Entrepreneur and founder of LHV Bank Rain Lõhmus told Kristjan Pihl in an interview on Vikerraadio on Friday that in Estonia, freedoms are restricted by regulations, and feudal lords take more and more from the private sector to redistribute (as too much money goes to the state budget).
When you landed at Tallinn airport on Wednesday afternoon, did you feel the heaviness and pessimism that seemed to be hanging over Estonia, at least according to the headlines in the daily newspapers?
I really felt a colder climate.
But I always start a conversation with taxi drivers about how they see Tallinn. Tallinn is not the whole of Estonia, of course.
And what can you see from the top floors of the LHV Bank skyscraper?
To be honest, there are small signs of danger from the bank's point of view, but overall, the picture is not the worst. But the areas that the bank is dealing with in its lending do not cover the whole economy, and it is not the whole picture.
What I'm convinced of – and let's face it – is that we've been in a cycle of rising interest rates for over a year, and whatever you call it, the main purpose of raising interest rates is to create unemployment.
Nobody is saying that, but that's the way it is – it is necessary to cool the economy.
We must be having a hard time now...
Yes. If everyone is talking about how to turn it around, it goes against the policy and trend that is being voiced; people are simply afraid to say that in order to bring inflation down and cool the economy, we need a different situation, where there is not a shortage of jobs but a surplus of jobs, up to a certain limit, it cannot be too big.
On the other hand, although it is very difficult for some people, from the banker's point of view, today everything is very good: the bakery is selling pastries, Liviko is selling vodka, and the bank is selling loans. The margins are very good...
Not that good. To be honest, I'm a lot more restless than I was a year ago, for example. A year ago, we knew things were going to get better. If people thought that this zero-interest rate environment was going to continue for a long time, they were very naive. It was a foregone conclusion that something like this (rising rates) was going to happen.
LHV released their nine-month results this week, and I think most people thought it was a super good result. You earned four times more, than at the same time last year.
Yes, but I look at it, and unfortunately, I see a lot of negative trends as well. I look at the fact that credit growth was only 12 percent, and at the same time, there was a 32 percent increase in costs due to inflation and regulatory requirements. Maybe we have been too soft on ourselves, spending too much because times are good.
I see very dangerous trends, we can't assume – I compare it to sprinting – that we have a 10 meter per second tailwind, these records should not count, these figures are temporary, they don't last.
And that's why we have to look forward, and we're always looking forward. People often look back and say it would be nice to tax, but in fact, you always have to look forward. Those who look back are thieves, usurers, or something else. Progress is always ahead.
The banks' nine-month profit was €108 million, almost 200 percent more than a year ago. Where is this money going?
In itself, it does not go anywhere directly. What LHV has been doing since the initial public offering for seven years now, and what we have always said, is that we pay a quarter to the shareholders, who can be anybody from 2016, and everybody benefits equally. The rest will remain as capital and reserves, which we will use to expand our activities.
Listen, your big money customers say that what used to be a good little LHV has now basically become a mini version of the big Swedish banks. Do you accept such criticism?
In part. I myself admit that, with the growth and the increase in regulation, there are so many things that I don't like.
I'll be honest with you: last year when I went around town, most of the people I knew patted me on the back and said you're doing so good and you're doing good things, but this year, two-thirds, or 75 percent, of the usual business has been tied to some kind of internal bureaucracy – usually anti-money laundering stuff that's being handled in an unreasonable way. That's something that needs to be dealt with as well.
Do you miss the old days when the LHV billboard above the Radisson Hotel had a picture of Giovanni Sposato with a blonde beauty next to him and a sign saying the Italians took your daughter but not your money?
No, I never miss it.
An acquaintance of mine just asked me about the Pegasus restaurant and if I'd like to do it again, and I said yes, maybe if I were 30, but I'm not.
I don't miss anything. I think you have to be brave to think ahead, and if something is wrong, you have to fix it quickly and radically. There is no going back.
Let's talk a little bit about politics. Businesses have been very critical of the government lately, saying that they don't understand what kind of economic policies the Kallas government is pursuing. For example, the head of Tallink, Paavo Nõgene, was very critical recently, saying that in such a recession, the state budget cannot be balanced at all and that the most important thing should be addressed—to create an environment where companies can be competitive. Do you agree that the wrong thing is being done?
I don't blame the Kaja Kallas government, but I would say more radically. It seems to me that what is being done is to bring back feudalism, to restrict freedoms through regulation, and to take more and more from the private sector for redistribution by the feudalists.
But why is this done?
Because they can. Voters accept. That's democracy.
Is this a long-term goal or rather a standstill?
No, I don't think it's been planned for a long time. It's an easy way, sweet. Those who spend more will probably prevail, and if they can, why not?
What bothers you most?
What bothers me the most is the restriction of freedom. Well, it's not directly imprisonment, like in North Korea, but it's through all kinds of rules and small regulations. I think the banks, in particular, see it as meddling in too many things, regulating too many things and having a huge unproductive cost because of this.
People's energy that could be going into producing the services or products that people want is actually going into nothing. And to do all that requires resources from the central apparatus, which in turn is bloated, and everyone knows that when an organization is bloated, a lot of the energy goes into running the organization itself.
Is there also a little bit of a grudge because the current government planned a bank tax?
I think that would have been a big mistake, because such a step would not go unanswered and the response would have been quite painful in the long run.
The Lithuanians did it, and that is cited as an example. But for me, it means that any thought of LHV expanding to Lithuania has been relatively shelved. How can you trust these guys?
I even calculated that this Lithuanian tax would have taken €50–60 million from LHV and punished our rapid growth, which benefited the economy. Please, say that wasn't the case! Most of it was generated by corporate finance and going backwards.
For me, this is madness. I am glad that a reasonable compromise has been reached in Estonia. But there are grim examples.
I recently heard from an acquaintance – thoughts about our Social Democrats, by the way – about what Macedonia has done. They also decided to introduce a solidarity tax, but they were even cleverer and targeted all predatory businesses with a turnover of more than €10 million. The tax was made retroactive by a parliamentary decision in March or April of this year, so that companies could not cheat in 2022. And already in May, the money was collected.
One thing is that the (bank tax) decision was made and you say it was a reasonable compromise. On the other hand, people were watching at the time when this compromise was made and they didn't really understand that some bank managers in nice expensive suits were going to go to Stenbock House with portfolios in their hands...
These are not very expensive suits.
How much could an LHV manager's suit cost on average?
Neither I nor Madis (Toomsalu) wear a suit. I haven't bought a suit in ten years. Except for going out at night.
Anyway, the suits were put on that day because something very important was happening. ERR news anchor Anvar Samost described it as something like this: four men go into a house, knowing they are going to lose €900 million, come out happy and as winners.
I think Samost has to say something about everything, and then he says it, but often wrongly, and this is one of those wrong things. There was no real risk of anyone getting or taking that much money, it was the usual bluff of politicians - rolling out a huge amount knowing you will never get it, but anchoring your expectations and seeing how much you can squeeze out. It's quite a common strategy.
Olavi Lepp from Swedbank said it was a choice between the plague or cholera.
Very well said, I think; what should have been said?
But in the end the winning ticket was drawn...
I'm not quite sure it's a winning ticket. It is in the sense that the state gets its money, but in a slightly different form. At the same time, the reputation of a credible Estonia is preserved, at least until it is damaged later.
The country will receive much less than it would have received in a few years.
The €900 million was a total bluff; they wouldn't have gotten it anyway. Secondly, don't think that if something like Lithuania had happened, I would have just said what my attitude toward Lithuania is. So that LHV and others would continue in the same way? I do not think so.
Was that when you got a call from the Tallinn office in Switzerland saying: "Listen, Rain, there's a situation"?
No, I'm never talking about a posteriori, I'm talking proactively.
What's happening in the background is that businesses are very outraged sometimes: there's a lot of foot-dragging and in many places redundancies and door closures.
How difficult is it for entrepreneurs right now to make the right decision based on the information coming into the bank?
Again, this is the purpose of the monetary policy cycle, and, of course, business does not like it. They particularly do not like it because the party is going on elsewhere in the sector. I have in mind the public sector. And of course, it is doubly difficult to look at, but that is the goal of the current economic policy.
If somebody says you can kill inflation in some other way, I don't think that has happened historically. You always have to create a shortage of money, and when there is a shortage of money, or when prices are high, you have bankruptcies and unemployment. That's just the way it is.
But let's advise the government on what to do anyway. Do we take the scaffolding away from the National Library and not make these investments?
I could be wrong about the numbers, but the original renovation plan for the National Library was €60 million, I think, which will go up to almost €100 million.
Now think: how important is the book today as a traditional thing, and how many people go through it every year? You can think of a huge number of things that are fun to do, but you always have to calculate the cost. Of course we could build fancy bank branches bigger than churches, but what's the point?
These are the things, unfortunately, where you have to look in the mirror and ask if we can do it or if we can do it this way.
I used to sit in a library when I was a student, but I think today's library is more like a cafe or a meeting place. Why does there have to be a primary, single library?
When I lived in Merivälja as a student, there was a small library in a side street where my grandmother could walk with a cane and borrow a book. She probably wouldn't have come to a central national library.
Come on, the officials searched for half a year to find the savings...
Research shows that the introduction of artificial intelligence should increase the productivity of such a medium-sized, low-end jobs by about 50 percent. The only thing is – it's nowhere in the plans and nobody in the public sector is working on it.
You have said repeatedly in the last fifteen minutes, in different versions, that the government is doing the wrong thing by restricting people's rights. I'm sure a lot of people thought it was about car tax and the right to own a decent diesel car. Have you registered your Bentleys and Posches in Switzerland?
And I want to clarify that I didn't say that the government was doing the wrong thing. They certainly do the right thing. I said too many things.
This restriction of rights is more like over-regulation of business. I am more of a supply-side economist, and I believe that the real growth will still come from businesses providing services and products that are actually needed.
But when it came to the car tax, I had mixed feelings – ideologically, I have nothing against it, but I feel that if I were a politician today, I would be against it. It is the wrong thing to do in today's environment. It is exactly the kind of thing that irritates a lot of people compared to revenue, and in fact, it will not solve any of our problems in the long run.
But what kind of tax should be introduced that would not make people, the so-called car people, angry?
Wikipedia has a chapter on what taxes have been imposed throughout the ages; for example, in Britain in the 18th century, there was a poodle tax, or a sin tax – there's quite a few. Glass was expensive, so windows in houses were taxed...
Chimney tax, brick tax, soda tax, salt tax, cattle tax – sorry listeners, a stag tax. What would you recommend to the finance minister from this list?
The finance minister-designate sitting across from me talks like a hardened feudalist, saying that the only way is to raise taxes, as if he were the finance minister of the court of Louis XIV.
I would like to remind you that, first of all, we have too much money in the national budget. We should be looking at where to leave out certain activities, to say that this is not what the state should be doing at all. So not to take money away from companies and people, but to let them buy things themselves and let them decide what is necessary and what is not. That is number one for me.
The second thing: on the one hand, it seems ideologically right to me to tax cars, but on the other hand, I don't like the idea of increasing the number of taxes and making things more complicated.
There is always charm in simplicity. I would not come up with new devious taxes to harass somebody from some angle so that the rest of the electorate does not suffer – that is also bad.
It would be best if people could choose how much of the gross national product the government could take for its own spending. What is that percentage – 30 percent, 35 percent, maybe even 40 percent?
That would be a kind of consensus, and that would be the basis for planning spending and so on. It might fluctuate a little bit from year to year, but it should be respected. That would be a fair agreement.
The next step would be to figure out how to put everything together, but the most important question remains how much to harvest, so to say. I don't see a consensus on that, which is why everyone is running in different directions: someone is thinking about how to tax more, someone is thinking about how to spend more, someone is thinking about how to increase Estonia's presence abroad, and someone is thinking about something else.
Rain, I consider myself really fortunate to have met you today. Nobody knows when you'll return to Estonia. I'll ask you some more personal questions now. You live in Switzerland, while your dear friend, LHV CEO Andres Viisemann, lives in Portugal. When you live so far away from each other, doesn't the distance also to Estonia vanish?
Switzerland is about halfway to Portugal. We've divided up to cover the whole of Europe, with him covering the western end, me the middle and the eastern.
But what about contact with Estonia, with entrepreneurs, with politicians?
Of course, it's not as close as it would be if I lived here, but it's often the case that you can see things a little better from a distance.
How does the threat from Russia, for example, that we perceive here at every turn, look from a distance? What is the attitude towards Russia in Switzerland?
It is partly of our own making. Talking about danger is itself a much, much greater danger. This is my personal opinion. Everyone can say that I do not live here; that is so easy for me to say, but I am convinced that it is true. At least in the short term, the danger is not that great.
Is there anything to be concerned about from Putin's Russia?
So and so. In the long run, none of us can predict anything, but as I understand it, the troops closest to us have been withdrawn, so there are fewer people near the borders. At the same time, our defenses have been greatly improved.
To be honest, I would talk less and do more, or maybe quietly build up our defenses instead of trumpeting every day how much of a threat we are.
It also has a very bad side effect: you always have to wonder how foreign investors will look at it. If you yourself say that we are such a high risk, you are squandering your own opportunities. Better to prepare quietly. Why are you shouting so loudly?
A few years ago, you dropped a bombshell at an investment festival when you said that you had acquired some crypto in the early years of Bitcoin and that by that time the value of that portfolio was almost equal to the total value of your LHV shares. But you lost those passwords. Have you found them?
No, and I haven't made much effort either. It's no secret that I have a wallet with 250,000 Ethereum units, anyone can calculate for themselves what it's worth.
That's hundreds of millions?
Yeah, and I can't solve this alone; if someone thinks they can, I'll take all offers. My own best plan is to build Rain Lõhmus as an AI and see if he can get his memories back.
But no, I take it easy. I don't like things that result in zero or one. You can spend ten years on it, and it might end up with zero; it might end up with you solving a problem, but I prefer to do things where progress is visible on a daily basis.
What happened to me was that I invested €50 euros in Bitcoin and lost my passwords. And I still don't dare tell my spouse that such a stupid thing happened. But here we are talking about hundreds of millions... So is this the weakest point of this system?
I absolutely agree that this is a very weak point of this system, which makes you think that this perfect decentralization has other risks that you don't usually think about. But it's very common for me to lose passwords. I went to renew my ID card passwords today; if it were crypto, I'd be in a big crisis again, but luckily the police and border police work.
Our conversation started with the fact that for many people in Estonia today, the situation is very difficult and the future is bleak – they don't know exactly what is going to happen. You are living a dream life on the shores of Lake Lugano, teaching your son to play tennis, going to nice little restaurants... Is there anything you can tell people to comfort them that sometimes your life is hard too?
I'm very often upset; I'm under a lot of stress. It's true that people can get upset about different things, but I think stress is important because it makes you engage. If you don't have stress, things start to go wrong.
What are you stressing about?
There are so many things. I've been around all day today; I can see all the things, and I can also see what's wrong with LHV Bank making record profits. It's not like you're counting the money and wondering where the good is for the year.
I know that when things are going well, people make a lot of mistakes, including LHV. How to avoid the damage that comes The difference is that maybe I don't have to calculate how to get from Milan airport to Tallinn as cheaply as possible – I'll come no matter what – but the fact is that I have to deal with the unpleasant things.
But to be honest, life would be boring if there were no such things. I wouldn't want that kind of life.
Editor: Kristina Kersa