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Latvia’s central bank governor Mārtiņš Kazāks urged European policymakers not to be “naïve” to the fact that the bloc is “at war” with Russia.
Kazāks, a member of the European Central Bank’s governing council who is a contender to be vice-president of the ECB, emphasized that central banks and the financial system should prepare for further development.
“It is nonsense to think that we are not in the WAR (with Russia),” he said in an interview with the FT. While the conflict did not happen “physically on our land“, he pointed to cyber attacks happening “all the time”, sabotage of submarine cables in the Baltic Sea and violations of Danish airspace by suspected Russian drones.
“We have to be strong to face that,” Kazāks said.
The 52-year-old trained economist, who has headed Latvijas Banka since December 2019, is one of six contenders to succeed Luis de Guindos as vice-president of the ECB.
De Guindos’ non-renewable eight-year term ends in May, and the finance ministers on 21 Euro zone members can decide on his successor as soon as Monday.
Kazāks, who is competing with rivals including Finnish central bank governor Olli Rehn and former Portuguese governor Mário Centeno for the role, is one of the more hawkish voices on the ECB’s governing council. He early warned of the risks of inflation after the Covid-19 pandemic and the start of a full-scale Russian invasion of Ukraine in 2022.
NATO has in recent years strengthened its military presence in Latvia, a former Soviet republic with a large Russian minority and a 280km-long border with Russia.
During the past four to six years, the central bank of Latvia has been working on “various contingency planning issues”, said Kazāks.
One focus is to ensure the continued availability of cash and digital payments in the event of a crisis, obliging commercial banks to operate networks of “critically important” ATMs, including some with their own power generators.
The country has also created a system for “offline physical card payments” at pharmacies, gas stations and food retailers.
“We are in many cases best in class and other countries are imitating our solutions,” he said, adding that “we are happy to share” them.
He said that the central bank’s contingency planning is related not only to the “risk of a Russian attack” but also to scenarios such as floods and other risks linked to climate change.
Kazāks said that if a euro member faced military conflict on its own territory, it could lead to “financial stability issues” and problems in the banking system, as well as debt sustainability concerns. “There may be spreaders moving around,” he said.
However, the central banker stressed that the risks were “marginal” and could be addressed by the EU.
“We have in our hands to make this possibility (of a direct conflict with Russia) much shorter,” he said, by supporting Ukraine in such a way that Moscow “does not win Ukraine” and by strengthening European military forces “to create a view of Russia that (any attack) is a high risk and not even worth thinking about”.