Testing The Limits

The Weekly Standard, October 20, 2014

Brāļu Kapi, Riga, March 1994 © Andrew Stuttaford

“I don’t think it’s 1940,” the woman in Riga told me in June, referring to the year the Soviets brought their own variety of hell to Latvia. “But then, I wouldn’t have expected 1940 in 1940 either.” And then she laughed, nervously. With Russia’s ambitions spilling across the borders that the breakup of the Soviet Union left behind, and talk from Vladimir Putin of a broader Russian World (Russkiy Mir), in which the Kremlin has the right to intervene to “protect” ethnic Russian “compatriots” in former Soviet republics, the once bright line that had cut the Baltic states off from the horrors of their past now seems fuzzy.

And in a more literal sense the borders that separated the Baltics from their old oppressor have lately appeared more vulnerable than once believed. Moscow has been pressing and provoking in the Pribaltika for years​—​some subversion here, some denial of history there. There have been maliciously random trade bans (Lithuanian cheese, Latvian sprats, and quite a bit more besides) and carefully planned cyberattacks. But the bullying has been stepped up sharply this year. The saber-rattling has evolved from menacing “training exercises,” such as last year’s Zapad-13 (70,000 Russian and Belarusian troops war-gaming their way through a fight against “Baltic terrorists”), to include too many flights by Russian fighters near or even in Baltic airspace to be anything other than part of a significantly more aggressive strategy.

On September 3, Barack Obama traveled to Tallinn, the Estonian capital, to reaffirm NATO’s commitment to the three Baltic states, all of which have been members of the alliance since 2004. Two days later Eston Kohver, an Estonian intelligence officer investigating smuggling across Estonia’s remote and poorly defended southeastern frontier, was, claims Tallinn, grabbed by a group of gunmen and dragged across the border into Russia. His support team at the Luhamaa frontier post nearby were distracted and disoriented by flash grenades and their communications were jammed: They were in no position to help.

Shortly afterwards, Kohver turned up in Moscow’s notorious Lefortovo prison. According to Russia’s rather different version of events, the Estonian was captured while on a mission on the Russian side of the border. Kohver faces espionage charges that could mean decades behind bars. He has “decided” to drop the lawyer that the Estonian government had arranged for him. Court-appointed lawyers will fill the gap. The stage is being set for a show trial, complete, I would imagine, with confession.

After a year of Russian lies over Ukraine, I’m inclined to believe democratic Estonia over Putin’s Russia. The timing was just too good. Barack Obama descends on Tallinn with fine words and a welcome promise of increased support, and Russia promptly trumps that with a move clearly designed to demonstrate who really rules the Baltic roost. In the immediate aftermath of Kohver’s kidnapping the Estonians signaled that they were prepared to treat the whole incident as an unfortunate misunderstanding. No deal. The power play stands, made all the more pointed by the way that it breaks the conventions of Spy vs. Spy, a breach that comes with the implication that Estonia is not enough of a country to merit such courtesies.

If anything could make this outrage worse, it is the historical resonances that come with it. There are the obvious ones, the memories of half a century of brutal Soviet occupation, the slaughter, the deportations, the Gulag, and all the rest. But there are also the echoes of a prelude to that: the kidnapping of a number of Estonians in the border region by the Soviets in the days of the country’s interwar independence, intelligence-gathering operations of the crudest type. These days Russia prefers more sophisticated techniques: Earlier this year, it polled people in largely Russian-speaking eastern Latvia for their views of a potential Crimean-type operation there (as it happens, they weren’t too keen).

But whatever the (pretended) ambiguities of the Kohver case, there were none about what came next. Moscow reopened decades-old criminal cases against Lithuanians who acted on their government’s instructions and declined to serve in the Red Army after Lithuania’s unilateral declaration of independence in March 1990. That government may not have won international recognition at that time, but recognition​—​including from Moscow​—​followed within 18 months. To attempt to overturn now what it approved in the interim comes very close to questioning the legitimacy of Lithuanian independence today.

This could turn out to be more than merely symbolic harassment. The Lithuanian government has advised any of its citizens theoretically at risk of Russian prosecution on these grounds not to travel beyond EU or NATO countries. That’s not as paranoid as it sounds​—​Russia has been known to abuse Interpol’s procedures in ways that can make for trying times at the airport for those it regards as its opponents.

As if that was not enough, injury has since been added to insult: A week or so later, Russia detained a Lithuanian fishing boat in waters that are international but within Russia’s exclusive economic zone. Lithuania acknowledges that’s where the vessel was, but argues that it had every right to be there. Russia maintained that the boat had been illegally fishing for crab, and took it back to Murmansk. Such disputes blow up from time to time, but once again the timing is, well .  .  .

And of course these actions are unfolding against a background not only of Russian aggression in Ukraine, but heightened verbal violence against the Baltics. We can be confident that when (as it seems he did) Putin boasted to Ukraine’s president, Petro Poroshenko, last month that Russian troops could be in the Baltic capitals (and, for good measure, Kiev, Bucharest, and Warsaw) “within two days,” he did so safe in the knowledge that his threatening braggadocio would be passed on.

Konstantin Dolgov, the Russian foreign ministry’s Special Representative for Human Rights, Democracy, and the Rule of Law (yes, really), obviously didn’t want to rely on third parties to get the message out: He went straight to Riga to deliver the message that Russia “would not tolerate the creeping offensive against the Russian language that we are seeing in the Baltics.” He pledged Russia’s “most serious” support to its purportedly embattled “compatriots.” No matter that they are, in reality, considerably freer (and generally better off) than Russians in Russia itself.

To be sure, Balts have heard this sort of talk before, but it’s hard not to suspect that this time something wicked might be on its way. A direct assault remains highly unlikely. This is not 1940. But the probing, the baiting, and the bullying will intensify, and so will efforts to foment trouble among the large Russian minorities in Latvia and Estonia. The October 4 election in Latvia passed peacefully, but the fact that “Russian” parties took about a quarter of the vote nationally (out of an electorate that excludes 300,000 mainly Russian “noncitizens”) and over 40 percent in Latgale in eastern Latvia will not, to put it mildly, have been overlooked in Moscow.

As to what Putin might want out of the Baltics in the end, it’s hard to say. If he succeeds in proving that NATO’s shield is nothing more than bluff (with all the consequences elsewhere that such an unmasking would bring in its wake), leaving Latvia, Lithuania, and Estonia with nominal independence​—​flags, folk dancing, presidents, elections, and all that​—​would probably be acceptable so long as real power resided in Moscow. Continued Baltic membership in the EU might still be possible, even desirable: A Trojan horse or three within the EU could come in handy one day. Guesses too far? Maybe, but what we know is that Putin will try to take what he thinks he can get away with.

That’s why deterrence counts. Both Latvia and Lithuania have committed to increase defense spending from current (meager) levels to the NATO minimum target of 2 percent of GDP, a target that Estonia has met for a while. Latvia recently bought 123 secondhand armored combat vehicles from the United Kingdom. Estonia has announced that it will improve the demarcation of the border with Russia and will reinforce its border guard with special response teams. Recruitment is running at much higher levels for volunteer home defense units such as Estonia’s Kaitseliit and the Lithuanian Riflemen’s Union. Again, this is not 1940: This time the Baltics would fight.

That’s all well and good, but it’s important to remember that the Estonian military can boast fewer than 4,000 regulars. Latvia may be getting those combat vehicles, but it only has three tanks. In the end, the security of the Baltic states depends on their membership in NATO and the guarantee that comes with it: An attack on one NATO member, be it France or be it Estonia, is treated as an attack on all. In recent months, NATO has sent a blunt message​—​from tough declarations to an increased and increasing presence in the region​—​that this would indeed be the case, but Moscow’s continued pressure indicates that it is not convinced.

Until it is, this dangerous game will continue.

Baltics on the Edge

National Review Online, September 4, 2014

Hermann Castle, Narva, Estonia (with Ivangorod Castle, Russia, in the background), March 2015 © Andrew Stuttaford

Prisoners of geology, Icelanders make it their business to understand volcanoes. Prisoners of geography, the peoples of the Baltic States do the best they can to understand the unruly, dangerous, and enigmatic superpower next door.

So, when Janis Berzins of Latvia’s National Defense Academy published a report in April titled “Russia’s New-Generation Warfare in Ukraine,” it was worth paying attention. Since then, Russia’s actions in Ukraine have evolved beyond the deployment of “little green men” and other irregulars of nominally uncertain provenance into an old-fashioned invasion, plain, simple, and bloody, but the West still needs to focus on what Berzins had to say. His subtitle — “Implications for Latvian Defense Policy” — suggests why.

With Putin seemingly set, so far as opportunity will allow, on reconstituting the “Russian World” (Russkiy Mir) that fell apart with the Soviet Union, it’s easy to imagine that Latvia and Estonia might be somewhere on the target list. They are both former Soviet republics. For two centuries, they were part of the Russian Empire. Both have large, imperfectly assimilated Russian minorities, who, Putin reckons, belong within that Russian World, a status that entitles them — lucky “compatriots” — to his “protection.” Each has a major, almost 100 percent Russian-speaking city (Daugavpils, Latvia, and Narva, Estonia) temptingly close to the Russian border.

Both countries are in NATO, and thus theoretically covered by Article V of the NATO Treaty, which provides that all the alliance’s member states “agree that an armed attack against one or more of them in Europe or North America shall be considered an attack against them all.” But in an age in which war can proceed by half-denied incursions and bogus popular uprisings (“non-traditional combat,” in Berzins’s phrase), who is to say what an “armed attack” really is? Berzins asks what would happen if a “Crimea-like situation” were to erupt in Narva. After all, Russia would undoubtedly insist that this too was the exercise of a “democratic right of self-determination.” And that, Berzins clearly fears, would cloud the picture enough for some Western politicians to claim that Article V should not apply. If that sounds too cynical, recall the lengths that some of them went last month to avoid calling the Russian assault on Ukraine (a country without the benefit of an Article V guarantee) by its right name: invasion.

According to the (anti-Putin) Russian commentator Andrey Piontkovsky, Putin is well aware that many NATO countries would be reluctant to be drawn into conflict by Article V. And even if they did come to Estonia’s aid, “Putin [could] respond with a very limited nuclear strike and destroy for example two European capitals. Not London and not Paris, of course.” Were that to happen, Piontkovsky believes, Putin would calculate that “all progressive and even all reactionary American society” would shout “‘We do not want to die for f***ing Narva, Mr. President!’”

Far-fetched? Probably. Putin is a gambler, but he’s not reckless. That said, it is worth noting, as did Anne Applebaum in a recent article for the Washington Post, that “Vladimir Zhirinovsky — the Russian member of parliament and court jester who sometimes says things that those in power cannot — argued on television that Russia should use nuclear weapons to bomb Poland and the Baltic countries . . . and show the West who really holds power in Europe.” Zhirinovsky is not, thankfully, in a position to shape policy, but he is occasionally used by those in the Kremlin to float ideas that they would like to see in circulation. As (notes Applebaum) Putin has put it, he “gets the party going.”

That this sort of talk is even out there will, as Putin knows, encourage a good number of NATO members to define Article V as narrowly as they can. Psychological pressure has always been a part of warfare, but it has an even larger role to play in Russia’s notion of a “New Generation” war. Within that, writes Berzins, “the main battle-space is the mind. . . . The main objective is to reduce the necessity for deploying hard military power to the minimum necessary, making the opponent’s military and civil[ian] population support the attacker to the detriment of their own government and country,” a strategy (essentially what once might have been called subversion, but taken to a whole new level) peculiarly suited to some of the more fragile countries that emerged from the wreckage of the Soviet Union. In this respect, Berzins’s account of the early months of the Russian onslaught in Ukraine makes depressing reading: “In just three weeks, and without a shot being fired, the morale of the Ukrainian military was broken [in the Crimea] and all of their 190 bases had surrendered.”

But Ukraine, I was repeatedly told during a visit to the Latvian capital, Riga, in June, was a failed state. Latvia is not. Nor is Estonia. Both have made remarkable strides since winning back their freedom from the USSR. They are members of the EU as well as NATO. Their economies have grown fast (if not smoothly), delivering a standard of living far better than that of their Russian neighbor. That is not the case in Ukraine. At their core, Latvia and Estonia have a powerful sense of national identity. Memories of their independent inter-war republics and the nearly half a century of brutal Soviet occupation that followed still sear. In 1940 they were annexed by Moscow without a fight. That would not happen again.

Nevertheless, their political structures are not yet as developed as they could be, and their economies are far from robust. There is a lot of Russian money floating around, particularly in Latvia, and their Russian-speaking populations (30 percent or so of the population in Latvia and approximately 25 percent in Estonia) are not only a cause for Putin, but a potential source of instability that the Kremlin is continually trying to exploit. This should not be overestimated: Most Latvian and Estonian Russians feel at least a degree of loyalty to those countries, and the approval that some of them show for Russian adventurism abroad (in the Crimea, for example) does not necessarily mean that they want Russian troops showing up at their front door.

Looking specifically at Latvia, Berzins cites instances of the early phases of New Generation warfare, including “supporting pseudo human-rights organizations, backing the organization of a referendum for Russian to be the second official language [it failed, but, tellingly, won a majority in Eastern Latvia], and surveying the population of the eastern border to get intelligence on their inclination to support a [Crimean-style] scenario.” Plus, adds Berzins, “in a more subtle way, Russia has been successfully influencing internal politics through some of the political parties.” That may be a reference to, amongst others, Harmony Center, Latvia’s largest, a party that draws most of its support from the country’s Russians, and that has links to Putin’s United Russia party. Its leader is the mayor of Riga, a city in which the population divides roughly evenly between Russian-speakers and ethnic Latvians.

Then throw the Russian media into the mix. It’s no secret that Russian television has become a pathway to a world of nationalist delirium, a world where two plus two does indeed equal five, a “parallel reality,” in Berzins’s words, “legitimizing . . . Russian actions in the realm of ideas.” And this is the TV that most Baltic Russians watch most of the time (local Russian programming is thin gruel). Its poison may be diluted by the fact that these viewers live in the West, but still . . .

And then there is the constant saber-rattling at the border, the incursions into Latvian or Estonian airspace, military exercises such as, most notoriously, Zapad-2013 (“West 2013”), in which some 70,000 Russian and Belarusian troops massed near the Latvian, Lithuanian, and Polish borders to war-game a scenario in which “Baltic terrorists” were the villains, an exercise designed to demonstrate who was really boss in this part of the world.

But for now, the spying, the probing, the pressing, occasional trade embargoes, cyber-attacks, dirty tricks (check out the way that Interpol was abused in the 2013 mayoral elections in Tallinn, the Estonian capital, for one example), a gnawing at the foundations is “all” that there has been. Polling the inhabitants of the border region is as close as Russia has come to crossing the line that would herald the next phase of a New Generation war — the seizing, maybe, of a building or two in Narva or Daugavpils by a bogus “people’s republic” and the arrival of those “little green men” — a phase that, for now, seems mercifully far off.

Berzins has suggestions as to how Latvia might head off that moment. These include increased funding for economic development in the poorer regions, a boost to military spending (Latvia has since committed to hike its defense spending to 2 percent of GDP, the minimum NATO target that nonetheless hardly any member states hit), and the introduction of something like Swiss-style conscription. But perhaps the most important — and the most optimistic — revolves around securing the revision of Article V to reduce the dangerous ambiguity that New Generation warfare has opened up, an ambiguity that quite a few NATO members might well prefer to keep intact.

It’s an ambiguity that comes with terrible perils — not just for Latvia and Estonia (and, quite probably, Lithuania as well: the third of the Baltic trio has a far smaller Russian-speaking population, but cuts off the Russian exclave of Kaliningrad from Moscow-friendly Belarus), but for NATO too. Standing by our Baltic allies — three democracies that have emerged from Soviet darkness — is the right thing to do, but it is a matter of self-interest too. If Putin prevails over the Baltic countries despite their NATO membership, that would, argues Piontkovsky, “mean the end of NATO, and the end of the U.S. as a world power, and the complete political dominance of Putin’s Russia not only in the area of the Russian World but in the entire European continent.” That may be overstating it, but such a blow to the prestige of Article V would at least risk an unraveling of NATO, with all the nightmares that would come in its wake.

Ambiguity can tempt the aggressor into believing that he get can get away with his next coup at little cost. This can, in turn, lead to catastrophe. Hitler was unconvinced that the British and the French would truly stand by Poland in 1939. The ambiguity over the Baltic guarantee can never be eliminated, but it can be reduced. The symbolism of Obama’s speech in Tallinn this week — and the promise to send additional U.S. Air Force units and aircraft to the Baltics — will have done no harm. The increasing presence of NATO aircraft in Baltic airspace in recent months is a good move, as is the stepped-up pace of joint NATO exercises on Baltic territory. A NATO rapid-response force of several thousand troops, capable of deployment within 48 hours, is now being proposed. Its equipment and supplies would be based in the east. Permanent manned NATO bases would be better still. As Estonia’s President Ilves remarked earlier this week, maintaining a “two-tier” NATO, divided between those countries with permanent bases and those without, sends the “wrong signal” to a “potential aggressor.” We can’t be sure that even bases would be enough to do the trick, but the more the West does now, the less likely it is that Americans will ever be asked whether they are prepared to die for Narva.

Latvia Divided

National Review, August 25, 2014

Riga, Latvia, June 2014 © Andrew Stuttaford

Riga — The cover of the British edition of Anna Arutunyan’s The Putin Mystique features a grainy, somewhat sinister image of the Russian leader, remote, mysterious, distant. In a bookstore on Riga’s Krisjana Valdemara Street, the Latvian edition is on sale; its cover shows Putin at the shooting range, a gun in his hand, a wry smile on his face, close, too close.

The key to understanding Putin, explained one Latvian official, is to think of him as a petulant and badly behaved teenager who likes to provoke, prod, and see what he can get away with. For quite some time now, that’s what Russia has been doing in the Baltic. Planes skim and sometimes cross borders. Military exercises are staged that seem intended to intimidate rather than to train. Last year saw some 70,000 Russian and Belarusian troops war-gaming a scenario in which “Baltic terrorists” were the villains.

Walk into the Latvian foreign ministry and you’ll see three large flags, Latvian, EU, and NATO. The EU is meant to secure Latvia’s economic development, NATO its safety. Article 5 of the NATO treaty provides that an armed attack on one NATO member is to be treated as an attack on all, but in a paper written in April, Janis Berzins of Latvia’s National Defense Academy wondered how NATO’s politicians would react in the event of a Crimea-like assertion of “self-determination” in Narva, an Estonian city on the Russian border where almost all the inhabitants are of Russian descent. It’s a question that’s just as easy to ask about Daugavpils, the overwhelmingly Russian-speaking capital of Latvia’s poorest, easternmost region.

Daugavpils, Latvia, June 2014 © Andrew Stuttaford

And it’s not a question that can safely be confined to Daugavpils. When Putin speaks about the plight of his “compatriots” cut off from their kin by the collapse of the Soviet Union, it is countries like insultingly independent Latvia that he has in mind. Around 26 percent of Latvia’s 2 million people are of Russian descent (and, more significantly, a higher percentage speak Russian at home). Riga itself is roughly evenly divided between Latvian and Russian speakers. The city’s mayor, Nils Usakovs, an ethnic Russian, heads up the leftish Harmony Centre, a political alliance that draws much of its support from the Russian community and, less than reassuringly, has links to Putin’s United Russia party.

But if Putin is to play his games here, he needs his “compatriots” in Latvia to be not only numerous but unhappy. Ukraine, I am frequently told, was a failed state, but Latvia is not. Latvia’s Russians are freer, and generally richer, than their counterparts in the motherland. And they know it. At the same time, there’s no denying the sense of exclusion that many of them feel, especially the nearly 300,000 who are “non-citizens,” a status that Putin has described as “shameful” and worse.

To talk to Elizabete Krivcova of the Latvian “Non-Citizens” Congress is to hear an echo of Selma, but, to add some proportion to that picture, consider that Latvia’s non-citizens have permanent residency, can travel visa-free through most of the EU and (unlike Latvians) in Russia too, and are eligible for most social benefits. They are excluded from voting and a range of jobs, most of them in the public sector, but the door to citizenship is wide open. Quotas have long since been scrapped, and the citizenship requirements (residency, a language test, some knowledge of Latvian history, and so on) have eased over the years: Some 140,000 (including Krivcova) have now been naturalized.

The House on The Corner, Riga, Latvia, June 2014 © Andrew Stuttaford

But when I suggest to one prominent Latvian politician that it might be time to lance this boil and grant citizenship to all the rest, he flinches, quickly adding that this would mean “losing Riga.” His body language says more than his reply: This is not just an expression of political calculation. In 1989, a future president of Estonia spoke of the “biological and social terror of belonging to a people that is dying out.” That’s a fear evidently shared by a good number of the 1.2 million Latvians who remain in their native land, the last of the last after half a century of Soviet occupation in which Latvians were brutalized, imprisoned, exiled, slaughtered, and denied their right to be. It was a systematic process of national obliteration, and it was reinforced by a continuous inflow of Russian settlers designed to swamp the people whose country Latvia once was.

Many local Russians supported Latvia’s bid for independence, which it finally won in 1991, and most of them thought that they should automatically become citizens of the republic in which they had lived for a good part, or maybe even all, of their lives. Latvians did not agree. From a strictly legal point of view — and during an occupation denied legal recognition by much of the West, strictly legal was all Latvians had had — the restoration of the pre–World War II Latvian republic meant that only its citizens (or their descendants) would be immediately eligible for a Latvian passport: The settlers would have to wait in line.

This bought time for Latvia to reestablish itself as a national republic, time in which the population balance shifted in a direction that favored ethnic Latvians, but not by enough to resolve the demographic impasse that history had left behind. For ethnic Latvians, the way to proceed was with a unitary state, with Latvian as its sole official language: “We are too small to be Canada.” Russian speakers would be slowly assimilated: Indeed, those under 35 can generally now manage pretty well in Latvian. Left (usually) unsaid: The problem of the non-citizens, a significant percentage of whom are elderly, would fade away as the Soviet generations died off.

Riga, Latvia, June 2014 © Andrew Stuttaford

For many Russian speakers, this will not do. What they argue for is integration rather than assimilation, perhaps not formal bilingualism but certainly increased recognition by the state of both the Russian language and a distinct Russian cultural identity. The current generation is, it is maintained, not responsible for the crimes of the past. Maybe, but too many of Latvia’s Russians are still reluctant to acknowledge the full horror of what happened here. Whatever one thinks of criminalizing speech (I’m not a fan), it is still a jolt to see the poster in Krivcova’s office mocking recent legislation banning the denial, justification, or trivialization of both Nazi and Soviet aggression against Latvia. This is not the best way to reassure Latvians nervous about the bully next door and a fifth column within.

Nevertheless, despite occasional bouts of bad feeling — such as that generated by a failed 2012 referendum to introduce Russian as a second official language — the two communities rub along well enough. The difficulty is that there is a third party — Russia — in this mix, and it seems set on contributing all the poison it can. Latvia’s NATO membership means that the likelihood of a direct attack by Russia is very small. What can be expected instead is an intensification of Russia’s longstanding attempts to subvert the country from the inside. For now, a Donetsk- or Crimea-style “uprising” is unlikely: The Russians reportedly took soundings in the Daugavpils area and found, even there, little enthusiasm for a move of that type. Meanwhile, Riga is quiet. Even the polling that showed that most Russian-speaking Latvians supported the annexation of Crimea should not be cause for too much concern: Cheering on the ancestral motherland at a safe distance is very different from wanting it to turn up on the doorstep.

Freedom Monument, Riga, Latvia, June 2014 © Andrew Stuttaford

But the potential for trouble exists, made more dangerous by the fact that a huge majority of Latvia’s Russian speakers get so much of their information from Russian TV. The Russian stations are typically more entertaining than the local offering, but they act as portals into the venomous parallel universe where Kremlin propaganda roams. The loyalty of many of Latvia’s Russians to Latvia is real, but it is not particularly deep. It’s easy to see how Russia could stir the pot. It has the resources, and Latvia’s is a divided society, history is still raw, and there is more than enough resentment to go around. Another risk is that further Russian adventurism, even if well away from the Baltic, creates a heightened climate of mutual distrust within Latvia that rapidly degenerates into something worse. And then there is the general election due in October. Best guess is that Harmony Centre will again come out on top, if less convincingly than in 2011, and will once more be kept out of power by an unwieldy coalition of the weak, often chaotic “Latvian” parties, a result that will only emphasize the divisions that Mr. Putin will undoubtedly still be looking to exploit.

Wilkommen, Bienvenue

The Weekly Standard, December 30, 2013

Riga, Latvia, November 2013 © Andrew Stuttaford

They take austerity seriously in Latvia. After each meeting with a government official he or she would turn off the lights as we walked out of the room. More than five years after the global financial crisis finally burst Latvia’s fragile economic bubble, scrimping is second nature. Given the direction this small, resilient Baltic country took after Lehman fell, that’s no surprise. The usual prescription for cleaning up the mess that overheating leaves behind, particularly in an export-oriented economy (exports amount to some 60 percent of Latvian GDP), centers around a sharp devaluation of the currency to restore international competitiveness. There were quite a few (including within the IMF) who suggested that Latvia should break the peg fixing its currency—the lats—to the euro, leaving the lats to sink to a level that more accurately reflected uncomfortable new market realities.

Riga, Latvia, November 2013 © Andrew Stuttaford

That’s not what Latvia did. The relatively low value added within Latvia to its exports, and the difficulty that it would have faced in satisfying domestic demand with domestic production, meant that a conventional devaluation would have struggled to work its naughty magic, even if the export markets had been there (by no means assured after the slump in the international economy). Tipping the scales further, local business and the nascent middle class—most of whose boom-bloated -borrowing had been in euros—would have faced catastrophe had they had to repay those debts in suddenly depreciated lati. That would have threatened both social disaster and a dangerous breach with the Nordic banks responsible for a large portion of that lending—banks that would now have a vital role to play in maintaining financial liquidity in the country (the only sizable Latvian bank had foundered).

Base of Freedom Monument, Riga, Latvia, November 2013 © Andrew Stuttaford

So Latvia stuck with the peg and opted for “internal devaluation,” shorthand for an attempt to mimic the competitive benefits of a traditional devaluation, but by squeezing costs (primarily labor costs) and excess demand out of the local economy rather than by depreciating the currency. This won Latvia financial backing from a group comprising the World Bank, the IMF, the EU, and the Nordic countries, support that had to sugar some very bitter medicine. Government expenditures were slashed (large numbers of public sector employees were fired and many of those who hung on saw their salaries cut by 20 percent or, indeed, much more) and, to a lesser extent, taxes increased. Between 2008 and 2012 total fiscal consolidation amounted to some 17 percent of GDP.

Most of the pain was front-loaded, both as a matter of practical politics (better to strike before austerity fatigue set in) and a matter of practical economics: Latvian interest rates had soared to damaging heights and confidence had to be rebuilt.

Central Market, Riga, Latvia, November 2013 © Andrew Stuttaford

Seen in that context, the 2009 declaration by Valdis Dombrovskis, the dourly impressive center-right prime minister, that Latvia would continue to seek membership in the eurozone (and, more specifically, get there by 2014) made sense. Whatever the mounting problems in the EU’s gimcrack currency union, it appeared to offer a comparatively safe haven from the Baltic storm. For investors and lenders, the obvious seriousness of this commitment, together with the external support that the government had won, significantly reduced the exchange-rate risk associated with doing business in Latvia. It was no coincidence that with the “devaluation ghost” (as the central bank delightfully puts it) held at bay, lats-denominated interest rates started to tumble.

On top of that, targeting eurozone membership provided a benchmark against which the performance of the Latvian economy could be measured. The country would only be eligible to switch over to the euro if it met the currency union’s “Maastricht criteria.” Its budgetary position would have to be on a sound footing, its inflation subdued, and so on.

Perhaps most important, the march towards the single currency signaled to Latvians that their reconnection with Europe would not be derailed by the economic crisis. Austerity was a means to an end, not just an end in itself. Many Latvians had (and have) their doubts about the wisdom of adopting the single currency (over half are still—to a greater or lesser extent—opposed), but the broader aim of anchoring their state more firmly in the West helped them to stay the course through the brutally tough times that followed the financial collapse.

Central Market, Riga, Latvia, November 2013 © Andrew Stuttaford

There are plenty of dismal statistics to choose from, but unemployment stood at over 20 percent in early 2010 (compared with an average of 6.5 percent in 2007), and GDP shriveled by 18 percent in 2009, after a 4.2 percent decline the previous year. Despite this, Dombrovskis was able to prevail in the October 2010 general election and then weather (albeit precariously) a snap election called in slightly murky circumstances the following September. The fragmented and incomplete development of political parties in Latvia means that general elections are not the best gauge of public opinion, but Dombrovskis’s survival (he went on to become Latvia’s longest-serving democratically elected prime minister) says something. He resigned only in late November, after the deadly collapse of the roof of a Riga supermarket, a tragedy for which he took “moral and political responsibility.”

But by then the economy was well on the mend, bolstered by a revival in global demand partly stimulated, of course, by less austere policies elsewhere. Quite why Latvia was able to resume its pre-boom trajectory as quickly as it did remains the subject of lively academic debate, but a low level of public debt was one crucial advantage: Latvia could persist with its tough approach without falling into the debt-deflationary trap that is crippling recovery in Greece and other grisly corners of the eurozone’s ER.

Latvia’s GDP growth began to turn positive during 2010, coming in at a total nicely above 5 percent for both 2011 and 2012, and is on schedule to be comfortably over 4 percent in 2013, the fastest growth in the EU. The current account deficit is again at a manageable level, the unemployment rate has shrunk to a number marginally below 12 percent, inflation is running at less than 1 percent (as opposed to nearly 18 percent in May 2008), and the budget deficit has returned to respectability after coming close to 10 percent of GDP in 2009. In 2012 it was only a little above 1 percent, while government debt stood at around a modest 40 percent of GDP, easily below the Maastricht requirement of 60 percent.

It is no surprise that Latvia’s formal application to join the euro in March was approved by the relevant EU authorities within a few months. Ordinary Latvians were not given an equivalent say. Calls for a referendum were rejected, not least on the grounds that the matter had long been decided. Any country joining the EU after the Maastricht Treaty came into force in 1993 (Latvia became a member in 2004 after—it is fair to note—a referendum) is obliged to sign up for the euro as soon as it meets the Maastricht tests, a proviso that the Swedes (joined 1995)—who wisely retain their krona—have ignored. Some seats at the EU’s table are more equal than others.

Central Market, Riga, Latvia, November 2013 © Andrew Stuttaford

In any event, Latvia will swap the lats for the euro on January 1 at the rate, to be precise about it, of 0.702804 lati per euro, although it will still be possible to pay for goods and services in lati for another two weeks thereafter. The conversion process within the public and private sector is well under way, as is an extensive program of public education (meetings, leaflets, advertising). Most visibly to the visitor, all prices now have to be given in both lati and euros, and from what I could see in Riga, that was happening everywhere. Even in the converted zeppelin hangars (history here is complicated) of the capital’s picturesque (and somewhat law-unto-itself) central market, everything was properly priced: I had been issued a nifty lenticular currency conversion card and could check that that was so. Watchdogs are in place to stop the changeover being used to hike prices (a common, if exaggerated, fear that has accompanied the introduction of the euro in other countries). To reinforce this, dual pricing will be mandatory until the end of June.

After the changeover, lati will be convertible into euros (at the fixed rate) at rural post offices for three months, at commercial banks for six months, and at the central bank in perpetuity. This matters. Ask officials why there is still so much opposition to the switch, and—perhaps a little condescendingly—they cite folk-memories of the damage caused by previous currency conversions, especially the abrupt introduction of a “new ruble” in 1961 during the Soviet era.

But there is more to it than that. Geopolitical realities (yes, we are talking about Russia), the size—and open nature—of the Latvian economy, and inadequate domestic capital formation all make a decent, if downbeat, case for Latvia to enter the eurozone, despite that currency union’s profound problems. Its flaws (to use a gentle word) have not escaped the attention of the man in the Latvian street. He also does not appreciate the fact that if there is another eurozone bailout (Greece, yet again?), frugal, hardscrabble, post-Soviet Latvia, one of the poorest countries in the EU, will have to chip in.

For a country to abandon its own money is to throw away an essential attribute of sovereignty. In a lovely but manipulative gesture, Latvian 1 and 2 euro coins will bear the image of Milda, the “Latvian maiden” who adorned prewar Latvia’s gorgeous—and emotionally resonant—5 lati piece. This time she is decorating a symbol not of hard-won independence but of a sadly withered autonomy.

And the eurozone’s long agony may bring with it another twist of the knife. The convenient fiction that made it politically possible to establish the euro in the first place was that this was a shared currency that could work with a minimum of pooled sovereignty, a stretch at the best of times, an impossibility in the case of a monetary union that is very far from being an optimal currency area; Germany is not Greece, Finland is not Portugal. If the euro is to survive in its current form, the eurozone will require much deeper fiscal and budgetary integration. Quite what will be left of Latvia’s low tax, fiscally responsible regime or, in any real sense, its self-determination, by the time this process is finished is anyone’s guess.

And what is to remain of Latvia itself? It emerged from nearly half a century of cruel Soviet occupation with its identity savagely battered—not least by the presence of a large Russian settler population (even today ethnic Latvians account for only some 62 percent of the country’s two million inhabitants)—but its heart intact. Membership in the EU has represented a kinder, subtler challenge. The opportunities it has brought to live in lusher lands to the west has led to a steady stream of emigration, a stream that became a torrent during the slump before dwindling again today. All told, the population has shrunk by over 10 percent since 2000. Exporting surplus labor helped Latvia manage the crisis, but at what longer-term cost?

Riga Castle, Latvia, November 2013 © Andrew Stuttaford

I spent the evening of November 11 down by Riga Castle. It was Lacplesis Day, the anniversary of the victory in 1919 by freshly cobbled-together Latvian forces (helped by Royal Navy guns) over a Russo-German army (as I said, history is complicated here) in the battle that effectively secured the new state’s independence after centuries of foreign rule. An ever-swelling crowd, talking quietly, proud to be there, had gathered, lighting row upon row of candles that flickered against the old castle walls, a tribute to the men who had fought so courageously for their country’s right to be. Bonfires did their best against the cold, clear northern night; once-banned flags—carmine and white like the ribbons everyone seemed to be wearing—waved in the chill breeze. A group of children sang folk songs of simple, crystalline beauty.

Behind us a series of tiny vessels had been launched into the River Daugava. Each bore a candle and some a miniature flag, too. They formed a brave, bright, glowing flotilla that sailed off into the dark, its destination unknown.

Too Small To Fail

The Weekly Standard, November 9, 2009

Independence Monument, Riga, Latvia, 2009  © Andrew Stuttaford

It's a measure of the tension of the times in which we live that Anders Borg, the finance minister of famously polite Sweden, has been going around threatening Latvia. Yes, Latvia. "The patience of the international community is," he growled on October 2, "very limited, and Latvia has little room to maneuver."

If it's rare for a Swede to lose his cool, it's astonishing that a small Baltic state (Latvia's population is just over 2.2 million) was the cause. But Latvia is in an economic mess that is extraordinarily deep (GDP will fall by nearly 19 percent this year), and the consequences have already spread far beyond its borders. Evidence that it was pushing back at those who have been trying to help is what triggered Borg's explosion--well, that, and the risk posed to three of Sweden's largest banks by their roughly 40 billion euros of Baltic exposure.

The story of the Latvian crisis is, if nothing else, proof of the old maxim that no good deed goes unpunished. While the underlying sources of the country's difficulties can be put down to the devastation of half a century of incarceration in the Soviet domain, the immediate cause can be found in one of the happier events in Latvian history: its 2004 admission, alongside the other Baltic states (Lithuania and Estonia), into the European Union.

The integration of large swaths of Eastern Europe into the wider European economy and, ultimately, the EU is something that even Euroskeptics concede has been a triumph: a fusion of enlightened self-interest, generosity, and strategic vision that has done much to smooth the path away from Soviet rule and Communist ways. Initial flows of capital lured to the region by the collapse of Communism were, as the 1990s progressed, supplemented by waves of investment attracted by the reassuring spectacle of former Soviet satellites rediscovering the pains and pleasures of the free market. The transformation was further accelerated by the prospect of eventual EU membership as a final guarantee that they would not slip back.

This was the way it worked in Hungary, Poland, and other former Warsaw Pact nations, and this was the way it eventually worked for the three Baltic states, the first former Soviet republics to apply for, and be accepted into, EU membership. Thus funds began flowing into Latvia, Lithuania, and Estonia almost as soon as they regained their independence--at a time when the prospect of losing it again to Brussels was still but a distant dream. Much of this money came from the neighboring Nordic countries attracted by an exciting local investment opportunity, historical connections (the Latvian capital, Riga, was once the largest city in greater Sweden), and a keen interest in avoiding the development of three turbulent post-Soviet slums in their backyard.

So far, so benign. But the onrush of Nordic cash overwhelmed the small and rickety enterprises typical of economies emerging from Communist rule. A huge part of the Baltic banking sector ended up in Nordic hands--roughly 70 percent of borrowing in Latvia is now sourced from banks controlled by foreign (primarily Nordic) institutions. What began as a change for the good (the Nordic-run institutions were better managed and capitalized than their local predecessors) degenerated into an unhealthy codependency as the banks financed an unsustainable boom on ultimately disastrous terms. By the time it was all over, they were essentially funding the current accounts of all three Baltic nations.

The bubbles began to inflate as EU membership loomed early this decade and ballooned after the three countries crossed the finish line. Too much money (and too much credit) was pouring into economies too small to absorb it productively, which triggered inflation, speculation, and a consumer binge. Overall government borrowing remained modest in each of the Baltic states, but debt racked up in the private sector--in Latvia it reached 130 percent of GDP in 2008. Imports were sucked into the region, and exporting industries were priced out. (Latvia's textile sector was 12 percent of the country's exports in the early 2000s; it is today only 5 percent.)

Alberta Iela, Riga, Latvia, 2009  © Andrew Stuttaford

As the Baltic economies roared (Latvia's GDP grew by 12 percent in 2006, and 10 percent in 2007), current account deficits soared (Latvia's peaked at some 25 percent in 2007). Fueling the inflationary fire still further, a number of EU countries (notably the U.K. and Ireland) waived the transitional period that has traditionally followed the accession of less-developed countries into the EU and opened up their labor markets to workers from the Baltic, attracting far more immigrants from the region than originally expected. That was good news for employers in London and Dublin, but it siphoned off talent back home, increasing already fierce upward pressure on wage rates and, incidentally, adding to the demographic anxieties of three small peoples that had--only just--succeeded in preserving their ethnic, cultural, and political identity after half a century of Moscow's best efforts to Russianize their countries. Not the least of the ironies facing the Baltic states is the way that their long overdue reintegration into the global economy could, by offering their best and brightest citizens better opportunities abroad, destroy the integrity and the essence of the nations they leave behind.

When economies overheat, real estate prices tend to boil over, and so it was all over the Baltic. In Latvia, house prices jumped by (on some estimates) 300 percent between 2004 and 2007. Never a healthy phenomenon, the real estate bubble had an extra malignant aspect in the Baltics as most of the mortgage lending (a chunk of it distinctly subprime) that financed it was denominated in euros--not yet the Baltic countries' currency. Back in 2004 when Latvia, Lithuania, and Estonia signed up for the EU they took a seat in the waiting room for the monetary union. They were in a strong position to satisfy the Maastricht preconditions for adoption of the euro (subdued inflation, low levels of government debt, and well-managed public spending), and all three local currencies--the Latvian lats, the Estonian kroon, and the Lithuanian litas--had been pegged to the euro by 2005. Forecasts that they would be replaced by Brussels' money in 2008 did not seem out of line. Borrowing in euros looked like the smart thing to do. Euro interest rates were well below those charged for borrowing in lati, krooni, and litai and, with the adoption of the EU's single currency purportedly just around the corner, there was not supposed to be much in the way of foreign exchange risk. International (mainly Nordic) banks keen to minimize their exposure to the small illiquid Baltic currencies were only too happy to oblige: Some 80 percent of all private borrowing in the Baltic countries is in euros.

But the cash that cascaded into the Baltic countries pushed up their inflation rates to levels far in excess of the Maastricht criteria. In Latvia inflation peaked at nearly 18 percent in May 2008--up from 6.2 percent in 2004 and the 2 percent range between 2000-03. Drawn in by the prospect of near-term Baltic adoption of the euro, the flood of new money has perversely done a great deal to delay that switch (the latest predictions cluster at around 2011 for Estonia, 2012-13 for Lithuania, and, fingers crossed, 2014 for Latvia, although the IMF recently suggested that the latter date will slip still further). Foreign exchange risk was back.

And so were tough times. The inevitable bust arrived, gathering pace at roughly the same time as international financial markets were freezing up in 2008, an unhappy coincidence that made bad things worse as the (already slowing) foreign capital inflows that had done so much to sustain the boom came to an abrupt halt. To get an idea of the scale of the disaster that has struck, Latvian retail sales are running at 70 percent of 2008, the nation's real estate prices are down some two-thirds from their levels of two years before, and industrial production slumped 18 percent between June 2008 and June 2009.

The textbook response to this type of boom-and-bust would be a drastic devaluation of the currency to slash the cost of exports, discourage imports, and bring burgeoning current account deficits under some degree of control. If textbooks aren't sufficiently persuasive, markets can usually be expected to help out, and, sure enough, the lats came under strong pressure in June. But the sparse market in Baltic currencies gives them considerable protection against speculative attack. It's almost impossible to short thinly traded lati, krooni, or litai to the extent it would take to break their pegs to the euro. The fact that Estonia, Lithuania, and Latvia all operate currency board systems (in Latvia's case de facto rather than de jure) under which their monetary base is essentially backed up by gold and foreign exchange reserves means it would take an almost complete collapse in domestic confidence to trigger a run on the currency.

Of the three Baltic currencies, the lats has come under the most pressure (the economic and political fundamentals are weaker in Latvia than in Estonia or Lithuania, and the Latvian central bank had to spend around 1 billion euros to defend the currency in June). Yet the Latvian authorities continue to believe that now is not the time for devaluation. Latvian central bankers told me in August that depreciating the currency is simply not the answer to the country's predicament, and they make a good case. Devaluations work best in economies where a good portion of demand can be satisfied domestically, where the export sector has a high value-added component (i.e., not textiles and the like), and when the global economy is in good shape. None of these descriptions applies to the Baltic states or the world in 2009.

The alternative approach being pursued by Latvia is an "internal devaluation" (Lithuania and Estonia have taken a similar tack) designed to rebuild its international competitiveness by purging the inflationary excesses of recent years and, while it's at it, restore badly needed fiscal and budgetary balance--in other words to generate some of the positive effects of a devaluation without abandoning the currency peg. If most countries are trying to reflate their way out of the current economic crisis, Latvia is doing the opposite. Public sector pay is slated to be reduced by as much as 40 percent (though actual cuts appear to have been less so far) as part of a budgetary squeeze that has included the closing of hospitals and schools (admittedly Latvia was oversupplied with both) and sharp reductions in both welfare payments and pensions--payments that weren't generous in the first place. Adding to the misery: Taxes are being increased. As economic cures go, this is about as tough as it is possible to get, and it has already yielded some tentatively positive results. Latvian inflation has been brought to its knees (in September it was running at 0.1 percent), the trade deficit has shrunk dramatically, and the current account is back in surplus (14 percent of GDP in the second quarter).

Advocates of a conventional devaluation retort that any signs of improvement are merely symptoms of an economy where all demand has been crushed and will stay crushed for quite some time. This is not, they argue, the sort of recovery that will persuade the nation's best and brightest to stay at home once the broader European economy has improved enough to resume hiring. Nor will it attract the new capital that Latvia so badly needs, capital that will only be further deterred as the "hopeless" defense of the peg perpetuates uncertainty over the currency's future while underpinning a real effective exchange rate that continues to rise.

Such arguments are too pessimistic--though only just--and they also fail to address the implications of all those foreign currency loans. Repaying them is already difficult within the context of a devastated real estate market and collapsing economy. Increasing the outstanding balances by 30 percent (the percentage generally thought to be by how much the lats would have to be devalued) would generate Sisyphean agony and drive domestic demand even deeper into the hole. Complicating matters still further is the fact that the affected borrowers are drawn disproportionately from the ranks of the young (many older Latvians remain ensconced in the properties they received gratis in the post-Soviet privatizations), the enterprising, and the upwardly mobile, who are the main hope of any lasting revival. (Undoubtedly a good number of them are also to be found in Latvia's governing class. Unsurprisingly they are not that keen to devalue. Would you vote yourself into bankruptcy?)

Crucially it was the harsh medicine of the internal devaluation that secured the international financial support without which Latvia's economy might have already collapsed. The country's key lenders have so far shown themselves willing to assist in propping up the Latvian currency. It's not hard to guess why, despite some rumored disagreements within the lending consortium, this strategy prevailed. The Swedish banks most heavily involved in the Baltic have all made substantial provisions against lending losses in the region (and raised major amounts of capital to replace what has been lost), but neither they nor the Swedish state that has effectively underwritten them would welcome the massive additional hit to balance sheets that would follow a devaluation of the lats--particularly as it would likely trigger devaluations (and further losses) in Lithuania and Estonia. There's also a clear risk (although less than there was a few months ago) of a domino effect--Baltic devaluations pressuring other vulnerable Eastern European currencies with the potential for extremely unpleasant implications for Western banks exposed in the former Soviet empire. To give just one example of what could be at stake, earlier this year outstanding loans by Austrian banks to Eastern Europe were reported to amount to roughly 75 percent of Austria's GDP.

It's this fear of wider contagion that largely explains the willingness of the multinational group that includes the EU, the IMF, the World Bank, and, of course, the Nordic countries to lend Latvia 7.5 billion euros (and that's before counting the indirect help Latvia has received, including critically, Sweden's support for its banks). In the wake of last year's global financial meltdown, those few billions may seem like chump change, but they represent a huge sum for Latvia (whose GDP stood at around 22 billion euros in 2008). For once, the country is benefiting from the size of its economy: It's simply too small to fail. In absolute terms a bailout of Latvia (or for that matter, any of the Baltic countries) does not involve that much money. If such a rescue can stave off catastrophe elsewhere it will be a bargain. Who needs a Baltic Lehman?

But will this support buy enough time for the internal devaluation to work? Talking to Latvian civil servants, it is impossible to miss their unease about what may happen when the bleak Baltic winter descends on a population struggling through economic disaster. Nobody has forgotten the rioting in Riga (and in Lithuania) in January, the low point of a fraught few months that also saw the collapse of Latvia's sitting government. While there was a reasonable level of confidence amongst those to whom I spoke that the social net will hold, a winter of discontent may be difficult to avoid as benefits ratchet down (unemployment benefits fall sharply after five months on the dole and are then eliminated altogether after nine months--although the unemployed remain eligible for other forms of assistance), savings evaporate, and jobs remain scarce. Unemployment now stands at 18 percent, a devastating number in a climate of deteriorating welfare support. There are indications that the economy's fall is slowing (GDP is currently forecast to decline by a mere 4 percent next year), but what few green shoots there are have sprouted too late to make much difference this winter.

Adding to the worries is the fear that the country's economic woes will be used by the ever more revanchist Kremlin to foment discontent among the roughly 30 percent of the population that is of ethnic Russian descent. Maddening symbols of lost empire, and small enough to bully, Latvia and Estonia have long been placed amongst Russia's worst enemies by Vladimir Putin. He may be unable to resist the temptation to make their problems worse.

The Latvian government's strategy appears to be to hang on grimly and hope that the global economy recovers quickly and strongly enough to pull a sensibly deflated Latvia out of the mire and into hailing distance of the allegedly (that's a debate for another time) safe haven of eurozone membership. So far this tough approach enjoys at least a degree of grudging popular support. Some two-thirds of Latvians are thought to support the defense of a currency that is a symbol of both hard-won independence and the ability of ordinary Latvians to build a better future for themselves. They have seen their savings wiped out twice in the last 20 years, first by the Soviet implosion (and the chaos that accompanied it) and then again, after painful rebuilding, by a massive banking crisis in the mid-1990s. Devaluation would look all too much like round three. Latvian officials also put a great deal of faith in the country's flexible labor markets and the resilience of a people with recent memories of times far, far harder than now. Latvians will know, I was repeatedly told, how to cope.

Maybe, but all attempts to measure public opinion are guesswork--bedeviled by societal division (ethnic Latvians and ethnic Russians often see matters in very different ways) and the fact that Latvia's political parties are often little more than collections of a few friends or co-conspirators, sustained by self-interest, shared ethnic identity, and passing eddies of voter enthusiasm. They are bad at reflecting public opinion and worse at shaping it. If overall living conditions deteriorate badly this winter, there may be no one able to speak honestly to the nation or for its concerns. That's not a recipe for social peace.

There will be parliamentary elections next year and the uncertainty about the degree of support the internal devaluation will continue to enjoy helps explain September's unexpected failure of the governing coalition to pass all elements of the austere 2010 budget that was a condition for the continued support of Latvia's international lenders. This was the failure that so angered Anders Borg in early October. His mood will not have been improved by the market tremors that followed both his comments and subsequent press reports in Sweden that he had told Swedish banks to prepare themselves for the worst.

It's difficult to imagine that he would have been cheered up by the almost simultaneous revelation that the Latvian government was contemplating measures limiting the liability of homeowners to their lenders, a move that would have serious implications for a number of Sweden's banks. This proposal may have been an unsubtle attempt to pressure the Swedes into agreeing to go a little easier on the 2010 budget, but, with the furor it stirred up, it backfired. Its most controversial element--the idea that it would have retrospective effect--has been withdrawn, and the budget hiccup has been resolved with a Latvian climb-down. But these spats were a reminder that the realities that define this uncomfortable situation continue to hold true: Latvia is still both highly vulnerable and too small to fail, the codependent relationship between Sweden's banks and their Latvian borrowers continues to be both intact and unhappy, and the durability and extent of popular support for Latvia's harsh economic medicine remains an unknowable, unnerving mystery.

It's going to be a long winter.