July 22 (Bloomberg) -- Of all the trips I took as Latvia’s ambassador to the U.S., one of the most memorable was a drive a decade ago across west Texas.
While I was stopping for gas, a cowboy who overheard my accent asked where I was from. I told him I came from a country of 2 million people on the Baltic Sea in north-central Europe. He said, “I know where you’re from -- we liberated you after World War II.” He was so sweet-natured that I didn’t have the heart to tell him that, actually, our nation had involuntarily become part of the Soviet Union, as it was known, for nearly half a century after the Allies defeated Adolf Hitler.
I was used to such misperceptions; during meetings in Washington, I sometimes wished I had carried a map. Within 15 minutes, I had to be sure to mention that Latvia was a democracy, or I wouldn’t get a friendly ear. Then, I’d go on to describe our (eventually successful) efforts to join the North Atlantic Treaty Organization and the European Union -- using our unique geography to become a center for trade and finance, a place where East meets West. Invariably, the response was the same: “Oh, you’re next to Russia -- you must be influenced by it.”
Those memories came back earlier this month as EU finance ministers approved Latvia’s bid to join the euro zone next January, prompting skeptics to ask, “Why would anybody want to join the euro right now?” With a series of crises culminating in the bailout of Cyprus, the euro has been described as everything from “a troubled currency club” to “a massive failure.” Why would Latvia want to be part of that?
A Natural Gateway
The official answer has focused on the economic benefits the euro will bring, including more trading partners; a common currency that makes it simpler for citizens and products to cross borders; a reduction in transaction costs; and greater monetary stability. These benefits are expected to boost foreign investment while making it easier for us to export and grow. Quick validation came from Fitch Ratings Inc., which raised Latvia’s long-term credit rating immediately after the EU decision.
But the unstated answer hearkens back to my experiences in America: We are simply tired of being defined by the border we share with Russia, or by our status as a so-called former Soviet state.
Latvia had a history in Europe long before we were co-opted by the Russian bear. We will continue to serve as a natural gateway for business to the 350 million consumers in the Commonwealth of Independent States. Now our membership in the euro area, as well as our participation in the EU and NATO and along with our bid to join the Organization for Economic Co-operation and Development, will enable us to reclaim our rightful role as a part of core Europe.
For a nation whose currency -- the lats -- is a symbol of the independence we won in 1990, to trade it for euros is understandably difficult, particularly for older Latvians with long memories of our forced embrace of the ruble a half-century ago. But unlike nations that perceive adoption of the euro as forfeiting control over monetary policy -- what U.K. foreign minister William Hague called being “trapped in the equivalent of a burning building with no exits” -- Latvia has already crossed that bridge, having pegged the lats to the euro eight years ago.
Sentiment aside, the euro will help us to escape a shadow that doesn’t fall over nations such as the U.K. What Western eyes don’t see every time Russia becomes mixed up in a global incident -- whether the tragic Boston Marathon bombing or the flight of Edward Snowden -- is the collateral damage for nations that used to be part of the USSR, making it harder for us to be seen on our own terms.
Take the issue of Cyprus and Latvian banks. One factor identified in the collapse of Cypriot banks was the large amount of questionable Russian deposits, some tied to criminal activity. Because Latvia’s private banks have a higher percentage of so-called “nonresident accounts” (three-quarters of which originate in former Soviet states), regulators have feared that homeless Russian cash will flee to Latvia. Moody’s Investors Service Inc. heightened the alarm in May, when it reported that nonresident deposits in Latvia had increased by 32 percent from 2010 to 2012.
That’s true, but they also fell by roughly 32 percent during the global financial crisis. Once Latvia regained its financial footing, nonresident accounts returned to their historical average -- and keep in mind that for the last two decades, nearly half of the deposits in Latvian banks have originated from the former USSR. In truth, while 6.4 billion euros left Cyprus in the first quarter of 2013, Latvia’s nonresident deposits grew by just 400 million euros.
And here is a last reason why Latvia is eager to join the euro zone: We understand the higher standard applied to institutions in Russia’s orbit. That’s why our banks’ anti-money-laundering standards are among the most rigorous, praised by everybody from the International Monetary Fund to the U.S. Treasury to MoneyVal, the Council of Europe’s anti-corruption unit. We welcome the bright light shined by the euro: It represents yet another chance to prove that Latvia, now the EU’s fastest-growing economy, is a stable place for Western investment, and a nation that is proud to help build Europe’s future.
(Aivis Ronis is the former Latvian ambassador to the U.S., Mexico, Turkey and NATO, as well as the former Latvian foreign minister.)
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