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Latvia’s central bank governor Martin Kazaks has urged European policymakers not to be “foolish” over the fact that the bloc is already “at war” with Russia.
Cossacks, a member of the European Central Bank’s Governing Council who is a contender to become ECB vice-president, stressed that central banks and the financial system need to be prepared going forward.
“It’s foolish to think that we are not at war (with Russia),” he said in an interview with the FT. While the conflict was not unfolding “physically on our soil”“, He pointed to “cyber attacks that happen all the time”, the sabotage of undersea cables in the Baltic Sea and violations of Danish airspace by suspected Russian drones.
“We need to be flexible to deal with this,” Kazaks said.
The 52-year-old trained economist, who has led Latvijas Banka since December 2019, is one of six contenders to succeed Luis de Guindos as ECB vice-president.
De Guindos’s non-renewable eight-year term expires in May, and the finance ministers of the 21 eurozone members are expected to decide on his successor on Monday.
Kazaks, who is competing with rivals including Finnish central bank governor Olli Rehn and former Portuguese governor Mario Centeno for the role, has been one of the more hawkish voices on the ECB’s Governing Council. He warned about inflation risks following the COVID-19 pandemic and the launch of Russia’s full-scale invasion of Ukraine in 2022.
In recent years NATO has strengthened its military presence in Latvia, a former Soviet republic with a large Russian minority and a 280 km long border with Russia.
Over the past four to six years, Latvia’s central bank has worked on “various contingency planning issues,” Kazaks said.
One focus has been on ensuring the continued availability of cash and digital payments in the event of a crisis, with commercial banks mandated to operate a network of “critical” ATMs, some of which are equipped with their own power generators.
The country has also developed a system for “offline physical card payments” at pharmacies, gas stations and food retailers.
“We are best in class in many respects and other countries are emulating our solutions,” he said. “We are happy to share them,” he said.
He said the central bank’s contingency planning deals not only with the “risk of a Russian attack” but also with scenarios such as floods and other risks associated with climate change.
The Kazakhs said that if a euro member were to face military conflict on its own territory, it could lead to “financial stability issues” and problems in the banking system, as well as concerns over debt sustainability. “You may have gotten the spread while moving around,” he said.
However, the central banker insisted those risks were “marginal” and could be addressed by the EU.
“It is in our hands to reduce this possibility (of a direct conflict with Russia),” he said, by supporting Ukraine in such a way that Moscow “does not win in Ukraine” and by strengthening European military forces to “create a view in Russia that (any attack) is a high risk and not even worth considering”.
