While Latvia is still fighting to save its economy, prevent further deterioration in living standards and ensure equitable distribution of European and International Monetary Fund loans, recent political focus has been mostly on international affairs. For the Baltic states significant issues of the past and present were closely aligned.

Considerable world attention has been paid to the 70th anniversary of the Molotov-Ribbentrop pact (Aug. 23), to the associated 70th anniversary of the beginning of World War II (Sept. 1) and, of more general concern, to an increasing closeness between Germany and Russia that brings eerie reminders of 1939.

The Molotov-Ribbentrop Pact, the vehicle by which Germany and the Soviet Union paved the way for the beginning of the Second World War, has always been an issue of the greatest importance to the Baltic states. In its secret protocol, the deal between Adolf Hitler and Joseph Stalin split up Eastern Europe into spheres of influence. It allowed Hitler to march unopposed into Poland and allowed the Soviets to do the same in the eastern part of Poland a few weeks later. Annexation of the Baltic states and Bessarabia (present-day Moldova) followed. The annexation of Finland was only prevented by the Finns’ astonishingly brave Winter War with the Soviet Union.

The pact and its consequences continue to affect Eastern Europe and beyond. The existence of the pact was strenuously denied by the Soviet Union, whose officials regarded it as Western propaganda. During the last years of the Soviet Union and its false dawn of political change, the pact in 1989 was acknowledged and condemned by the Congress of People’s Deputies. But since the coming of Vladimir Putin’s regime, there has been an astonishing rehabilitation of the pact. The pact is increasingly promoted by Russia as a wise strategic move by the Soviet Union in response to the West’s failure to contain Hitler through the appeasing Munich agreement. Moreover, the Kremlin released new archival documents purporting to show the West was hoping for a war between the Soviet Union and Germany so that the it would not have to soil its hands.

Allied to this have been repeated and continuing assertions that the Baltic states voluntarily joined the Soviet Union in 1940—and denials of occupation. Significantly, Aug. 23 was also the 20th anniversary of the Baltic Way—the world’s longest (in kilometres) political demonstration when, still under the Soviet Union in 1989, people joined hands from Vilnius to Tallinn, via Rīga, to demonstrate against the occupation.

Recent years have seen increasingly tense relations between Poland and Russia, and the commemoration of the beginning of World War II brought these issue to a head once more. An impressive ceremony in Gdansk, where World War II started in 1939, brought together many world leaders. But while Poles stressed the harm that had come to Poland and the rest of Europe through Nazi and Soviet actions, Russian responses were ominous, refusing to accept responsibility for Poland’s fate, and attacking those who would “rewrite history.” This time there was also a new slant on another Soviet atrocity: the murder of thousands of captured Polish officers after the defeat of Poland by the Soviet army at Katyn. Stretching historical credulity, Russia now claims that this incident, while regrettable, was an understandable Soviet retaliation to the way Soviet prisoners of war had been treated by Poland in its independence battles in 1918-20!

These Russian arguments have been condemned by many in Poland and the Baltic states, as well as by former Latvian journalist Frank Gordon, who has long warned of the unremitting desire of Russia to regain control over this territory. Equally critical have been a number of European writers, for example Pavel Felgenhauer of the Eurasia Daily Monitor, who argues that “in Soviet times the Kremlin adamantly denied the existence of a secret Molotov-Ribbentrop protocol. Today, the protocol is also praised, since the Kremlin clearly wishes to re-enact it.”

Re-enact the pact? While this sounds fantastic, we must pay attention to a very contemporary issue: the growing closeness between Germany and Russia, now developing into an important economic and potentially strategic partnership. The keys here are energy and the poorly performing economies of both Germany and Russia. For several years now Russia has been able to gain increasing influence in Europe through its importance in energy supply—particularly natural gas. Russia now supplies Germany with more than two-thirds of its gas needs plus oil, as Germany has reduced its own dependence on coal power. Former German Chancellor Gerhard Schröder has been prominent in advancing Russian interests both economically and politically: the Nord Stream project (chaired by Schröder) intends to build a gas pipeline under the Baltic Sea from Russia to Germany, bypassing the present supply routes through the Ukraine and Poland, both countries that have recently had tense relations with Moscow. Politically, Schröder has been a continual apologist for recent Russian actions whether in Georgia or elsewhere.

Germany’s insistence on its own energy security is now very much at odds with a European Union desire to forge a common energy policy and diversify energy supplies. Even more worrying is that Germany’s economic malaise has found some saviours in Russian oligarchs and government-backed entrepreneurs, who are taking stakes in troubled German industries, and a hope that close links with Moscow will favour Germany in selling heavy industrial and transport goods to Russia and investing in Russian infrastructure. Such moves would also give Putin and Russian President Dmitry Medvedev some sorely needed economic gains.

Historically, Germany and Russia have dominated Eastern Europe since the late 19th Century, and the present-day financial (and energy) crisis seems to have delivered an unexpected set of factors to re-establish this joint dominance.

Things to watch for

While most eyes were turned to Molotov-Ribbentrop and to Poland, some recent internal events in Latvia also claimed attention even in normally politically soporific August.

Latvia was finally able to achieve agreement with the IMF over its deficit and start receiving funds to stabilise the economy. Yet this success has not stopped leaders of coalition partner People’s Party (Tautas partija) from continually sniping at government actions—even those actions they had formally agreed to. Such actions are clearly positioning by this once dominant but now poorly rated party for the next Saeima (Parliament) elections just 13 months away, and introduce an unwelcome instability into Latvia’s government.

Meanwhile, the newly elected Rīga City Council continues to strengthen its ties with—Russia, who else?

These developments deserve close watching.

Recent political attention in Latvia has been sharply divided between the government of Prime Minister Valdis Dombrovskis desperately trying to pull Latvia out of its financial mess with the aid of the International Monetary Fund, and new political developments particularly centred around the Rīga City Council election.

The European Parliament elections, held on the same day as municipal elections, also testified to significant new political shifts—not all of them positive for Latvia.

The results of the June 6 municipal elections saw an unprecedented change of power in Rīga. With glamour boy Nils Ušakovs as leader, Harmony Centre (Saskaņas centrs, or SC) swept to victory, gaining 26 of the 60 seats on the city council. Remarkably for Latvia’s usually highly fragmented election results, only three other parties gained seats by crossing the 5 percent vote threshold: Ainārs Šlesers’ First Party of Latvia (Latvijas Pirmā partija, LPP) gained 12 seats, Prime Minister Dombrovskis’ New Era (Jaunais laiks, JL) got 8 seats, and Sandra Kalniete’s and Valdis Kristovskis’ relatively new Civic Union (Pilsoniskā savienība, PS) had a strong performance and earned 14 seats. Effectively, all of the coalition parties that previously held power were expunged in a stunning turnaround, and two former leading parties, People’s Party (Tautas partija, TP) and the Union of Greens and Farmers (Zaļo un zemnieku savienība), gained less than 2 percent of the vote.

An immediate coalition formed between the SC and LPP, with a friendly political business agreement that Ušakovs will be mayor, while the ever-opportunistic Šlesers gained a sinecure as vice mayor and—more lucrativley—as head of the Rīga Port Authority (Rīgas Osta), an organisation whose finances and operations have been shrouded in secrecy, making murky agreements with cargo shipping companies but failing to support a single sustained passenger ferry service between Rīga and any port in the Baltic.

The strength of SC support, and the survival and even growth of the often scandal-ridden LPP, brings ominous portents for Latvia’s future. Clearly, the Rīga elections are just one stage in a desire ultimately by these parties to control the Saeima (Parliament) at next year’s scheduled national elections.

Reactions have been mixed. Some observers have seen it as a sign of growing Russian influence, others as signs of corruption shifting from the national level (where it seems there is little left to steal) to Rīga with its many assets. For others, however, this election has represented a clearing of the air. Instead of constantly shifting coalitions between many parties and unclear responsibilities for decisions, as characterised by the previous city council, it is now clear who will be responsible for anything that happens in Rīga—for good or bad. The SC, which has always been in opposition at national and Rīga levels, will now be tested, and the activities of the LPP will also be now more apparent.

Meanwhile, the elections for the European Parliament delivered a more mixed result, which reminds us once more that Rīga is not all of Latvia. The eight Europarliament deputies were divided among SC (2), PS (2—another strong showing for this new party) and one each to other parties. Two-time former Prime Minister Ivars Godmanis gained a place for the LPP in alliance with Latvian Way (Latvijas ceļš). JL’s deputy is the former Latvian-American Krišjānis Kariņš. The beleaguered For Fatherland and Freedom (Tēvzemei un brīvībai / LNNK) returned its former deputy Roberts Zīle, as did the Moscow-leaning For Human Rights in United Latvia (Par cilvēka tiesībām vienotā Latvijā), whose veteran Soviet imperialist Tatjana Ždanoka retained her place. The last two barely passed the 5 percent barrier to election.

On the Rīga City Council, SC lost no time in making the improved status of the Russian language an early objective. Various hints of allowing more Russian language use in public administration (againt the current state language law) are early indicators of what is likely to be a renewed long-term battle. Of immediate concern, however, has been Ušakov’s move to shut down the non-Russian and non-Latvian schools and have them join the Russian stream.

Since regained independence, Latvia has encouraged the non-Russian communities to develop their own schools. In about a dozen schools the language of instruction is Lithuanian, Ukrainian, Estonian, Polish or other minority language.

This move comes because of the significant decline of numbers in Russian schools in Rīga. For example, in 1990-1991, there were some 33,100 students in Latvian schools in Rīga, dwarfed by the 67,000 in Russian schools. However, Rīga has seen a radical dwindling of numbers in Russian-stream schools, so that in 2008-2009 there were 33,700 Russian students, now slighly overshadowed by those in Latvian-stream schools, 34,600. Yet there has not been a proportional closing down of Russian schools, with only a few closures or mergers.

The desire to close all non-Russian and non-Latvian schools and join them to Russian-stream schools is one more attempt—sustained now for two decades—to count all non-Latvians as “Russian speakers.” In fact the smaller nationalisties do not see themselves at all as part of the Russian mass, and will resist this move strongly.

Meanwhile, against the backdrop of these political innovations, the Dombrovskis government has pursued intense talks with the International Monetary Fund over loans, a process made increasingly difficult by the IMF insistence on massive budget cuts (around LVL 800 million), and by rapidly declining revenue as the economy contracts. Dombrovskis’ work has not been helped by often disorienting statements from coalition partner TP, which has threatened to cut off the talks if further budget cuts are envisaged, only to back off from this threat at the last minute.

At the same time, it should be said that the IMF has taken a perhaps extraordinary hard line on Latvia, insisting on massive budget reductions when quite clearly the government has no option but to cut into sensitive areas such as health, education and pensions. One cut in pensions has already been agreed on, teachers will work on reduced salaries, and the first hospitals are being closed or merged. The IMF hard line has also made it impossible for the government to engage in any stimulus package, an option many governments around the world have taken, with some apparent success.

If the harsh cuts are made the IMF will lend Latvia enough money to stabilise its financial system, restore its credit rating and introduce needed sructural reforms. Also, Latvia can only become part of the eurozone if it maintains a low budget deficit—and that salvation is something the government still sees as its ultimate aim, not knowing how the electorate will respond to its present efforts at next year’s elections.

Since Latvia’s new government came into office two months ago, the atmosphere of Latvian politics has changed almost beyond recognition. When President Valdis Zatlers picked Valdis Dombrovskis to be prime minister, a sequence of events began that now show us a government facing up to the realities both of the catastrophic financial crisis engulfing Latvia, and of the need to change a political culture of corruption and self serving.

Dombrovskis is from the New Era Party (Jaunais laiks, or JL), which stood outside the previous coalition, but he quickly stitched together a coalition that has been remarkably trouble free. Paradoxically, the situation made it easier to form a government, in that all the former coaliton parties were keen to do so quickly, or face a possible early Saeima election. Dombrovskis was also able to sideline a mortal enemy of JL. Ainārs Šlesers’ First Party of Latvia (Latvijas Pirmā partija, or LPP) was not accepted into the coalition, leaving it and the two Russian-oriented parties in opposition. To show he does not give a damn, strongman Šlesers himself is now a candidate for the mayor of Rīga, another source of potential kickbacks now that his political businesses in the national government (transport, communications, infrastructure) are no longer accessible. The former coalition-leading People’s Party (Tautas partija), the Union of Greens and Farmers (Zaļo un Zemnieku savienība) as well as the much bruised and discredited For Fatherland and Freedom (Tēvzemei un brīvībai / LNNK) make up the coalition together with JL.

Overshadowing the politics is the daunting economic situation, with Latvia needing to borrow several billion euros from the International Monetary Fund but needing to bring in severe cutbacks in spending. Budget cuts of just under LVL 1 billion (EUR 1.4 billion) will reduce the deficit to an acceptable level. Latvia must be able to eventually bring its budget deficit down to 3 percent of gross domestic product to qualify for acceptance into the euro zone. This time around it is intent on limiting the budget to a 7 percent deficit, fearful that revenue decline will even make this hard to achieve.

Dombrovskis gained his credentials as a Europarliamentarian, with a penchant for economic and infrastructure issues. His team includes the extraodinary return of a previous superstar, Einars Repše, who was the celebrated director of the Bank of Latvia that maintained the currency despite all adversity, then the ill-fated self-directed prime minister of the first JL government, and then a petulant isolate. Now Repše is back in the hot seat as finance minister, and seems to have regained much of his financial credentials. He and the government are in an almost impossible situation: given falling revenues, cuts to government spending must now approach some 40 percent. The government has indicated there will be protected core areas: health, education, internal affairs (including fighting corruption) and justice, but even they must restructure many of their activities. And “protected” is a very relative term: both teachers and health workers are facing salary cuts.

One other area that has already been cut savagely was the raft of committees, councils, advisory panels, secretariats and boards of dozens of enterprises and semi-government institutions where representatives—almost all with close links to one or other former coalition parties—gained enormous salaries for little work. These sinecures have been almost totally abolished. There is an ongoing reduction of numbers in all government departments. More worryingly, both the state-owned TV and radio face massive cuts. There are concerns over their maintianing programming standards and questions have been raised even about their viability. Other state-owned institutons of national importance, including libraries, also face uncertain futures.

Under this barrage of financial woe a remarkable scene is unfolding of ministers relatively rarely openly squabbling, and even those who despised JL and kept it out of previous coalitions have had to put their heads down and follow Dombrovskis and Repše into financial responsibility. While it is certain that drastic cuts in the upcoming budget will be unpopular, ministers of all parties are caught in a bind: Each wants to fight for their area of responsibility, but each knows that if IMF requirements are not met, the country will be in even greater financial chaos, and they will be blamed.

The first test of the new political order will soon be upon us with local government and European Parliament elections on June 6. Here other, more traditional, political issues are to the fore. Both elections will be a test to see what support the former coalition parties still have in the electorate. The People’s Party has been down to less than 2 percent popularity in some recent opinion polls, and although it holds power in many local government areas it could be in for a shellacking. For Fatherland and Freedom may share a similar fate, and even the traditional Union of Farmers and Greens has struggled to gain 5 percent support. JL is now the leading party, according to opinion polls, alongside the Russian-oriented Harmony Centre (Saskaņas centrs, or SC).

Yet it will be the Europarliament elections that will generate most heat, and there the SC is at the heart of the issue. The SC is a peculiar organisation. At the last Saeima elections it had considerable success in vastly outpolling the other traditional hardline Russia-leaning party, For Human Rights in United Latvia (Par cilvēktiesībām vienotā Latvijā, or PCTVL). SC consists of three factions. Two are moderate, gaining most of their votes for Russians who are Latvian citizens, but gaining some support among Latvians as well. Their very presentable leader, Nīls Ušakovs, is running for mayor of Rīga in the local government elections. Many Latvians indeed would prefer him to Šlesers, the other celebrity candidate. Ušakovs’ faction runs a moderate line on ethnic and national issues.

The third faction is headed by the notorious Alfreds Rubiks—former mayor of Rīga, Communist Party first secretary and unreconstructed pro-Moscow advocate—who was jailed in 1991 for six years because of his treason against the new Latvian state. Detesting the very existence of the Latvian state, he has worked hard to align himself with the SC instead of the PCTVL.

Now Rubiks is the No. 1 candidate for the SC in the European Parliament elections. Having a possible Latvian representative of this calibre in the EP has shocked many. It also raises questions about the “moderate” credentials of the SC. Was it really a put-up piece of political craftsmanship to assume a moderate face while still harbouring anti-Latvian and pro-Moscow policies? Although voters have the option of crossing off names and even many SC voters may balk at electing this troglodyte figure, there is a chance Rubiks may become one of Latvia’s Europarliament deputies. If PCTVL still manages enough votes, we may have two such deputies representing Latvia.

If you are a Latvian citizen your vote on June 6 may be more than usually needed.