RIGA, Latvia -- When Vladimir Zhirinovsky rants and raves, Estonians and Lithuanians tremble. Latvians count their money.


Latvia, a tiny Baltic state with a huge ethnic Russian minority, is blossoming into a destination of choice for Russian capital in flight, due to a series of aggressive banking reforms.


"We are not just the Switzerland of the former Soviet Union, we are in a position to compete with Switzerland itself as a world financial center," Prime Minister Valdis Birkavs told The Moscow Times in an interview.


"Russians, Belarussians and other Soviets like to bank here, because they have old ties, and they don't have a language barrier since we speak Russian," he said. "When Zhirinovsky was elected, a stream of money poured into Latvia from Russia."


In January 1993, Latvian banks held deposits of about 99 million lats ($174 million); by January 1994, that figure had quintupled to 492 million lats.


"That's an increase of about $700 million in one year in bank deposits, and $700 million is nearly a quarter of the country's GDP," said Jonathan Bemis, economic officer for the U.S. Embassy in Riga. "You have a wave of money from Russia flowing over this country."


That also makes up a significant portion of the estimated total of $12-15 billion dollars that fled Russia illegally last year.


Riding the crest of the cash wave is Latvia's new currency -- the handily named lat -- introduced in May 1992. The Estonian kroon, adopted at about the same time, was pegged to the Deutsche mark at 8:1 and has been one of Europe's steadiest currencies. But the Latvians -- out-free-marketing Estonia's notorious free-marketeers -- have let their currency find its own value.


The result has been astonishing: While the Russian ruble and the Ukrainian karbovanets have tumbled, the lat has steadily climbed: one lat was valued at $1.17 in January 1993, $1.70 in January 1994.


"Today the lat gains about two U.S. cents against the dollar every month," said Economics Minister Ojars Kehris with pride.


Latvia is sandwiched between Estonia to the north, Lithuania to the south and Russia to the East. In Lithuania, a largely Communist government elected in 1992 and farmers -- who make up a surly, subsidy-fattened lobby throughout the former Soviet Union -- have gummed up all efforts at economic reform.


Estonia, by contrast, has achieved striking successes under the leadership of Prime Minister Mart Laar, 33. Dubbed "the youth mafia" by local journalists, Laar's cabinet includes a 27-year-old foreign minister and 28-year-old ministers of defense and interior.


Latvia's Prime Minister Birkavs ? aware of an implicit comparison with Estonia's wunderkind -- laughed wryly when asked his age.


"I'm 51, but I feel much younger," he said, and then defended his competence not by citing his distinguished law career -- he was president of Latvia's Lawyers Society, which in 1988 became the first freely elected lawyers society in the Soviet Union -- but with a long discussion of his passions for tennis and sailing.


Birkavs' government stands on a tenuous parliamentary coalition of farmers and free-marketers. To keep the farmers happy, Latvia will run a budget deficit this year.


Latvia's GDP shrank by 33.8 percent in 1992. In 1993 GDP fell by 19.9 percent, when agricultural output fell 14.1 percent, manufacturing 32.6 percent and construction 49.8 percent.


Those figures must be taken skeptically, Bemis said. Government figures only measure the state sector, while his "wild guess" is that the private sector now accounts for 25 percent of the economic activity in the country.


Statistics throughout the Baltics are disastrously unreliable as they are rarely adjusted for inflation, seasonal changes or other variables.


Economics Minister Kehris defended the economic contraction as a healthy process. Latvia, he said, is shedding the inefficient factories and farms of the Soviet era.


"Many enterprises will go bankrupt in the near future, and that is normal and necessary," Kehris said.


However, economists and politicians say the recession has bottomed out, and according to the Economics Ministry, the last three months have seen a slight rise in economic growth.


Indeed, many observers say Latvia will be the Baltic region's economic powerhouse. The capital Riga, a city of 900,000, is the largest Baltic port, and the closest thing to a regional metropolis. Its size and location make it the area's commercial center of gravity.


Tallinn, a city and port half the size of Riga, looks quaint in comparison, while the Lithuanian capitol of Vilnius is a sleepy, landlocked town in need of a fresh coat of paint.


Many foreign firms with an eye to doing business in Russia ? Kellogs, for example, which is building a $22 million cereal factory ? have chosen Riga for their headquarters.


"There's an attitude in the business world here that it is Latvia's future to act as a gateway to Russia, a Hong Kong, a stable platform for business with a large, troubled but economically interesting neighbor," said Bemis.