

But doubts remain. Mr Dombrovskis lacks the authority to push tough measures through parliament and his public wobble could be seen as an attempt to summon up another burst of international pressure on the government to do the right thing. If so, it is risky.

The same could be said about another of Mr Dombrovskis’s moves—calling for a draft law that would restructure domestic assets of foreign banks. Borrowers would be liable only for the collateral value of their loan (eg, a house bought with a mortgage) rather than the whole amount. Banks would also be unable to evict defaulters from their homes without rehousing them. A fall in property prices of over 50% has sent Latvia’s private-sector debts to foreigners ballooning. They will need restructuring eventually. But this proposal looks unworkable, clumsy and damaging. Shares in Nordic banks, which have been the biggest private-sector lenders to Latvia, dipped on the news.

If Latvia fails, with a strike by international lenders prompting a debt crisis or a bank run, the spotlight then turns to the neighbouring Baltic states of Estonia and Lithuania. They are not in the same political mess, but both have also pegged their currencies to the euro and are facing huge and painful adjustments. Some wonder if the EU might accelerate its recognition of Estonia’s impressive progress in sorting out public finances by giving it early approval of its plans to join the euro in 2011. But where would that leave Lithuania, which is nowhere near balancing its books and borrowing expensively from private lenders instead of turning to the IMF?

An even bigger question involves the future co-operation between the IMF and EU. They worked together closely during the emergency rescue of Latvia in December. Now ties are strained: the IMF thinks Latvia should devalue its currency. EU officials are determined that it should not, for fear of the wider effect on ex-communist countries that are trying to join the euro zone. That has led the EU to squeeze the IMF into accepting softer conditions on Latvia than it would have wished for. For all those involved, in Brussels, Washington, DC, and Riga, patience is running out.

Baltic turnaround?

Baltic economies

Feeling a bit fragile

Sep 24th 2009
From The Economist print edition

A Baltic meltdown has been averted, but the gloom may yet last a bit longer

WORRIES about a financial meltdown across eastern Europe have receded, thanks to generous outside support, some canny policies and the start of a recovery in western Europe. Poland, the region’s biggest economy, has managed to avoid recession altogether. But even the worst-hit countries are breathing more easily.

This week Moody’s, a rating agency, noted a “fragile stabilisation” in the three most vulnerable: Hungary, Latvia and Iceland. Some mildly encouraging signs are visible. Thanks to plunging imports, and foreign investors refinancing local subsidiaries, Latvia’s second-quarter current account showed a surplus of 14.2% of GDP. A year ago it was a 15.1% in deficit. The economy shrank by a grim 18.7% year-on-year, but the worst seems to be over and some industries are picking up.

The slowdown has hurt the banks, which have lost nearly $1 billion this year. That is a big hit for the shareholders, mainly Nordic, whose managers lent so recklessly. But contrary to expectations, only one big local bank had to be rescued and nobody has pulled out. Doomsters who forecast bank runs and devaluation in Latvia (followed by Estonia and Lithuania, which also have currencies pegged to the euro) have little to show for their gloomy prophecies.

Yet Latvia, in particular, is still in an economic and political mess. It survives because outside lenders, chiefly the European Union and the IMF, think it worth propping the country up with smallish loans (by bail-out standards). The European Commission lent €1.2 billion ($1.8 billion) in July, following an IMF-led €7.5 billion agreement in December. In theory, the money is conditional on spending cuts and tax rises. The IMF agreed, reluctantly, to a budget deficit of 8.5% of GDP in 2010, down from 10% this year. The measures have been striking: some civil servants’ pay is down by a third. But that followed big rises during the boom years.

The real shortcoming is that Latvia’s squabbling politicians have ducked deeper changes in the public sector and the civil service. The People’s Party, supposedly part of the ruling coalition, says it may block a planned property tax. The government promised its lenders it would implement this, but it has to secure support in parliament. Some senior politicians in the People’s Party want to swap the currency peg for a band. The EU’s monetary affairs commissioner, Joaquín Almunia, lectured the Latvian prime minister, Valdis Dombrovskis, recently about the need for “national consensus” behind the austerity plan. But the prime minister cannot crack the whip over his coalition’s powerful party chiefs, who prefer carping about government policies to voting for them.

Outsiders find Latvia’s politicians unimpressive and exasperating. But they are unwilling to cut the country adrift or to push it into a devaluation. Turmoil in Latvia could easily spread to the neighbours, or even to Hungary (see article). Latvia’s biggest asset is its neighbours’ popularity, says one weary international banker. Foreign money may plug the public finances for a bit and so avert disaster. But it is not a recipe for prosperity. Latvia did not solve its growth-choking problems, such as corruption and poor public services, when times were good. Nor is it solving them when they are bad.

Foreign Policy magazine (2)

Welcome to Baltland
In Russian, the Baltic states are called pribaltika—literally, the "Baltic shore." That infuriates Estonians, Latvians, and Lithuanians, as do most other attempts to lump them together. Estonians are the prickliest: Toomas Hendrik Ilves, now president, angered his southern neighbors by saying that Estonia should be more fairly counted as a Nordic country, not a Baltic one. That was tactless. But in truth, the differences are legion and the similarities—barring one chunk of tragic 20th-century history—scant.

In Estonia and Latvia, national consciousness began only in the 19th century with the emancipation of serfs, the growth of literacy, and the stirring of resentment against German barons and tsarist rule. Not so in Lithuania. Its identity is shaped by a folk memory of superpower status. The Grand Duchy of Lithuania, the last pagan state in Europe until 1387, once stretched to the shores of the Black Sea. It was larger than the Holy Roman Empire and had six official languages. Now the size of West Virginia with only 3.7 million people, Lithuania has shrunk. But its sense of grand identity remains. In any intra-Baltic discussion, Lithuania tends to lead with a grandiose self-centered plan, often with a blithe disregard for practicalities. In March 1990, for example, Lithuania mounted a frontal attack on the Soviet Union and declared independence; Estonia and Latvia, by contrast, initially held back and only declared "sovereignty."

The three countries also have different foreign phobias. Anti-Semitism has plagued Latvia and Lithuania, but not Estonia. Russia and Russification worry Estonia and Latvia more than Lithuania, which is instead twitchier about Poland. It has clashed with Poland repeatedly over the city of Vilnius (Polish-occupied in the interwar years) and in recent years over whether their respective minority populations can spell their names in official documents with letters such as ? (which exists in Polish but not the Lithuanian alphabet) or "?" (a Lithuanian letter nonexistent in Polish).

The three states have struggled, literally and figuratively, to find a common language. Older people speak Russian, usually badly in Estonia and rather well in Lithuania. Younger people speak English, often quite proficiently in Estonia and somewhat more rarely in Latvia and Lithuania. Almost no Baltic country studies or speaks the languages of the others. A Lithuanian diplomat once told me, "It is easier for us to find a Chinese speaker than an Estonian speaker."

Life under Soviet rule was different, too. Some Lithuanians were able to watch Polish television—a huge excitement during the 1980-81 Solidarity era, and always more informative than Soviet propaganda. Similarly, from the early 1960s on, Estonians in the north of the country were able to receive Finnish television, which broadcast subtitled foreign films and documentaries: a vital window into the real world. Finns also flooded into Tallinn on cheap, visa-free booze cruises. Estonians referred to them derisively as "moose" (because, as an Estonian woman once told me, they are "large and noisy, with clumsy mating habits").

The differences between the Balts are arcane and sometimes amusing. But they matter. Estonia's Nordic-style thrift, openness, and careful planning have proved almost ideal for the post-communist years. It was the wealthiest of the three before the occupation, and it is still the leader. But its smugness-the big weak point-has now let it down badly. Latvia's more diffuse identity has perhaps meant weaker bonds between state and society, which has allowed corruption to flourish and prevented a speedy response to the crisis. Lithuania's headstrong "we do it differently" approach has repeatedly cost it time and friends, but the lag spared the country the spending frenzy that has cost the other two so dearly.

Relations will never be as close as, say, between Estonia and Finland. But sibling rivalry has its virtues. It encourages innovation-what one country invents, the others can copy. And each country is determined to be the first to emerge from the crisis.

MAP BY KATHERINE YESTER

Edward Lucas is a senior writer at The Economist and author of The New Cold War: Putin's Russia and the Threat to the West.

Grybauskaite

Lithuania's new president

Steel magnolia
May 21st 2009
From The Economist print edition


Dalia Grybauskaite is tough—and she needs to be

INTERESTING, but for the wrong reasons. That is a crude characterisation of Lithuania’s dispiriting politics ever since the country regained its independence in 1991. In 2004 President Rolandas Paksas was impeached amid speculation over his ties to organised crime. In 2006 a senior politician, Viktor Uspaskich, claimed asylum in Russia after details of his party’s unorthodox finances were leaked to the authorities. Barely less scandalous has been a 15-year delay over issues such as building a new nuclear power station or hooking up Lithuania’s electricity grid to neighbours.

Luckily the politicians’ failings have been offset by a small caste of impressive officials who have anchored the country in the European Union and NATO. Now one is to be president: Dalia Grybauskaite, who easily won the election on May 17th, is a former diplomat and finance minister. For the past five years she has been the EU’s budget commissioner.


This has proved to be a good base for a political career. Lithuanians, shorn of their middle class under Soviet occupation, are impressed by experience abroad. The outgoing president, Valdas Adamkus, spent most of his life in America before returning “home” to serve two terms as head of state. In Brussels the hardworking and incisive Ms Grybauskaite has been a success. She has also used her position to make pointed criticisms of the Lithuanian government.

Nobody doubts her brains or grit. Yet she remains something of a mystery. Her election platform promised transparency and rigour, but gave few details of her views (she barely campaigned, and faced no serious challenger). Apart from her black belt in karate, her hobbies and tastes are unknown. Her zealously guarded private life (she is unmarried and childless) has prompted prurient media speculation. In Soviet days she taught agricultural economics in the Communist Party’s in-house training college. In 1991 she was talent-spotted by an American programme for high-fliers in eastern Europe. But she does not seem to share the fervent Atlanticism usual among Lithuanian politicians.

Ms Grybauskaite’s main formal role as president lies in foreign policy. But on domestic policy, she should work well with the centre-right coalition government that took office last year. She backs its austerity programme, which includes a 15% pay cut for all state employees—including her. She wants faster reforms, for example in energy, plus the sacking of incompetent ministers. Yet as Lithuania’s leaders grapple with its current 12% fall in GDP, their big task is to explain the situation to a weary and cynical public. Finding the charm and sympathy to relate to ordinary folk may test the steely new president.

Vilnius book review

Vilnius

Contested city

Apr 30th 2009
From The Economist print edition

Vilnius is an example to others—a contested city, but not a divided one

THE choice of name for the capital of present-day Lithuania—Wilno, Vilna, Vilne, Wilda, Vilnia or now Vilnius—shows who you are, or were. In the 20th century alone, it has been occupied or claimed by Germany, Russia, Poland and the Soviet Union, with only brief periods of Lithuanian autonomy.

Vilne, in Yiddish, was home to one of Judaism’s greatest rabbis, a saintly brainbox known as the Gaon (Genius) who gave his first sermon aged seven and kick-started the great Jewish intellectual revival in the 18th century. “Vilna is not simply a city, it is an idea,” said a speaker at a Yiddish conference in 1930. It was the virtual capital of what some call Yiddishland, a borderless realm of east European Jewish life and letters in the inter-war era. At times, the majority of the city’s population was Jewish. Their murder and the deportation of many Poles by Stalin meant that the city lost 90% of its population during the second world war. Present-day inhabitants of Vilnius may find much they did not know in Laimonas Briedis’s subtle and evocative book about their city’s history.

Poles mourn the loss of Wilno, one of their country’s great cultural and literary centres. Poland’s two great poets studied there: Adam Mickiewicz nearly two centuries ago, and in the pre-war years Czeslaw Milosz, a Nobel prizewinner. Yet both men saw their Lithuanian and Polish identities as complementary, not clashing.

For Russians, Vilna had harsher echoes. Fyodor Dostoyevsky stayed there briefly, detesting the subversive pro-Polish sentiment of what was the third-largest city in the tsarist empire. Earlier it was centre stage in Napoleon’s disastrous invasion of 1812. Mr Briedis neatly sums up the city’s appearance in Tolstoy’s “War and Peace”. “A crossing through Vilna was like a passage of honour: to the east…lay Russia—a familiar land offering spiritual comfort and self-respect; to the west—Europe—a foreign territory prompting national self-doubt and embarrassment.”

In any of the dozen possible renderings of the city’s name, its roots evoke mystery. Wilda, its old German label, comes from the word wild. In Lithuanian come hints of the words for devil (velnias), the departed (velionis) and ghost (vele). That ambiguity is fitting. In its 700-odd years of recorded history, the city has been both capital city and provincial backwater. Outsiders have been struck by its filthy streets and shameless women, and also by its glorious architecture and heights of scholarship. Pilgrims flock to the Gates of Dawn, its most holy Catholic shrine. It has been the epitome of tolerance and a crucible of the Holocaust.

In a modern Europe Vilnius can seem peripheral. Mr Briedis, however, begins by noting that when French geographers recently plotted the mid-point between Europe’s cartographical extremes, they found the continent’s true centre was a derelict farmhouse just outside the city.

Foreign visitors have left few written accounts, but Mr Briedis uses them all as sources. A hapless papal delegation provides the first. In 1324 it tried and failed to persuade Lithuania’s great pagan ruler, Gediminas, to adopt Christianity. He showed no desire to forsake Perkunas the thunder god, berating his visitors for their intolerance. “Why do you always talk about Christian love?” he asked the pope’s men. “Where do you find so much misery, injustice, violence, sin and greed, if not among the Christians?”

Lithuania eventually adopted Christianity, along with a dynastic deal with Poland, in 1387. A cathedral was built on the pagan temple, the holy fires doused and the sacred groves felled. The Grand Duchy of Lithuania flourished. At its height in the 16th century it was a vast multiconfessional empire, stretching to the Black Sea, with no fewer than six legal languages, including Hebrew and Armenian. Even as that declined, the Vilnius style of Baroque architecture ripened in glory, a “splendid autumn” in one of Mr Briedis’s many well-turned phrases, that paid “a gracious farewell to its phantom golden age”.

The most poignant chapter is on cemeteries past and present, many of which were desecrated by the Soviets. Mass graves are still unearthed in Vilnius. They hold victims of Stalin’s NKVD, of the Nazis, and—as in one recent example—thousands of fallen soldiers from Napoleon’s shattered Grande Armée. Vanished civilisations and lost empires leave a city stalked by horror and steeped in wonder.

Baltic economics

[sorry for lack of activity. I am taking longer than expected to get over my hospital excursion]

The troubled Baltics

Still afloat in the Baltic, just

Apr 8th 2009 | TALLINN
From The Economist print edition

The three Baltic economies face a spiralling economic downturn

ONCE the fastest-growing economies in Europe, the three Baltic countries are now the opposite. Latvia, which in December received a €7.5 billion ($10 billion) bail-out led by the International Monetary Fund, is basing its budget on a 13% decline in GDP. Estonia and Lithuania expect a decline of a tenth. A conventional response might be devaluation and fiscal stimulus. But the Baltics’ currency pegs to the euro are a matter of national pride. Moreover, most private borrowing is in euros, so devaluation would mean beggary for many. Instead, the response has been wage cuts meant to regain competitiveness.

Fiscal stimulus is tricky too. Estonia ran a budget surplus during the boom, so has some room for manoeuvre, but even it can risk only a deficit of 3% of GDP permitted by the rules for joining the euro. All three countries want to adopt the single currency as soon as possible, though not by bending the rules: the whole point is to gain credibility, not to enter the club “on a stretcher”, as one official puts it. But as economies shrink, it gets harder to meet deficit targets. Latvia’s new government has been haggling over a 5% ceiling agreed with the IMF, missing last month’s €200m instalment of the bail-out as a result.

The Baltics have no shortage of external support. The European Bank for Reconstruction and Development this week agreed to bail out Parex, a Latvian bank. The IMF has more money to help. But the economic adjustments are still unimaginable in old Europe. Having soft-pedalled reform after joining the European Union, the Baltics now have to make up for lost time, in a climate where they are perilously exposed to the global downturn.

Belatedly, some progress is visible. Inflation and current-account deficits are falling. Latvia has begun unpicking a network of sinecures in nationalised industries. But overdue reforms such as simplifying local government in Estonia are still on hold. Yet compared with the polarised politics and debt-soaked economy of Hungary, the Baltics’ outlook is not bad. None of the three is much exposed to the international financial markets. Their stocks, bonds and currencies are thinly traded. Most of their external debt is owed by local bank branches of Swedish parents. Bits of those loan books have soured, particularly in property and construction. But other parts are still sound. So long as the Scandinavian banks stand by their investments, the Baltics should be all right.

Public protests have been muted and peaceful except for two bust-ups in Lithuania and Latvia. Estonia’s politics look the most solid, with a well-regarded coalition government. Latvia’s government, in office for just a month, is more broadly based than its predecessor and has shed some incompetent figures. Lithuania faces a presidential election in which the front-runner is the EU budget commissioner, Dalia Grybauskaite. Her financial skills may soon be tested, since after the election Lithuania may well turn to the IMF for help.

Belatedly, some progress is visible. Inflation and current-account deficits are falling. Latvia has begun unpicking a network of sinecures in nationalised industries. But overdue reforms such as simplifying local government in Estonia are still on hold. Yet compared with the polarised politics and debt-soaked economy of Hungary, the Baltics’ outlook is not bad. None of the three is much exposed to the international financial markets. Their stocks, bonds and currencies are thinly traded. Most of their external debt is owed by local bank branches of Swedish parents. Bits of those loan books have soured, particularly in property and construction. But other parts are still sound. So long as the Scandinavian banks stand by their investments, the Baltics should be all right.

Public protests have been muted and peaceful except for two bust-ups in Lithuania and Latvia. Estonia’s politics look the most solid, with a well-regarded coalition government. Latvia’s government, in office for just a month, is more broadly based than its predecessor and has shed some incompetent figures. Lithuania faces a presidential election in which the front-runner is the EU budget commissioner, Dalia Grybauskaite. Her financial skills may soon be tested, since after the election Lithuania may well turn to the IMF for help.

East European economies

To the barricades
Jan 22nd 2009 | VILNIUS
From The Economist print edition


Economic pain brings political ructions

IN INTENSIVE care but angry: that describes Latvia’s economy after its dramatic rescue by the IMF and other foreign lenders. Now the question is whether the tough conditions imposed by the bail-out are politically tolerable. A riot in Riga, in which more than 40 people (including 14 police officers) were hurt and 106 arrested, suggests there is a bumpy ride ahead.

Latvia, a country of 2.4m that may soon be the sixth-biggest debtor to the IMF, is not alone. Lithuania has pushed through similarly tough wage and spending cuts and tax rises. A protest on January 16th turned violent, with protesters pelting the police with snowballs and stones. After a decade in which breakneck growth made up for political weaknesses, pessimists fear that the post-cold war settlement across eastern Europe may now be at risk.

That settlement rested on three notions. One was that Western-style politics was both trustworthy and efficient, in contrast to the failures of communism. The second was that welfare capitalism and integration into Western markets would produce prosperity. And the third was that joining the European Union would provide a guarantee of economic and political security. All three now look wobbly.

In 2006 Latvia’s economy was still growing by an astonishing 12% a year. One reason was that locally owned banks—comprising some 40% of the financial system—took deposits from foreigners (chiefly Russians) and invested in an increasingly frothy property market. The government not only failed to supervise them properly. It also inflated the bubble by running a loose fiscal policy.

The biggest local bank, Parex, collapsed and has been largely nationalised. Outsiders going through the books are finding much to be glum about. At worst, the Latvian taxpayer faces a bill of up to $3 billion. Even at best the country faces several painful years as it tries to regain competitiveness. Such pain may have been tolerable after 1991 when problems could be blamed on communist times. Nobody knows where public anger will focus now.

The IMF and others believe that the best solution would have been immediate devaluation of the national currency, the lat, accompanied by its replacement by the euro. That would have hurt the many households and businesses that have borrowed in foreign currency. But calculations published by the IMF suggest that the recovery thereafter would have been quicker and steeper.



Yet euroisation has proved impossible. The European Central Bank and the European Commission were unwilling to change their rules. And the overwhelming consensus in Latvia favours keeping the lat’s currency peg. Neither the protesters in Riga nor opposition politicians want a devaluation. Their most controversial demand is for a progressive income tax (Latvia, like its neighbours, has a flat tax).

Ainars Slesers, the transport minister, is suggesting legal action to protect creditors of the Nordic-owned banks that make up most of the rest of the financial system. He blames their irresponsible lending for stoking the boom. Yet it is only foreign banks’ willingness to stump up for their losses that is keeping Latvia afloat. Shares in Nordic banks such as Swedbank and SEB have plunged because of worries about their exposure to bad Baltic loans.

Latvia’s prime minister, Ivars Godmanis, is widely seen as a competent heavyweight. But he depends on powerful political barons such as Mr Slesers to support his governing coalition. The president, Valdis Zatlers, wants a cabinet shuffle to dump discredited figures. Failing that, an early election in the summer looks likely. Yet Latvia’s opposition parties are a motley lot; and no policy mix can now avoid economic pain.

Most other east European EU members are in a better way, at least for now. Estonia was more prudent during the boom, building up net public assets equivalent to 7% of GDP. It can now run an expansionary fiscal policy that offsets the recession, rather than a tight one that aggravates it, as in Latvia and Lithuania. Estonia’s banks are almost all foreign-owned. Even Lithuania’s dodgiest local bank is nothing like as troubled as Parex in Latvia.

Not that the foreign-owned banks are in great shape. Across the region cash-strapped banks are cutting business loans, worsening the downturn. No international or national institution has the authority to deal with banks that take deposits in one country and lend in another, often with managers in a third country and shareholders in a fourth. Neither the IMF nor the ECB is set up to deal with these beasts.

The biggest concern is how far the economic weakness will spread. Poland, the biggest regional economy, has looked fairly safe. The central bank has even cut interest rates sharply, after raising them in 2008. But industrial production is plummeting, with inevitable effects on tax revenues. By the summer the government will have to choose between maintaining a tough fiscal stance (a condition for joining the euro) and easing the pain of recession. At least Poland has a choice. Hungary, the most indebted country in the region, has little option but to tighten its belt further.

Governments normally respond to recession by loosening fiscal policies to preserve jobs and output. But most in eastern Europe cannot do this. Their debts make it hard to borrow more. Currency pegs in the Baltics and Bulgaria that once seemed to offer stability and a smooth path to the euro now put the burden of adjustment wholly on wages and output. The voters, many of whom suffered gas cut-offs in Russia’s gas spat with Ukraine, won’t like it. What will they do? Nobody knows.

Latvia on the brink

Latvia's troubled economy

Baltic brink

Dec 18th 2008
From The Economist print edition

Latvia has chosen economic torture over complete collapse

ONE of the more dramatic and controversial financial rescues in modern European history has been taking shape in Latvia over the past three weeks, led by officials from the International Monetary Fund and backed by neighbouring countries, the European Union and other institutions. Latvia’s central bank has burned through €1 billion ($1.4 billion), around a fifth of its reserves, since mid-October to defend the national currency, the lat. This is pegged to the euro in an arrangement similar to a currency board, but with an even bigger lump of foreign currency to back local money in circulation. As a stopgap measure, the Swedish and Danish central banks this week offered a combined €500m in short-term swap facilities, allowing the central bank to keep exchanging lats for euros. The IMF-led bail-out—so far agreed only in outline—is likely to amount to over €7 billion, with contributions from the Fund, Nordic countries and Latvia’s Baltic neighbour, Estonia.

The deal does not require Latvia to devalue its currency. This is highly controversial inside the IMF, where memories of the debacle over Argentina’s abandonment of its currency board in 2002 are still painful. But ending the currency peg would be tricky, not least because the central bank’s independence is constitutionally entrenched. It would bring little lasting benefit. And it would be deeply unpopular. Some 85% of loans to Latvian households and firms are denominated in euros and other foreign currencies.

The clinching argument was the damage that a devaluation could wreak elsewhere. Swedish and Finnish banks, which own the bulk of Latvia’s banking system, could find their own creditworthiness suffering. Although total exposure to Latvia is still small, the perception of risk is damaging. In late October, the Swedish government launched a loan guarantee plan of SKr1.5 trillion ($190 billion) to allay fears about its banks’ future.

A Latvian devaluation would also be likely to topple the currency boards of Estonia and Lithuania, and to endanger the precarious stability secured in recent weeks in other wobbly east European countries such as Hungary. The IMF said this week that it did not believe that either Estonia or Lithuania needed to abandon their currency boards. However, big current-account deficits there and in other east European countries remain a worry.

The bail-out plan makes unprecedented demands for fiscal adjustment to trim both the current-account deficit and inflation. After some years of double-digit growth (during which a complacent government signally failed to cool the economy), Latvia faces a 5% or greater contraction in GDP next year. The tax rises and spending cuts that have been agreed upon are worth a full 7% of GDP. Public-sector salaries will fall by 15%. Private employers are making deep wage cuts too.

Latvia’s flexible economy may fare better than the political system, which is notable for fragmented parties, squabbling mediocrities, dodgy business lobbies and abuse of power (the security police briefly arrested an economics lecturer who urged people to keep their savings in foreign currency in cash). The prime minister, Ivars Godmanis, is a heavyweight, but lacks a competent team. This matters as the plan calls for big structural changes, including thorough reform of the financial system. The crisis was precipitated by the near-failure of a locally owned bank, Parex, which enjoyed a lively offshore business taking deposits from Russians, some of which appear to have been lent, unwisely, to locals. Having pushed the central bank into printing 200m lats ($390m) to support Parex, the government is now nationalising it.

Assuming that the bilateral elements in the plan are finalised, it may yet be agreed upon at an IMF board meeting shortly before Christmas. Any delay risks creating new room for speculators to try to attack the currency, and for locals to panic and turn more lats into euros (after some unwise remarks by the finance minister about a possible devaluation, the central bank lost more than €100m in reserves in a single day). Negotiating the plan has involved hectic late-night sessions in which outside officials have given locals copious instructions on the details of reform measures and the lobbying needed to gain support for them. It seems to have worked. But only for now.

Daily Telegraph rant today

Russia, Georgia and the EU: Victory for the Kremlin?

Britain's shameful U-turn on Russia is alarming many in Eastern Europe, says Edward Lucas

So it is business as usual with Russia. And what a bad business it is. Britain's decision to allow France to lead the European Union back into normal relations with Vladimir Putin's ex-KGB regime in Russia is one of the most startling volte-faces in our country's recent diplomatic history. It has left our allies in Eastern Europe – Poland, the Czech Republic, Estonia, Latvia and Lithuania – aghast at our duplicity. "Our last European hope just ----ed us. We should have known. For we are but a small faraway country about which they know nothing," a senior official in the region wrote in a despairing email after The Daily Telegraph broke the news on Friday.

European unity after the war in Georgia was never terribly impressive – a mild public rebuke and the suspension of talks on a new "partnership and co-operation agreement" until Russia met the conditions of the loosely worded truce brokered by the French president, Nicolas Sarkozy.

Russia has met some of those conditions – but not all. EU monitors are still unable to inspect the war zone properly. If they could, they would see evidence of ethnic cleansing in the two separatist enclaves of South Ossetia and Abkhazia. They would also see that Russia has increased its military presence. The message to the Kremlin is clear: you can invade a neighbouring country, threaten Europe's energy supplies, and the EU will do nothing serious about it.

The reason is simple: Gordon Brown cares little about foreign affairs, but likes the idea of stitching up deals on the reform of international finance with his new friend Mr Sarkozy. France, which is running the EU until the end of the year, wants a triumph to present to the European summit in Nice this month. Showing that it has repaired relations with Russia is part of that. It will please all the pro-Russian countries in the EU. Russia's energetic cultivation of contacts in Germany, Italy, the Netherlands, Austria and France has built up a bridgehead of influence. Those in Whitehall who watch with alarm and disgust as parts of our establishment cosy up to rich and powerful Russians have been outmanoeuvred. The idea that the start of talks is balanced by a new, careful scrutiny of EU-Russian relations should fool nobody. This is surrender.

It must be especially humiliating for David Miliband, whose condemnation of Russia's actions, in a speech in the Ukrainian capital Kiev on August 27, inspired hopes from the Baltic to the Black Sea that Britain was now a champion of the ex-communist countries' freedom and security. He excoriated Russia's "unilateral attempt to redraw the map", calling it "the moment when countries are required to set out where they stand". This week's decision casts those words in a bitter light.

It is also part of a wider and gloomier picture. Even before the war in Georgia in August, Russia was bullying its neighbours, stitching up Europe's energy market and turning money into power across the continent. In the old Cold War, the Kremlin was shackled by communism. Now it has been turbo-charged by capitalism, through the boom in oil and gas prices that has brought it 
$1.3 trillion in extra revenues since 2000. That enables it to exercise influence not only on us, but among us, too. It has built up assets, commercial and human, in positions of power across Europe. German industry makes tens of billions of euros in the Russian market; Russia is Germany's main energy supplier. The former German chancellor Gerhard Schröder chairs the consortium building a Russian-German gas pipeline (conceived, in secret, while he was still running Germany).

Even though the EU is far stronger than Russia on paper, three times bigger in population terms, and more than 10 times larger as an economy, it seems unable to stand up to the Kremlin. The financial crisis has hit Russia hard – but it has hit us harder. A few years ago, threatening to freeze dodgy Russian companies out of the developed world's capital markets would have been a real threat. Now, if they find London, New York, and Frankfurt unwelcoming, they can turn to the exchanges in Dubai, Mumbai and Shanghai.

Nor does Russia greatly care if it is excluded from clubs such as the Council of Europe or the G8, or if talks on joining the World Trade Organisation or the Organisation for Economic Co-operation and Development are frozen. Such "punishments" may even reinforce the message of the ex-KGB regime to the Russian people: that their country is surrounded by malevolent hypocrites. The Kremlin's message to Europe is cold and confident: you need us more than we need you. President Dmitri Medvedev is proving as tough and tricky as his predecessor, Vladimir Putin. His new security plan is to end the Atlantic alliance, pushing America out of Europe and creating a new security regime in which the continent's biggest countries – chiefly Germany and Russia – will boss everyone else about.

It is not too late to fight back. Nato has already changed its approach. Belatedly, the alliance's top-secret military planning bureaucracy is working out how it could defend the Baltic states and Poland. Nato warplanes last week held air exercises over Estonia, while senior American commanders are paying frequent visits to the Baltic states.

That is encouraging, but it is not enough. There are other matters that need addressing urgently – including Russian spying. This has reached unprecedented levels, and is probably more dangerous and destructive to Western interests than during the old Cold War. A co-ordinated, wholesale expulsion of Russian intelligence officers and their hangers-on from, say, London, Stockholm, Oslo, Copenhagen and Warsaw would send a powerful message to the Kremlin.

The key to the West's future security is the security of the Baltic states. Estonians, Latvians and Lithuanians have thrown in their lot with us and we must not let them down. Consider this scenario. Imagine that Estonian extremists start intimidating local Russians (who amount to around a third of the Estonian population). Russia can easily stoke this covertly, while demanding publicly that Estonia crack down. Then imagine that Russian activists (again, backed, discreetly, by Moscow) set up "self-defence units" which start patrols, and set up checkpoints. When the Estonian authorities try to stop this, the Kremlin complains; Russian military "volunteers" start mustering across the border, proclaiming their intention to defend compatriots from "fascism". The Russian media report this with wild enthusiasm; the Russian authorities say they cannot indefinitely restrain the spontaneous patriotic sentiments of their citizens.

Suppose Estonia requests support under Article IV of the Nato charter. At this point, Russia's cultivation of assets in the West pays off. Germany, Italy and other big European countries tell Estonia to sort out its problems with Russia bilaterally. The result is a worse split in the Alliance even worse than the one over Iraq. Faced with the West's weakness, the Kremlin ups the odds. Estonia tries to restore order; Russia terms that an intolerable provocation and demands a change of government, immediate changes in the language and citizenship laws, and the establishment of what it calls a "Swiss solution": cantons in which Russians will be allowed "to run their own affairs". To back this up, Russian forces start military manoeuvres.

So what does Estonia do then? America may offer moral support, but is it going to risk a Third World War with Russia to protect Estonia? Such a course of events is not inevitable, or even likely. But it is not as preposterous as it should be. Too many of the ingredients are in place and the Kremlin is perfectly capable of cooking them into a dangerous dish. The big question for Estonia and its friends is what can be done to make sure that never happens.

The answer is not to give up on Nato but to complement it with a regional grouping. The existing Nordic ties between Sweden, Norway and Finland, boosted by support from Poland and Denmark, would put this scenario back where it belongs: in the world of geopolitical thrillers. Add in British, Canadian and American involvement and you would have a formidable counterweight to Russian mischief-making in both the Baltic and the Arctic – the likely hotspots of the new Cold War.

Edward Lucas is author of 'The New Cold War: How the Kremlin menaces both Russia and the West' (Bloomsbury). An updated edition is published thismonth.

Why the Baltics should chill out, not heat up (Europe view no 99)

Europe.view

Keep calm and carry on
Sep 18th 2008
From Economist.com


Giant spiders will not attack Estonia—official

THE Baltic states are full members of NATO. In theory, that means they need worry about external threats no more than any other NATO member. If they come under threat from, say, Russia, they are entitled to exactly the same protection under Article IV (political support) and Article V (military support) as any other country in the alliance.

But viewed from Estonia, Latvia and Lithuania it doesn’t quite feel that way. Baltic officials have been privately and semi-publicly urging NATO to increase its visible presence in the Baltic states, both in terms of planes, ships and soldiers, and through high-profile visits. If the response is cool, they question the alliance’s resolve.

It is true that the permanent NATO presence in the Baltic consists merely of a few warplanes, provided on a rota by NATO countries that, unlike the Baltics, have real air forces. NATO contingency-planning regards any military danger from Russia as a taboo (after all, Russia is a friend, isn’t it?). So formal threat-assessment gives no basis for the alliance to plan how to reinforce its north-eastern members.

All that is going to change, slowly. NATO’s “Military Committee 161,” which deals with threat assessment, will shortly consider how to rejig the bureaucratic basis for military planning. Other work is already under way.

But there is little to be gained, and much to be lost, by panicky talk in the Baltics about the need for more NATO support. It creates the potentially dangerous impression that the Baltic states are “lite” members of NATO. The alliance’s secretary-general, Jaap de Hoop Scheffer, said rightly last week in Riga that there was no need to show “special solidarity” or create extra “NATO bases”: every Latvian military base was a NATO base, he noted.

The biggest threat to the Baltic states right now is not military, but psychological, as questions that should be ludicrous are treated seriously. Estonia’s media has been in a flap about a book to be published next week about the Bronze Soldier affair of 2007 (when the clumsy move of a war memorial from central Tallinn to a military cemetery prompted a night of rioting and splenetic Russian reaction). The book, by a Finnish author called Johan Bäckman, says that as a result of this, Estonia will be part of the Russian Federation within ten years. Perhaps. But perhaps Estonia will be swept away by a tsunami or colonised by giant spiders. Giving the book front-page treatment, albeit highly critical, suggests that the editors privately think its thesis is plausible.

Another flap illustrates the danger of over-reacting to such pokes. A smattering of Estonian farmers have supposedly (according to a dubious Russian news source) pledged loyalty to a restored “Estonian Soviet Socialist Republic” on the grounds that “bourgeois Estonia” is a country “where nobody cares about the common people . . . with raging unemployment and corruption, and everything depends on NATO and the Americans.”

That was picked up by the international media and appeared in sober news outlets such as the Denver Post. In a sense the story is just meaningless fluff. But it is worrying that anyone took it seriously at all: a similarly ludicrous story elsewhere—say a few South Tirolean farmers saying that they wanted to restore the Hapsburg empire—would have scarcely merited a line.

The best defence for the Baltic states is to steer their economies safely through the global downturn, to clean up corruption, and to make their fractious and sometimes opaque political systems work better. As far as Russia is concerned, impassive calm is, for now, the best approach.

europe view no 95 Lithuania and the Holocaust

[this was written three weeks ago before the attack on Georgia and published while I was on holiday]
EUROPE

Europe.view

Prosecution and persecution
Aug 21st 2008
From Economist.com


Lithuania must stop blaming the victims

IS LITHUANIA really persecuting Holocaust survivors as if they were war criminals? Not quite, but the story is still troubling. It starts with the Nazi occupation of Lithuania when the Germans, with local help, were murdering Jews (more than 200,000 Jews perished, around 95% of the pre-war population). The Nazis’ main opponent was the Soviet Union, so Jews’ only chance of survival was to fight alongside Soviet-backed partisan groups, who were fighting both against Hitler and to restore communist rule in Lithuania.

Sixty years on, independent Lithuania is still wrestling with the dilemmas of the wartime years. The Soviets condemned many Nazi collaborators (and tens of thousands of others) immediately after the war, but atrocities committed by the other side remain almost wholly unpunished. Perpetrators of dreadful crimes are still living freely in Russia and elsewhere.


Yet the interest Lithuanian prosecutors have shown in a handful of elderly Holocaust survivors seems to have only a tangential relationship with righting those historical wrongs. Fania Brantsovsky, now 86, is a librarian at the Vilnius Yiddish Institute in Lithuania, a survivor of the Vilna Ghetto and a former partisan. Prosecutors say they want to talk to her and another survivor, Rachel Margolis, about a partisan massacre of civilians in 1944.

Perhaps most spectacularly, a prosecutor wants to interview Yitzhak Arad, a Lithuanian-born historian and ex-head of Yad Vashem in Israel. Until recently he sat on a high-level Lithuanian commission investigating crimes perpetrated by totalitarian regimes in the country. Now he is refusing to co-operate. In a book published in 1979 he described how his partisan unit “punished” villagers who did not give them food.

No formal charges have been brought; the prosecutors say they are just following up a line of inquiry. But they claim to be “searching” for Ms Brantsovsky, as if she were a fugitive. The Lithuanian government seems embarrassed by the issue but says it cannot intervene in the justice system. It is bits of the Lithuanian media, calling for the individuals concerned to be put on trial as terrorists and criminals, who have done most to inflame the situation.

But it is still bad. Lithuania’s record on prosecuting war criminals of the other stripe has been spotty, to put it mildly. Targeting prominent local Jews looks selective, even vindictive. It also fits into a general pattern of what Dovid Katz, the Yiddish Institute’s research director, calls “Holocaust obfuscation”. This involves a series of false moral equivalences: Jews were disloyal citizens of pre-war Lithuania, helped the Soviet occupiers in 1940, and were therefore partly to blame for their fate. And the genocide that really matters was the one that Lithuanian people suffered at Soviet hands after 1944.

These arguments are as repellent as they are flimsy. Jews (perhaps 500 of them) comprised around a third of the pre-war Communist Party. But Jews also suffered disproportionately from the deportations of June 1941, aimed at the bourgeoisie of all races. The Soviet Union was profoundly anti-Semitic.

Dodging the blame for Lithuanian collaboration in the Holocaust is shameful. It also makes separating facts from Soviet-era smears (now enthusiastically repeated by Kremlin propagandists) more difficult. Lithuania suffered dreadfully under Soviet rule, but “genocide” is the wrong word. Lithuania in fact suffered less than its Baltic neighbours. It regained territory (including its historic capital, Vilnius) and a wily local Communist leader shielded it from russification.

It may suit demagogic politicians and their media hangers-on to distort history and defame Jews. But it reflects dreadfully on Lithuania, at a time when small countries in Russia’s shadow need all the help they can get.

Europe View no 86: Lithuania

Europe.view

Lithuania split by the atom

Jun 19th 2008
From Economist.com

Energy security in the Baltics is getting worse

IT was a mistake to start with, compounded by procrastination. The consequences for the security of one of Europe’s most vulnerable corners are potentially appalling.

As part of the deal to join the European Union, Lithuania agreed to close its perfectly serviceable nuclear-power station at Ignalina. No engineering or safety case for this was ever made: the requirement was a political one, sprouting from a neurotic strand of greenery in western Europe.

Lithuanians can feel cross about that. But they should be furious with politicians of all stripes, who have failed to plan for the now imminent deadline of 2009. After that, Lithuania will be 90% dependent on fossil fuel, with around half of its supplies coming from Russia. Unscrambling the agreement on Ignalina would require the consent of every EU member, at a time when their patience has been taxed by Lithuania’s brave but unpopular veto on new talks with Russia.

Lithuanian officials are looking for wiggle-room—for example, starting to close the power station in 2009, but not actually taking it off-stream. Few would bet much on that bearing fruit. The populist parties that are hoping to take power in this autumn's elections have a simpler message: they will simply ignore the requirement to close Ignalina. That would mean an almighty bust-up with Brussels.

The only bright side is that Lithuanian politicians will finally face the consequences of their actions, or lack of them. The sensible thing would have been to start several years ago building a new nuclear plant on the same site, to replace Ignalina. But the countries involved in the plan (Lithuania and the other two Baltic states, with the belated addition of Poland) still cannot agree how big it should be, or on shareholding structure. That exasperates those who urgently want the Baltic “energy islands” hooked up into the rest of Europe. But nobody seems able to bang heads together with sufficient force.

Other vital projects such as power links to Sweden and Poland are also woefully behind schedule. Lithuania still squanders energy; a programme to improve home insulation is pitifully inadequate.

Matters are even worse because Venezuela has stopped supplies of orimulsion, a bitumen-based fuel that formed an important part of Lithuania's energy imports. Whether that is due to Hugo Chavez's friendship with Vladimir Putin is a matter of dark speculation in Vilnius.

The immediate danger for Lithuania is that Russia will drive a hard bargain for the extra gas, most likely by demanding a bigger stake in Lithuania’s energy industry. In the long run, Russia says it will build a new nuclear power station in Kaliningrad, the exclave of territory it holds between Lithuania and Poland.

The truly galling prospect is that this gets built and hooks up to the European energy network, while the Lithuanians and their EU allies continue dithering about a replacement for Ignalina. That would be yet another victory for Russia's push into Europe, and yet another humiliating defeat for those who try to oppose it.

As so often in European security, hopes for a rescue rest on America. Lithuania is not only offering to host America's missile-defence base if the Poles decide they don't want it. It is also hoping that an American company will build the new nuclear reactor.

Perhaps—but these things don't happen overnight and Russia is hardly likely to find extra gas to heat a country set on hosting a missile base that it sees as a direct threat. It looks like 2009 will be a year of hot diplomacy and cold radiators in Lithuania.