Central banks, economic statecraft and offshore banking: Comparing financial internationalization strategies in Latvia and Estonia

Small states play a critical role in the operation of the Global Wealth Chains, storing capital assets and funnelling financial flows. However, the knowledge of how such practices of financial transit emerge remains scant. Focussing on the 1990s as the formative decade of post-Soviet capitalism, the article focuses on the variegated financial internationalization in the Baltics, as Latvia developed a vibrant offshore banking sector, whereas Estonia pursued complete Westernization in bank ownership. Challenging the literature that relates the emergence of Baltic offshore finance with right-wing politics, and existing trade and cultural links with Russia, the article argues that the varieties of financial internationalization in the Baltics were due to ‘economic statecraft’ by the Central Banks (CBs). Drawing upon a survey of CB reports, parliamentary speeches, press archives, memoirs, and elite interviews, the article argues that the Baltic CBs’ path-setting decisions shaped the two distinct financial internationalization paths through three interventions: currency reforms, agenda setting, and banking regulation. Drawing on the literature on social embeddedness of CBs, the article attributes the differences in the two CB approaches to their informal alliances with broader society – domestic financiers in Latvia and the government in Estonia.