Note to reader The titles in the GMB series of Doing Business with… guides for each of the 10 countries that joined the European Union on 1 May 2004 were first published in hard copy over the 18 months preceding entry. Since publication, there have been changes in the law and regulatory environment in each country, both in the period up to accession as countries strove to complete the harmonization of their systems with the EU’s acquis communautaire body of legislation and directives and during the 18 months since. In some countries there have been changes in the taxation regimes or in accounting regulations. Change has occurred in political environments too, following parliamentary elections or in the balance of coalition governments. The economic climate of some states has been affected by the continuing malaise of the EU15 economies. Six of the EU10 (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovakia) have entered the EU exchange rate mechanism 2, the eurozone’s ante-chamber, and expect to join in 2007 or 2008. The Central European states are less advanced in meeting the eurozone entry criteria and previous plans for early entry have been modified with entry dates slipping to 2009–2010 or later. All of these developments are reflected in the revised ebook editions, which GMB now offers in its online EU10 collection. The texts of the revised editions have been amended accordingly and the changes are tabled in the accompanying updates to each ebook for the benefit of readers who have been working with the original edition. Further updates are programmed at regular intervals and readers purchasing ebook editions now have the opportunity to take out annual subscriptions for the update services. In this edition of Doing Business with Latvia, updates are included for the following chapters: 1.2 and 3.3.
Doing Business with Latvia
GLOBAL MARKET BRIEFINGS
Doing Business with Latvia
Consultant Editors: Jonathan Reuvid Marat Terterov
GMB
Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published in 2003 and updated in 2005 by GMB Publishing Ltd. © GMB Publishing Ltd. and contributors Hardcopy ISBN 1-905050-24-0
E-book ISBN 1-905050-61-5
British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library Library of Congress Cataloguing-in-Publication Data Doing business with Latvia / consultant editor Marat Terterov. p. cm. -- (Global market briefing) Includes index. ISBN 1-905050-24-0 1. Latvia--Commerce--Handbooks, manuals, etc. 2. Latvia--Economic conditions--1991--Handbooks, manuals, etc. 3. Investments, Foreign--Latvia--Handbooks, manuals, etc. I. Terterov, Marat. II. Series. HF3639.8.Z6D65 2003 330.94796--dc21 2003009055
Contents Foreword Aina¯rs Šlesers, Deputy Prime Minister of Latvia List of Contributors Map 1: Latvia and its neighbours Map 2: Riga and surrounding districts Introduction Marat Terterov
ix xi xiv xv xvi
Part One: The Economy and the Business Environment 1.1
Latvia Today Ojars Kalnins, Director, Latvian Institute 1.2 Economic Overview Alf Vanags, BICEPS Updates are given at the end of this chapter
12
1.3
19
1.4
1.5 1.6
Latvia and the European Union Alf Vanags, BICEPS Administrative Barriers to Investment in Latvia Jacqueline Coolidge, Foreign Investment Advisory Service and Lars Grava, Director, Synergy Consulting LLC Investor Incentives Latvian Development Agency Foreign Trade Latvian Development Agency
3
25
35 44
Part Two: The Legal Structure and Business Regulation 2.1 2.2 2.3 2.4 2.5 2.6
The Legal Framework for Foreign and Domestic Investment Lejins, Torgans & Vonsovics Forms of Business Organization Lejins, Torgans & Vonsovics Practical Procedures for Company Incorporation Lejins, Torgans & Vonsovics Agency, Distributorship and Franchising Kronbergs Law Office Competition Law Lejins, Torgans & Vonsovics Employment Law Kronbergs Law Office
53 62 68 73 78 84
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Intellectual Property Lejins, Torgans & Vonsovics 2.8 Property Legislation and Real Estate Kronbergs Law Office 2.9 Dispute Resolution Lejins, Torgans & Vonsovics 2.10 Import and Export Procedures Lejins, Torgans & Vonsovic
92 99 106 112
Part Three: Finance, Accountancy and Taxation 3.1
Financial Sector Kevin R Smith AWS Structured Finance Ltd 3.2 Accountancy and Audit Deloitte & Touche 3.3 Business Taxation Deloitte & Touche Updates are given at the end of this chapter
121
3.4
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Mortgage Lending in Latvia Mortgage and Land Bank of Latvia
128 132
Part Four: Key Sectors of Trade and Investment 4.1
Energy Industry Latvian Development Agency 4.2 Machinery and Engineering Latvian Development Agency 4.3 Electronics and IT Latvian Development Agency 4.4 Chemicals and Pharmaceuticals Latvian Development Agency 4.5 Food and Agriculture Latvian Development Agency 4.6 Textiles and Clothing Latvian Development Agency 4.7 Wood Processing and the Furniture Industry Latvian Development Agency 4.8 Transportation and Logistics Latvian Development Agency 4.9 Financial and Insurance Services Latvian Development Agency 4.10 Construction and Real Estate Development Latvian Development Agency 4.11 Telecommunications and Media Latvian Development Agency
147 153 159 163 168 172 176 181 186 191 195
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4.12 Travel and Tourism Latvian DevelopmFent Agency
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Part Five: Appendices Appendix 1: Business Risk Assessment Appendix 2: Quality of Life and Recreation Appendix 3:Human Resources Appendix 4: Supporting Infrastructure for Business Appendix 5: International and Regional Trade Fairs 2003 Appendix 6: Useful Contacts Appendix 7: Contributor Contact Details
205 210 213 217 226 231 237
Index
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Other titles in this series from GMB
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Foreword On behalf of the Latvian government, it is my pleasure to outline some aspects of Latvia’s future development and economic strategy. Over the last 12 years, since Latvia regained its independence and set out on its course to European integration, it has gone a long way towards achieving its strategic goal of becoming an integral part of the European community. Latvia has established itself as one of the fastest growing economies in Europe. In 2001 the GDP growth rate of 7.7 per cent was more than twice the EU average. The growth rate was 6 per cent in 2002, and continued annual growth rates exceeding 5 per cent are expected in the foreseeable future. A stable national currency and a low rate of inflation have also contributed to the country’s economic development. Latvia’s credit ratings are good; especially remarkable is the most recent credit rating upgrade by Moody’s from Baa2 to A2. The government is continuing its efforts to secure further reforms and is determined to improve its work on export and investment promotion. Some months ago, together with other European countries, both new and old EU members, Latvia signed the Accession Treaty of the European Union and so is well on the way to successfully achieving its aim of integration. Now it is time to set up and achieve new goals. For myself and for the government of Latvia, attaining the average EU living standard is a strategic aim for the next decade. Latvia’s comparative advantage lies, first, in its geographical location as a platform between the EU and Russia. Proximity to the markets of the CIS (Commonwealth of Independent States) and its strategic location, well-developed infrastructure (ports, railways, roads, pipelines for oil transit and airports) and the existence of significant transit flows make Latvia an important player in new Europe, a significant business node between west and east, north and south. However, Latvia’s most substantial advantage lies in its wellqualified and skilled human resources – its people, their knowledge, understanding of the region and linguistic abilities. Latvia’s long-term economic strategy has encouraged the use of know-how and high technologies, as well as a shift from a labourbased to a knowledge-based economy. Latvia’s IT&T sector has grown by 20 to 30 per cent each year during the last decade.
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I am convinced that by successfully exploiting these advantages, Latvia has the potential to become an important business centre in new Europe. To achieve this vision, the government of Latvia has committed itself to further improving the country’s business and investment environment. The government’s economic policy is based on reduction of the tax burden. Corporate income tax has been reduced to 19 per cent this year and will be further reduced to 15 per cent next year. It is a good incentive for both local and foreign investors. The government has developed an active dialogue with the Foreign Investors’ Council (founded by foreign investors working in Latvia), and takes into due consideration their recommendations and proposals on how to improve legislation and remove bureaucratic barriers. Thus, investors are provided with favourable working conditions and the government fulfils its objectives – to secure Latvia as an attractive location for investments, and to encourage the presence of Latvian goods and businesses abroad. Latvia has developed into an attractive country for foreign investment and many world-renowned companies, such as ABB, Philips, Ericsson, Siemens, Nokia, Sybase, IBM and Microsoft, are just some of the successful and satisfied investors in Latvia. On behalf of the Latvian government, I invite you to discover Latvia as an ideal location for the establishment of your business. Aina¯rs Šlesers Deputy Prime Minister of Latvia
List of Contributors Alf Vanags, director of BICEPS, was born in Riga, Latvia but was educated in the UK and has worked in universities in the UK, Canada, Australia, China, Denmark, Latvia and Russia. He has acted as an adviser for government and international organizations and has published articles in a number of areas, most recently on transition in the Baltic states. He has been back full time in Latvia for about five years and is currently the director of the Baltic International Centre for Economic Policy Studies (BICEPS) which is a research institute aimed at promoting high quality policy-oriented research in the Baltic states. He is also editor of Baltic Economic Trends, published by BICEPS to provide a platform for the dissemination of research and to monitor and comment on the Baltic economies. Deloitte & Touche in Latvia is one of the leading professional services organizations in the country, delivering world-class assurance and tax, legal, consulting and financial advisory services. With more than 75 people the practice serves many of the country’s largest companies, public institutions, and successful, fast-growing growth companies. Their internationally experienced professionals strive to deliver seamless, consistent services wherever their clients operate. Their mission is to help their clients and their people excel. Their Latvian practice is a local practice within their regional firm in Central Europe, a member organization of Deloitte Touche Tohmatsu. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity. The new strengthened Ernst & Young commenced its operations in the Baltic States on 1 July 2002 and now employs more than 260 professionals in Estonia, Latvia and Lithuania. Their increased power coupled with global professional expertise enables them to provide more specialized services to the business community and deliver greater value to their clients and people. They are even better equipped to face the challenges of today’s market and provide first-class services to their clients.
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Kevin R Smith is managing director of AWS Structured Finance Ltd. AWS acts as an advisor to companies on most financing and accounting matters including raising trade and project finance, debt and equity but has particular expertise in Central and Eastern Europe and the Former Soviet Union. Latvian Development Agency (LDA) was established in 1993 by the Latvian Government to attract foreign direct investment in Latvia and promote the export of Latvian goods and services. The range of the offered LDA services and activities has developed and changed according to the requirements of the economic situation in Latvia. The main directions of the LDA activities are based on: ‘Long Term Economic Strategy of Latvia’, ‘National Development Plan’, ‘National Program on Foreign Trade’, ‘National Program for the Development of Small and Medium Sized Enterprises’, ‘Industrial Development Guidelines of Latvia’, ‘National program of the Development of Energy Sector’ and other legal acts. Since 2000, Ojars Kalnins has served as a director of the Latvian Institute, a state-funded agency established in Riga in 1998 to provide information about Latvia to the international community. Information about Latvian history, culture and society is available in several languages on the Latvian Institute’s website (www.latinst.lv), and in a variety of audio-visual and printed materials. The Institute also works with the international media and press, assisting journalists with contacts, interviews and resources during visits to Latvia. A former advertising executive in the United States, Ojars Kalnins has specialized in writing and speaking about Latvia since 1985, worked as a pro-independence lobbyist in Washington until 1991 and served as Latvia’s ambassador the United States from 1993 until 2000. Law firm Lejins, Torgans & Vonsovics was founded in 1994. During its years of operation, the firm has grown into one of the leading Latvian law firms with a wide and respectable client base and excellent reputation for quality services rendered. Areas of practice are diverse and comprehensive, covering virtually every area of business law. Major practice areas include corporate law, mergers and acquisitions, banking and finance, privatization, competition law, commercial law, real estate, tax, customs and trade, labour law, intellectual property and litigation/dispute resolution.
List of Contributors
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Mortgage Bank was established in 1993. The main objective of being the only state-owned bank is to support the economic development of Latvia in accordance with the following directions of activity: lending to the small and medium-sized enterprises, mortgage lending and issue of mortgage bonds. In 2002 the bank had a four per cent share of total industry gross assets, making it the eighth largest bank in Latvia. Total gross assets of the bank have reached LVL175.4 million, profit of the bank constitutes LVL1.213 million, and its loan portfolio reached LVL134.9 million. At the end of 2002 the loan portfolio of the bank was the fourth largest among the commercial Banks of Latvia, providing Mortgage bank with a market share of 6.3 per cent.
Map 1 Latvia and its neighbours
Map 2 Riga and surrounding districts
Introduction This is our first attempt at compiling a significant publication on the topic of doing business with Latvia. The readership of Kogan Page’s newly emerging Global Market Briefing international business series will be familiar to varying degrees with the recently independent Baltic states as one political and economic bloc, formerly controlled by the Soviet Union. However, far fewer individuals from our readership are likely to be familiar with the specific features of the economies and business environment of the individual ex-Soviet republics of the Baltic region. During the last decade, the Republics of Latvia, Lithuania and Estonia have been consolidating on their newly re-established sovereignty and are now seeking to promote themselves as fully-fledged emerging markets in the North-Eastern corner of Europe. Latvia is the second largest of the three countries with a population of around 2.3 million and a surface area of little more than 65,500 square kilometres. Latvia is strategically positioned at the centre of the Baltic Republics – Estonia is to the north and Lithuania to the south – with Russia, Latvia’s traditional political patron, lying to the east. Riga, Latvia’s grand capital and major port on the Baltic Sea, has for centuries served as an important commercial, cultural and transportation centre. Prior to Latvia’s independence in 1991, Riga, with a population of one million, was regarded as one of the Soviet Union’s major cities – and held no less significance in the Tsarist Russian Empire prior to the Bolshevik Revolution in 1917. Today Latvia, in a similar vein to Estonia and Lithuania, is considered to be amongst the most successful of the transitional economies of the newly independent states of the former Soviet Union. Economic reform commenced in Latvia almost simultaneously with independence, with foreign investment and restitution laws promulgated by the Latvian parliament during October and November 1991, and small-scale privatization of state property also commencing before the end of the year. Wide-scale liberalization of consumer prices was introduced in early 1992, controls on foreign trade were abolished, and large-scale privatization projects were announced by the government, together with the introduction of further legislation in support of the privatization program. A new currency, the Lat, was introduced in 1993 and the basis for the
Introduction
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operation of a securities market was also made operational. The results of the reforms were clearly becoming evident by the mid1990s, as the size of the private sector in Latvia’s GDP increased from virtually zero during the late Soviet period to over 60 per cent by 1997. Similarly, by 1996, 64 per cent of Latvia’s workforce was engaged in private sector employment. As the country’s economic reforms continued to promote privatization and an influx of foreign investment during the second half of the 1990s, the Latvian statesector continued to decline in significance as a productive force in the economy, more or less heralding the end of Latvia’s four decades of socialist economic planning. The results of Latvia’s economic reforms and transition from a socialist to a market economy are at present highly encouraging for those parties viewing the country from the perspective of a business opportunity. Between 1996 and 2001, real GDP has grown by an average of 5.7 per cent annually, and was slightly more than 6 per cent in 2002. Latvia’s growth figures, roughly twice the EU average, are impressive and commensurate with the government’s objective of elevating the living standards of Latvia’s residents to convergence with the level of developed countries in the foreseeable future. The country’s other macroeconomic indicators are also positive. Latvia, for example, was one of the first exSoviet republics to reduce its inflation rate to single figures and at present consumer prices are annually rising in the range of 2–2.5 per cent. Latvia has also been successful in attracting substantial volumes of foreign direct investment (FDI) – roughly $US1000 per head of population in cumulative FDI by the end of 2002. This figure is favourable in comparison to other states of the former Soviet Union, though less so in comparison to some of the more advanced transitional economies of Central and Eastern Europe such as Hungary, the Czech Republic, Slovenia and Estonia. Much of the FDI coming into Latvia has been attracted through the privatization programme and has focused on projects in a number of sectors, including telecoms, transport, retailing, tourism and hospitality and financial services. Latvia’s economy has become increasingly diversified as a result of the restructuring that took place in the 1990s. During the Soviet period, Latvia’s state-owned economy performed well in various spheres of production, including mechanical engineering, electronics, textiles and food processing. It also possessed a highly developed scientific research structure, particularly in chemical industries. Some 45 per cent of the country’s surface area is covered by forests, and wood products have traditionally been Latvia’s chief
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export commodity. With the reforms of the 1990s, and given the new demands on government and society, a substantial shift from a labour-intensive to a knowledge-intensive economy has been taking place in the country. As has been the case in neighbouring Estonia, the government’s efforts to promote an ‘information society’ in Latvia have called for substantial involvement from foreign companies and numerous foreign investors have already asserted themselves in the Latvian market. Some of the larger foreign entities to have invested in Latvia during its first decade of transition include Coca Cola (USA), Statoil (Norway), IKEA (Sweden), Neste (Finland), Siemens (Germany), Microsoft (USA) and Gazprom (Russia). Furthermore, as the reader may already suspect, Latvia is very likely to join the European Union in the next round of enlargement in May 2004, which will subsequently give investors in the country access to the EU’s vast network of trade agreements with over a hundred countries worldwide. For companies currently contemplating the prospect of doing business with Latvia, it is evident that Latvia’s recent experience with independent economic development will continue to provide an abundance of new commercial opportunities into the foreseeable future. This book is designed for all parties contemplating Latvia as a market in which to do business and is primarily divided into four sections. In Part One, we provide the reader with a general background to the Latvian market, where our authors provide a general discussion overviewing the Latvian economy, the investment environment and foreign trade patterns. We also provide a country profile entitled ‘Latvia Today’, where we look back at Latvia’s recent and not so recent historical and cultural past, as well as examining some of the main aspects relevant to the country’s foreign and domestic policy-making processes. The very topical issue of the challenges facing Latvia’s economy and society after anticipated integration into the European Union in May 2004 is also discussed. Authors in Part One include the Latvian Institute, the Baltic International Centre for Economic Policy Studies (BICEPS), the Latvian Development Agency (LDA) and the World Bank’s foreign investment advisory unit FIAS. In Part Two, the international consulting firm Ernst and Young, together with one of Latvia’s leading providers of business-oriented legal services, Lejins, Torgans & Vonsovics law office, provide the reader with a detailed discussion of Latvian business legislation, including topics such as forms of business organization, company registration procedures, property law, competition law, employment law, dispute resolution and intellectual property.
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In Part Three, our authors – Deloitte & Touche, AWS Consult, and the Mortgage and Land Bank of Latvia – discuss topics relating to the fiscal and financial sectors in the Latvian economy, providing overviews of the country’s banking system and the financial markets, mortgage lending practices, taxation, auditing and accounting. In Part Four, the Latvian Development Agency takes an in-depth look at the Latvian economy from a sectoral perspective. No fewer than 12 different spheres of industrial activity central to the country’s economic activity are introduced and this part of the book will prove to be of major interest to foreign businesses not deeply familiar with the structure of Latvia’s increasingly diversified economy. In the appendix of the book we provide some analysis of the level of business risk associated with the Latvian market and provide the reader with various other data we hope will prove useful to investors not previously familiar with doing business with this Baltic country. Marat Terterov Oxford, England June 2003
Acknowledgements I would like to thank Mr Juris Cinitis, former Director of the Latvian Development Agency, for his assistance in my efforts to start this project in Riga in October 2002. It is highly unlikely that this publication could have reached its present level of quality and structure had it not been for Juris’ initial efforts to get it off the ground, as well as his ebullient monitoring of the book’s development during the first half of 2003. I would also like to thank all of the contributing authors who submitted articles to the publication and acknowledge their diligence in meeting my strict deadlines for article submission.
Part One The Economy and the Business Environment
1.1
Latvia Today Ojars Kalnins, Director, Latvian Institute
Table 1.1.1 Essential facts and figures Political system Capital Other major cities Population Area Language Legal system Currency Average exchange rate, 2001 GDP GDP growth, 2001 GDP growth rate average over 5 years GDP per capita Inflation, 2001 Inflation annual average over 5 years FDI stock, 2001 FDI stock per capita, 2001
Republic Riga Ventspils, Liepaja, Daugavpils 2.35 million 65,589 km2 Latvian (official). Russian, English and German are also widely spoken Based on civil law 100 ‘santims’ = 1 ‘lat’ (LVL) LVL0.560 = R1 R6,716.15 million 7.6 per cent 4.5 per cent R2,840 2.6 per cent 1.43 per cent R2.665 million R875
Source: Central Statistical Bureau of Latvia, 2002
Introduction The Baltic country of Latvia is located at the crossroads of northern and eastern Europe, on the east coast of the Baltic Sea. The Republic of Latvia is bounded by Estonia to the north, Russia and Belarus to the east, and Lithuania to the south, and has a sea border with Sweden to the west. Other neighbouring countries
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The Economy and the Business Environment
include Finland, Poland and Germany. The strategic location of Latvia has been the major influence on the country’s diverse history and culture. Today, this location forms the basis for Latvia’s newfound economic success and aspirations of re-integrating into the international community of nations. As the world enters a new millennium, Latvia is entering one of the most promising periods of its history. In 2001 it looked back on 10 years of renewed independence and forward to an increasingly prominent role in the new Europe emerging in the 21st century. Latvia today is renewing the old, creating the new and reasserting a distinctive national presence on the European scene. The rest of the world is beginning to rediscover Latvia as well. It is discovering a country that has been a sovereign state since 1918, but a national state of mind for centuries. A country that survived two world wars and 50 years behind the Iron Curtain, even more committed to the principles of freedom, democracy and international co-operation. A country with a language, culture and attitude totally unique to its region – yet a national identity woven through with diverse historical influences. Latvia is a Baltic country, a Baltic Sea country, a European country. It is poised to be a NATO and EU country. And ready to take its place in the global community. Latvia is a country of 2.3 million people who are discovering what it means to live, work and play in an environment they can shape themselves. It is a place where schoolchildren and college students – the emerging generation of national, economic, social and cultural leaders – have a reason to be optimistic about their future. A future where Latvia is free to find its own place in the increasingly interconnected global community of the 21st century.
A tradition of democracy The Republic of Latvia was established as a parliamentary democracy in 1918 and elected four saeimas (parliaments) before the onset of the Second World War. It was a member of the League of Nations and enjoyed an economy and standard of living comparable at that time to Finland and Denmark. The Soviet Union occupied Latvia in 1940 and annexed it to the USSR, where it remained a de facto Soviet Republic for 50 years. In 1990, while still under Soviet rule, the people of Latvia elected a majority of pro-independence deputies to what was then the Soviet parliamentary body, the Supreme Council of Latvia. On 4 May
Latvia Today
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1990, the Supreme Council voted to restore full independence following a transition period. The Soviet government in Moscow refused to recognize this declaration and attempted to use force on several occasions in 1991 to overthrow the elected parliament and government and re-establish a pro-Moscow regime. With massive peaceful demonstrations and passive resistance, the people of Latvia thwarted Moscow’s attempts. On 21 August 1991, following the collapse of Soviet Union, the Latvian Supreme Council adopted a resolution for the full restoration of Latvian independence. In late 1992 the Supreme Council proclaimed elections to the first post-independence Latvian parliament, which were held on 5 and 6 June 1993. The elections led to the convening of the 5th Saeima, continuing a link with the parliamentary bodies of pre-war Latvia. The 5th Saeima elected Guntis Ulmanis President of the Republic of Latvia in 1994. Subsequent parliamentary elections have been held in 1996 (6th Saeima) and 1999 (7th Saeima). President Guntis Ulmanis was reelected to a second (and constitutionally final) term in 1996; Dr Vaira Vike-Freiberga was elected president by the 7th Saeima in June 1999.
A free market economy and a stable currency Throughout its history, Latvia has always enjoyed the economic advantages of its strategic location on major trading routes between north and south and east and west. As Latvian governments moved quickly in the early 1990s to restore a free market economy, encourage privatization, stabilize the currency and diversify import and export flow, Latvia rapidly emerged as one of the economic success stories of the post Cold War period. When the European Bank for Reconstruction and Development chose Riga, the capital of Latvia, as the site for its annual meeting in 2000, Latvia was widely viewed as an advanced transition country. Latvia’s progress in price and trade liberalization, small and large-scale privatization and financial sector reform has resulted in an economy that has grown by an average of 3 per cent each year since 1994. Latvia’s national currency, the lat, was pegged informally to the International Monetary Fund’s Special Drawing Right (SDR) in 1994, and has been one of the most stable currencies in the world since then. A new phase in Latvia’s economic transition was marked by an invitation to begin EU accession talks at the Helsinki EU Summit
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in December 1999. In developing a finance and banking system that corresponds to EU requirements, Latvia established a Finance and Capital Markets Commission in 2001 to monitor brokerages, insurers, credit institutions, investment funds, and private pension funds. Latvia concluded its accession talks and received an invitation to join the EU in the autumn of 2002.
A wide-ranging foreign policy When Latvia joined the United Nations in 1991, it came as a country that recognized that its return to a global community carried with it new global responsibilities and challenges. It was an historic opportunity to close one chapter in world history, and open a new one based on international engagement, co-operation and common values. Latvia’s foreign policy priorities were clear from the outset and have remained constant during its first decade of restored independence. They include co-operation with strategic partners and countries in the Baltic Sea region, integration into a unified Europe and transatlantic security structures, and active engagement in international organizations. Developed in accordance with priorities that are defined in the foreign policy concept adopted by the Latvian parliament, Latvia’s foreign policy, like its economic policy, has been one of the success stories of the post-Cold War era. Since 1991, three parliaments and nine governments have shaped Latvia’s foreign policy to achieve two concrete goals – membership of NATO and the European Union. At the same time, Latvia has sought to establish a constructive and co-operative relationship with its neighbour, Russia. Historically, Latvia has always had close cultural, economic and political ties with Western Europe and the Nordic States. In rebuilding an independent Latvian state, these EU and NATO countries have become Latvia’s closest political and economic partners. Special ties were also established with the United States, which had never recognized the legitimacy of Soviet rule in Latvia following the Second World War. Latvia’s diplomatic mission in the US, begun in 1922, continued to operate throughout 50 years of Soviet occupation, and the US became one of Latvia’s first embassies following the restoration of independence in 1991. The Soviet occupation had also left a legacy in Latvian-Russian relations which required special attention. One of Latvia’s first
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major foreign policy achievements was the successful negotiation to remove Russian (formerly Soviet) troops from Latvian soil in 1994. Latvia’s integration into Europe included membership in the Council of Europe, the Organization for Security and Co-operation in Europe and the European Bank for Reconstruction and Development. Regionally, Latvia became an active member of the Council of Baltic Sea States and formed special ties with Lithuania and Estonia through the Baltic Council of Ministers and the parliamentary Baltic Assembly. In 1998, Latvia joined Estonia and Lithuania in signing the US Baltic Charter with the United States. Latvia’s commitment to global co-operation meant membership of the World Trade Organization, World Bank, International Monetary Fund and World Health Organization, as well as many other international bodies. Latvia was among the first countries to step up to the threshold when both the EU and NATO opened their doors to new members. In 1999, Latvia was named an aspirant country at the April NATO Summit in Washington and invited to begin EU accession talks at the December EU Summit in Helsinki. In the first half of 2001, Latvia signalled its diplomatic maturity by assuming the presidency of the Council of Europe, during which time Armenia and Azerbaijan joined the Council. By 2001, Latvia had established over 35 diplomatic missions around the world, including embassies in most EU countries as well as China and Israel. As the world enters a new millennium, Latvia continues to expand its ties with the global community, looking north, south, east and west, committed to protecting its national interests through the strengthening of democracy, stability and cooperation the world over.
Strengthening a transatlantic security system When Latvia restored its independence in 1991, many viewed this as the beginning of Latvia’s return to Europe. Latvia, however, has been an integral part of European political, economic and cultural structures for eight centuries. With the collapse of the Iron Curtain and the end of the Cold War, Europe is returning to Latvia. For Latvia, membership in the European Union and NATO are not ends in themselves, but simply means to accomplish a greater goal – participation in a united Europe. Latvia has sought membership of NATO in order to make its contribution to the formation of European security policy. In the
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The Economy and the Business Environment
development of Latvia’s security policies, Latvian governments have focused on regional co-operation and European integration, while building a special relationship with the United States in order to strengthen the transatlantic aspect of its security policy. For Latvia, membership of NATO means commitment to the basic principles of the North Atlantic Treaty, democracy, rule of law, political and economic stability as well as the development of the Latvian National Armed Forces according to NATO standards, optimizing expenditures and resources. In 1991 Latvia participated in the inaugural meeting of the Northern Atlantic Co-operation Council (NACC), now the EuroAtlantic Partnership Council (EAPC). In 1994 Latvia signed the Partnership for Peace framework document and became an active PFP participant. In 1999, during the NATO summit in Washington, Latvia was named as a NATO aspirant country and became fully engaged in the Membership Action Plan (MAP) process. In 2002, at the NATO Prague Summit, Latvia received its long-awaited invitation to join NATO. Latvia understands that contributing to the security of Europe means more than military preparedness and interoperability. In keeping with other NATO members, Latvia has re-established democratic institutions, placed the Ministry of Defence under civilian control and developed a fully transparent defence budget. This budget has steadily increased to 1.75 per cent of the GDP in 2002 and will reach 2 per cent in 2003. Since Latvia did not have a national defence force during the Soviet occupation, Latvia’s national defence system was built practically from scratch. The LNAF were established in 1991, and tailored to meet Latvia’s security needs and NATO standards. Even prior to NATO membership, Latvian forces have worked collectively with NATO forces to preserve peace, prevent war and enhance the security and stability of the transatlantic community. Latvian troops and specialized personnel have participated in all NATO-led operations in the Balkans, as well as other endeavours by the OSCE and WEU. Latvia realizes that no single country can be self-sufficient in ensuring its security. The 21st century has brought with it new threats to European, transatlantic and global security in the form of international terrorism or regional conflicts. Latvia is ready to do its share to promote stability and security.
Latvia Today
9
The goal of an integrated society The forefathers of the Latvian people first arrived in the Baltic region around 2000 BC. In the ninth century AD the territory of modern Latvia was inhabited by four major tribal cultures, the Couronians, Latgallians, Selonians and Semigallians. In the 13th century Latvia was invaded by armed Germanic Crusaders, who founded Riga and established control over the indigenous people and territory. Over the ensuing centuries, traders and invaders from Germany, Poland, Sweden and Russia established a presence in Latvia, alongside the local Latvian inhabitants The Latvian people finally established a Latvian state in 1918 with citizenship for all the residents, regardless of ethnicity. Between 1918 and 1939, ethnic Latvians comprised about 75 per cent of the population; the remainder consisting of Russians, Jews, Germans, Poles, Lithuanians, Estonians, Roma and other minorities. During the Second World War, Latvia suffered three invasions and occupations; 120,000 Latvians were deported to Soviet concentration camps in Siberia, 140,000 fled to the West and tens of thousands more disappeared or perished in the conflict. As a result of Hitler’s policies, the majority of Baltic Germans were resettled in Germany and 90 per cent of the Jewish population was annihilated in the Holocaust. Nearly a third of the ethnic Latvian population was killed, deported or relocated and Latvia’s prosperous, multi-ethnic society was decimated. The greatest toll was among the wealthy and educated – those who had shaped Latvia’s social, economic and intellectual life following the First World War. During Soviet rule between 1944 and 1991, hundreds of thousands of Soviets were brought into Latvia, reducing the indigenous ethnic Latvian population to 50 per cent. With the restoration of Latvian independence in 1991, Latvia also re-established its original citizenship laws and policies. This enabled all former (pre-1940) citizens and their dependants to restore their citizenship, regardless of ethnicity. Since 1991 Latvia has established State-funded minority schools serving eight ethnic groups: Russian, Polish, Jewish, Ukrainian, Estonian, Lithuanian, Belarussian and Roma. These schools also serve as cultural centres. In 1991 the Latvian Government began to implement a bilingual education programme, designed to provide ethnic minorities with an opportunity to learn Latvian, as well as their native tongues. There are nearly 1.4 million native speakers of Latvian in Latvia, and 140,00 abroad. As one of 250 major languages in world, spoken by more than a million people, the Latvian language is also
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The Economy and the Business Environment
one of the oldest. It was established as a State language in order to preserve this unique cultural heritage. Nevertheless, English and Russian are widely spoken throughout Latvia, and knowledge of other languages is rapidly increasing, enabling Latvia to retain its special national identity, while moving toward fuller integration with Europe and the globalized world at large.
An ancient culture in a dynamic European setting Like other cultures, Latvians have developed traditions, customs, decorative designs and a world view that are uniquely their own, closely tied to the Northern European land and natural resources that they depended on for survival. Ironically, the period when the Latvian language and culture began to coalesce was also the period when it faced its greatest threat, for the 13th century marked the beginning of a series of foreign incursions, invasions and occupations. German, Swedish and Polish warriors and traders brought European culture to Latvia, at times threatening the existence of the Latvian culture, at times strengthening it through adversity, and eventually co-existing alongside it. Latvian culture was both preserved and manifested in folklore that displayed the collective wisdom and beliefs of the Latvians’ ancient tribal ancestors. A uniquely Latvian cultural phenomenon, folk songs or dainas, date back well over a thousand years. Rich with tradition, literature and symbolism, the dainas serve as an oral record of Latvian culture. By the 19th century, more than 1.2 million texts and 30,000 melodies were identified. In the 21st century, these songs continue to live as an essential part of Latvian contemporary holiday celebrations and social life. Latvian traditions still play a central role in the Latvian identity today. This uniquely ‘Latvian’ culture is woven through its literature, music, theatre and the visual arts. Yet, the legacy of foreign rule has also given Latvia a second, European culture. As a distinctive Latvian identity emerged during the National Awakening in the 19th century, so did an appreciation for the achievements of other cultures. Latvians enthusiastically embraced all the classical arts – literature, painting, theatre, symphonic music, architecture, opera, ballet and film. Latvia’s National Opera – the ‘White House’ of Riga – was one of the first buildings to be renovated after the restoration of independence in 1991 and is the centrepiece of a flourishing cultural life.
Latvia Today
11
Latvia’s home-grown, world class opera singers, such as Inese Galante, Sonora Vaice, Egils Silins and Elina Garance, today perform in opera houses throughout Europe. Peteris Vasks is considered one of the finest contemporary composers in the world, while Riga-born violinist Gidons Kremers and his Kremerata Baltica chamber orchestra won a Grammy in 2002. Violinist Baiba Skride took First Prize in the Queen Elizabeth International Music Competition in Brussels in 2001 and is considered one of the most outstanding young violinists in Europe. A hundred years ago Riga was known as the ‘Paris of the North’. As it enters the 21st century, Riga has blossomed as a creative centre for the arts once again. Local and visiting art exhibitions and the opera, theatre and ballet, compete with night clubs and discos that rock with jazz, blues and the latest electronic fusions of hip hop and dance music. After 10 years of independence, Riga is now called ‘The Second City that Never Sleeps’, and ‘The Hottest City in the North’. The vibrancy of cultural life in Latvia is a product of talented artists, performers and writers that honed and developed their skills in cities and regions throughout Latvia. Many continue to live and work in their home towns or rural settings, blending the influences of traditional roots with the modern, cosmopolitan influences of the nation’s capital. This spiritual desire to live and flourish as Latvians, as Europeans, and as the shapers of the 21st century, is a phenomenon that continues to shape Latvia’s multi-faceted, dynamic culture.
Links www.lda.gov.lv www.li.lv
1.2
Economic Overview Alf Vanags, BICEPS Macroeconomic overview Despite experiencing one of the largest transition recessions of the early 1990s, Latvia is now one of the transition economies’ success stories. Macroeconomic stabilization was relatively quickly established; the new Latvian currency was introduced in 1993 and since early 1994 has been pegged to the SDR (Special Drawing Rights) at the rate of 1SDR = LVL0.7997. This currency peg has withstood a number of external shocks such as the 1995 banking crisis and the 1998 Russian crisis. In the period between 1996 and 2001, the real GDP has gone up by an average of 5.7 per cent per year and in 2002 growth was 6.1 per cent. This is approximately twice the growth rate in the EU and about one and a half times faster than the EU accession countries as a whole. Inflation too was quickly overcome – Latvia was one of the first transition economies to achieve single digit inflation. Low inflation has been maintained and in recent years Latvia has had some of the lowest inflation rates in Eastern Europe with consumer price rises in the range 2–2.5 per cent. Other macroeconomic indicators are also very positive: the share of investment in GDP has persistently been in excess of 25 per cent every year since 1998; the flow of foreign direct investment (FDI) has also been steady and as of the end of 2002 the stock of FDI per capita stood at about US$1,000, placing Latvia 6th among the Eastern European candidate countries. Interest rates, which were very high in the early 1990s, have fallen sharply in recent years – average credit rates in late 2002 were down to around 7–8 per cent for both long and short term credits, compared with 15 per cent or more in the aftermath of the Russian crisis. The maturity structure of credits has also improved with the share loans for a period in excess of five years having recently exceeded the share of shortterm credits (ie for less than one year). In part this is due to the boom in mortgage lending that took off in 2002. Nevertheless, with
Economic Overview
13
total credit standing at about 30 per cent of GDP, Latvia remains a country in which, for supply or demand reasons, or perhaps both, credit lags behind the levels typically experienced in developed countries. The overall fiscal situation has been mixed. On the one hand, with the exception of 1999 when following the Russian crisis the fiscal deficit was 4.2 per cent of GDP, the budget deficit has always been well within the Maastricht criteria level of 3 per cent. In 2003 the government is aiming for a deficit of just 3 per cent. This may prove to be difficult since entry into NATO requires that defence expenditures should be at least 2 per cent of GDP. EU entry and the co-financing requirements of the Structural Funds will also put pressure on the public finances. On the other hand, government expenditures remain below 40 per cent of what is a rather small GDP per capita, so many much-needed expenditures are not financed. However, there is scope for more public borrowing – at around 15 per cent, government debt remains very low in relation to GDP, with about two thirds being external debt. Regarding the external sector, Latvia continues to run a current account deficit in the range of 7–10 per cent of GDP. This is generally regarded as rather high and from time to time it is suggested that Latvia is a potential candidate for a payments crisis. This has not yet happened – despite runs on the currency at the time of the banking crisis in 1995 and the Russian crisis in 1998. It may be that as a developing country it is natural that Latvia will run a current account deficit, ie invest more than is saved. Nevertheless, some aspects continue to be worrying – the trade balance is running at something like minus 15–20 per cent of GDP: this is covered partly by a positive balance on the services account and partly by FDI. Both are vulnerable to developments. The services trade depends on good relations with Russia and in the spring of 2003 the Russian pipeline monopoly Transneft is refusing to ship oil through the Latvian port of Ventspils. Also, in the past FDI has been very much driven by privatization and this has all but dried up. The mortgage boom has also led to a property boom in the capital Riga which has something of the appearance of a bubble.
Structure of the Latvian economy Latvia entered the 1990s with an economy geared to the all-Union production system of the USSR. Manufacturing was important, as was agriculture – at that time Latvia was the biggest producer of
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The Economy and the Business Environment
radios in the USSR and also produced minibuses, chemicals, textiles and clothing. Since independence, the structure of the economy has been radically transformed – manufacturing now represents about 15 per cent of GDP and agriculture about 4.5 per cent (although it has over 14 per cent of the employment market) while the services sector, much of which did not exist in Soviet times, now accounts for about 70 per cent of GDP. Similarly, trade has been re-oriented towards the west with more than 60 per cent of exports destined for EU countries and just 10 per cent to the CIS countries. Neighbouring Estonia and Lithuania are important trading partners receiving 14 per cent of Latvia’s exports between them. The EU, with a share of just over 50 per cent, is also Latvia’s biggest import partner, followed by the CIS with a share of about 13 per cent. Interestingly, Lithuania with a share of nearly 10 per cent is, at the country level, Latvia’s second biggest import partner (behind Germany which has a share of about 17 per cent). Within Latvia this is sometimes interpreted negatively – especially as Latvia has a negative bilateral trade balance with both Lithuania and Estonia. Sometimes this is also interpreted as a negative effect of the Baltic Free Trade Agreement. However, such opinions represent a rather nationalistic (mercantilist) misunderstanding of the role of specialization in international trade. Within manufacturing, the most important sectors are food processing (nearly 32 per cent), metal products and machinery and equipment (nearly 20 per cent), wood products (17 per cent) and textiles and clothing (12 per cent). The food processing sector is quite heavily dependent on the Russian and Baltic markets. The wood products sector has grown most since independence and wood is Latvia’s single biggest export commodity (34 per cent of exports of goods). Concerns have been voiced that wood products are ‘low value-added’ and that Latvia relies excessively on this sector. Other important export sectors are transport vehicles, metal products and engineering (21 per cent) and textiles and clothing (15 per cent): in other words about 70 per cent of Latvian exports originate in just three sectors. Imports are more diversified with metal and engineering products being the number one import sector (nearly 30 per cent). Within the services sector, trade (ie wholesale and retail trade) contributes about 19 per cent of GDP, transport storage and communications about 15 per cent and real estate just over 11 per cent. Within the transport and communications sector nearly 30 per cent
Economic Overview
15
of added value is provided by land transport (including pipeline transport) and another 35 per cent by auxiliary services. The other significant services sector is post and communications. Mobile telephone communications have developed especially rapidly in recent years. Historically, the monopoly fixed line operator Lattelekom has produced some of the highest tariffs per capita to found anywhere in Europe. Moreover, these have been fiercely defended by Lattelekom against call-back and attempts to circumvent them. However, the market was liberalized on 1 January 2003 and this, together with very active competition in the mobile sector, will result in much more competitive tariffs in the future. Financial services account for just under 5 per cent of GDP. This reflects the relatively low level of ‘monetization’ of the Latvian economy. Until recently, very few people in Latvia had bank accounts and wages were paid in cash. Even now, the shadow economy (estimated at between 13 and 17 per cent and something over 40 per cent of GDP) is a cash economy. Information technologies (IT) generated 4.6 per cent of the Latvian GDP in 2001. This is a sector on which great hopes are pinned. It is one of the sectors that has been selected for promotion as an industrial cluster and so far is the only such sector in which there is an active cluster organization. Agriculture by contrast is a dying sector. Productivity is low even by Eastern European standards, many farms are too small to be commercially viable and many farmers are middle aged or older. Participation in the Common Agricultural Policy (CAP) was seen by some optimists as a way out, but the announcement in 2002 of ‘second class membership’ of the CAP for Eastern European farmers came as a nasty shock. The future of the countryside is an emotional issue for many Latvians and perhaps a way out will come through the rural development elements of the CAP and the EU Structural Funds.
Labour markets The labour markets are the location of much of the most serious reallocation involved in Latvia’s transition to a market economy. The outcome generates a somewhat mixed picture. On the one hand women appear to be doing well – the participation of women in the Latvian labour force is slightly above the EU average, whereas for men labour force participation is 11 percentage points below the EU average. Overall the participation rate is around 59 per cent which is about five percentage points below the EU average. The low
16
The Economy and the Business Environment
participation rate of men may reflect their relative inability to adjust to the newly emerging market economy. There are also significant regional disparities, with Latgale having the lowest rate at about 53 per cent. Interestingly, the rate of part-time working by women in Latvia (nearly 12 per cent) is much lower than the EU average of more than 33 per cent. This may reflect a Soviet legacy or may simply reflect the fact that more women in Latvia are the main ‘breadwinner’ than in the West. Recent developments in unemployment have followed a cyclical pattern with unemployment rising after the Russian crisis and then declining again with the resumption of strong economic growth. In early 2003 the registered unemployment rate was nearly 8 per cent while the proportion of ‘job-seekers’, ie unemployment according to the ILO survey method, was just under 13 per cent. This represents a narrowing of the gap between ‘registered’ and ‘survey’ methods of measurement – until recently the number of ‘jobseekers’ was about twice that of the registered unemployed. There are also very large regional disparities in unemployment, with the worst hit areas being in Latgale where even registered unemployment in many places ranges between 20 and 26 per cent. Latvia has low numbers of self-employed (6 per cent) and low numbers of employers (3 per cent) in the work force. This may also be seen in the data on SMEs where the latest figures suggest that Latvia has about 18 SMEs per 1,000 of population, compared with a figure of over 50 per 1,000 inhabitants in Western Europe. This may reflect a lack of inherent entrepreneurship in the Latvian population or may also be a consequence of well-known barriers to setting up and running small enterprises. Wages in Latvia remain low. Gross monthly wages exceeded US$250 for the first time in 2001 and in 2002 had gone up to US$271 (US$195 net). This of course makes Latvia a country with some of the lowest labour costs in Eastern Europe – hourly labour costs in 2000 were just EUR2.42: only Romania and Bulgaria’s labour costs were lower. Poland for example has labour costs of nearly EUR.5 and Slovenia almost EUR9, while in Western Europe hourly labour costs are typically in excess of EUR20.
A political economy perspective Latvia applied to join the EU in October 1995 and was invited to join at the 2002 Copenhagen summit. Accession will take place in
Economic Overview
17
May 2004, assuming the September 2003 referendum is successfully negotiated. The commitment to the EU has been a major factor in securing political and policy stability in Latvia – in its absence it is possible that Latvia would have been a much less stable place. Firstly, there is the matter of the large non-Latvian minority of the population which stands at over 40 per cent and is a majority in Riga and in many other cities. Without the constraints of EU ambitions it is not impossible that nationalist elements in the Latvian elite might have succeeded in pursuing a harder line on language and other minority issues than proved possible in practice. Considerations of both EU and NATO accession have had a demonstrable impact on this question at key times. Secondly, in every election since independence the winning party has been a newly created one and often led by people not previously directly involved in politics. This strange phenomenon reflects two aspects of Latvian political life – the ‘immaturity’ of the political system and the fact that many of Latvia’s most important political parties have tended to represent certain business-specific interests rather than ideological or class interests as is more common in the West. This also shows up in surveys of corruption and the business environment in Latvia in which Latvia typically scores highly in terms of ‘state capture’, ie the ability of business interests to influence legislation in a favourable way. The EU accession process has been important in this context because by providing a ‘template’ for many important institutions and laws it has been possible to avoid a local political dogfight over these issues. Thus Latvia has been able to create a unified Financial Services Regulator ahead of the similar British one, and in the regulation of public utilities a unique unified Public Utilities Regulatory Commission covering all the major utilities under one umbrella. It has also been possible to create a Competition Council that is more ready for the EU’s competition policy changes than are many incumbent EU members. So Latvia has its positive and negative points. However the bottom line is that Latvia will enter the EU in 2004 as the EU’s poorest member state. The latest official figures from the EU suggest that Latvia has a GDP per capita at a purchasing power of 33 per cent of the EU average. Latvia will also be ranked as one of the most corrupt countries in the EU – in the 2002 Transparency International Corruption Perceptions index Latvia was ranked joint 52 (out of 102 countries), compared with Lithuania at 36 and Estonia at 29 and the lowest incumbent EU country, Greece, at 44.
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The Economy and the Business Environment
The shadow economy will continue to play an important part, despite the efforts of the New Era government to eradicate it. The question is whether all this represents a challenge or whether it will be a handicap. Latvia has two possible role models – Greece also entered the EU as its poorest member state and with a none too shining reputation. Today it is still the poorest country in the EU. On the other hand Ireland too entered the EU as its poorest member and even in 1993 was fourth poorest. Ireland too did not have the highest reputation for political integrity. Today it is the second richest EU country (after Luxembourg) and its political life has been largely transformed. Does Latvia have a real choice?
ONLINE UPDATES 18 June 2005 Economic progress and outlook (Chap. 1.2) Latvia selected indicators Latvia – Selected Indicators 2001 Change from previous year in % GDP (real) Industrial output (real) Gross fixed capital formation (real) Consumer prices (yearly average) Unemployment (yearly average) Budget balance (ESA 95, in % of GDP) in EUR mn Merchandise exports Merchandise imports Current account Current account (in % of GDP) FDI (inflow, net) Gross foreign debt (end of period) Gross foreign debt (in % of GDP) Import cover (in months) Average exchange rate: LVL/EUR Average exchange rate: LVL/USD
2002
8.0 6.9 11.4 2.5 13.1 –2.0
6.4 5.8 13.0 1.9 12.0 –2.3
2,502 3,993 –699 –7.6 126 6,321 68.9 3.3 0.56 0.63
2,693 4,255 –653 –6.7 265 7,187 73.6 3.1 0.58 0.62
2003 7.5 6.5 10.9 2.9 10.6 –1.6
2004
2005
8.5 6.0 16.3 6.2 10.4 –1.1
Forecast 7.0 6.5 5.1 5.8 12.5 11.5 4.7 3.1 10.0 9.5 –1.5 –1.4
2,806 3,366 3,700 4,577 5,581 6,190 –808 –1,353 –1,210 –8.2 –12.3 –10.3 235 434 391 7,850 10,219 11,670 80.0 93.2 99.5 2.7 2.7 2.6 0.64 0.67 0.70 0.57 0.54 0.53
2006
4,130 6,970 –1,140 –8.8 356 13,520 104.9 2.5 0.70 0.52
Sources: Bank Austria Creditanstalt Economics Department, Latvijas Banka, Latvijas Statistika
On 12 March 2005, after 100 days in office, the coalition government’s prime minister, Aigars Kalvitis, strengthened its position in the local Latvian elections, which attracted a 52.9 per cent national turnout. In the capital, Riga, the government parties
S1
succeeded in gaining power from the ruling centre-left parties. The political situation is now judged stable, but there remains a risk of realignment among the coalition parties. Latvia’s real GDP growth of 8.5 per cent in 2004 was the highest in the EU and was driven by above-average rates of growth in the construction industry (13 per cent) and the service sector (8.7 per cent), notably in the hotel and restaurant industry, transport and trade. Gross capital formation and private consumption were the main drivers of growth on the expenditure side, both stimulated by 7 per cent rapid credit growth. Unless the restrictive monetary measures taken in 2004 begin to have an effect, domestic demand will continue to power growth. However, export opportunities have been somewhat blunted by Asian competition (notably in textiles) in Latvia’s EU markets. GDP growth is expected to slow to 7 per cent for 2005 and taper off further to 6.5 per cent in 2006. Nevertheless, the external trade account is forecast to remain in surplus, rising to nearly EUR2.5 billion in 2005 and EUR2.8 billion in 2006. Accordingly, the current account deficit, as a percentage of GDP, is expected to fall back from a peak of 12.3 per cent in 2004 to 10.3 per cent in 2005 and 8.8 per cent in 2006. Import demand continues to be driven by faster growth in real wages and rising employment in Latvia’s buoyant economy. Foreign direct investment (FDI) remains robust with net inflow climbing strongly to EUR434 million in 2004 and forecast to be held in the range of EUR350—400 million for the period 2005/ 2006. However, the economy is highly geared with foreign debt at EUR7.8 billion at the end of 2004 (93 per cent of GDP) and forecast to climb to EUR13.5 billion (105 per cent of GDP) at the end of 2006. The budget balance deficit as a percentage of GDP remains well under control; although forecast to rise from 1.1 per cent (2004) to 1.5 per cent in 2005, it is expected to ease off to 1.54 per cent in 2006. Latvia is far from a full employment economy with unemployment expected to remain at around 10 per cent, but there is some risk of overheating if inflation fails to decline from its 2004 level of 6.2 per cent as currently foreshadowed. Pegging the lat to the euro on EU accession was followed on 30th April 2005 by entry into EMSII, the waiting room for joining the eurozone. Entry into the eurozone is planned for 2008, provided that all the criteria are satisfied. Given the current unease surrounding the euro, there may be a question mark over the entry schedule. April 2005, Bank Austria Creditanstalt Report 2 - 2005 and the Editor
1.3
Latvia and the European Union Alf Vanags, BICEPS Introduction It is a fact, perhaps not a welcome one, that when Latvia joins the European Union in 2004, it will be competing with Lithuania for the place of being the poorest country in the EU. According to the 2002 Regular Report on the Candidate Countries, Latvia’s GDP per capita evaluated at purchasing power parity (PPP) – that is taking into account that countries have different price levels – was 33 per cent of the EU average in 2001. Lithuania’s figure stood at 38 per cent and Estonia’s at 42 per cent. In fact the three Baltic states will be the three poorest countries in the Union and Latvia itself will contain the three poorest individual regions: Latgale, Zemgsale and Vidzeme. All of this is despite experiencing average annual growth rates in excess of 5 per cent over the last five years or so. This is perhaps a bleak starting point for Latvia’s membership of the European club. The challenge for Latvia is to confront and overcome this. It can be done – Ireland also entered the European Community as its poorest member, and even 10 years ago was the fourth poorest but it is now the second richest after Luxembourg. Finland too has made remarkable progress. Entry into the European Union can be seen in a number of different ways. One is to think of entry as simply a passport to the EU single market and to eligibility for EU structural funds. The other is to consider EU membership as an opportunity to effect a transformation of Latvia’s society and economy. The net impact of the trade and fiscal transfer effects can be thought of as the upfront impact of accession and its magnitude is now more or less understood. The longer term effects are contingent on Latvia following suitable policies and are accordingly much less predictable.
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The Economy and the Business Environment
The upfront impact of accession If we look at accession just as entry into the single market, then we have to ask: how much of these benefits has Latvia already received? The answer is probably quite a lot. The very first phase of the accession process was the Association agreement signed in 1995, which committed Latvia and the EU to the creation of mutual free trade in industrial products by 1998. This has been achieved and Latvian trade has been significantly re-oriented towards the EU. This has certainly brought Latvia noticeable benefits – estimates made at BICEPS using a computable general equilibrium (CGE) model of the Latvian economy suggest that these benefits have been worth about 1 per cent of Latvia’s GDP. Important, but not a radical transformation of the society and economy. Accession itself will not lead to further tariff reductions except in agriculture, where tariffs and import quotas will be replaced by the mechanisms of the common agricultural policy (CAP). However, market access for Latvia and the other accession countries will be improved through another route – the reduction of so-called ‘real trade costs’. These sum up all the administrative costs of either exporting to or importing from the EU. These can be quite substantial and have been estimated to be around 5 per cent or more of the product price. With accession, these will largely disappear since selling a Latvian product in, say, Italy or Hungary will legally speaking be the same as selling it in Latvia. Simulation using the CGE model of the Latvian economy suggests that the benefits of reduced real trade costs will amount to about 0.8 per cent of the Latvian GDP, smaller than the effect of tariff reductions but still noticeable. It should be added that Latvian exporters will have to work to take advantage of this easier market access and there are some fears in Latvia that enterprises will find it difficult to compete in the EU single market. When Latvia joins the EU it is obliged to adopt the EU’s common external tariff, which is different from Latvia’s – some tariffs will go down and others up. Where tariffs go up this may create trade diversion, ie a switch in the source of supply from a lower cost source to a higher cost one. The principal items subject to trade diversion are heavy duty trucks and mineral products from Russia. Using the CGE model it has been calculated that trade diversion will generate a cost of minus 0.13 per cent of GDP. This is small but not totally negligible. Other negative trade effects will come from the fact that Latvia will also be obliged to adopt the EU contingent protection regime ie anti-dumping. The effect of this is hard to
Latvia and the European Union
21
quantify, but as a small country Latvia is unlikely to be the host of a major EU producer that benefits from an anti-dumping measure. So contingent protection is likely to have an asymmetric effect for the Latvian economy – consumers will lose but producers are unlikely to benefit. With respect to agriculture, it is hard to predict what the net effect of accession will be on Latvia. When the Commission announced its proposals for the participation of the candidate countries in the CAP it caused an uproar in Latvia with talk of ‘second class members’. However, when the Commission came up with actual figures it was clear that Latvian farmers will on average be better off in the CAP than out of it even though they have to pass through a transitional period for direct payments starting with 25 per cent of the EU incumbent level in 2004 and achieving equal status only in 2013. This is especially true for the larger commercial farmers. In Latvia there are also many thousands of small, so-called semi-subsistence farmers who will fall outside the CAP system of payments and even for them the Commission has come up with one-off payments of R1,000 over a period of five years. So on balance there is something for everyone and in any case agriculture makes up just over 4 per cent of the GDP even though it has about 14 per cent of employment. In addition to the payments associated with the CAP the rural economy in Latvia will be supported by the Rural Development Fund, part of the Structural Funds, and here the aim will be to restructure agriculture away from its traditional activities and even away from agriculture itself. Indeed the structural and cohesion funds will by themselves have a significant effect. In the first programming period which runs from 2004 to 2006 a total of just over R1,000 million will be available for Latvia – this is three to five times more than has been available in the form of pre-accession funds. After taking into account Latvia’s contribution to the EU budget the net fiscal transfer will amount of just over 3 per cent of the Latvian GDP. Adding all this up it is likely that Latvia stands to gain about 5 per cent of GDP from accession, although perhaps more than 1 per cent is already being enjoyed through the free trade area in manufacture. This is sizable but is slightly less than the annual increment to GDP that economic growth generated in recent years. So this leads to a consideration of the impact of accession on the longer term prospects of the Latvian economy.
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The Economy and the Business Environment
The long term challenge Average gross wages per month in Latvia are less than R280. This sends two important signals to agents in the Latvian and European economy. One is that labour in Latvia is cheap. And, indeed, so it is – unit labour costs in Latvia are nearly one tenth of those in Western Europe. The other signal is that living standards remain low as compared with the West. These two signals suggest two different kinds of ‘convergence mechanisms’ – one, which might be thought of as the ‘benign scenario’, is that capital will be attracted to Latvia and this will raise the productivity of the Latvian economy. The other, much less welcome in both Latvia and the incumbent EU, is that the sharp differences in real incomes will induce large flows of migrant workers as soon as this is allowed, as it surely will be long before incomes have converged. This is something of a nightmare scenario for Latvia which already suffers from a demographic crisis. Two important policy areas will decide the mix of long term outcomes – one concerns the development of the environment for investment in general and FDI in particular and the other concerns how the structural funds will be used.
The prospects for investment and FDI Foreign direct investment (FDI) brings both capital and know how and has been at the root of the Irish ‘miracle’. What are the prospects for Latvia? At present, Latvia, with an accumulated FDI of about US$1,000 per head is roughly in the middle of the candidate country league table but its share of investment as a percentage of GDP has been among the highest. Much of the existing FDI has been of the horizontal type, ie by ‘multi-plant’ foreign enterprises seeking to reproduce another ‘plant’ for the Latvian market. Typical examples are financial services, telecoms, retailing and hotels. Rather small amounts of FDI have been of the vertical type, ie where a foreign enterprise seeks to locate different parts of a production process in different locations depending on costs. Moreover very few investments in Latvia have been of the ‘greenfield’ type; rather they have taken the form of purchase of existing enterprises, often in the privatization process. How will accession affect the investment environment? Generally, the deeper integration associated with accession is likely to increase FDI both from within the EU and outside. Thus earlier enlargements saw an increase in intra-EU investment and it is well known that the creation of regional trade areas causes an increase
Latvia and the European Union
23
in FDI from outside the area. Thus in the Latvian case full membership of the EU single market together with language and cultural linkages will make Latvia a potential host for investments from Russia aimed at the EU market. In the case of a transition country such as Latvia another effect can be expected to operate – namely the completion of the institutional framework for a market economy and its effect on the confidence of investors. Evidence on both interest rates and the country ratings of agencies such as Moody’s and Standard & Poor’s over the last few years point to the fact the risk premium associated with investing in Latvia has been falling. Full EU accession can be expected to further reduce this risk premium and boost investment from both abroad and within. Of course, other factors also have to be favourable. Thus although Spain experienced a major post-accession boom almost at once, in Ireland it took some time for a boom to emerge, while in Greece the economy worsened before it improved. Policies to create the right environment will be important. Here Latvia has recognized that there are many unnecessary administrative barriers to both domestic and foreign investment and it seems that there may be a genuine attempt under way to do something. However, the structural funds also represent an important opportunity to change the business environment in Latvia.
Using the structural funds The use of structural funds, which will become available for Latvia in 2004, is often cited as a key component of the Irish economic success. Is there a lesson to be learned there for Latvia? The structural funds may be used to fund the following kinds of activities: • Infrastructure; • Development of human resources; • Business environment. In all cases so far, infrastructure has taken the largest share of structural funds. This will also be the case in Latvia and quite rightly so, since, for example, there are still many people in small towns who are not connected to mains sewerage, and Latvia has no road that can be categorized as a motorway. However, the proportions taken by human resource development and support for the business environment can be very different, and Ireland especially
24
The Economy and the Business Environment
fought to have a particularly large share devoted to human resource development, whereas Greece has tended to lean the other way. Human resource development, insofar as it creates human capital, leaves something valuable behind once the structural funds expenditure ceases, whereas support for the business environment is often a mask for subsidies to enterprises and often leaves nothing once the subsidy is removed. Indeed, the evidence is that business supported in such a way will move to the next subsidized location once the current subsidy ceases. Moreover, human resource development complements FDI. A higher-skilled workforce will attract more and better FDI. This is certainly also the Irish experience. Which way is Latvia leaning? The current Single Programming Document (SPD), which is the national ‘business plan’ for the use of the structural funds seems to lean more in the direction of the Greek rather than the Irish example, but it is early days yet.
Will Latvia meet the challenge of the EU? There seems little doubt that Latvia will prosper in the EU in absolute terms, just as both Greece and Ireland have prospered. But what will happen in relative terms? Will Latvia follow Ireland and leapfrog countries that are currently richer or will it follow Greece and remain at the foot of the table? Prediction is hard if not impossible. However, two important conditions, both indirectly connected with the structural funds, have to be satisfied if the Irish example is to be the model. Firstly, there is the attitude to the funds. Many regard it as a handout from Brussels, something to be ‘divvied’ up, ie transferred from the richer to the poorer regions of the Union. In fact the funds are intended as a mechanism for the poorer regions of the EU to help themselves develop. This is not something that Latvia has yet learned. The other condition concerns the well-known perception that Latvia is a corrupt country, especially in the area of ‘state capture’ – ie political parties represent business interests and political decisions often reflect the preferences of the parties’ business backers. Ireland too was once regarded as having a corrupt political elite, but EU membership and especially participation in the structural funds has created a culture of accountability and transparency that did not exist before. If EU membership can do the same for Latvia then it will provide the key ingredient to harnessing the full potential of the Latvian people.
1.4
Administrative Barriers to Investment in Latvia Jacqueline Coolidge, Foreign Investment Advisory Service1 and Lars Grava, Director, Synergy Consulting LLC, Riga While Latvia has been a strong performer in terms of attracting foreign direct investment and encouraging domestic investment since the mid-1990s, the strength of the reform programme since 1998 can be credited with enhancing the country’s performance. Inflows of FDI into Latvia have been maintained at about 5 per cent of GDP. Gross fixed capital formation for Latvia has held steady at about 25 per cent of GDP over the past three years. In 2000 the Latvian gross domestic product increased by 6.8 per cent and in 2001 by 7.7 per cent. These figures compare favourably with other transition and emerging market economies, and have been sustained for several years. According to the Ministry of Economy, consumer price inflation in Latvia in recent years is close to the level of inflation in developed economies and is among the lowest in Central and Eastern Europe. In this light, it is clear that overall policy reforms have been proceeding well. However, while policy and legal reforms, as part of the EU accession process, are viewed as generally sound, there are indications that practical implementation of new policies has not always yielded a positive impact on the business community, who often still struggle with cumbersome and opaque bureaucratic procedures that add unnecessarily to costs and risks. The government of Latvia wants to keep its reform programme carefully targeted to the current needs of the business community and to encourage new investment.
1
The Foreign Investment Advisory Service is a joint facility of the International Finance Corporation and the World Bank. The views expressed in this chapter are entirely those of the author and do not necessarily represent the views of the World Bank Group.
26
The Economy and the Business Environment
One of Latvia’s most noteworthy achievements over the past few years in improving the business environment was the establishment of a structured dialogue mechanism between representatives of the public and private sectors to identify problems, discuss solutions, prepare an Action Plan to improve the business environment and subsequently review progress made in implementing reform. In fact, the European Commission Enterprise Directorate General has cited this process in Latvia as a ‘CC-BEST’ (Candidate Country – Business Environment Simplification Taskforce) practice that could usefully be shared with other EU candidate countries. Structured dialogue for reducing administrative barriers and improving the business environment began with a Steering Committee composed of senior government technocrats, a small number of (mostly foreign) business associations as dialogue partners and an ad hoc secretariat at the Latvian Development Agency. The dialogue mechanism is now being expanded to other Latvian business associations, and the Action Plan has been subsequently revised and updated on a regular basis. To date, 90 out of 100 suggested measures that were included in the Action Plan have been successfully implemented. Key developments since 1999 have taken place in the following areas: • Many procedures have been simplified and there has been a reduction in the number of steps and the time taken, for example, in enterprise and tax registration, immigration and customs. Latvia currently has one of the most efficient regimes for business registration in the world, in terms of the relatively low number of steps, costs and time requirements; • Government institutions are increasing their level of co-ordination to improve efficiency in areas like border crossings and customs, immigration and inspections; • There is improved information available to the public (including on the Internet) on various procedures, such as enterprise registration, inspections, customs and valuation of real estate; • Administrative or petty corruption seems to have receded (although there are indications that other, more sophisticated forms of corruption are still problematic); • There is improved dialogue between the government and the business community in many areas of concern to the business community.
Administrative Barriers to Investment in Latvia
27
In 2002, the Foreign Investment Advisory Service (FIAS) and the Latvian Development Agency (LDA) completed a business survey as part of an assessment of administrative procedures,2 which included a list of obstacles rated by the business community. These included both ‘administrative barriers’ and other issues of concern in the business environment. Figure 1.4.1 shows a ranking of obstacles first by ‘prevalence’ (how many businesses cited it as an obstacle) and by ‘severity’ (how severe an obstacle it is for these businesses). On the basis of the self-assessment (including the business survey) and comparison with other emerging-market economies, it appears that the main remaining problem areas include the following: • Numerous complaints and difficulties in the areas of tax and customs administration; • Lingering problems at the municipal level, including: – abuse of municipal trade permits; – municipal police inspections; – construction approvals. • Administrative corruption in a few key problem areas including: – construction; – customs; – municipal police. • The persisting perception of an un-level playing field between those enterprises that operate lawfully and those functioning wholly or partially in the shadow economy, or with the benefit of ‘good connections’ with government officials; • The time-consuming registration of the transfer of real estate rights; • Recent changes in notarization requirements that seem to increase the time and costs spent in fulfilling various administrative procedures. Since the self-assessment exercise, the Action Plan has been revised in consultation with the stakeholders and submitted to the Government for adoption and it addresses a number of these concerns, as detailed below.
Need for further reform of tax and customs The business survey conducted for the self-assessment exercise showed clearly that high tax rates and burdensome tax administration 2 Self Assessment of Administrative Procedures for Doing Business in Latvia, 2003. www.lda.gov.lv/eng/inner/aboutagency/fias
28
The Economy and the Business Environment 0
20
40
Tax rates
73
Instability and unpredictability of changes in laws and regulations
73
Tax regulations/administration
60
80
2.7 2.6 2.6
54
Cost of infrastructure services
45
Competition with grey/shadow economy
45
Inflation
39
Corruption in public sector
35
Personal and property safety
32
Favouritism/cronyism
29
Obtaining business (sector) licensing
28
Anti-competitive practices
26
Access to construction permits
21
Municipal police inspections
18
Access to land
18
Labour legislation and regulations Customs legislation and regulations
17
Inspections of premises
16
2.2 2.6 2.1 2.5 2.4 2.3 2.1 2.5 2.5 2.1 2.6 2.1
18
Standards for product and service certification Registering process of a new business
14
Functioning of the judiciary
13
Access to infrastructure
13
2.3 2.0 2.1
16 1.9
2.5 2.4
Intellectual property rights regulations 11
2.5
Organized crime/mafia 11 Environmental legislation and regulations 11 Expatriate employment regulations 5 Foreign exchange legislation and regulations 5 1.0 Prevalence of %
100
2.2 2.0 2.6 1.8 2.0
3.0
Severity (1-4)
Figure 1.4.1 Regulating spheres – business obstacles Base for ‘Prevalence’: all companies interviewed, N = 541; answers ‘Not an obstacle’ and ‘Hard to say’ not shown. Base for ‘Severity’: those who admitted it was an obstacle, excluding ‘Hard to say/DK’. Mean on scale from 1 (Minor) to 4 (Very Severe).
Administrative Barriers to Investment in Latvia
29
are at the top of the list of concerns for businesses in Latvia. On the one hand, investors should take these findings in context: complaints about taxes are common in most other countries.3 On the other hand, there are some clear areas of concern within the tax and customs administration in Latvia that need to be addressed in order to yield significant improvements in the business environment. Besides tax rates, another issue of concern to businesses is tax penalties, both in terms of the proportion of respondents selecting this as a problem and in terms of their severity. Many businesses and professional accountants agree that severe penalties are applied to firms who have made minor technical errors, while other firms escape the attention of the tax authorities altogether. This is a problem that has been raised repeatedly over the last several years, but little progress has been made. The government has now committed itself to undertake a detailed review and where possible, apply more flexible standards for tax penalties as used in various EU Member States. Another problem identified by enterprises responding to the survey is the frequency of changes in tax rules and rates, with inadequate advance communication or explanation from the State Revenue Service. A solution being considered by government is consolidating the revisions and introducing them on a regular, predictable basis. Representatives of the business community continue to urge the government to better define the legal validity of advice or opinions provided by the State Revenue Service. Customs administration has proven to be a constructive dialogue partner for round-table discussions to identify and resolve systemic problems, and has made considerable progress with reforms. Nevertheless, the self-assessment exercise found significant areas in need of further improvement, which should be considered high priority given the importance of trade and transit to the Latvian economy. These include lingering problems with corruption and delays that hold Latvia back from its potential role as a key hub in international transport in the Baltics and northern Europe more generally.
Administrative barriers at the municipal level of government While the central government has been working systematically over several years to remove administrative barriers, efforts at the 3
In fact, the 2003 Forbes ‘Tax Misery Index’ ranks the tax burden in Latvia relatively favorably, especially compared to EU Member and Accession states.
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The Economy and the Business Environment
municipal level have been less uniform. The business survey carried out as part of the self-assessment clearly shows several lingering problems at the municipal level of government, including: • Inappropriate and in some cases illegal requirements for businesses to obtain a municipal trade permit; • Evidence of abusive and corrupt behaviour on the part of some municipal police; • Evidence of corruption and mismanagement in the construction approval process at the municipal level.
Municipal trade permits There are problems relating to the municipal trade permits, where unclear legislation and its haphazard application is often allowing the municipalities to overstep their mandates and sometimes even require that any enterprise operating in a given municipal territory receive such a permit. Not only is this often a burdensome requirement, with redundant requests for approvals and documentation, but very often the issuance of municipal trade permits is not even legal. The government has recognized that the existing practice of issuing municipal trade permits actually fills a gap in information on businesses operating on a municipal territory, so efforts are underway to improve the transfer of information between the Enterprise Register and the municipalities, rather than placing the burden on the enterprise itself.
Municipal police The business survey yielded two clear categories of evidence of problems associated with the municipal police. First, they are ranked among the highest of categories of public servants in the incidence of bribery, and second, they are ranked among the lowest of agencies within the public sector in terms of ‘quality of service’. The municipal police have an unclear and often overreaching mandate and poor co-ordination with other institutions. The municipal police are reported to often engage in inspections-type activities, but without the mandate to do so. This can not only be damaging to business activities, it may also lead to opportunities for corruption. After initial interest by both Parliament and the Riga City Police in addressing this issue, the momentum for reform has apparently diminished.
Administrative Barriers to Investment in Latvia
31
Construction Another significant problem at the municipal level, according to businesses, continues to be the construction permit process, including long waits, unclear rules and relatively high incidence of corruption. The construction system is generally characterized by a lack of clear guidelines from national legislation and a lack of adherence to these norms in the municipalities. One solution that is long overdue is the preparation of detailed territorial plans for the cities. Generally, there is little concerted effort to streamline procedures requiring the input of many different state and municipal institutions, as well as a lack of information on the actual fees levied by the different institutions. The government has once again committed itself to attempt to consolidate this information on fees, but the broader problem will require a more concerted and systematic solution than has been currently applied. There is also a need for legislative reform, including a review of the General Construction Regulations with the aim of shortening the period of time needed for receiving acceptance of the completion of building and clearly specifying all the steps of the construction approval process. Riga is the most important location for construction activity in Latvia, so it is especially important that Riga attempts to resolve those problems that may be more acute there than elsewhere. In many cases, competition between local jurisdictions to attract investment will often provide a powerful incentive for local-level reforms. However, in the case of Latvia, where the size of Riga relative to other municipalities (including the size of the market, the labour pool and the strong base of infrastructure) is very high, such competition may have limited influence.
Continuing efforts to deter corruption There is considerable evidence that Latvia’s efforts to combat corruption have been having a beneficial effect: for example, in the Transparency International Corruption Perceptions Index, Latvia moved from 59th place in 2001 to 52nd in 2002. However, the government of Latvia believes the overall level is still too high, particularly since Estonia is only ranked at 29 and Lithuania at 36. Anecdotal evidence and focus groups convened by LDA and FIAS suggest that while petty administrative corruption has diminished,
32
The Economy and the Business Environment
related problems continue, such as complex financial transactions for tax avoidance or for reward of agreed bureaucratic decisions, cronyism, forcing an enterprise to accept an unwanted partner or employee or make an unforeseen investment, the existence of ‘roofs’, even relying on an intermediary like a lawyer, contractor or freight forwarder to pay bribes. Meanwhile, the results of the LDA/FIAS business survey suggest that corruption in the context of administrative procedures (petty corruption) is at a relatively low level. About 35 per cent of survey respondents cited corruption as an ‘obstacle’ to doing business in Latvia, with an average rating of 2.5 on a scale of 1–4 (where 4 is extremely severe). A question regarding bribes and payment of gifts was asked for each of the key administrative procedures that entrepreneurs undertook and the results include a ranking that indicate that most corruption-prone procedures include: • • • •
Construction approvals; Customs; Municipal police inspections; Change of classification of property usage.
Due to various reasons, the business survey may underreport the overall incidence of corruption, and FIAS considers the survey results to be a minimum estimate of the incidence of bribery. Nevertheless, given the size and structure of the survey, FIAS is confident that the relative ranking of agencies regarding corruption is reasonably accurate. The Anti-Corruption Bureau has expressed interest in working with LDA to measure businesses’ perceptions of corruption in various agencies by undertaking regular surveys to determine changes in the rankings.
Notarization Businesses have stated that notarization requirements are not especially expensive, but they are time-consuming and burdensome. The benefits of notarization for a given document should be weighed against the costs in terms of time and money spent by the business community in receiving such notarization. In part due to the observations of the self-assessment exercise and the ensuing discussions, Parliament is considering reforming the notary establishment by increasing the number of members. At the
Administrative Barriers to Investment in Latvia
33
same time, work is ongoing to identify and reduce the number of documents requiring notarization.
Other themes and issues arising from the self-assessment Interaction between government institutions and enterprises There is still a low level of communication by institutions with enterprises, both in terms of communicating information on requirements to enterprises as well as in terms of seeking feedback or input from them. An important tool to level the playing field between enterprises is provision of equal access to information on procedures, to remove the excuse of many bureaucrats that most businesses ‘don’t understand the proper procedures’. Examples of good provision of information to the business community include: • Enterprise registration (which has a website www.ur.gov.lv and a number of brochures); • Customs; • Department of Citizenship and Migration Affairs. There are also few examples of government institutions seeking active feedback from enterprises. The government has recognized the need to disseminate best practices existing within its institutions and the State Chancellery has been mandated to create, disseminate and update such a database.
Compliance rather than enforcement Government institutions cannot spend their time enforcing rules by controlling all aspects of an enterprise’s application and operations, but enterprises report they are very often confronted with an a priori assumption that they are not in compliance with rules governing tax, health and safety etc, and that the burden of proof is on businesses to satisfy officials that they are in compliance. An increasing amount of these government/business interactions will need to be based on warranties and representations by the enterprise, but also taking into account the principles of risk assessment, self-certification and the ‘silence is consent’ principle.
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The Economy and the Business Environment
One effort to tackle this broad issue is an agreement between the tax administation and the business community to support industry-based initiatives to ensure compliance among sector businesses, particularly in traditionally problematic sectors such as construction and wood-processing.
Validity of electronic documentation and signatures Communication and sharing of information among government institutions is increasingly dependent on the electronic exchange of information to avoid unnecessary delays. This would improve procedures such as registration of enterprises; submission of customs declarations; tax reporting, filing and payment; receipt of various licences and permits and receipt of construction permits. After some delay, the government has undertaken to determine which services should be made available electronically. Nevertheless, in order to achieve a viable electronic environment, a prerequisite is getting standard procedures in place and ensuring that they work smoothly.
Conclusion Latvia has made great strides in improving its investment climate and preparing for accession to the EU market. Competition within the EU market will be fierce, and Latvia still has some way to go to improve administrative efficiency and reduce corruption, especially in critical areas such as customs and construction. Another focus will need to be on improving and standardizing public administration at the level of the local self-governments, a problem shared by many EU accession countries.
1.5
Investor Incentives Latvian Development Agency In order to attract foreign investment and ensure a businessfriendly investment climate, Latvia has developed a favourable legislative regime. This covers areas of particular interest to the foreign investor, including national treatment of foreign investors, tax benefits, acquisition and utilization of real estate, favourable customs procedures, access to Special Economic Zones and free ports and improved regulations regarding visas and work permits. Latvia is a party to the Convention of 18 March 1965 on Arbitration on Investment Disputes between Countries and Citizens of Other States, ratified 19 June 1997, and the New York Convention of 10 June 1958 on Recognition and Execution of Decisions of the International Arbitration (effective from 13 July 1992).
Foreign direct investment Foreign direct investment is long-term investment in the equity capital (charter fund) of a company engaging in entrepreneurial activity in the Republic of Latvia. Latvia has adopted various laws to promote and protect foreign direct investment and to encourage the inflow of foreign capital into Latvia. The liberal Law on Foreign Investment (adopted 5 November 1991 and subsequently amended) provides that national treatment is to be granted to foreign investors, meaning that foreign investors have the same rights and duties as natural and legal persons of Latvia. For the most part, ownership in various industries is unrestricted by Latvian law. A foreign enterprise may also be the sole founder of a Latvianregistered enterprise, such as a limited liability company, joint stock company or representative office. In addition to national treatment and liberal ownership requirements, the Law on Foreign Investment grants a variety of other incentives for foreign investors:
36
The Economy and the Business Environment
• If subsequent Latvian laws worsen the legal investment conditions pursuant to which the investment has been made, those favourable laws that were in effect at the time of the investment apply for 10 years from the date of the investment (there are some exceptions to this rule, including amendments to competition laws and, in limited cases, the taxation system); • Foreign investors may freely import and export capital with no permits required, namely they may: – repatriate their profits, provided all applicable taxes have been paid; – repatriate their investment, provided all obligations to creditors have been settled; • The tax law permits substantial depreciation rates on fixed assets and allows losses to be transferred from year to year within a five year period.
Customs procedures and duties Due to Latvia’s status as an important link between East and West, the government has placed great emphasis on easing customs procedures. Under the Customs Law the following customs procedures are available: release for free circulation; temporary import or export; customs warehousing; import to a duty-free shop; inward processing; export; outward processing; transit etc. Customs duty is not applied to vehicles engaged in international transport, transfer of Latvian and foreign currency and securities, goods in transit through Latvia, goods imported into customs warehouses or inland customs zones, goods exported from customs warehouses or inland customs zones, foreign investment of fixed assets, mass media, import of non-commercial personal goods or property (up to a value of LVL300) etc. Some imports are exempt from VAT – for example, fixed asset investment for manufacturing (provided the importer is a registered VAT payer and the import of the asset does not threaten Latvian competitiveness) technical assistance imported as a donation etc. No VAT or custom duties are imposed on the Latvian border for the following customs procedures: • Inward processing; • Temporary import; • Inward processing under customs control;
Investor Incentives
37
• Customs warehousing; • Transit.
Tax related incentives Corporate income tax The rate of the corporate income tax as per the Law on Corporate Income Tax is 19 per cent but will be reduced to 15 per cent by 2004 (exclusive rates are applicable for dividends, use of copyrights and neighbouring rights etc). Companies involved in supported investment projects can benefit from a corporate income tax holiday equal to 40 per cent of the amount invested. The qualifying conditions for this tax reduction are as follows: the investment project must have been approved by the Cabinet of Ministers, the amount of the project must exceed LVL10 million and the investments must be made within a three year period. Depreciation of fixed assets as per the Law on Corporate Income Tax is performed in accordance with the double declining method – applying the depreciation rates shown in Table 1.5.1 for the set categories of fixed assets. Table 1.5.1 Depreciation rates for set categories of fixed assets Category
Depreciation rate Type of fixed assets
1 2
10% 30%
3
70%
4
40%
5
15%
Buildings; construction Railway equipment and technological devices; sea and river transport means; marine and port technological devices; power industry devices Hardware and related equipment, including printers, information systems, computer programs and data compiling devices; communication devices, copiers and related equipment Other fixed assets, excluding those stated below Oil research and minefield platforms with devices ensuring their functioning (located on the said platforms); oil research ships
38
The Economy and the Business Environment
Enterprises established in specially supported regions may apply an additional rate for the depreciation of fixed assets used in related entrepreneurial activities and obtained within the term of the status granted to the relevant region. Prior to calculation of the total depreciation rate applicable to the set category of fixed assets, their value is increased by multiplying with the following coefficients: • • • •
fixed assets of 1st category – 1.5; fixed assets of 2nd category – 1.3; fixed assets of 3rd category – 1.8; fixed assets of 4th category – 2.
Companies producing hi-tech products and hardware and software products are granted a 30 per cent reduction of their corporate income tax. This tax break is applicable in those cases where 75 per cent of a company’s output consists of the above products and the company has ISO 9000, ISO 9001 or ISO 9002, or GMP certification. In order to support small and medium-sized enterprises, 20 per cent tax reduction of the calculated corporate tax is granted to small and medium sized companies, in accordance with the following criteria: • the book value of the company’s fixed assets does not exceed LVL70,000 (approx. US$ 118,500); • net turnover does not exceed LVL200,000 (approximately US$ 339,000); • the company does not employ more than an average of 25 employees during the taxation period. Expenses for research and development (including those connected with the technical documentation of unimplemented projects, if the value of such projects does not form part of the fixed assets), which are connected with the entrepreneurial activities of the tax payer, are written off in the year accumulated.
Real estate tax The Law on Real Estate Tax reduces the tax on land, building and constructions to 1.5 per cent of net book values as of January 2000. The law provides for real estate tax to be levied at a flat rate of 1 per cent of the cadastral value as of 1 January 2004.
Social insurance contributions The policy for mandatory social insurance contribution payments provides a gradual reduction of mandatory social insurance
Investor Incentives
39
contributions. From 1 January 2003, the employer must withhold social contribution payments on a monthly basis at a rate of 24 per cent, the total tax payable is 33 per cent (compared with 35 per cent in 2002), so 9 per cent must be paid from the employee’s payroll. The State Employment Service funds 100 per cent of retraining costs of the unemployed for occupations chosen by the employer.
Free zones: free ports and Special Economic Zones There are currently four free zones in Latvia: the Ventspils Freeport, the Riga Freeport, the Liepaja Special Economic Zone (including the port of Liepaja) and the Rezekne Special Economic Zone. The benefits of Latvian customs free zones include: • 0 per cent VAT for most goods and services provided in the free zones, including construction services; • excise tax and customs duty exemption on import into free zones from foreign countries and export abroad; • storage of goods in the free zone for an unlimited period; • any industrial, commercial and service activity is permitted, provided such activity is in compliance with the law and customs regulations etc. The Special Economic Zones are designed to develop and promote trade, industry, shipping and air transport, as well as the transit of goods via Latvia. The Liepaja and Rezekne Special Economic Zones enjoy not only free zone status, but also grant considerable tax incentives (in addition to the benefits listed above) for companies registered with the SEZ authorities, such as: • 80–100 per cent rebate on property and real estate taxes; • up to 100 per cent depreciation rates applying the double-declining method for all types of fixed assets (in certain instances); • 10 year carry forward of losses; • 80 per cent rebate on corporate income tax applicable to income derived within the zone; • 0 per cent VAT on most goods and services supplied in the free zones, including construction services etc. These incentives are available for 20 years to duly registered companies that sell no more than 20 per cent of their industrial
40
The Economy and the Business Environment
output during a given year within Latvia. Both the Liepaja and Rezekne Special Economic Zones have been established for a period of 20 years, from 1997 to 2017 (subject to extension). If subsequent Latvian legislation worsens the tax incentives originally granted to a company registered with either Special Economic Zone, those favourable laws that were in effect at the time of the company’s registration shall continue to be applied to the company.
International commitments and the World Trade Organization Latvia has concluded agreements on mutual promotion and protection of investments with 35 countries, including Canada, Germany, Denmark, Belgium, the Netherlands, Italy, Great Britain, Spain, Switzerland and Norway, and with the USA on trade relations and intellectual property rights protection. International agreements to prevent double taxation and non payment of taxes are effective with 24 countries, including Denmark, France, Italy, Ireland, Great Britain, the Netherlands, Finland, Sweden, Norway, Germany, Canada and the USA. Since its declaration of independence on 4 May 1990, Latvia has become party to over 100 multilateral agreements and conventions, such as the Europe Agreement establishing an association between the European Communities and their member states, the free trade agreement with EFTA states, the Vienna conventions on diplomatic and consular relations, the Rome convention on the protection of performers, producers of phonograms and broadcasting organizations, the Vienna convention on the law of treaties, the convention on the international transport of goods under cover of TIR carnets, the United Nations convention for the international sale of goods etc. Significantly, Latvia was the first Baltic State to become a member of the World Trade Organization and has thereby committed itself to the liberalization of international trade and the elimination of protectionism.
Experience with FDI Ever since Latvia regained independence, foreign direct investments have been the major driving force of its transitional economy and have shown steady growth with FDI stock doubling every 3–4 years. Currently ranked fourth among Central and Eastern European
Investor Incentives
41
countries for FDI stock per capita, Latvia continues to enjoy high recognition among both regional and global FDI contributors. The main sources of foreign direct investment in Latvia have been, and remain neighbouring countries in the Baltic Sea region, which have been active in Latvia from the beginning of the 1990s. Currently investments from Sweden, Germany and Denmark make up almost 40 per cent of the total FDI stock covering a variety of fields from finances, telecommunications and trade to fully exportoriented manufacturing. The high level of interest in Latvia has two main explanations: • substantial differences in operational costs between the ‘east’ and ‘west’ coasts of the Baltic Sea; • investors striving for presence in the fast growing Baltic market and looking at further strategic opportunities in Russia and the CIS. The other group of more remote investing countries is led by the USA and Great Britain, who tend to choose Latvia both as a market base for the Baltic region and as a favourable manufacturing location. Countries to the east, mostly Russia, have chosen Latvia for transit/value-added logistics operations for their main export commodities – oil products, chemicals and metals.
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The Economy and the Business Environment
Table 1.5.2 Established foreign investment projects in Latvia Area
Company
Manufacturing ACMA Group (Singapore)
Axon Cables (France) BSW Timber (Great Britain) Dinex (Denmark) GEBR Knauf Werwaltung (Germany) Glasseiden Oschatz (Germany) Hartwell Pripps/ Ringness (Finland/Sweden) IKEA Group (Sweden)
Sales and marketing Transport and logistics
Activity
Location
Tooling plant and production Riga of moulds and dyes. Major customers include ABB, Toyota, Volvo, Ford, Saab and General Motors High frequency telecom cable Daugavpils harness assembly Riga area Sawmilling operation Greenfield automotive components plant Manufacture of construction materials
Acquisition of a chemical (fibreglass) plant Acquisition of the largest and best-known brand name brewery Sawmilling & manufacturing of glued-laminated furniture components Proditron (Sweden) Electronics contract manufacturing Rhodia Industrial Acquisition of a synthetic Yarns (France) fibre/yarn plant Ziegler Plant for automotive industry Machinenbau contract manufacturing, (Germany) manufacturing of agricultural machinery Coca Cola Distribution chains (USA/Austria) Kesko (Finland) Retail chains for food products, greenfield shopping malls Linstow Varner/ Retail trade, property Rimi (Norway) development Neste (Finland) Chain of service stations Statoil (Norway) Chain of service stations Danzas (Germany) Logistics operations, customs terminals Noord Natie Greenfield project for the (Belgium) largest multi-modal container terminal in the Baltic countries SAS (Denmark, Active shareholders of Sweden) Latvia’s national airline Schenker (Sweden) Logistics operations, customs terminals Statoil (Norway), A joint greenfield petroleum Neste (Finland) product distribution terminal for the Baltic countries Greenfield timber export/ Wilhelmsen value-adding terminal (Norway)
Jelgava Riga area Valmiera Riga Riga area Riga, Ogre Daugavpils Daugavpils
Riga Latvia Latvia Latvia Latvia Riga Ventspils Free Port Riga Riga, Liepaja Riga Free Port Riga Free Port
Investor Incentives
43
Table 1.5.2 continued Area
Company
Energy
CME International (US) E.ON and Ruhrgas (Germany), Gazprom (Russia) High-tech and IT ABB East Ventures (Finland) BioLitec (Germany) Exigen (US) Microsoft (US) Siemens (Germany)
Sheldahl (US)
Tieto Enator (Finland/Sweden) Real estate
SIVA (Norway) Skanska (Sweden)
Thorkild Kristensen Properties (Denmark) Linstow Varner (Norway) Communications Nortel (Sweden) Sonera (Scandinavia) Telia (Sweden) Finances
Codan (Denmark) HEX Group (Finland) NORD/LB (Germany) SEB Group (Sweden) Vereinsbank und Westbank (Germany)
Source: Latvian Development Agency, 2002
Activity
Location
Greenfield co-generation Liepaja plant for Liepaja city Gas storage & distribution in Latvia the Baltic states Engineering and automation technology, HQ for the Baltic States Manufacturing of optical fibre and cables, medical equipment Acquisition of a Latvian software house for expertise in business process software Sales and customer service, HQ for the Baltic States 2 regional centres of excellence for microwave data transmission & indoor networking solutions Acquisition of a Latvian team of researchers for R&D and manufacturing of vacuum deposition for copper coating and accumulator technologies Acquisition of a Latvian software house for expertise in banking solutions and payment card systems Industrial estate developers Office building and industrial parks Office, domestic and commercial properties, HQ for the Baltic States Retail chains, supermarkets, real estate Acquisition of a mobile operator Acquisition of the national fixed telecommunications operator, IT & ASP services Shares in the mobile market leader, Internet & ASP services Acquisition of an insurance company Acquisition of the Riga Stock Exchange Acquisition of a local bank Acquisition of a former stateowned bank Establishment of banking operations in the regional market
Riga Livani Riga Riga Riga
Salaspils
Riga
Ogre Riga Riga Riga Latvia Latvia Riga, Latvia Riga, Latvia Riga Latvia Latvia Riga
1.6
Foreign Trade Latvian Development Agency Due to a small local market, insufficient range of locally produced products, lack of minerals and a geographically strategic location to large markets, Latvia’s economy has always been involved in international trade and the development of services supporting these transactions. The growth of local industry is closely linked to its ability to increase exports of goods, in three broad market directions – the EU, Russia and other CIS countries as well as to the neighbouring countries of Lithuania and Estonia. Compared to 2001, the value of Latvia’s foreign trade in 2002 increased at current prices. Merchandise export was worth LVL1,408.8 million, an increase of 12.1 per cent on 2001. Total imports rose at a slightly faster pace by 13.4 per cent to LVL2,497.4 million lats. The export-import balance continues to increase. In 2001 imports exceeded exports by 75.2 per cent but in 2002 the difference was 77.3 per cent. For a detailed breakdown of foreign trade by sector, see Table 1.6.1. The EU market has become most important destination for goods produced in Latvia (see Figure 1.6.1). In 2002, the value of exports to the EU was 60.4 per cent (61.2 per cent in 2001) of the total Latvia’s export value while imports constituted 53 per cent (52.6 per cent). Compared with 2001, the value of exports to the EU rose by LVL81.6 million or 10.6 per cent (by LVL38.3 million or 5.2 per cent in 2001). In turn, the value of imports from the EU increased by LVL165.1 million or 14.3 per cent (LVL143.2 million or 14.1 per cent in 2001). Imports from the EU in 2001 exceeded exports by LVL388.0 million but by LVL471.5 million in 2002. The most important export commodities to the EU were wood and wood products (sawn wood, unprocessed wood, articles of wood and plywood), non-ferrous metals and articles of non-ferrous metals, furniture, iron and non-alloy steel (bars, profiles, wire) and men’s and women’s clothing.
Foreign Trade
45
Table 1.6.1 Export and import of goods in 2002 (LVL thousand) Export 2002 % against previous year Wood and wood products 472,826 Base metals and base metal 185,398 products Textiles and textile products 180,091 Prepared foodstuffs (including 100,783 alcoholic and non-alcoholic beverages and tobacco products) 90,982 Machinery and mechanical appliances; electrical equipment 82,954 Miscellaneous manufactured articles 81,475 Products of chemical and allied industries 38,393 Wood pulp; paper and paperboard 30,544 Stone, plaster, cement, glassware and ceramic products 26,620 Transport vehicles 24,058 Mineral products 23,704 Live animals and animal products 22,138 Plastics and plastic products; rubber and rubber products 18,811 Vegetable products 10,195 Optical instruments and apparatus (inc. medical), clocks and watches, musical instruments 8,899 Raw hides, leather, fur and articles thereof 4,019 Other goods 3,278 Precious and semi-precious stones, precious metals, metals clad with precious metals and articles thereof 2,858 Footwear, headgear, umbrellas and other articles 655 Fats and oils 135 Works of art, collectors’ pieces and antiques 1,408,816 Total Source: Central Statistical Bureau of Latvia
Import 2002 % against previous year
110.7 116.0
41,757 142.6 210,837 115.6
101.5 139.1
171,543 105.0 165,254 121.8
113.7
530,760 114.2
116.5
75,022 118.8
102.4
261,073 113.3
111.4
107,726 117.1
127.1
64,759 118.8
108.7 113.2 97.6
244,472 118.3 243,187 99.2 64,723 120.1
132.6
124,021 119.0
134.7 117.1
82,217 112.0 50,981 106.2
95.6
9,018 113.7
111.1 70.5
2,642 101.5 5,374 80.3
103.2
19,276 110.6
213.4 88.2
22,676 114.6 68 35.1
112.1
2,497,386 113.4
46
The Economy and the Business Environment 100%
9%
8%
9%
12%
13%
13%
15%
16%
19%
9%
10%
10% CIS
38%
30%
12%
36%
12%
13%
14%
14%
80%
12%
60% 9%
11%
Other countries Lithuania and Estonia
12%
40%
EU
20%
0% 1995
1996
1997
1998
1999
2000
2001
2002
Figure 1.6.1 Latvian exports by groups of countries
Among the most important commodities Latvia imported from the EU were machinery, mechanical appliances and electrical equipment (various machine tools, computer hardware, office equipment, household appliances and electrical equipment), passenger cars, paper and cardboard, semi-manufactures and articles of plastic and pharmaceutical products. In 2002, commodity exports to the CIS represented 10 per cent of total exports (10.3 per cent in 2001).
Germany 15%
Other 21% Italy 2% Finland 2%
United Kingdom 15%
Netherlands 4% United States 4% Denmark 6% Russian Federation 6%
Sweden 11% Estonia 6%
Lithuania 8%
Figure 1.6.2 Main export destinations in 2002
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The Economy and the Business Environment
By contrast, imports from the CIS in 2002 have decreased to 13.1 per cent of the total, in comparison with 14.8 per cent in 2001. The export-import balance with CIS countries is decreasing: the negative balance was LVL229.2 million in 2000 and LVL194.9 million in 2001 but in 2002 the balance was LVL186.9 million. In 2002, exports to Russia, the most important trade partner among the CIS countries, represented 5.9 per cent (no change on 2001) but imports constituted 8.8 per cent (9.2 per cent in 2001). Compared with 2001, exports to Russia rose by 12.3 per cent or LVL9.0 million and imports increased by 8.2 per cent or LVL16.6 million. In 2002, tinned fish exports to Russia amounted to LVL23.3 million, an increase of LVL2.3 million compared with 2001. Electrical machinery and equipment (electrical instruments, electrical engines and generators, electrical transformers), machines and mechanical appliances (various machine tools for different industries of the national economy), pharmaceutical products as well as light industry products dominated the exports to Russia. Among the most important goods Latvia imported from Russia were energy resources (natural gas, electricity, oil products), sawn wood, paper and cardboard, vodka and other goods. Since the regaining of independence all economic transformations in Latvia have been linked to the creation of an open market economy and liberalization with the aim to integrate in the world economy and at the same time to become an independent and stable trading partner.
Other 29%
Germany 17%
Lithuania 10% Netherlands 3% Demark 3% Italy 4% Poland 5% Estonia Sweden 6% 6%
Russian Federation 9% Finland 8%
Figure 1.6.3 Main import sources in 2002
Foreign Trade
49
To match the above goals Latvia implements a liberal foreign trade policy which is based on internationally recognized terms and conditions – most favoured nation treatment, principles of nondiscrimination and mutual benefit, efficient use of comparative advantages of Latvia, competition in the domestic market promoting growth of production and private consumption and development of exports – as necessary preconditions for further growth of the gross domestic product. In order to liberalize the trade regime, Latvia has concluded 12 free trade agreements (FTA) with 29 countries: 15 member states of the EU and four states of the European Free Trade Association, and with Bulgaria, Lithuania, Estonia, Czech Republic, Slovakia, Slovenia, Poland, Hungary, Turkey and Ukraine. Latvia is a full member of the WTO and it has MFN trade regimes with all WTO members. All countries of the FSU have the same beneficial trade regime with Latvia.
Part Two The Legal Structure and Business Regulation
2.1
The Legal Framework for Foreign and Domestic Investment Lejins, Torgans & Vonsovics The Latvian legal system is basically a classic European continental law system with a significant German influence. Since independence in 1991, one of Latvia’s main goals has been to accede to the EU and national laws have been continuously reviewed in order to harmonize them with EU laws. This process has now been successfully completed and Latvia was invited to join the EU on 13 December 2002. It is expected that Latvia will become an EU member state by 1 May 2004. Because of this, Latvia is not materially different from EU countries in terms of the legal environment for investments. Some of the most important developments and legislative acts of particular interest to investors are highlighted below.
General overview of Latvian corporate law Latvian corporate law has recently undergone significant changes. Up to 2002, corporate law was rather fragmented: each type of business (13 in total) was regulated by a separate law, which often contradicted another. In order to eliminate such inconsistencies, to consolidate legal provisions and ensure compliance with EU standards the Commercial Law*1 was adopted and entered into force on 1 January 2002. Amongst others, the Commercial Law covers incorporation and management matters for corporate entities. The Commercial Law provides for a transitional period of three years, ending on 31 December 2004, during which both the new 1
An English text of the Commercial Law and other laws marked in the text with * can be found at www.ttc.lv. Translations are unofficial.
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The Legal Structure and Business Regulation
Commercial Law and the old corporate laws are effective. Any new corporate entities that are incorporated in Latvia after 1 January 2002 are subject to the requirements of the Commercial Law and are registered with the Commercial Register of the Republic of Latvia (CoR). Entities incorporated before the Commercial Law came into effect are subject to the old corporate laws on, for example, entrepreneurship, joint stock companies, limited liability companies and others. Those companies registered under the old laws must reregister with the CoR by 31 December 2004 at the latest, and upon reregistration become subject to the Commercial Law. To ensure that the CoR is not overloaded with re-registrations at the end of the transitional period, transitional provisions mean that if any amendments are made to the charter of a company after 1 July 2003 they may be registered only on condition that re-registration with the CoR takes place simultaneously. Re-registration mainly involves bringing the corporate charter of the company into line with the provisions of the Commercial Law. These provisions are more detailed than those of the old corporate laws and the requirements of form and content of corporate documents have changed. The Commercial Law also provides a greater degree of protection to minority shareholders and creditors of companies.
The law on groups of companies In Latvia a separate law governs the formation and operation of ‘groups of companies’. The Law on Groups of Companies* entered into force in 2000. It defines a ‘group of companies’ as a dominant undertaking together with one or several dependent companies. A dominant undertaking is an undertaking that has a decisive influence over one or more companies and can be located in Latvia or another country but only Latvian registered companies qualify as dependent companies. The law sets out the liability of the dominant undertaking, protection measures for minority shareholders of the dependent undertaking and creditors, etc.
General overview of Latvian contract law The general provisions of Latvian contract law are found in Latvian Civil Law. If international agreements entered into by Latvia provide for provisions differing from those under national law, the provisions of international agreements (conventions) prevail. For
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55
example, Latvia has acceded to the UN Convention on Contracts for the International Sale of Goods 1980, therefore provisions of the Convention may be applicable to sale-purchase agreements entered into between Latvian and foreign entities. The following briefly summarizes the basic provisions of the contract law under Latvian Civil Law:
Governing law Parties to the contract are free to choose governing law, unless specific provisions of Latvian law expressly preclude such choice by the parties (for example in real estate transactions which must be governed by Latvian law). If the parties fail to agree on governing law, it shall be assumed that the governing law will be the law of jurisdiction where the contract is to be performed. If the place of performance may not be determined, the laws of the place of execution of the contract shall govern. If under the above provisions, the law of the foreign country is applicable, which in turn refers back to Latvian law, the latter is applicable.
Consummation of the agreement Agreement is considered to be entered into only when the parties have mutually established essential provisions of the transaction with an aim to establish a contractual relationship. For example, essential provisions of the purchase agreement are the object of purchase and the price.
Consequences of the agreement Parties are obliged to fulfil the terms of the agreement once it is entered into. Under no circumstances may one party to the agreement unilaterally withdraw (not even if the counter-party has failed to fulfil its obligations). The only exceptions are cases where the parties have contracted for the right to withdraw or the right to withdraw in particular circumstances is expressly provided under the law.
Liability of the parties Subject to certain exceptions, the general rule is that under any agreement for disposal of any item the disposing party bears liability for the quality of the item, ie that it does not have any concealed defects and has not been misrepresented.
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The Legal Structure and Business Regulation
Such liability exists under the law even without the respective provisions being contained in the agreement.
Contractual penalties If the contract provides for a contractual penalty, the creditor may demand either penalty or performance but not both. Exception is made if it has been expressly agreed that both penalty and performance may be demanded or where the penalty has been established not for non-performance as such but rather for late performance. Unless it has been expressly agreed otherwise, payment of a contractual penalty does not exclude the right of the creditor also to claim for damages.
Late payments Even if the contract does not provide for any penalty for late payment, the creditor still is entitled to claim interest on late payment at the rate of 6 per cent per annum. However, interest for late payment must be claimed simultaneously with receipt of repayment of principal. If the repayment of principal has been accepted without indication that interest for late payment is due, it may not be claimed at any later point.
Damages Unless the scope of the damages is limited by the provisions of the contract, damages are calculated to include direct and indirect damages and lost profit.
Laws promoting foreign investment The importance of creating a consistent and attractive legal framework for private foreign investment in Latvia was recognized immediately after the regaining of independence. Latvia established under law the principle of national treatment of foreign investors, certain tax exemptions and allowances and the concept of free economic zones. Latvia has also entered numerous bi-lateral treaties on the promotion and mutual protection of investments with other countries. Some of the most important pieces of legislation aimed at encouraging and supporting private foreign investment are described below.
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57
Law on Foreign Investment in the Republic of Latvia The Law on Foreign Investment in the Republic of Latvia* was adopted in 1991. It set benchmarks for the legal climate for foreign investors in Latvia and played a significant role in encouraging foreign investment. In addition to the principle of national treatment, which is clearly spelled out in the law, it inter alia provides for the following: • in cases where legislation enacted subsequent to foreign investment modifies the investment framework such that it becomes less favourable, the legal provisions in force at the time the investment was made continue to apply for the term of 10 years; • foreign investors may freely transfer profits out of Latvia subject to payment of all applicable taxes; • after fulfilment of their obligations towards creditors, foreign investors may freely transfer their investments abroad; • property imported as foreign investment and not intended for sale is not subject to customs tax on import. According to the transitional provisions of the Commercial Law described above, the Law on Foreign Investment in the Republic of Latvia will cease to be valid on 1 January 2005.
‘Tax free zones’: free ports and Special Economic Zones The Latvian laws provide for ‘tax free zones’: geographical territories designated by special laws where certain tax allowances will apply to companies registered and operating in the territory who have met specific conditions provided for by the relevant laws. The respective zones are created with the purpose of developing and boosting the economy of the territory in question (for example in the city of Liepaja and the district of Liepaja) and encouraging trade and production, as well as attracting investment through a particularly favourable business environment. There are currently four tax free zones in Latvia, each of which is regulated by a separate law: • Special Economic Zone of Liepaja (established by the Law on the Special Economic Zone of Liepaja, 17 February 1997, for a period of 20 years: 1 March 1997 to 1 March 2017); • Special Economic Zone of Rezekne (established by the Law on the Special Economic Zone of Rezekne, 1 October 1997, for the term of 20 years: 4 November 1997 to 4 November 2017);
58
The Legal Structure and Business Regulation
• Free Port of Riga (regulated by the Law on the Free Port of Riga* of 9 March 2000 and established for an unlimited period); and • Free Port of Ventspils (established by the Law on the Free Port of Ventspils of 19 December 1996 for an unlimited period). Before commencing operations in a free zone, investors intending to benefit from tax allowances are required to enter into an agreement with the authority of the respective free zone (Board) setting forth amounts and terms of the investment, minimum number of employees and other conditions to be met by the investor. The Board of the free zone, subject to the fulfilment of certain conditions, grants to investors the right to the following allowances of direct taxes (ie company income tax and real estate tax): • 80 per cent reduction of corporate income tax; • 80 per cent reduction of real estate tax. According to the Law on the Application of Taxes in Free Ports and Special Economic Zones* companies are entitled to the abovementioned reductions, subject to calculation of the proportion of tax reductions against the total investment of the company. Under specific circumstances several other benefits are available as provided by the law. Benefits may differ depending on the respective free zone.
Law on Control of Commercial Activity Support On 1 January 2003, the Law on Control of Commercial Activity Support entered into force replacing the former Law on Control of Support Granted to Entrepreneurial Activities by State and Local Governments 1998. It applies to all commercial companies and any private person or legal entity that carries out or is about to carry out commercial activity, irrespective of its form of ownership and fields of commercial activity. ‘Support’ is defined as any direct or indirect financial support provided to business from the resources of state, municipality or EU. The law permits support to private business only in cases specified in the Treaty of Europe (Treaty on Formation of Association Between EU and its Member States on one side and the Republic of Latvia on the other side, effective as of 1 February 1998) or other treaties binding to Latvia. Types of support listed under the law are the following:
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59
• direct payments from the state budget or local government budget (subsidies); • measures in the field of taxation or mandatory social insurance payments (eg tax allowances); • surety issued by the state or local government; • subsidizing interest rates on loans; • full or partial waiver of dividends by the state or local government for companies they control; • investment in the company by state or local government; • cancellation of debts; • determination of preferential rates for services rendered by state companies; • sale of real estate below its market value or purchase of real estate at a price above its market value; or • other financial aid granted or provided from the resources of state, local government or the EU. The law allows support aimed at regional development, support for research, training, employment, protection of environment and energy saving (including production of combined (electricity and heat) energy and regenerative energy) and specific requirements must be met in order to qualify for support. Support to SMEs is also permitted, SMEs being defined as companies employing less than 250 employees, with an annual net turnover not in excess of LVL23,000,000 or balance value not in excess of LVL15,000,000 and provided that no more than 25 per cent of share capital is held by one or more companies not corresponding to the above criteria. The law also specifies criteria for support to certain industries – the steel industry, car industry, shipbuilding and repairing and the transportation sector. Special provisions regulate support to companies controlled by the state or local governments. Any support of export is expressly prohibited. No subsidies on export are allowed. The prohibition refers to any form of support relating to the export volumes of the company, creation and operation of distribution networks or current expenditures of the company for its export operations. The Law on Control of Commercial Activity Support contains general framework provisions. Special provisions regarding particular forms of support can be found in various other laws and regulations. For example, pursuant to the provisions of the Law on Companies Income Tax* the investor is entitled to apply for company income tax allowance in the amount of up to 40 per cent of the amount of the investment provided all the following criteria are met:
60
The Legal Structure and Business Regulation
• the Latvian Government has granted the investment project the status of Supported Investment Project • the investor has made investments in the aggregate amount in excess of LVL10,000,000 within the framework of the supported investment project; and • the aggregate investment is made over a period not exceeding three years. The allowance, if granted, shall be applied after the investment project is completed.
Purchase of real estate by foreign investors There are certain exemptions from the principle of national treatment of foreign investors. For example, Latvian laws impose certain limitations on foreigners purchasing real estate. Foreign legal entities and individuals are not allowed to purchase the land in the following areas: • land located in state border zones; • land in the protected dune zone of the Baltic Sea and the Riga Gulf, as well as other land in protected zones of public watercourses and rivers, unless such land is designated as land for construction in the general plan of the respective city/district; • land designated for agriculture or forestry under the general plan of the respective city/district; • the land of state reserves. Foreign entities and individuals are also subject to restrictions on the purchase of other land. Prior to registration of the title to a particular parcel of land with the Land Registry, consent must be obtained from the local government of the respective city/district. An application indicating the proposed use of the land to be acquired must be submitted before consent can be granted. If the purpose of use as indicated in the application does not contradict the approved general plan of the respective city/district, the local government is under obligation to grant consent for transfer of the land. If consent is denied, the decision may be appealed against in court. Foreign legal entities and individuals may become shareholders in local companies which are not subject to the above restrictions, subject to certain qualifying requirements.
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61
International treaties In addition to the Treaty of Europe discussed above, Latvia is a party to a considerable number of other bilateral and multilateral international documents in the fields of private international law, free trade, economic co-operation, double taxation avoidance, customs, promotion of investment, intellectual property, international transportation, recognition and enforcement of foreign arbitral awards, legal assistance etc. Latvia is also a member of the WTO.
2.2
Forms of Business Organization Lejins, Torgans & Vonsovics Merchants doing business in Latvia The Commercial Law defines ‘commercial activity’ as ‘an open economic activity carried out by merchants in their name for the purposes of gaining profit’. ‘Merchant’ is defined under the Commercial Law as ‘a natural person (individual merchant) or a commercial company (partnership or capital company) registered with the Commercial Register’. All merchants must be registered with the CoR. According to the Commercial Law, commercial activities in Latvia may be performed by the following: 1. 2. 3. 4.
individual merchant; partnership (general partnership and limited partnership); limited liability company (LLC); joint stock company (JSC).
Individual merchant Individual merchants are individuals registered as merchants with the CoR. An individual is obliged to register as a merchant when he/she performs commercial activities and his/her annual turnover from commercial activities exceeds LVL200,000, or if he/she employs more than 5 employees simultaneously and annual turnover exceeds LVL20,000. The Commercial Law also allows any individual performing commercial activities to register as an individual merchant at its own discretion even if his/her commercial activities do not fall under the above criteria.
Forms of Business Organization
63
Partnership The Commercial Law provides for two types of partnerships – general partnership and limited partnership. A general partnership is an establishment, the purpose of which is the performance of commercial activities by using a joint firm name, and in which two or more persons (members) have united on the basis of a partnership agreement without limiting their liability against creditors of the general partnership. Members of general partnerships can be either individuals or legal entities, both foreign and local. As with LLCs and JSCs the Commercial Law grants the members of the partnership significant discretion as to the contents of the partnership agreement (in particular on issues such as decision making, profit sharing and representation). A limited partnership is a partnership in which at least one of the members has limited its liability against creditors of the partnership by the amount of their investment in the partnership. The member with limited liability has certain restrictions in terms of the representation of the partnership and distribution of profits. Otherwise, the same provisions as for general partnerships apply.
Limited liability company The LLC is the most widely used form of business organization. Generally, the liability of the shareholders of the LLC would be limited to the amount of their respective investments in the share capital of the LLC. However, an LLC can also be incorporated as a company with supplemental liability where one or several shareholders are personally liable against creditors of the company with all of their assets. Provisions of the Charter of an LLC may differ from those under the Commercial Law only if such deviations are explicitly permitted. Share capital
The minimum share capital of an LLC is LVL2,000. This capital may be contributed either in cash or in kind (tangibles or intangibles). Investments in kind are to be evaluated by qualified experts, except if the total value of investment does not exceed LVL4,000 and does not constitute more than one half of the share capital. In those case, contributions in kind may be evaluated by the incorporators themselves.
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The Legal Structure and Business Regulation
Management of the company
The highest decision-making body of the LLC is the board of shareholders. The Commercial Law places the following issues within the exclusive competence of the board of shareholders: • amendments to the Charter; • increasing and decreasing of share capital; • election and dismissal of supervisory board and management board members, auditor, controller and liquidator; • approval of annual accounts and distribution of profits; • bringing actions against members of the supervisory board and management board, founders or shareholders of the company; • termination or continuation of activities or reorganization of the company. It is permitted to include other issues within the competence of the board of shareholders by respective provisions in the Charter of the company. The board of shareholders is also entitled to decide on any issue within the competence of the supervisory board or management board. However, in such cases the shareholders become jointly and severally liable for any losses caused to the company as a result of their decision. The Commercial Law provides for a two-tier management system consisting of the supervisory board and the management board, but the supervisory board is optional for LLCs. If a supervisory board is set up it is responsible for supervision over the management board and approval of major transactions. The management board is responsible for daily management matters. The management board may have one or more members. While the law does not provide for any citizenship restrictions on the members of the boards, at least half of the management board members must be residents of Latvia. The rights of representation of the company by the management board cannot be limited as against third parties. However, management board members may be granted either joint or individual representation rights. The Commercial Law provides for liability of the management board and supervisory board members for the losses caused to the company. The burden of proof is placed on the member of the board to show that he/she has acted as an honest and diligent manager.
Forms of Business Organization
65
Joint stock company JSCs are designed as public companies. For this reason they have a higher minimum capital requirement and a more complex management structure and are also a less popular form of business organization than LLCs. The regulations applicable to LLCs described in the previous section are also relevant to JSCs, unless stated otherwise in this section. Share capital
The minimum share capital of a JSC is LVL25,000. All the capital as stated under the charter has to be subscribed by the date of submission of the registration application. JSCs may issue various categories of shares which grant to the shareholders one or a number of the following rights: the right to receive dividends, liquidation quota and voting rights at the shareholders’ meeting. Shares can be issued as registered shares or bearer shares. Registered shares can be issued either in paper form or as dematerialized shares. Bearer shares can only be issued as dematerialized shares. The Commercial Law also allows the issue of preferred shares which grant specific rights in respect to dividends and liquidation quota. Preferred shares do not have voting rights. Personnel shares may be issued to employees and members of the management board. The aggregate amount of par value of personnel shares may not exceed 10 per cent of the subscribed share capital. One more option is convertible bonds which entitle the holder of the bonds to convert them into shares in the company within a specified term. Convertible bonds can be either registered or bearer securities. If the company decides to issue convertible bonds the shareholders of the company have the right of first refusal to acquire them. Management of the company
In addition to the issues listed within the competence of the board of shareholders of an LLC, the following issues are placed within the exclusive competence of the board of shareholders of a JSC: • issue and conversion of securities; • remuneration to the members of the Supervisory Board and the auditor. In contrast with LLCs, the Commercial Law does not allow the board of shareholders of a JSC to decide on any issues other than those listed above, unless explicitly provided under law.
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The Legal Structure and Business Regulation
The supervisory board is mandatory for JSCs. The management board must be appointed by the supervisory board and there should be at least three members on the management board.
Units of merchants carrying out commercial activities in Latvia Undertakings The Commercial Law establishes the concept of ‘undertaking’ which is defined as an organizational economic unit. The undertaking comprises both tangible and intangible items belonging to a merchant, as well as other economic benefits (value) which are utilized by the merchant to perform commercial activities. A merchant can run one or more undertakings, for example shops, factories, etc. As a general rule, in cases where an undertaking or a separate part of an undertaking is transferred into ownership or use of another person, the acquirer of the undertaking shall be liable for all the obligations of the undertaking or its respective part. However, in respect to those obligations which have been created prior to the transfer of the undertaking or a part of it into ownership or use of another person, and the terms or preconditions for the fulfilment of which has come into effect within five years of the transfer of the undertaking, the liability of the transferor of the undertaking and the acquirer of the undertaking shall be joint and several if the transfer agreement does not specify otherwise.
Branches and representative offices A branch is an organizationally independent part of an undertaking, which is territorially or otherwise separated from the principal undertaking and at the location of which commercial activities are systematically performed on behalf of the merchant. Branches do not possess legal personalities. Branches can be opened by both local and foreign merchants. They must be registered with the CoR. Foreign merchants (unlike local merchants) may open representative offices in Latvia. Representative offices, like branches, do not possess legal personalities and, unlike branches, may not carry out commercial activities in Latvia. Representative offices are
Forms of Business Organization
67
usually maintained for market research and business promoting activities.
Choice of corporate presence for foreign merchants According to the Commercial Law, foreign merchants have the following options when establishing a corporate presence in Latvia: 1. 2. 3. 4. 5.
LLC; JSC; partnership; branch; representative office.
The most appropriate type of presence depends on a number of factors. Partnership is very rarely chosen by foreign investors. Partnerships are normally created between local and foreign construction companies. Those partnerships are normally set up for a limited period of duration, ie for the period until the joint construction project is established. When evaluating the choice of branch vs subsidiary (LLC or JSC), the most important advantage of choosing subsidiary is limited liability. Branches do not have a separate legal personality and so creditors of a branch may sue for the assets of the foreign entity. However, branches do have certain other advantages, such as the possibility of transferring their profits abroad without the imposition of withholding tax (there is a 5–10 per cent withholding on dividends remitted abroad) and the ability to allocate head office expenses to the branch in a proportion to profit generated by branch against the worldwide income. The choice of the form of presence will also depend on the type of business to be conducted in Latvia. For example, banks and insurance companies may only be established as JSCs, not LLCs in Latvia. Foreign banks may also operate branches in Latvia. If there is an intention to raise capital on the public market, JSC should be chosen since only shares of JSCs may be offered to the public. Most foreign investors choose to set up LLCs and this is also the most popular form of incorporation for local businesses.
2.3
Practical Procedures for Company Incorporation Lejins, Torgans & Vonsovics Business activities subject to licensing Certain types of business activities are subject to receipt of licence or permission. For example, a licence is required for: • • • • • •
• • • • • •
insurance operations; intermediary services by insurance broker companies; bank operations; organization and maintenance of lotteries and gambling; investment companies; operations in the securities market – by broker companies (for intermediary transactions with securities and holding of securities accounts) – by banks (for intermediary transactions with securities and maintenance of securities accounts) and – by stock exchanges; manufacture and sale, import and wholesale of tobacco products; production and sale, import, wholesale and retail sale of spirit and alcohol; manufacturing, import, wholesale and retail sale of fuel; carriage of passengers and freight by rail; transport by air; special aviation work, etc.
Licences are issued by the state or local government authorities. For example, the state authority executing general supervision in the financial sector, the Finance and Capital Market Commission, issues licences relating to banking, insurance, investment fund and
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private pension fund businesses, as well as other intermediary businesses in this sector. Local governments license the commercial carriage of passengers within their territory. The terms of the licence vary depending on the type of licensed activity. Certain licences are issued for an unlimited term. Regulated businesses may be subject to special capital requirements, requirements for qualifications of the management etc. For example, the minimum incorporation capital for a bank is the equivalent of EUR5,000,000, LVL30,000 for insurance brokerage companies, LVL1,000,000 for life insurance companies and LVL 500,000 for other insurance companies. The licensing requirements should be understood at the incorporation stage. Companies must apply for their licence after registering with the CoR and may not commence licensed activities before receiving the licence.
Incorporation documents Since the most common forms of business organization are LLCs or JSCs, the following is an outline of the requirements for incorporation of these companies. The following documents are required for the incorporation of either an LLC or JSC: • • • • •
foundation agreement or resolution if there is a single founder; charter; application; the consent of the board members to take their respective positions; notice from the bank on deposit of capital and/or statement on contribution in kind; • sample signature cards of the members of the management board; • notice on the seat of the Management Board; • receipts of payment of the state duty and fee for publication in the official gazette. Shareholders’ signatures on the foundation agreement or resolution, charter, application for registration, as well as sample signatures of the management board members must be certified in front of the public notary. If signed in front of a foreign notary, documents must also be authenticated (apostiled or legalized). Exceptions are the documents certified in countries with which Latvia has entered bilateral treaties on legal assistance – Belarus,
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Estonia, Kyrghizia, Lithuania, Moldova, Poland, Russia and Uzbekistan. The foundation agreement or resolution (if there is one founder) must contain the following data: • • • • • • • • • • •
information on founders; company name; amount of share capital, number of shares and their par value; amount of the share capital subscribed and paid up before registration by each founder, as well as terms and procedure of paying up the share capital; number of shares for each founder according to subscribed share capital; details on investment in kind; the maximum allowable incorporation expenses and procedure of covering the expenses; information on management board members; information on the supervisory board members (if applicable); information on the auditor; any other provisions that the founders deem necessary and which do not conflict with the law.
The company Charter should contain the following information: • company name; • types of commercial activities; • term or goal of operation (if the company is incorporated for a limited term or for the attainment of a specific goal); • amount of share capital, number of shares and their par value; • number of management board members and their rights to represent the company jointly or individually; • number of supervisory board members (if applicable); • specific provisions for alienation of shares (if applicable); • other provisions considered essential by the founders and which do not conflict with the law. If the company is incorporated as a JSC the Charter should also indicate: • categories of shares, as well as the number and par value of each category; • whether the shares are registered or bearer shares, as well as conditions for conversion of registered shares into bearer shares and vice versa (if such conversion is contemplated by the Charter);
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• whether the shares are issued in a paper form or dematerialized, as well as conditions for conversion of paper from shares into dematerialized shares and vice versa (if such conversion is contemplated by the Charter).
Investment of share capital By the date of submission of incorporation documents to the CoR at least 50 per cent of the share capital of an LLC must be paid up. The rest of the share capital must be paid up within one year from registration with the CoR. JSCs are required to demonstrate payment of at least 25 per cent of the subscribed capital and no less than the minimum capital set out for JSCs, ie LVL25,000, by the date of submission of their incorporation documents.
Registration procedure The company must be registered with the appropriate branch of the CoR depending on the legal address of the company (ie the seat of the management board). The speed of review of incorporation documents and registration with the CoR depends on the amount of state duty paid. For example, currently standard duty for the registration of LLCs is LVL100 and LVL250 for registration of JSCs. On payment of standard duty, registration will be accomplished within 2 weeks. However, registration may be accomplished within two to four days if double or triple state duty, respectively, is paid. In addition, there is also a state duty for publication of the notice of registration in the official gazette Latvijas Vestnesis in the amount of LVL24. The CoR may refuse the registration if the documents submitted do not comply with the provisions of the law. In this case the state duty will be payable upon resubmission of the documents. CoR may also postpone the registration of the company if any documents required for the registration are incomplete, and grant the company time to correct the discrepancies or submit the missing information. In this situation the company will not be required to pay state duty again. When a company is registered with the CoR it is given a registration number that serves both as the CoR registration number and the registration number of the taxpayer with the State Revenue Service.
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Liability for activities before registration The Commercial Law provides detailed regulations in respect of the activities of incorporators before registration of the company with the CoR. The founder who has acted on behalf of the company before its registration with the CoR is liable for any obligations arising from such action. These obligations are transferred to the company if within three months from the date of registration members of the management board or shareholders representing at least 1/20 of the share capital have not raised objections to the transfer of the obligations to the company. If such objections have been raised the issue is decided by the board of shareholders. However, transfer of obligations to the company does not limit the right of creditors to demand fulfilment of incorporators’ obligations. If assets of the company are not sufficient to satisfy creditors, founders are jointly and severally liable to the creditors for the obligations of the company. Claims based on pre-incorporation transactions have a limitation period of three years from the date of registration of the company with the CoR.
2.4
Agency, Distributorship and Franchising Kronbergs Law Office Introduction The use of agency and distribution agreements has become a typical way for foreign companies to gain access to the local market without the commitment of establishing and maintaining a Latvian registered legal entity. Latvian wholesale and logistics companies have already developed strong distribution networks. They are, however, becoming increasingly challenged by large retail chains developing their own warehousing and distribution networks, particularly in the fields of consumer, household and food products. The general law of contract in Latvia is found in the Civil Law, which is in content similar to the current German Civil Law. Perhaps unsurprisingly so, as its origins can be traced to a technical assistance project from Germany in the late 1930s. This law contains a section dealing with sale of goods, and reference to this section is applicable to distribution, agency and franchise agreements in Latvia.
Commercial agents There is a whole body of law within the Commercial Law that governs the principal and agent relationship, if the agent is a qualified ‘commercial agent’ under the law. An individual or company registered as a merchant under the Commercial Law may elect to become a commercial agent under the law simply by concluding a written commercial agency agreement between itself and a principal. Once such an agreement is concluded, the commercial agent is subject to a broad set of statutory rights and obligations, the highlights of which are outlined below.
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Statutory rights and obligations of a commercial agent A commercial agent is under a positive duty to deliver to its principal all necessary information and documents regarding any matter for which it acts for the principal as its commercial agent. A commercial agent is subject to a statutory duty of care towards its principal, and is required to abide by the reasonable instructions of its principal. An agreement that is in violation of such duty of care is void under the law. A principal dealing with a commercial agent is under a general statutory duty to provide the commercial agent with such relevant documents (samples, drawings, price lists, advertising brochures, required transaction provisions) as are required in order for the commercial agent to perform its duties. A principal dealing with a commercial agent is under a duty to keep the commercial agent appraised of developments with respect to approval or rejection and performance of transactions in which the commercial agent has been engaged on behalf of the principal. The principal is also under a positive duty to advise its commercial agent of any foreseeable material decline in the scope of transactions in which the commercial agent is to be engaged on the principal’s behalf. A principal contracting out of the provisions of the law governing its relations with a commercial agent invalidates it. Article 49 of the Commercial Law sets out a loose framework for a minimum remuneration level, such that if remuneration by a principal of its commercial agent has not been set under contract, the commercial agent is entitled to such remuneration as is customary within the industry for the performance of its services. If there is no such customary standard of remuneration, the commercial agent is entitled to reasonable compensation having regards for the conditions of the transaction. Under the law, a commercial agent is entitled to a commission on a transaction concluded during the period of validity of the commercial agency contract, if such transaction is concluded as a result of the service provided by the commercial agent or with a party who was introduced to the principal by the commercial agent. If a commercial agent is granted rights to a specific territory or a specific set of clients, the commercial agent has a right to a commission on transactions concluded within such territory or with such a group, even if the transactions have been concluded without the involvement of the commercial agent, provided that such transactions have been concluded during the term of validity of the
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commercial agency agreement between the commercial agent and its principal. A commercial agent is entitled to a commission for a transaction concluded after the termination of the commercial agency contract if (a) the transaction is concluded due to substantial activity of the commercial agent prior to the expiry of the commercial agency contract, and such conclusion has been reached within a reasonable period of time following expiration of the commercial agency contract, or (b) prior to the termination of the commercial agency contract, the commercial agent or principal has received a related proposal from a third party. The law provides that where a prior commercial agent has a claim for a commission, the current commercial agent has no claim for the commission unless the specific circumstances justify a fair division of the commission between the two commercial agents. A commercial agent is entitled to a commission from the moment that a principal has fulfilled the transaction, and payment may not be withheld from the commercial agent beyond the last day of the month following such fulfilment. If the transaction fails for reasons of third party failure to perform, provided that the principal has performed, the commercial agent’s right to a commission is extinguished and the commercial agent is required to return any advanced commission to the principal. A principal’s incomplete or partial fulfilment of a transaction may trigger the requirement to pay the commercial agent a commission. The basic rule is that the right to a commission is extinguished if the reasons for non-fulfilment of the transaction cannot be fairly blamed upon the act or omission of the principal. Commercial agents are entitled to regular payment of their commissions, such that the commissions must not be calculated less frequently than once monthly, and payments must not be less frequent than once every three month period. Commercial agents are entitled by law to request an accounting of the commissions and particulars of information that goes into the calculation of the commissions. Where the commercial agent guarantees performance of a counterparty to the principal in a transaction, the commercial agent is entitled under the law to special remuneration. Compensation of costs incurred by the commercial agent are payable by the principal if it is standard industry practice to reimburse such costs. Unless otherwise agreed, where the commercial agency contract is of an indefinite term, it may be terminated by either party on
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notice to the other, in accordance with the applicable terms of a statutory sliding scale ranging from one to four months. Expiration of the commercial agency contract may trigger a right of the commercial agent to an equalization payment to make the commercial agent whole for loss of commissions from its prior customers. The statutory right to such equalization is not to exceed an average annual commission, based on the previous five years. Termination for cause does not trigger an equalization requirement. Commercial agents are under a positive duty of confidentiality toward the principal that extends beyond the term of the commercial agency contract, with respect to commercial secrets entrusted to the commercial agent which have become known in connection with the commercial agents acting for the principal. The parties may agree to a non competition clause extending up to two years beyond the term of the commercial agency contract, provided that the principal pays the commercial agent corresponding remuneration for the duration of the competition restriction period.
Franchising During the past decade, a number of international franchisors have established corporately owned or agent-owned franchises in Latvia. Franchising has also become of interest to a number of domestic or regional investors ready to assume the role of franchisees so as to take advantage of proven ready-made concepts of business operation. To date, franchising of domestically developed business concepts has been very limited, with the vast majority of franchise relationships comprising foreign franchisors granting franchises in the local Latvian market. One possible exception may be underway with the recent public expression of interest by Mayor Lushkov of Moscow in the business concept of the Latvian LIDO restaurant chain for possible application to the Russian market. While the Competition Law sets out certain prohibitions on market participants that might ordinarily capture exclusive supply and other customary agreements between franchisors and franchisee, Regulation No 52 of the Cabinet of Ministers of 16 February 1999 on Regulations on the Exemption of Franchise Agreements from the Prohibition of Agreements by the Competition Law sets out exemptions that generally enable customary franchise agreements without notice to or approval from the Competition Council.
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Currently, there is little statutory treatment of franchise relationships, and unlike some jurisdictions which have special legislation dealing with disclosure requirements of franchisors, Latvia has not yet taken such regulatory steps. EU accession is likely to fill in certain gaps in the regulatory environment concerning franchising and distribution.
2.5
Competition Law Lejins, Torgans & Vonsovics Legal framework Competition law matters in Latvia are governed by the Competition Law adopted on 4 October 2001 (effective from 1 January 2002) and a number of government (Cabinet of Ministers of the Republic of Latvia (CoM)) regulations further detailing and specifying the general provisions of the Competition Law. Specific procedures for notifications in competition matters and their review are set forth in detail in guidelines approved by the Latvian Competition Council. The Competition Law aims to harmonize the regulatory framework of Latvian competition law with the principles established in EU legislation. As a result, current Latvian law governing competition matters is very much in line with the EU law.
Regulatory body General Competition matters fall under the remit of the Latvian Competition Council (LCC). The LCC is a state institution established by the CoM and acting under the supervision of the Ministry of Economics. It comprises five members, one of whom acts as a chair. Members of the LCC are appointed by the CoM at the recommendation of the Minister of Economics for the term of five years. Decisions are passed by the LCC at its meetings. The Bureau of the Competition Council provides secretarial and expert support for the LCC, investigating issues, reviewing documents and drafting its decisions.
Remit of the LCC The LCC is charged with monitoring the activities of businesses on the market, undertaking measures to prevent market concentration,
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reviewing complaints on unfair competition etc. It may exercise a wide range of preventive and punitive measures to ensure fair conditions for all businesses operating on the market. Inter alia, the LCC is entitled: • to order the market participant to discontinue conduct that violates competition law provisions, to order it to reinstate the conditions existing before the violation and to set forth further binding conditions relating to discontinuation of such conduct; • to impose substantial penalties of up to 10 per cent from annual turnover of each party involved; • to seize profit gained by the market participant as a result of illegal activities for the benefit of the state; • to prohibit mergers or to make the merger subject to certain binding conditions; • where the merger has taken place in violation of the procedures set out by the Competition Law, to request division of the company or group of the companies, termination of joint control or joint action; • to decide on exceptions to the general prohibition of transactions set forth by the Competition Law, ie to permit transactions which would normally be prohibited if they promote production, sales of goods or economic progress resulting in benefit to consumers. The LCC may further make the respective transaction subject to certain additional binding terms and conditions for the parties concerned.
Competition Council and jurisidiction of the courts According to Article 21 of the Competition Law, a market participant who deliberately or negligently violates the law shall cover losses which, due to such violation, have been caused to another market participant or party to a contract. The LCC does not take decisions on the compensation. If the party considers itself entitled to damages it must bring its claim to the relevant court.
Agreements between market participants Prohibited agreements The Competition Law prohibits and invalidates any agreements between market participants that are intended to or may result in
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hindrance, restriction or distortion of competition in the territory of Latvia. The following agreements, amongst others, may be prohibited: • any form of direct or indirect fixing of prices and tariffs, or provisions for the same, as well as regarding exchange of information relating to prices or provisions regarding sale; • restriction or control of the scope of production or sales, markets, technical development or investment; • division of markets by territory, customers, suppliers or other conditions; • provisions that make entering, amendment or termination of a transaction with a third party subject to acceptance of obligations, the commercial effect of which are not relevant to the particular transaction; • agreements on participation or non-participation in tenders, auctions or agreements on terms of such participation or nonparticipation, unless competitors have publicly announced their joint tender and the purpose of the tender is not to hinder, restrict or distort competition; • imposition of unequal provisions in equivalent transactions with third parties, creating for them disadvantageous conditions in terms of competition; or • action (failure to act) as a result of which another market participant is forced to leave the relevant market or entry of a potential market participant into the relevant market is made difficult. Each agreement must be evaluated on its own merits in terms of background and economic circumstances and therefore it is not possible to provide an exhaustive list of the types of agreements that may fall under the restrictions of the Competition Law. However, it is fair to say that distribution or supply agreements, dealership agreements, agreements between competitors and similar arrangements are the ones most frequently scrutinized by authorities and thus requiring particular attention in the light of the provisions of the Competition Law.
Individual exemption Agreements which may be prohibited must be notified to the LCC to obtain individual exemption from general prohibition. Exemption can be obtained only upon demonstration of the beneficial effects of the agreement. The LCC will grant the exemption if it determines that the agreement
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promotes improvements in the production or sale of goods or economic progress and thereby benefits consumers, and in addition, 1) does not impose restrictions on the market participants concerned which are not necessary for achievement of these objectives; and 2) does not afford the possibility of eliminating competition in a substantial part of the relevant market.
Block exemptions The Latvian Cabinet of Ministers has enacted a number of regulations expressly excluding certain types of agreements from the notification requirement, provided they fully comply with the provisions set. Block exemptions currently have been granted to: • Agreements between carriers by sea (ie agreements the purpose and consequence of which are technical improvements in transportation means or the co-operation of sea-carriers); and • Agreements in the field of inland carriage by railway and vehicles (ie various agreements between inland carriers if the purpose or consequences of the agreement are improvements in technology or technical co-operation).
Concentration Under Latvian Competition Law, mergers of market participants and gaining of decisive influence by one market participant over the other qualify as transactions involving concentration. In particular, market participants must apply to the Latvian Competition Council for permission in cases of: • merger of two or more independent market participants in order to form one market participant (consolidation); • joining of one market participant to another; • acquisition of decisive influence by one or more market participant over another market participant or participants. Decisive influence is defined as the ability directly or indirectly to control decision making on the management institutions of the market participant through shareholding or otherwise, or the ability to appoint such a number of members of a supervisory or management institution to ensure a majority vote on the respective institution.
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Market participants must apply to the Latvian Competition Council for permission if they meet at least one of the following criteria: • the combined turnover of the parties to the transaction during the previous financial year was at least LVL25,000,000; • at least one of the parties involved had a dominant position on the relevant market before the concentration. The turnover of the parties is calculated on a worldwide basis. A dominant position under Latvian Competition Law is defined as the economical (commercial) position of a market participant or participants on the relevant market where it/they hold at least 40 per cent market share and have the ability substantially to hinder, restrict or distort competition on the relevant market for a sufficient period of time, acting fully or partially independently of competitors, clients or consumers. Notification must be submitted prior to a transaction taking place. The LCC may prohibit a transaction only if a result of transaction dominant position is formed resulting in substantial hindering, restriction or distortion of competition on any of the relevant markets. Even if the above circumstances exist, the LCC may still allow the transaction, subject to certain conditions. Up to now, the LCC has interpreted the market participant definition broadly, ruling that foreign companies directly or indirectly holding shares in Latvian subsidiaries may be considered market participants within the meaning of Latvian Competition Law and therefore even a merger of two foreign companies may become subject to notification requirements under Latvian law. Procedure and form of concentration notifications are specified by CoM regulations.
Unfair competition The Competition Law defines and rules on illegal unfair competition. Unfair competition comprises actions as a result of which provisions of laws or fair practices of trade are violated and which have created or may create hindrance, restriction or distortion of competition. Inter alia, unfair competition may be manifested by the following:
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• use or replication of a legally used name, trademark or other features of another market participant if such may be misleading as regards the identity of the market participant; • imitation of name, labelling or packaging of goods produced or sold by another market participant or use of trademark if such imitation or use may be misleading as regards the origin of goods; • dissemination of false, incomplete or distorted information regarding another market participant, its employees or goods, which may cause losses to the other market participant; or • obtaining, use or distribution of information on another market participant containing commercial secrets without the consent of the market participant, etc. In cases where the LCC determines that unfair competition has taken place, it is entitled to impose fines of up to 5 per cent of the annual turnover of the previous financial year of the violating party.
2.6
Employment Law Kronbergs Law Office Overview The primary law governing the relationship between employer and employee in Latvia is the Labour Law. The Labour Law applies to all employees regardless of status, and to all employers, regardless of their corporate structure. While it is generally possible to draft employment contract provisions with some flexibility, in cases where the parties contract out of the Labour Law to the detriment of the employee’s position, any such detrimental provisions are not binding. It is therefore important for an employer to ensure that any draft employment contract is in compliance with the statutory minimum guarantees for employees under the Labour Law. It is also the case that under Section 12 of the Labour Law, in the event that international agreements which have been ratified by the Saeima (Latvian parliament) contradict Latvian law, the provisions of the international agreements apply. Conscientious employers will review which ILO and other agreements Latvia has entered into, in order to avoid the risk of legal challenges from their employees.
Obtaining a work permit Stage one Obtaining the right to work in Latvia is generally a two-stage process, beginning with the application for a work permit. At the time of writing, the Latvian government is in the process of drafting a new set of regulations governing work permit acquisition requirements and no definitive draft is yet available. However, no radical changes from current requirements are expected. The current requirements are as follows:
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• Regardless of whether a foreigner is entering the country on the basis of a temporary resident’s permit or a visa, a work permit must be obtained in order to work in Latvia; • The employer must provide a job description to be displayed at the State Employment Department. Within a period of one month, any permanent Latvian resident may apply for the position advertised; however the employer is not obliged to accept any such applicant. At the end of this month, an application together with supporting documentation of the successful candidate must be submitted to the State Employment Department. The documentation is reviewed by the State Employment Department within 10 working days from submission. The documents currently required are: – A diploma or other appropriate certificate verifying educational qualifications; – A draft of the employment contract; – A copy of the employer’s registration certificate and statutes; – Confirmation from the State Revenue Service that the employer is not in tax arrears; – A copy of the applicant’s passport.
Stage two Once a work permit has been obtained, it will be necessary to progress to stage two. This normally means obtaining a resident’s permit, but sometimes a special visa is needed, for example for successful applicants such as scientific or educational personnel, or representatives from specific countries. In order to obtain a resident’s permit, the following documents must be submitted to the Citizenship and Immigration Department: • • • • •
Permit application; Invitation form; A copy of the applicant’s passport; Two passport size photographs of the applicant; A doctor’s certificate confirming that the applicant does not suffer from tuberculosis.
After submission, a resident’s permit will be supplied within either five days or one month, depending on whether the stamp duty paid is LVL50 or LVL150.
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Employing citizens or permanent residents of Latvia Types of employment contract Except for specified jobs which may be performed under a fixed term contract, employment contracts in Latvia are by law permanent contracts. Exceptions are outlined in section 44 of the Labour Law and include the following: • seasonal work; • work in sectors where employment contracts are not ordinarily permanent; • temporary replacement of an employee; • casual work; • employment due to temporary overflow of work; • emergency work in order to prevent the consequences of force majeure conditions or other exceptional circumstances adversely affecting or potentially adversely affecting the normal course of business; • temporary public work. Reference should be made to Regulations of the Cabinet of Ministers for a more precise breakdown of these exceptions to the permanent contract rule. Additionally, fixed term employment contracts are permitted with respect to the executive bodies of capital companies, unless they are employed on the basis of some other contract governed by civil law. The term of a fixed term employment contract may not exceed two years. Where a contract has expired but neither party has ended the employment relationship, the contract is deemed to be permanent.
Non competition clauses The Labour Law permits non competition clauses barring competition after termination only if: • the employment agreement provides that non competition is to protect the employer against such occupational activity of the employee as may cause competition; • the term of the restriction on competition does not exceed two years from the date of termination of the legal relationship;
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• it provides for a duty of the employer to pay the employee adequate monthly compensation for the observance of the restriction on competition. Employers are advised to seek professional advice prior to adding such provisions to employment contracts.
Confidentiality Under the Labour Law, an employee is obliged not to disclose any information brought to his or her attention which is a commercial secret of the employer. The employee has a duty of care to the employer in the confidential handling of such information. The employer has a duty to indicate in writing what information is to be regarded as a commercial secret.
Working procedures manual An employer with more than 10 employees is required to draft a working procedures manual in consultation with representatives of the employee, within two months of the date business activities commence. The manual must include: • • • • • • •
working hours; breaks; length of the working week; organization of working time; date, place and manner of payment; general procedures for granting of leave; labour protection measures, behavioural regulations for employees and other regulations pertaining to the working procedures of the business.
An employer is obliged to ensure each employee has access to the manual.
The hiring process Section 7 of the Labour Law provides that discrimination based on race, colour, gender, age, disability, religion, political or other conviction, ethnic or social origin, and property or marital status is forbidden.
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Under the Language Law, certain categories of employment require competence in the Latvian language.
Form of contract An employment contract must be in writing and in Latvian (although additional language versions may exist). Employment agreements must contain full particulars of the parties concerning legal names, place of residence, employer’s registration and employee’s personal identification number. Other requirements include the commencement date, term, workplace, remuneration amount, the agreed daily or weekly working hours, length of annual paid leave and the notice term. The contract must state if the employer intends to require any overtime.
Probation Unless the contract stipulates a probation period, none applies. If a probation period is stipulated, then it may not exceed three months. Employment of those under 18 years of age is not subject to probation. During a probation period, termination may be at three days’ notice and it is not necessary for the employer to give a reason for termination. If the three month period lapses without the termination of the employee, the employee is deemed to be a permanent employee under the Labour Law.
Restrictions on employment The Labour Law prohibits the employment of children under 13, and permits the employment of children between 13 and 18 only under restricted conditions. Additional protection with respect to type of work and hours worked applies to pregnant women, women within one year of childbirth and breastfeeding women.
Parental leave The Labour law provides 56 days of pregnancy leave, followed by 56 days of maternity leave, making a total of 112 leave days. Parental
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leave is 10 calendar days, and is granted immediately after the birth of a child and no later than two months after the birth. The law also contains provisions for leave for adoptive parents.
Leave and holidays All employees are entitled to annual leave of four working weeks, plus the following national holidays: • • • • • • • • •
1 January; Good Friday; Easter Sunday and Easter Monday; 1 May; 4 May (Independence Declaration Day); Second Sunday in May (Mother’s Day); 23 June (Logo Day); 24 June (John’s Day); 18 November (anniversary of the Proclamation of Independence of the First Republic of Latvia; • 25 and 26 December; • 31 December.
Hours of work The length of a normal working week for employees over the age of 18 and based on a five day work week may not exceed 40 hours. The regular working time of employees exposed to special risk may not exceed seven hours per day and 35 hours per week. Additional restrictions apply to adolescents under 18 years of age. A working week of six days but no more than seven hours per day may be agreed to in consultation with employee representatives. Overtime, if called for within the employment agreement, is permissible, but only if it does not exceed 48 hours in any four-week period and 200 hours within a calendar year. Overtime is prohibited for those under 18 years of age, pregnant women and women for a period of up to one year after childbirth, and during the entire period in which a woman is breastfeeding.
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Termination An employment contract may be terminated: • with the written consent of the parties (without notice); • on the expiration of the term of the contract (where there is a fixed term contract or where there is a contract for the completion of a specific task); • by the employer with ten days’ notice: – if the employee has, without just cause, significantly violated the employment contract or specified working procedures; – if the employee during the course of employment has acted contrary to moral principles and such action is incompatible with the continuation of employment; – if the employee has grossly violated labour protection regulations and has jeopardized the health and safety of other persons;* • by the employer without notice: – if the employee has acted illegally and therefore lost the trust of the employer; – if the employee is under the influence of alcohol, narcotic or toxic substances during the course of employment; • by the employer with one month’s notice: – if the employee is not competent to perform the contracted work;* – if the employee is unable to perform the contracted work due to his or her state of health and such state is certified by a doctor;* – if the employee who previously performed the relevant work has been reinstated;* – in the event of staff reduction;* – in the event of the employer’s liquidation.* In addition to the notice provisions outlined above, severance pay requirements may also apply in the case of the conditions marked with an asterisk(*), and where an employee terminates for just cause. In such cases, the following severance pay provisions apply: • one month’s average earnings if the employee has worked for the employer for less than five years; • two months’ average earnings if the employee has worked for the employer for less than 10 years;
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• three months’ average earnings if the employee has been employed by the employer for a period of between 10 and 20 years; • four months’ average earnings if the employee has worked for the employer for more than 20 years. Certain additional requirements apply in the case of collective redundancy. Many of the foregoing stipulations are subject to the existence of a collective agreement, which may contain more favourable terms for employees than those provided under the Labour Law.
2.7
Intellectual Property Lejins, Torgans & Vonsovics Regulatory framework Latvia is a World Intellectual Property Organization (WIPO) member state and is a signatory to most of the international treaties in the area of intellectual property protection, such as the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, the Madrid Agreement Concerning the International Registration of Marks and its related Protocol, to name but a few. Some of the main national laws regulating intellectual property protection in Latvia are: • Law on Trademarks and Indications of Geographical Origin (Trademarks Law) as of 16 June 1999 (effective from 15 July 1999); • Law on Protection of Industrial Designs as of 4 May 1993 (effective from 10 June 1993); • Patent Law as of 30 March 1995 (effective from 20 April 1995); • Copyright Law as of 6 April 2000 (effective from 11 May 2000).
Regulatory bodies Latvian Patent Board The Latvian Patent Board is an independent state institution established by the Cabinet of Ministers and operating under the supervision of the Ministry of Justice. The Patent Board is in charge of industrial intellectual property matters in Latvia. The Patent Board examines applications for and issues: • patents for inventions, • patents for industrial designs, • trademark certificates.
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The Patent Board keeps the official register of patents for inventions, patents for industrial designs and trademarks, certifies individuals qualifying to act as agents in the registration process (Patent Agents), advises on issues relating to protection and registration of intellectual property in Latvia and so on. Unlike local individuals and entities, foreign individuals and entities may only apply to and correspond with the Patent Board via patent agents. The Patent Board keeps the register of patent agents.
Appeals Council of the Patent Board This is a special body acting under the supervision of the Patent Board and has been established for the review of disputes related to registration of intellectual property rights. The Appeals Council is formed of three representatives of the Patent Board, as well as four independent specialists in science, technology and law. According to the Patent Law, a body of at least three members of the Appeals Council (one a lawyer, one a representative of the Patent Board and one an independent specialist) reviews claims brought by legal entities or individuals on decisions of the Patent Board (for example, claims on a decision to decline an application for a patent or registration of a trademark brought by the applicant, as well as third party claims of illegal registration of trademark or illegal grant of patent). Claims brought to the Appeals Council shall be reviewed within three months. Decisions of the Appeals Council can be appealed to the court.
Trademarks According to the Trademark Law, trademarks are divided into several categories, including verbal, graphic and combined. Latvian law allows the use of unregistered trademarks, provided it does not infringe the rights of the other persons and does not violate provisions of the laws and regulations. However, full protection of the trademark can be obtained only upon registration of the trademark. The applicant can apply for national registration of the trademark (only effective in the territory of Latvia) or for international registration of the trademark under the Madrid Agreement Concerning the International Registration of Marks and its related Protocol.
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Registration of a trademark is effective for a term of 10 years from the application date. It can be extended unlimited times for a further 10 year period.
Patents for inventions and industrial designs Inventors may apply for the national registration of a patent or for international registration under the procedures set forth by the Patent Co-operation Treaty. International registrations performed abroad in accordance with the Patent Co-operation Treaty will be effective in Latvia only if Latvia is indicated as one of the countries to which the registration extends. According to the Patent Law, patents for inventions are issued for the term of 20 years from the application filing date. This term may be extended for the period not exceeding five years and only in cases where the patented invention is a pharmaceutical substance subject to a compulsory testing and registration before the trading of it in Latvia is permitted, or if the patented invention is a method of preparation of the substance or a previously unknown use of the substance. Special procedures are provided for international applications filed under the Patent Co-operation Treaty. Separate provisions are devoted to a designation of the European patent to Latvia.A European patent application and a European patent granted on the basis of such an application have the same legal effect in the Republic of Latvia as a national patent application and national patent. A patent for industrial design shall be issued for a new, attractive design that can be used for industrial or craftsmanship products. Initially the patent for the industrial design is granted for five years; however at the request of the owner of the patent the term may be extended for two consecutive five year periods.
Copyright Objects of copyright According to the Copyright Law (Article 4), authors of various works are deemed to hold copyright, including, amongst others, authors of: • literary works; • dramatic and musical-dramatic works, scenarios, literary productions of audio-visual works;
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• • • •
choreographic works and pantomimes; musical compositions with or without text; audio-visual works; drawings, paintings, sculptures, graphic works and other artistic works; • works of applied art, decorations and works of scene-design; • design works etc. Without prejudice to the copyright of authors of original works, authors of derivative works are also deemed to hold copyright. According to Article 5 of the Copyright Law, such derivative works are: • translations and adaptations, revised works, annotations, theses, summaries, reviews, musical arrangements, screen and stage adaptations and similar works; • collections of works (encyclopaedias, anthologies, atlases and similar collections of works), as well as databases and other compiled works which, in terms of selection of materials or arrangement are the result of creative activity. The Copyright Law also protects the rights of performers, phonogram producers, film producers and broadcasting organizations to, respectively, performances, their fixations, phonograms, films and broadcasts as ‘adjoining rights’.
Legal substance of copyright Copyright in a legal sense is deemed to constitute movable property. According to the Copyright Law copyright consists of two categories of rights – personal and economic rights. The former may not be transferred to third parties and always remain with the author. The latter can be transferred by the author to third parties. The Copyright Law lists the following personal rights: • authorship – the right to be recognized as the author; • the right to decide whether and when the work will be disclosed; • the right to revoke a work – the right to request that the use of a work be discontinued, with the provision that the author compensates the losses which have been incurred by the user due to the discontinuation; • the right to the name – the right to require his or her name to be appropriately indicated on all copies and at any public event
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associated with his or her work, or to require the use of a pseudonym or anonymity; • the right to integrity of work – the right to permit or prohibit the making of any transformations, changes or additions either to the work itself or to its title; and • the right to legal action (also unilateral repudiation of a contract without compensation for losses) against any distortion, modification, or other transformation of his or her work, as well as against such an infringement of an author’s rights as may damage the honour or reputation of the author. The economic rights of the author are the exclusive rights to the use of the work, ie: • • • • • • • •
to communicate the work to the public; to reproduce the work; to distribute the work; to rent or to publicly lend originals or copies of a work, except for three-dimensional architectural works and works of applied art; to retransmit the work by cable; to translate a work; to arrange, to adapt for stage or screen, or to otherwise transform a work; and to make the work available to the public by wire or by other means, in an individually selected location and at an individually selected time.
Due to the specific nature of such copyright objects as software and databases, special provisions are designated for the exclusive rights of use by authors of software (computer programs) and authors of databases.
Scope of the Copyright Law and term of copyright Pursuant to Article 3 of the Copyright Law it shall be deemed that the respective person has copyright to the relevant copyright object (work) under one of the below listed circumstances: • the work is announced (communicated) in Latvia; • the work has not been communicated in Latvia but exists in Latvia in any material form; • the work is simultaneously published abroad and in Latvia (it is deemed that publication is made simultaneously if the work is
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published in Latvia within 30 days of the initial publication in a foreign country); • the work is announced (communicated) in any material form abroad if the author of the work is a Latvian citizen or a person entitled to a Latvian non-citizen passport, or a person whose permanent residence (domicile) is in Latvia; • it is provided for under treaties binding to Latvia. The performer, phonogram producer, film producer or broadcasting organization shall be deemed to have adjoining rights to the particular work under the Copyright Law if: • the performer, producer of phonograms or film producer, respectively, is a citizen of Latvia or a person entitled to a Latvian noncitizen passport, or a person whose permanent residence (domicile) is in Latvia; • the performance occurred in Latvia or the first sound fixation of the phonogram was made in Latvia, or the announcement of the phonogram occurred in Latvia, or the first fixation of film was made in Latvia; • the broadcasting organization is registered in Latvia; • the performance is fixed in phonogram to which the phonogram producer has adjoining rights under the Copyright Law; • a performance that is not fixed in a phonogram has been included in broadcast of Latvian broadcasting organization; • it is provided for by treaties binding to Latvia. As a general principle, copyrights exist for the author’s lifetime and for 70 years after the author’s death. For certain forms of works different terms of validity may apply, for example, for databases the term is 15 years from the day the database was created.
Rights to work created during employment All personal rights to the work created at the assignment of an employer shall remain with the employee, irrespective of the form of work. Also, according to the general principle, all economic rights to the work created by the employee in the course of his/her employment duties shall remain with the employee. There is an exemption to the above general principle to the effect that all economic rights to a computer program created by an employee while performing a work assignment shall belong to the employer, unless specified otherwise by contract.
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Notwithstanding the above general principle, the parties may agree to the effect that all (or some part of) economic rights to the work created by the employee are transferred to the employer.
Intellectual property protection measures Under Latvian laws an owner of intellectual property is entitled to exercise any legal measures to protect its rights, including submitting a claim with the court in order to prevent unauthorized use of intellectual property and to recover damages caused. The court may impose various measures, ranging from cease and desist orders to compensation of lost profit and surrender of items produced or profit gained. Under the provisions of the regulations by the Cabinet of Ministers, the owner of intellectual property may request the application of special customs measures to preclude release of counterfeit or piratic goods on the Latvian market. According to Regulation No 325 of the Cabinet of Ministers on Procedures for the Performance of Customs Control Measures for the Protection of Intellectual Property (passed 24 July 2001) the owner of a registered trademark or patent may initiate special customs measures to avoid importation of counterfeit products to Latvia. The owner may submit to the Central Customs Board of the State Revenue Service (Central Customs Board) a written application regarding counterfeit goods. If the Central Customs Board finds an application to be substantiated, it shall specify a time period during which customs control measures shall be applied. The customs are supplied with a detailed description and samples of original goods in order to detect and prevent the import of such products which do not correspond to the description of the original goods. A contact person is designated which the customs authorities contact in each case where suspicious goods enter the territory of Latvia.
2.8
Property Legislation and Real Estate Kronbergs Law Office Property rights The Latvian real estate market is supported by a fully developed legal and professional infrastructure for real estate ownership, occupancy, and investment. Latvian individuals and locally registered legal entities are legally entitled to own, occupy, and invest in real estate, subject to the qualification that locally registered legal entities that are majority foreign owned by foreigners from a jurisdiction that has not concluded a treaty with Latvia on mutual trade and investment protection require a permit from local government regarding land acquisition. Certain additional restrictions apply in the case of coastal and border land, agricultural and forest land, so before contemplating a purchase it is important to review the legal description and physical location of the target acquisition with a lawyer to ascertain if the planned purchaser can legally acquire the target acquisition. If the planned purchaser is not eligible to purchase the object, it may be possible to register a Latvian special purpose entity to acquire the property.
Purchase and sale agreements Besides the obvious requirements of inclusion of the particulars of buyers and sellers, legal descriptions of the real estate (cadastral number and municipal address) and the purchase price, it is wise to provide under purchase and sale agreements for an escrow closing. Purchase agreements must also stipulate who has the authority for each of the respective parties to submit, receive and sign documents
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related to registration. Particulars of the buildings being transferred should be included in transactions involving land and buildings. Due to the content of Latvian civil law, it is accepted practice in Latvia for the parties to warrant – aside from any other representations and warranties they may wish to include – that they are aware of the value of the real estate and that they waive any right to claim an annulment of the transaction or adjustment of the purchase price arising from excess loss. Where vendors are natural persons, it is advised that the consent of the vendors is obtained to ensure that no subsequent challenges related to matrimonial status interfere with the transaction. If the object of purchase includes housing inhabited by the vendor, then it is important to provide for a final date upon which the premises shall be vacated. It is also critical to provide for whether or not the sale is subject to existing leases. Agreement between the parties that the purchase is of an empty building is not binding upon any registered tenants or land book registered leases. For these and other reasons, escrow closings are the preferred approach to conveyancing. Where escrow closings are contemplated, a separate escrow agreement is required between the purchaser, seller, escrow agent, and where applicable, financing institution. Such escrow agreements should clearly set out the conditions precedent under which the proceeds of sale shall be released to the vendor and whether there is to be any adjustment in the purchase price, depending, for example, upon settlement of any debts such as outstanding utility bills etc.
Registration of title Not all buildings, apartments or land are yet registered in the land book. Where real estate transactions concern property that is registered in the land book, a notarized registration request form must be submitted. This practical and important conveyancing step in the transaction requires the involvement of a notary, yet for all other steps in the transaction, it is best to seek the advice of lawyers hired to protect their client’s interests. Latvia has revived its pre-Second World War land book registration system, with good results. Searches of the land book can reveal encumbrances such as easements, rights of common use, mortgages, pledges, arrest orders and certain other clouds on the
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title. Registration does not take place in real time and this is one of the reasons why escrow closings are the preferred approaches to real estate purchase and sale transactions. Notaries are required to prepare an application for registration of interests with the land book. Ordinarily, land book registrations are reliable indices of the state of a title. To err on the side of caution, it may be advisable to conduct a bankruptcy search on prior holders of the title, as administrators are permitted to bring actions for the recovery of debts from up to five years prior to the effective date of bankruptcy, as determined by a court. State duty of 2 per cent of the purchase price applies to real estate transfers where the real estate was acquired under a purchase agreement. Three per cent stamp duty applies if the real estate was acquired under a gift agreement, with the percentage calculated from the real estate cadastral value or the purchase price, whichever is higher.
Rights of first refusal by municipalities and other third parties Under section 78 of the Law on Municipalities, municipalities are entitled to the right of first refusal on the purchase of buildings on the same terms and conditions as those proposed by the prospective parties to the agreement of purchase and sale. While this right is very rarely exercised by a municipality, parties wishing to close the transaction in a short period of time will be faced with up to a month’s delay while the right of refusal is considered by the applicable municipality. Titles to buildings and land may be based on an undivided interest in the estate or a partitioned interest in the estate. In order to circumvent the municipality’s right of first refusal, the practice of separating one purchase transaction into two parts has gained popularity as a form of conveyancing, arguably in conflict with at least the spirit if not the letter of the law. The theory of such a conveyancing method is that as municipalities have no right of first refusal on a fraction of the undivided title to a building, they have no corresponding right of first refusal on either of the two parts being acquired, even if the result is the acquisition of the whole object. This approach to conveyancing has not yet been judicially considered, but is unlikely to be successfully challenged as the practice has become so widespread that a retroactive
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reversal of it would likely be in conflict with public policy considerations as it would have a destabilizing effect on property rights in Latvia. The right of first refusal may also apply to co-owners and cobeneficiaries and may also exist in applicable wills and lease agreements. The rights of first refusal does not apply in all types of real estate transaction, and it is best to review the application on a case by case basis.
Forms of title In 1991, Latvia began the process of denationalizing property nationalized during the 50-year period of Soviet rule. New forms of real estate ownership include the Latvian equivalents of fee simple and leased fee/leasehold ownership, easements and liens. Most aspects of commercial real estate leases are negotiable. Latvian civil laws allow for the concept of perpetual usufructs. Granted by a state or municipality in exchange for an annual fee, perpetual usufructs temporarily convey the right to use or occupy real estate for a stipulated use. Perpetual usufructs usually carry terms of 99 years, are transferable and inheritable, and typically provide options to extend the term.
Leases Most commercial real estate leases have a term of three years or more. Lease terms ranging from five to ten years are common where the landlord or tenant makes a significant capital investment in the leased space. Commercial leases generally require several months notice if either party intends to terminate the lease upon expiration. Leases frequently call for automatic renewal in the event that termination of notice is not received within the designated period. Residential leasehold interests are subject to rent control for seven years following denationalization, unless vacated by the protected tenants, in which case the premises are not subject to rent control by any future tenants. Rent control does not apply to newly built buildings. There are various possibilities for owners to revoke rent controlled tenancies, most commonly through location of substitute accommodation, usually in practice requiring the purchase of alternate accommodation for tenants. Protected
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tenancies are not transferable without the owner’s consent and a tenancy that has lost protected status is subject to market rents. Residential lessees on protected tenancies are given considerable protection under the law when it comes to eviction proceedings. For example, if a residential tenant in arrears makes part payments under a lease, it may successfully shield itself from eviction, even if the lessor in question is not made whole by the part payment and has little hope of recovering future unpaid rent. In practice, where non performing tenancies are an impediment to property development, building owners will sometimes hire property managers experienced in tenancy removal, mostly helping find alternative accommodation.
Vehicles for property acquisition, tax considerations Besides qualifying natural persons, property may be held by a variety of qualifying real estate ownership vehicles, including general partnerships, limited liability partnerships, limited liability companies and corporations. Such vehicles differ primarily in their tax obligations and in the level of legal/financial protection they provide to their investors. Enterprises are subject to an income tax of 19 per cent in 2003 and 15 per cent in 2004. Companies that enter into an agreement with the management of the Liepaja or Rezekne Special Economic Zones or the Riga and Ventspils free ports may qualify for tax incentives including an 80 per cent rebate of corporate income tax on income derived from the respective zone or an 80 per cent rebate of withholding tax on dividends and management and service fees paid to non-residents. With effect from 1 January 2001, foreign investors investing more than LVL 10 million (year on year 17 million) within three years may benefit from a corporate income tax rebate equal to 40 per cent of the amount invested if the foreign investor’s investment plan is approved by the government. The tax rebate is granted in the year the investment project is completed. If the corporate income tax imposed is less than the tax rebate granted, the unused portion of the tax rebate may be carried forward for 10 years. Dividends paid out of profits that are subject to tax under the enterprise income tax law are not included in taxable income. A 10 per cent withholding tax is imposed on dividends paid to non-residents. Resident companies and non-resident companies operating through a permanent establishment in Latvia include capital gains
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in their taxable income. For non-resident companies without a permanent establishment in Latvia, a withholding tax of 2 per cent is imposed on proceeds received on sales of Latvian real estate. Withholding taxes are imposed on the following payments to nonresidents: • dividends (at a rate of 10 per cent); • management and consulting fees (10 per cent); • interest to a related party (10 per cent, except interest paid by banks where a 5 per cent tax applies); • royalties (5 per cent or 15 per cent); • rent payments (5 per cent); • capital gains on alienation of real estate situated in Latvia (2 per cent) and any payments to offshore locations (tax havens), unless the taxpayer proves the bona fide nature of such payment (25 per cent). Sales of land and buildings are exempt from VAT, except in the case of sales of new buildings. Buildings are considered to be new for a one-year period after completion of construction or capital renovation. Registration and stamp duties applicable to sales of property are 2 per cent of the value, not exceeding LVL30,000. Transfers of shares of real estate companies are exempt from stamp duty, and this is something that may be of interest when evaluating whether to dispose of real estate through an asset sale or through a share sale. Real estate financing is widely available with local banks (increasingly foreign owned) offering a wide range of real estate financial products, including mortgages, participating debt, mezzanine/equity financing, and multi-tranche equity structures. Long term financing is generally available in US dollars and euros. To mitigate potential currency risk to the borrower, leases are frequently quoted in the same currency as the loans and converted to LVL upon payment.
Barriers Subject to certain restrictions on the purchase of coastal and border land, agricultural and forest land, there are no significant barriers to foreign owners, investors and users of Latvian real estate.
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Trends and opportunities With the development of the Latvian commercial real estate market, corporate real estate users with significant real estate portfolios are looking to sale-leaseback transactions as one method for realizing the value of their real estate for redeployment into their core businesses. Latvia’s tax and accounting regulations on sale-leasebacks are generally favourable, making these transactions popular. Institutional investors are increasingly interested in Latvian real estate, both urban and rural. There is a shortage of residential real estate in the capital city of Riga, which supports growth in residential real estate prices. There is an overabundance of class B office space in Riga, which has led to a slower rate of development of class A office space.
2.9
Dispute Resolution Lejins, Torgans & Vonsovics The Court system Description of courts Latvia has a three-tier court system that consists of district (city) courts, regional courts and the Supreme Court. The district (city) courts are the courts of the first instance. The regional courts sit both as courts of the first instance and as appeal courts hearing appeals from the district courts. The regional courts hear cases where the amount of the claim exceeds a certain threshold, as well as some specific categories of cases, such as trademark disputes, real estate disputes and others. The Supreme Court consists of two divisions, Civil and Criminal, and a Senate. The Civil Division hears de novo appeals from the Regional courts on issues of law or fact, while the Senate hears appeals on issues of law only (‘cassation’) from both the regional courts and the Civil Division of the Supreme Court.
Judges No juries are formed in any cases. Civil cases are tried by a single judge in the district courts. When the regional courts are sitting as trial courts, cases are tried either by a single judge or by a judge and two assessors. Appeals are heard by a panel of three judges. At the Supreme Court level both de novo appeals and cassations are heard by three judges.
Jurisdiction Depending on the value of the claim, personal injury cases must be filed in either the Regional Court or District Court. If the value of the claim does not exceed LVL30,000, the case must be filed in the
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appropriate District Court. Claims in excess of LVL30,000 must be filed in the Regional Court. Generally the action with a Latvian court will be brought against legal entities registered in Latvia. While, theoretically, actions can be brought against foreign legal entities, from a practical point of view it will be difficult for a court to obtain personal jurisdiction over an entity not registered in Latvia.
Description of trial, costs and timing Hearing The procedural rules for proceedings (trials) in the state courts are set forth in the Civil Procedure Law of 14 October 1998. Proceedings in Latvian courts are oral. At the outset of a hearing the parties make opening statements briefly stating whether the claim is maintained by the plaintiff and admitted by the defendant. First the plaintiff ’s evidence is presented and witnesses questioned and then the defendant and its witnesses are given the floor. Once the hearing of the parties and their witnesses is completed, the judge considers any submitted written evidence. The hearing of the evidence is followed by debates. During debates the parties present their closing statements. The parties may not refer to any circumstances and evidence that has not been heard during the hearing. After the parties have presented their closing statements and extended remarks on the statement of the opposite party, the court leaves to confer. In most matters the summary decision will be announced by the court on the same day, followed by publication of the full text of judgement (containing the evaluation of evidence presented and the court’s reasoning) at a later date set by the court.
Role of judge and lawyers The role of the judge in a hearing is to conduct the proceedings and decide on the requests advanced by the parties. Generally, the court does not undertake any activity aimed at collection of evidence at its own initiative. However, it may question parties and witnesses and order expert reports etc without any request from the parties involved. Lawyers at the hearing act as representatives of their respective party with all the rights of such a party, including the right to render an opening statement, question witnesses, experts and the other party, present evidence and give the closing statement.
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Costs of litigation The costs of litigation are divided into two categories: • court costs; and • costs related to management of the case. The court costs are comprised of: • state duty for the submission of the claim; • chancellery duties (for copies of the case materials etc); and • costs incurred to review the case by the court (sums to be paid to experts, postage expenses etc). The state litigation duty is based on the value of the claim. For example, if the sum of the claim is between LVL20,001 (approximately US$33,000) and LVL100,000 (approximately US$170,000) the state duty for submission of the claim would be LVL440 (approximately US$730) plus 1 per cent of the sum in excess of LVL20,000. The case management costs are comprised of: • legal fees; • cost of travel to the court hearings; and • costs incurred to collect evidence (such as translation costs etc). The court orders the losing party to pay the winning party’s court costs. If the claim has only been partially granted, the plaintiff is entitled to recover court costs in proportion to the scope of claim granted by the court and the defendant is entitled to recover in proportion to the scope of the claim that has been denied. In addition to the recovery of court costs, the case management costs are paid by the winning party, however the defendant may recover its costs only if the plaintiff ’s claim is entirely rejected. The following limitations apply to recovery of case management costs: • legal fees are recoverable in full, but must not exceed 5 per cent of the total claim granted; • travel expenses are recoverable in accordance with the rates established under Latvian laws; • costs for the services of an expert are recoverable in an amount not to exceed an average fee charged for the relevant services in particular locality.
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Timing There is a significant backlog of court cases that have yet to be heard in Latvian courts and so a relatively long period may elapse before a final decision is obtained. For instance, the first hearing with the court of the first instance is usually scheduled to take place in around three months but appeals may take over a year. The hearing of appeals under cassation procedure is usually scheduled to take place within approximately two and a half months. Once a hearing is scheduled, the process should advance relatively quickly. However, procedural rules allow postponement of hearings for various reasons. Since judges’ calendars are so full, postponed hearings may have to be re-scheduled several months ahead. On most occasions the hearing itself would not take longer than a day or two, but this depends on the complexity of the case. Once the summary decision is announced by the court, the full text of the judgement must be prepared within 14 days.
Arbitration An alternative to the resolution of disputes in a court of law is arbitration. Arbitration is often preferred because the process takes less time. One additional factor in the decision to choose arbitration over litigation is the fact that Latvia has not yet joined the Lugano Convention on Jurisdiction and Enforcement of the Court Rulings in Civil and Commercial Cases. This means that recognition and enforcement of the rulings of foreign courts is limited to the rulings of the courts of countries with which Latvia has entered into bilateral agreements. Those are relatively few and include such countries as Lithuania, Estonia, Russia, Ukraine and Poland. Since Latvia joined the UN (New York) Convention on Recognition and Enforcement of the Rulings of Foreign Courts of Arbitration, enforcement procedures of rulings of arbitration are relatively simple and not time consuming. The criteria for recognition stated in the local laws do not differ much from the provisions of the Convention. As there are still ongoing theoretical disputes on recognition and enforcement of the interim awards within the framework of the Convention, problems may arise when the interim award has been submitted to the Latvian court for recognition. The state duty payable for the recognition of the award of the court of arbitration is comparatively low.
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In addition to the speed of review and relative simplicity of enforcement, arbitration is appealing because decisions are final and not subject to further appeal. However, this could also of course be seen as a negative aspect, particularly in the context of local arbitration courts, due to the impossibility of contesting even plainly unfair decisions. There are a number of local courts of arbitration in Latvia. The ones most commonly used are Riga International Court of Arbitration, Latvia International Court of Arbitration and the Court of Arbitration of the Chamber of Commerce and Industry. Alongside local courts of arbitration, international courts of arbitration are also used, mostly in international business transactions with high values justifying the higher costs of arbitration. The most commonly used international arbitrations are the Arbitration Institute of the Stockholm Chamber of Commerce and ICC International Court of Arbitration. Ad hoc arbitrations are relatively less popular.
Simplified debt collection procedures The Civil Procedure Law provides for the possibility in certain limited circumstances to avoid lengthy full proceedings before the state court and to obtain the court order for debt collection under simplified proceedings.
Non-adversary debt collection In cases where, for example, the parties have agreed on nonadversary debt collection and agreement between the parties is approved by the public notary or where obligations have been secured by mortgage or commercial pledge, the creditor may request the court to enforce non-adversary debt collection. The mandatory condition for filing a non-adversary debt collection request to the court is notification of the debtor prior to filing. The request is reviewed and the decision is made by a single judge without holding a hearing within seven days of submission of the request. If all the criteria provided under the law are met, the judge issues a decision to enforce non-adversary debt collection.
Compulsory debt collection following the notification procedure Another possibility that makes debt collection less time consuming is compulsory debt collection subject to notification.
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Under this procedure, in cases where the creditor holds the instrument that is due and is not paid, the creditor may submit an application to the court. The court will send the debtor a notification proposing to settle the debt within 14 days or submit objections to the court. If the debtor does not object to the claim and does not settle the debt, the court will adopt a ruling on compulsory collection of the debt.
The Constitutional Court The Constitutional Court (Satversmes tiesa) is an independent institution entitled to hear cases on compliance with the laws and other legislative acts of Latvia, with Satversme (the Latvian Constitution), the compliance of legislative acts with acts of higher legal force and the compliance of legislative acts with international agreements concluded or joined by Latvia. The Constitutional Court does not hear disputes arising from applications of the law. The following may submit a claim to the Constitutional Court: • • • • • • • • • • •
the President; Saeima (Parliament); no less than 20 members of Saeima (Parliament); the Cabinet of Ministers; the Prosecutor General; the Council of the State Control; any municipality; the State Human Rights Office; a court; a judge of the Land Register; an individual whose fundamental rights have been violated
If the court proceeding in the Constitutional Court is initiated by the individual whose fundamental rights provided by Satversme have been violated, this person is required to demonstrate that all other means have been exhausted prior to turning to the Constitutional Court. The Constitutional Court was established in 1997. Since then it has had an increasing impact on the interpretation of laws and other legislative acts. Its rulings are of equal force to the law and may not be appealed.
2.10
Import and Export Procedures Lejins, Torgans & Vonsovics International framework In 1998 Latvia entered the Treaty of Europe (Treaty on Formation of Association between the EU and its member states on one side and the Republic of Latvia on the other, effective from 1 February 1998), which inter alia provides for the establishment of free trade relations between Latvia and all member states. Also, in the same year Latvia became a member of the WTO. In addition to the above, Latvia is a party to a considerable number of other bilateral and multilateral international documents in the fields of free trade, economical co-operation, customs, promotion of investments etc.
National laws (Latvian customs law system) The Latvian customs system is based on WTO and EC customs practice. The Latvian Customs Law (passed on 11 June 1997) is largely similar to the EC Customs Law. It sets forth the general legal framework in relation to import and export of goods, specifies customs procedures, rights and responsibilities of the parties involved in the export/import operations etc. Some of the other important legislation related to customs issues are: • Law on Customs Tax (Tariffs), passed on 29 September 1994, setting forth customs tariffs on import and export for each particular product group; • Law on Value Added Tax, passed on 9 March 1995, regulating VAT payment issues (which are noteworthy for import/export operations);
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• Law on Excise Tax, passed on 25 November 1999, setting forth the general legal framework for excise tax payments in Latvia (important for import/export operations if the relevant goods are deemed excise goods in which case they will be subject to excise tax payments, as well as possibly being subject to specific customs procedures). In addition, a number of special laws have been passed to regulate excise tax payments for specific groups of excise products, ie tobacco products (Law on Excise Tax on Tobacco Products as of 29 October 1998), alcoholic beverages (Law on Excise Tax on Alcoholic Beverages, 29 October 1998), oil products (Law on Excise tax on Oil Products of 13 November 1997) and beer (Law on Excise Tax on Beer of 25 November 1999).
General principles of import/export operations The following briefly summarizes some of the basic provisions of the Customs Law and other customs-related Latvian laws and regulations, highlighting basic principles and concepts applied under Latvian customs laws.
General Customs clearance is to be carried out either at the border or inland within a bonded warehouse. Import operations can only be carried out by Latvian-registered legal entities. Foreign businesses must be assisted by local agents. Non-residents may carry out customs clearance for transit or temporary import only. Tariff rates vary according to the specific agreement entered with each particular country. If a country has entered into a preferential trade agreement with Latvia, the rate of import tariffs is lower, usually 0 per cent.
Customs value In 96 per cent of cases, customs duty is levied on the basis of ‘transaction value’ to which transportation and insurance costs are added. Royalties and licensing fees also may be included in the transaction value. WTO/GATT valuation principles are applicable in all other cases. Customs has a database with the approximate prices of various goods and will not accept a differing price at the border if the
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difference between customs information and the price shown in the invoice is 30 per cent or more. In this case, customs will collect a guarantee bond which will be calculated on the basis of customs information. Similar issues could arise if a transaction is entered into between related parties.
Related parties A reduction of the import price in transactions between related parties may create problems with the valuation of goods for customs purposes. A price difference will be investigated by customs before it is accepted as substantiated. For this purpose the importer may demonstrate one of the following: • the value of the transaction closely approximates the value of transactions with identical or similar goods for export to Latvia in non-related party transactions occurring at or about the same time; • there is evidence to certify that the relations between the persons concerned do not affect the price paid (for example, the price is affected by seasonal discounts available to any party). Customs are allowed to apply the import price of other similar products in order to establish the value of the goods for customs purposes. Under the Customs Law, the parties to a transaction are deemed to be related if they fall under any one of the following categories: • one party to a transaction is involved in the management of a company owned by the other; • both parties are joint owners of one and the same company; • the parties are employer and employee of the same company; • one party has votes and holds or controls, directly or indirectly, 5 per cent or more of the shares in a company owned by the other; • one party controls, directly or indirectly, the other; • both parties are controlled, directly or indirectly, by a third party; • both parties jointly control, directly or indirectly, a third party; • the persons are married or related. In related party transactions it is likely that customs valuations will cause problems, therefore a company should prepare as many documents as possible in advance to prove that the price charged is
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an arm’s length price. There is no official list of documents that can be demanded by customs.
Customs payments No customs duty is payable on most types of non-agricultural goods when moving between Latvia and its Free Trade Agreement partners. Another important exemption applies to the temporary import of goods for reprocessing. Goods to be just stored or repackaged in a free zone or bonded warehouse are not subject to any import duties, tax on natural resources or VAT. Duties and taxes only become payable on customs clearance for consumption in Latvia. All imports into Latvia are subject to VAT at the rate applied to domestic goods. The input tax can be credited against the tax payable on sales subject to the requirement that the seller (importer) is a registered VAT payer. Certain reliefs are granted for imported fixed assets and foreign investments (see ‘Foreign investments’ below). Excise tax is imposed on manufacturing or import of alcohol, spirits, wine, some types of beer, tobacco, coffee, soft drinks, cars and fuel. Under particular circumstances an exemption from excise tax can be granted on import of the above goods. Certain goods subject to excise tax, such as tobacco and spirits, are subject to special trade rules and special procedures for payment of tax. Natural resource tax is payable on the packaging of imported goods, packaging material and goods dangerous to the environment.
Customs and storage Bonded warehouses may be used for temporary tax deferral during storage of imported goods. Payment of customs duties, VAT, natural resources tax and excise tax is postponed as long as the goods are not released for consumption within Latvia. Certain processing operations may also be performed in these warehouses. The storage of goods has no time limit. Bonded warehouses may also be used for export and transit goods. Only specified bonded warehouses are authorized to store alcohol, cigarettes and oil products.
Port of entry and inland transport Goods can be imported through any road, rail or river border crossing points, through Riga Airport or any of the Latvian commercial ports, the largest being Riga, Liepaja and Ventspils.
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Certain goods, such as tobacco and spirits, can only be imported through specially designated border crossing points. A guarantee is needed when clearing customs inland. For instance TIR Carnet is acceptable as the guarantee.
Origin In Latvia there are essentially the same rules of origin as in the EU, since during the process of approximation of legislation the EU Customs Law has been taken on almost in its entirety. As a result, in Latvia there are the same preferential origin and non-preferential origin rules, with less variations of preferential origin. If processing in a transit country exceeds simple operations, the product will be treated as originating in the transit country (new country of origin).
Temporary import Special customs procedures for temporary imports can be applied if goods are to be re-exported within a given time period not exceeding two years. In order to import goods on a temporary basis, special permission must be obtained from customs authorities. In addition to the documents required for ordinary import procedures, a contract must be presented to customs showing that title to the goods will not pass to a Latvian registered entity. In certain circumstances it may be possible to obtain an extension for a temporary import. However, in practice customs authorities rarely issue such extensions. It is possible to custom-clear items brought on the basis of a temporary import procedure. In this case they must be declared as imports and customs tariffs. Natural resource tax, excise tax and VAT, if applicable, is payable on the full value of the goods at the time they were first brought into Latvia.
Foreign investments The Law on Value Added Tax provides that when assets are imported into Latvia the importer is liable to pay 18 per cent VAT as well as import duty. Nevertheless, the company can obtain VAT exemption on the basis of any one of the following: • fixed assets imported as foreign investment in the share capital; • performing standard procedures for fixed asset imports.
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Foreign investments in share capital are exempt from import duty and VAT. Prior to importation, an increase in the share capital must be made and specific documents must be prepared for submission to customs and the State Revenue Service (SRS). Under standard procedures, fixed assets are exempt from VAT, however there is no relief from other taxes under this option. It should be noted, however, that certain fixed assets may not qualify for VAT exemption on import by reason of being included in a list of assets approved by the Ministry of Economy. This list details assets which are either produced locally or for which their import would cause a distortion of competition. If the inventory and fixed assets originate in Europe (EU, EFTA, CEFTA and FTA countries), in practice there is no difference from the perspective of customs payments, either under the procedure of foreign investment in share capital importation or importation of fixed assets under standard procedure.
Anti-dumping Pursuant to the Anti-dumping Law of 16 December 1999, the State Internal Market Protection Bureau (SIMPB) was established as a regulatory body charged with monitoring anti-dumping matters. SIMPB performs investigations to determine whether the import of particular products to Latvia takes place at dumping prices and determines the necessity for and scope of the measures to eliminate the negative effects of dumping. If the price of a product sold on the Latvian market is suspiciously low, ie lower than the price on the market of the exporting country, SIMPB may commence investigation to determine whether dumping is the reason. Investigations can be commenced either at the initiative of SIMPB itself (if it has sufficient proof to consider that dumping is taking place) or at the initiative of local producers if they are able to advance sufficient proof of dumping and subsequent damage to local industry. If dumping is proved, SIMPB may impose anti-dumping payments up to the amount of the dumping margin as determined during the course of investigation. The anti-dumping payment shall be charged on import of the respective products on top of regular customs payments.
Part Three Finance, Accountancy and Taxation
3.1
Financial Sector Kevin R Smith, AWS Structured Finance Ltd Introduction As with any sector in an emerging economy, the financial services sector has undergone massive changes in recent years. However, despite the progress already made, there is still further to go. All three Baltic States countries are small – Latvia has a population of only 2.7 million – and this makes some aspects of change easier but others more difficult. It remains a common misconception that the Latvian currency (lat) is restricted in some form. This is not the case and the lat is fully convertible. The Governor of the central bank of Latvia (Latvijas Banka) has recently predicted that Latvia will adopt the euro somewhere between 2006 and 2008, following Latvia’s admission into the European Union in 2004.
Banks There are 23 banks in the Latvian banking sector, although the three largest banks account for approximately 53 per cent of the country’s banking assets. At the end of May 2002, total assets in the banking system amounted to LVL3.7 billion and there has been solid growth in recent years. The largest bank is Parex Bank, which represents 19.8 per cent of total banking assets, slightly ahead of Latvijas Unibanka (17.8 per cent). The third largest bank in Latvia is Hansabank (15.5 per cent), and Hansabank also has a very strong presence in Estonia and Lithuania. As evidenced by the continual growth in banking assets, the number of bank accounts and outstanding loans continues to grow. As of April 2002 there were over 1.7 million bank accounts held with commercial banks in Latvia and the volume of demand
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deposits in client accounts grew twice as quickly as the number of accounts. Over 77 per cent of the accounts were opened with the top four banks and almost 90 per cent of the accounts belonged to Latvian residents. The amount of loans issued by banks in 2001 came to LVL1.6 billion and increased 51 per cent between 2000 and 2001. A large percentage of the loans were to private companies (LVL1.23 billion) and individuals (LVL245 million). Over the same period deposits grew by 25 per cent of which LVL697 million came from private companies. All the main Latvian banks have now been privatized although the state does retain a number of minority stakes. As in other countries in this region, many of the banks are competing in the same sector and initially focused on foreign companies operating in Latvia and the larger local corporates. Competition has been fierce, and this has resulted in a number of the banks widening their focus and looking at smaller corporates and the retail sector. Given the close proximity of Scandinavia, it is the Finnish and Swedish banks that have had the greatest influence on the banking sector and which are the biggest outside investors. Their influence is obvious and can be seen in the growth and sophistication of electronic banking, back office systems, customer service and other areas. Overall, the banking sector is both well developed and sophisticated and offers virtually all the products and services that would be expected in any developed market economy. Telephone banking is widely available and Internet banking is being introduced by many banks. One part of the banking sector that has yet to make significant progress is the provision of residential mortgages. Without doubt this market will become very important in the future but due to factors such as legislation that makes it difficult for the lender to repossess the property in need, and the lack of long term loans it will be some time before major developments are seen. However, most of the bigger commercial banks are now running programmes to promote residential mortgages and are experiencing very rapid growth (albeit from a low starting point) in the size of their mortgage portfolios. This competition is leading to the availability of longer term loans and lower interest rates and this in turn increases demand still further. One other part of the banking sector that has been relatively slow but is now beginning to take off is the debit and credit card
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market. The majority of visa and mastercards are actually debit cards rather than credit cards, as in the UK, but the number of transactions using these cards each year doubled to 5.3 million between the end of 1999 and the end of 2001 and continues to grow. At present, only about one in six retail outlets accepts cards but as this increases so too will the level of use.
Financing trade and projects Approximately 90 per cent of all trade in the European Union is conducted on an open account basis although many companies have some form of credit insurance. Trade with Latvia has not as yet reached the EU level but some 70 per cent of trade is conducted on this basis. Over the years there have been many successful projects financed on a non-recourse project finance basis. These have been structured both with and without assistance from the British Export Credit Guarantee Department (ECGD) and other export credit agencies. In recent times ECGD has changed its policy on financing projects in the region in order to secure more business and this means that projects that were previously unable to obtain cover may now do so. Perhaps the most important change is that ECGD no longer needs a government guarantee in many cases but will look at municipality or large local corporate risk. In addition, the private insurance market has an increasing appetite for risk in the Baltic States. The trend towards financing major projects by way of partnerships established between central and/or local government and private companies has not gone unnoticed in Latvia. Whilst progress was being made under the previous government, the new government elected in the autumn of 2002 appears to be even more in favour of public-private partnerships as there is ever growing recognition of the impact that PPPs can have in developing infrastructure such as roads, rail, water treatment plants and many other large projects. Actual progress on this front has been slower than in other EU accession countries but it is hoped that momentum will start to build shortly and if the new government demonstrates its commitment to PPP, Latvia has the potential to overtake a number of other countries in the region. In order to make these projects happen, laws need to change and attitudes and ideas need to become more flexible. However PPPs offer the most realistic way to finance many of the projects required
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and as this becomes more widely understood the number of PPP projects in the country will increase dramatically. As Britain and British based firms are world leaders in this type of finance, the development of this sector in Latvia offers many opportunities in the future.
Investment funds A small number of investment funds and providers of private equity have been active in Latvia for many years, although their role is continuing to expand as the country’s economic growth continues. In an effort to promote the sector, the EBRD has invested in a number of funds although the majority of the equity funds have their roots in either Scandinavia or the USA. In very simple terms the preferred scenario for a fund is to invest between US$1 million and US$5 million in a joint venture company with a local partner and a foreign strategic investor. Clearly this is over-simplified and for the right project both smaller and much larger funds can be found and any commercially sound project can, in theory, attract funds. A number of locally based funds are effectively subsidiaries of global funds or are linked to banks. As the market continues to mature and stabilize the growing demand for this type of funding is being met by the creation of new funds and the expansion of existing ones. The sector remains difficult given the constraints in which it operates but steady growth is expected to continue.
Insurance Life insurance, as in all the emerging markets, is very underdeveloped in comparison with western Europe or the USA, as is the private pensions industry. The level of gross premiums increased by 27 per cent in 2002 and totalled some 5.76 million lats but this was still not sufficient to offset the falls in premiums paid in 2000 and 2001 and in 2002 premiums paid were only about half of the 1999 figure. This pattern is unusual, as the level of life insurance premiums is growing quite strongly in the other EU accession countries. At the end of 2002 six life insurance companies operated in Latvia. The development of private pensions is also now taking hesitant steps forward. As with every country there is an urgent need to
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move away from the provision of pure state systems and legislation has been changed to allow the implementation of the second and third pillars (mandatory and voluntary contributions to a private pension fund). The non-life and general insurance sector is, in general, reasonably well developed but the sector has been hampered by the number of fraudulent claims and the low level of payouts made in the past – especially in the motor sector. There are now 15 non life insurance companies and four pension funds in Latvia.
Legal Section Two of this book is dedicated to legal issues, but given the impact of legislation on doing business in the financial services sector it is appropriate to include a very brief outline here. The legal sector, or more correctly the law, has undergone more change than perhaps any other sector. A number of international law firms are present and many have been instrumental in adapting old legislation and writing new laws. As the Latvian economy moves ever closer to a market driven economy, the need for legislation to change to allow the economy to expand and foreign companies to invest and trade in a safe environment becomes ever greater. The scope and depth of these changes has increased significantly as EU membership beckons. It is true that many of the laws are not directly comparable with UK or EU legislation but much progress has been made. However, implementing new legislation is only one aspect of changing laws. It is widely recognized that the interpretation of new laws can on occasion be questionable and it is also generally recognized that there remains an element of corruption that in some cases can undermine the system as a whole. In addition, the judicial system is lacking in experience although this will of course improve over time.
Accountancy One of the requirements for any company wishing to raise debt or equity funding, trade finance, or establish any form of partnership with a foreign party is the need to produce accounts to international accounting standards. Latvian accounts are often not very transparent, rather brief and open to interpretation and so not very reliable.
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All the large foreign accountancy firms are present and the trend towards international accounts is trickling down to the smaller companies. Chapter 3.2 considers these issues in more detail.
Stock exchange As is common with most of the stock markets in the emerging markets the stock exchange is not very liquid with only a limited number of companies listed and this can impact on many other aspects of the financial services sector. For example, the limited market restricts the activities of insurance and pension fund asset managers, does not encourage long term savings which in turn reduces the possibilities of the provision of long term loans and does not enable it to act as a provider of fresh capital to fund the growth of local companies. Market capitalization at the end of September 2002 was LVL422 million and whilst the number of listed shares remained fairly constant at 62, the number of large companies on the official list dropped from six to only three. There is a co-operation agreement in place with the London Stock Exchange and one Latvian company (Latvijas Unibanka) is listed in London.
Corporate governance The way in which business is conducted, the transparency of transactions and relationships, minority shareholder rights and general financial management are some of the main concerns behind corporate governance. As with many aspects of the financial services sector in Latvia much has been done but more needs to be done. Much effort is now being put into addressing many aspects of corporate governance, and indeed the new government that came into power in autumn 2002 did so largely on the back of reducing corruption and increasing transparency.
Regulation In July 2001 the Financial and Capital Markets Commission officially took over responsibility for the regulation of the financial sector in much the same way as the FSA does in the UK. This
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includes banks, insurance companies, pension funds, investment funds and the capital markets. Regulation and supervision of the various parts of the financial services sector were generally regarded as being relatively good prior to this change to one supervisor and the new body continues to improve the situation, although it is recognized that the lack of experienced professionals is a limiting factor.
Summary The financial services sector has been totally transformed over the last 10 years and while mistakes have been made and there is still more to be done, the progress made has been remarkable and many of the past mistakes have already been recognized and rectified.
3.2
Accountancy and Audit Deloitte & Touche Introduction Accounting and auditing in Latvia is regulated by two main laws: Law on Accounting and on Annual Reports of Enterprises (both dated 14 October 1992), which are based on the 4th and 7th directives of the EU. The latest amendments to the Law on Annual Reports of Enterprises were passed on 20 April 2001 and relate mainly to the definition of financial statements and annual reports. The Law on Accounting outlines the basic principles and rules which must be followed in accounting records, stock taking and annual reporting. The law also designates the institutions which are responsible for adopting and introducing methodological guidelines concerning accounting, and the penalties which may be imposed for violating the law.
Structure The Law on Annual Reports of Enterprises and the Law on Accounting apply to all enterprises and non-profit organizations that are registered with the Enterprise Register of the Republic of Latvia, irrespective of the type of entrepreneurial transactions they undertake or of the property they possess. The Law on Annual Reports of Enterprises includes the following sections: • general provisions; • layouts of balance sheet and profit and loss account; • special provisions regarding individual items of the balance sheet; • special provisions regarding individual items in the profit and loss account;
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• • • •
valuation rules; rules for the content of notes; management report; regulations on the completion and signing of annual reports of enterprises; • auditing and publishing of the report. The Law on Accounting also applies to institutions and organizations which are financed from the state and municipal budgets, to all public organizations, their associations, foundations with limited numbers of participants, religious organizations and trade unions. According to current legislation, accounting records shall: • clearly display the transactions and financial results of a company; • give a true and fair view of its financial position. The records shall be kept in such a manner as to enable any person who is qualified in accounting to clearly identify: • the financial position of a company; • the business transactions made in a given period of time; • the beginning and the sequence of each transaction. The accounting principles addressed in the Law on Accounting are those of: • • • • • • • •
going concern; consistency; continuity; clarity; truthfulness; comprehensiveness; the accrual method of accounting; the historic cost principle.
The Law on Certified Auditors, dated 3 May 2001, governs the activities of certified auditors in Latvia. To become a certified auditor, a person shall fulfil all the requirements and pass the examinations of the Latvian Association of Certified Auditors. The Association may cancel a certificate in accordance with its stated procedures.
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Practice The accounting period shall be 12 months, usually but not necessarily the calendar year. A newly formed company may have a longer or a shorter accounting period for the first year, but it may not exceed 18 months. If the accounting period is changed for an already existing company, it shall not exceed 12 months. Where either a company terminates its activities or the beginning of the accounting period is changed, it may be shorter than 12 months. The measure of value must be a monetary unit of the Republic of Latvia (Latvian lats) and the accounting language must be Latvian. All the codes, abbreviations, separate letters and symbols used in accounting records shall be explained. The accounting records and all the confirming documents shall be stored in Latvia. Each entry in the accounting ledger must be confirmed by a document justifying that entry in the prescribed form. An annual report consists of: • • • • • • •
balance sheet; profit and loss statement; cash flow statement; explanatory notes; other relevant information; management report; auditors report.
All annual reports are subject to a mandatory audit by a certified auditor selected by the shareholders of the company if at least two of the following thresholds are exceeded: • total assets – LVL100,000; • net turnover – LVL200,000; • total number of employees in the reporting year – 25.
Essentials Latvian accounting principles are being brought into line with the international standards which apply in their respective fields. The Law on Accounting applies to the permanent establishments (subsidiaries, departments) of foreign-owned enterprises registered with the Enterprise Register of the Republic of Latvia.
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The Law on Annual Reports of Enterprises does not apply to banks or to credit institutions and insurance companies, which are regulated by special Acts of Parliament. Nor does it apply to farms and fisheries and individual businesses where the annual income from business transactions is less than LVL45,000 at the beginning of the reporting year. Companies which form part of a group shall have the same accounting period. Where a partner in an economic activity is a foreign person, a second accounting language, which has been agreed upon by the parties and is acceptable to the auditors, may be used. A company may freely appoint a certified auditor to perform an audit. A company must submit a copy of the audited annual report, the management report, the auditor’s report and the date on which the annual report was approved by the shareholders to the State Revenue Service and to the Enterprise Register not later than a month after approval of the annual report and not later than four months after the end of the reporting year.
Concerns Additional requirements for specific documentation, such as the presence of the company seal, etc, are provided by the Cabinet of Ministers. A company’s secret information shall be disclosed to the auditors and to the tax administration reviewing the declared taxes, as well as to other state institutions in accordance with procedures provided by the legislation. Although other information included in the accounting records is considered to be a commercial secret, the information and data included in an annual report are not classified as a commercial secret of the company.
3.3
Business Taxation Deloitte & Touche Introduction Having gained full independence from the Soviet Union in 1991, Latvia swiftly began to adopt free market principles. The benefits of this quick transition include the dynamic growth of Latvia’s private sector and trade with Western countries. The government strongly supports privatization and has developed a programme that significantly streamlines the privatization process. As a rule, foreign investors have the same rights and are granted the same privileges as Latvian investors.
Structure The following forms of business organization are common in Latvia: • • • • • • • •
Joint stock company; Limited liability company (may be also owned by one person); Representative office; Permanent establishment; Branch; General partnership; Limited partnership; Sole proprietorship.
Foreign trade offices and branch offices can also be opened in Latvia. Only joint stock companies and limited liability companies are considered separate entities under the law. Partnerships and most sole proprietorships are not subject to corporate income tax. In the case of partnerships, the individual partners are subject to personal income tax or corporate income
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tax, as appropriate, or in proportion to their shares of the partnership profits. The income of a sole proprietorship is generally subject to personal income tax in the hands of its owner.
Resident entities Resident companies are subject to corporate income tax on their worldwide income. A resident company is one that is legally registered and established in Latvia. Dividends received from another resident company are not included in taxable income, unless the payer is exempt from corporate income tax. Dividends received from a non-resident company are included in taxable income. A tax credit is available for taxes paid to other countries on foreign-source income. The amount of the credit, on a per-country basis, may not exceed the amount of Latvian tax that would have been payable on the foreign source income. Capital gains are included as taxable income and are taxed at the normal prescribed rate. Losses realized on the sales of securities may only be set off against gains realized from the sales of securities. Other capital losses may be set off against ordinary income realized by the company. Losses not utilized during the current year may be carried forward for five years. Companies primarily engaged in the exploitation of natural resources may carry forward losses for 10 years. No carry-back of losses is allowed. Latvian law includes group relief provisions. A group consists of a parent company that is resident in Latvia or a country with which Latvia has a tax treaty and its resident subsidiaries where the shareholding in the subsidiaries is 90 per cent or more. A company qualifies as a small company if it meets two of the following three criteria: • Fixed assets valued at no more than LVL70,000; • Net turnover no more than LVL200,000; • No more than 25 employees.
Non-resident entities Non-resident entities are subject to income tax on Latvian-source income only.
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Any entity that is legally registered and established in any country other than Latvia is considered non-resident. Latvian permanent establishments of non-resident entities are considered resident entities separate from their non-resident parent entities. Any income received from outside the country by a Latvian permanent establishment is considered taxable.
Practice The amount of profit shown in the company’s annual financial statements is the starting point for determining taxable income. The amount must then be adjusted for tax purposes, eg any expenses or losses that are disallowed for tax purposes must be added back into income. As a rule, business expenses are deductible for corporate income tax purposes if they are directly connected to the generation of taxable income. A single corporate income tax rate of 19 per cent applies to all companies for 2003. The tax burden, although not the rate of tax, may be reduced for small companies by 20 per cent. From 1 January 2004 the rate will be further reduced to 15 per cent, and the small companies discount will be withdrawn.
Investment incentives Most tax incentives available to new foreign investors were discontinued with effect from 1 April 1995. However the following benefits are available to qualified investors: A joint stock company or limited liability company certified as an investor in a designated special economic zone (ie Liepja or Rezekne) may enjoy all the tax benefits in effect when the certificate is issued. Current tax advantages include: • reduction in corporate income tax of up to 80 per cent; • reduction of immovable property tax of between 80 per cent and up to 100 per cent; • ten-year tax loss carry forward. (The zones were created in 1997 and are valid for 20 years).
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An enterprise that receives a permit may enjoy the incentives granted by the free port regime. Under this regime, imports from and exports to foreign countries are exempt from VAT and excise and customs duties. Companies initiating a qualifying ‘large investment’ in Latvia may be eligible for a reduction of corporate income tax equal to 40 per cent of the investment. Requirements to qualify are: • • • •
Minimum investment of LVL10 million; Investment in fixed assets; Investment completed and implemented within three years; Approval of the project by the Latvian Ministry of Finance.
Companies in Latvia manufacturing high technology goods may qualify for the ‘High Technology Company Incentive’ of a 30 per cent reduction on the statutory corporate income tax rate. The following criteria are applied: • High quality goods to be approved by the Ministry of Finance; • High technology goods to represent not less than 75 per cent of the company’s turnover; • The company to have either ISO 9000, ISO 9001 or ISO 9002 certification.
Depreciation The declining balance method of depreciation is specified in Latvian tax law for fixed assets. Therefore, tax depreciation may not be the same as depreciation for accounting purposes. The rates specified in the law are: • Buildings: 5 per cent; • Oil rigs, equipment located on oil rigs and ships used for the exploration and exploitation of natural resources: 7.5 per cent; • Certain equipment related to transportation and energy: 10 per cent; • Computers, software and office equipment: 35 per cent; • Other fixed assets: 20 per cent. In practice, these rates are doubled when they are applied. Intangible assets are depreciated in accordance with the straight line method.
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Industrial property rights are generally depreciated over a fiveyear period and other intangible assets are usually depreciated over a 10-year period.
Allowable business expenses and deductions Research and development
Research and development expenses are immediately deductible when they are incurred. Interest
Generally, interest may be claimed as a deduction for tax purposes, except to the extent that it does not exceed the average interest rate of the last month of the financial period multiplied by the company’s equity at the beginning of the financial period. (The interest rate used is the government-determined short-term lending rate for credit institutions). Personnel costs
Salaries, wages and similar employee compensation may be deducted. Amounts paid for gifts to employees or for employee entertainment are not deductible for tax purposes. Similarly, certain benefits provided to employees, such as the use of a company car for personal rather than business purposes, are not deductible. Provisions
With the exception of financial institutions, companies are not permitted to deduct amounts set aside as bad or doubtful debt provisions for tax purposes. Charitable donations
Up to a limit of 20 per cent of the taxpayer’s corporate income tax liability, 85 per cent of donations to specified charitable, cultural, religious and athletic associations may be deducted from the tax amount payable. These expenses are treated as non-business expenses and disallowed in the corporate tax return. The net effect of these two adjustments is that a donation of, say, 100 only costs the company 34 from its after tax income (in 2004 this cost will reduce to 30). In the case of donations to the Cultural Fund of Latvia, Olympic Committee of Latvia and Children’s Fund of Latvia, a maximum 90 per cent of donations may be deducted from the tax payment.
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Withholding taxes
Withholding taxes usually apply to various payments made to nonresidents and non-resident individuals. Payments to resident companies are not usually subject to withholding tax. Rates applicable to non-resident companies include: • • • • • • • • •
dividends: 10 per cent; bank interest paid to a related person: 5 per cent; other interest paid to a related person: 10 per cent; copyright royalties:15 per cent; patents and other royalties: 5 per cent; management and consulting fees: 10 per cent; capital gains from the disposal of securities: 10 per cent; income from the use of property in Latvia: 5 per cent; payments to non-resident individuals of Latvian-sourced income (except exempt income): 25 per cent.
As a rule, Latvia does not observe the double tax treaties signed by the former Soviet Union. Since dissolution, Latvia has begun to develop its own double tax treaty network.
Book-keeping and corporate assessments The tax year is usually the same as the company’s financial year. Periods other than the calendar year may be used if permission is obtained from the Ministry of Finance. Tax payers are required to submit tax returns annually, which must be accompanied by financial statements. A tax return includes the company’s self-assessment of the taxes it owes. Taxes are paid in advance on a monthly basis, by the fifteenth of the month, during the tax year, based on the taxpayers prior tax liabilities. If the advance payments do not fully cover the tax liability shown in the annual tax return, the tax payer must pay the balance outstanding within fifteen days of submitting the return. If the return shows an overpayment, the tax overpaid may be used towards the following year’s tax liability, or may be refunded on request.
Other taxes and employers’ contributions The rates of other significant national taxes and employers’ contributions are:
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• VAT (exported goods and services zero-rated): 18 per cent/9 per cent; • Social security contributions (on total remuneration and benefits in kind): 24.09 per cent; • Immovable property tax (except for exempt categories of land): 1.5 per cent, reducing to 1 per cent from 1 January 2004. In the case of VAT, a person that supplied taxable goods and services valued at more than LVL10,000 annually during the previous 12 months must be registered. On imports, the taxable amount is the sales price or customs value, plus customs and excise duties, insurance and freight. A credit mechanism is in place, similar to that used in other European VAT systems, so that the VAT burden falls solely on the final consumer. A number of goods and services are exempt from VAT, including certain books, daycare and home nursing services, educational and library services, imported goods that are exempt from customs duty and most real estate.
Miscellaneous taxes • Annual fee on any type of vehicle used for road transport (subject to exempt usage); • Excise duty at variable rates on the sales price of certain goods; • Taxes levied on gambling establishments and sales of lottery tickets; • Fees on gambling or lottery licences; • Natural resources tax on the extraction of natural resources, the use of pollutants and any activity degrading the environment.
Essentials Latvian permanent establishments of non-resident entities are taxable on their Latvian-source income at the same 19 per cent rate as resident entities. A permanent establishment in existence for less than 12 months may elect to treat 20 per cent of turnover as its taxable profit, rather than filing accounts. This can be paid by withholding from customers’ payments. Any tax due on income paid to non-resident entities from Latvia is generally withheld at source.
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Separate tax returns must be filed by each of the companies included in a group. A loss incurred by a resident group company may be transferred to another resident group company and set off against the taxable income of the transferee. Latvian-source income earned by a non-resident entity with a permanent establishment in Latvia may be attributed to that permanent establishment, provided that the parent non-resident company and the Latvian permanent establishment are engaged in similar business activities in Latvia. The employer generally withholds at source the tax due on employees’ income.
Concerns The amount of the loss that may be set off between resident group companies is limited to the amount of taxable income of the transferee. Unlike subsidiaries, certain expenses of branches are not allowable for taxation, being interest, royalties, rents and management consulting fees payable to the central office except for an element of central cost. Branches, like other resident entities, must withhold taxes from payments made to non-residents. If the tax authorities find that a company’s tax return does not reflect the taxpayer’s full liability, they will demand an additional payment and may impose a penalty. Harsh penalties are imposed if tax evasion is suspected.
ONLINE UPDATES - 23 June 2005 Business taxation (Chap. 3.3) Dividends Dividends distributed to domestic and EU (under parent/subsidiary directive) corporate and individual residents are not subject to withholding tax. Withholding tax at 10 per cent does apply to dividends payable to non-residents. Domestic and EU dividends are exempt in the hands of corporate recipients as well as resident individuals. Foreign dividends paid by third-country resident companies are taxable (with a participation exemption).
S2
Individual tax Non-residents are taxed on Latvian-source income only. Individuals are treated as resident in Latvia for tax purposes if they have a place of residence there or if they stay in Latvia for 183 days in any 12-month period. Resident individuals are taxable on their worldwide income and are charged at a flat rate of 25 per cent. Dividends received are exempt, except where the distributing company is non-resident or is a resident company that has been entitled to the tax benefits of the special economic zones or free ports.
Capital gains Gains on the sale of publicly traded securities are exempt from capital gains tax. Capital gains of individuals on personal property, including shares and irremovable property, are exempt except where the property was acquired for the purpose of resale. However, gains by individuals on the sale of immovable property held for less than 12 months are taxable.
Value-added tax Following harmonization with the EC directives, VAT rules have been modified. VAT continues to apply to most transactions and registration remains compulsory for businesses with annual turnover above LV10,000. However, natural or legal persons doing business or acquiring goods within the territory of the EU exceeding LV7,000 in a calendar year are also required to register. The standard rate remains 18 per cent, and a lower rate of 5 per cent applies to hotel services, veterinary services, water and waste collection. Zero-rating applies to exports of goods and related services, and supplies and maintenance relating to the vessels of international shipping lines. Exemptions include cultural services, insurance, rent paid for dwellings, some financial services and copyright royalties.
Administration and compliance Companies are required to make monthly advances in respect of their corporate tax to be paid by the 15th day of the month. A tax return is due four months after the year-end and any balance of tax due must be paid within 15 days thereafter. Employees’ income is taxed by withholding. Individuals in business must make quarterly advance payments of tax. Individual tax returns are due by 1 April following the yearend and any final payment of tax is payable within 15 days after submitting the return.
S3
Additional tax information • Income from participation in a partnership is taxed at 15 per cent, rental income from real estate in Latvia at 5 per cent and income from the sale of real estate at 2 per cent. • There is transfer-pricing and thin-capitalization legislation, and rules against offshore companies. • Tax losses can be transferred between group companies within the Latvian jurisdiction. • Tax incentives remain limited to special economic zones, free ports, special regions and investment credits. There are also incentives for investment in agriculture. • Latvia has concluded more than 30 tax treaties. • Other taxes include: customs duties, excise taxes, gambling and lottery tax, natural resources tax and real estate tax. Source: Deloitte Touche Tohmatsu, 20 May, 2005
3.4
Mortgage Lending in Latvia Mortgage and Land Bank of Latvia Mortgage loans are the commercial banks of Latvia’s fastest growing product: over the last four years the volume of mortgage loans doubled annually and this rate shows no sign of slowing in 2003. Many financial institutions other than banks are also engaged in mortgage lending, particularly those with the backing of foreign capital. There are several reasons for this rapid development, of which the most significant are: • a sound legal system ensuring effective protection of creditors’ interests • as a result of privatization and restitution of ownership, a significant amount of unmortgaged private property has come onto the market. The stable and relatively rapid development of the economy accelerating the real estate market is also a factor.
Legal system The basis of the legal system is the Civil Law and Land Book Law, adopted in 1937 and renewed in 1993. These laws have remained virtually unaltered: only the legal regulations of the Civil Law pertaining to the family law and establishment of separate property of the spouses have changed. The Land Book Law has been supplemented by a chapter on computerized land books, as a result of which there is a unified computerized land book in Latvia. The system makes it possible to see updated information on real estate, acquire complete information on the contents of the property, its owners and any transactions and encumbrances quickly and at a distance.
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These laws comprehensively define all necessary terms and govern ownership and pledge rights. They are essentially similar to those of continental Europe. Although in most cases, only a mortgage that has been registered with the land book may be considered legal, this requirement has been modified to take privatization into account. A special law stipulates that in the period of accelerated privatization, registration of the apartment’s ownership and encumbrances with the State Land Service is acceptable prior to the registration of ownership of an apartment with the land book. The legal regulations of the civil process governing the recovery of mortgage-backed claims were established on the basis of pre-war laws. The procedure was set up so that a judge passes a decision on the recovery on the basis of the filed documents, without the claimant and respondent being present. The decision passed by the judge is final and unappealable. This process means that a quick and effective recovery process has been established, guaranteeing recovery of creditors’ resources. The advantage of Latvia’s transition to a market economy was that new laws were not needed since the most important previously existing laws and ownerships could simply be renewed, and this provided for an efficiency that translated to a rapid development of the mortgage market. Ownership to real estate has been acquired in Latvia through the process of privatization and denationalization. In the denationalization process the mortgage encumbrances that were abrogated by the Soviet regime at the beginning of the occupation in 1940 alongside nationalization were not restored, but few deferred payments in cash were made during the privatization process. Consequently, there is a vast volume (in terms of both quantity and market value) of private property whose mortgage encumbrance is beginning to take shape. The annual increase of the number of registered property units ended in 2000 when the highest number of property units – 139,600 – was registered. Since then the number has been decreasing constantly: 120,500 in 2001 and 116,300 in 2002. These data demonstrate the high development intensity of legally registered private property. The transactions registered with the land book show the activity of the Latvian real estate market. In 2002 50,500 real estate purchase transactions were registered. 5.6 per cent of these properties were sold within the year, but with the gift agreements 6.8 per cent of the properties have changed owners.
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The number of mortgages registered is growing rapidly; however the number of purchase transactions per year exceeds the number of registered mortgages by nearly 10 per cent. The information summarized by the land book reveals that only 8 per cent of the property units registered in Latvia are encumbered by ‘active’ mortgages. The comparatively small number of mortgaged properties, taken against the background of the upsurge in mortgage loans, basically means that highly valuable properties have been pledged and that a high number of apartment properties have been registered with the State Land Service and not the land book. Mortgage lenders finance mortgage loans either from equity or deposit resources. All the necessary preconditions have been established to attract resources on the capital market on a larger scale. For this purpose, in 1998 the Mortgage Bonds Law was adopted, governing the most essential conditions pertaining to the issuing of these securities and their circulation as well as comprehensively protecting the interests of the investors. The Mortgage Bonds Law of Latvia stipulates that any commercial bank may issue mortgage bonds provided it can ensure compliance with the criteria defined in the Law. The following are the most essential criteria: • the equity capital of the bank may not be less than the equivalent of EUR8 million; • the supervising institution has not imposed any restrictions on the operation of the bank; • the bank has submitted to the supervising institution regulations for the valuation of the real estate to be mortgaged and regulations on the management of the Mortgage Bond Cover Register. The regulations on the management of the Mortgage Bond Cover Register must provide for segregated management of the assets included in the Cover Register from other assets of the bank. The most essential elements of the law relate to the management of the Mortgage Bond Cover Register and its use for the monitoring and control of the security of the system as the Cover Register performs the basic functions in the protection of the rights of the holders of mortgage bonds. In accordance with the law it is possible to issue mortgage bonds only on the basis of previously acquired mortgages. These mortgages have to comply with the conditions stipulated in the law (registration of ownership and mortgages in
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the land book, limits on the amount of the loan, insurance of the property, recovery of claim through court) and may serve as the cover of mortgage bonds if included in the Mortgage Bond Cover Register. According to the law only the amount of mortgage bonds, not exceeding the issuer’s claim based on mortgages at their face value, may be in circulation. Furthermore, the excess of the cover may not be less than 10 per cent of the total amount of the weighted assets included in the Mortgage Bond Cover. The interest payments on mortgage bonds must be less than the interest income on mortgage loans. The aforementioned law applies when the loans and mortgage bonds are issued in the same currency and identical interest rates for the loans and mortgage bonds are established, for example as fixed interest. However, the law allows for flexibility on condition that the rights of the investors are protected. The currency of the assets included in the Mortgage Bond Cover Register and that of the mortgage bonds in circulation may differ only if the issuer is taking the necessary measures to prevent the currency risk. Even more room for manoeuvre is allowed by the regulation stipulating that for the Mortgage Bond Cover the issuer may use the cover assets hedge contracts secured by assets included in the Mortgage Bond Cover. The formation and maintenance of the Mortgage Bond Cover Register, in other words the inclusion into and exclusion of the assets from the Cover Register, take place in accordance with fixed procedures that provide for the principle of segregated management defined by law in practice. The law stipulates that the assets of the Cover Register and their interest that function as the cover of the outstanding mortgage bonds may be excluded from the Cover Register only in the amount that would allow for the required cover of mortgage bonds with the remaining assets. The right to claim contained in the Mortgage Bond Cover Register and payments of the borrowers following hereof must first of all be used in settlements with the holders of mortgage bonds as determined by regulations on the circulation of mortgage bonds. To comply with the required ratios, these resources may be used for the reduction of the amount of the mortgage bonds in circulation by buying them up on the securities market, for example in a situation when no new mortgages are acquired. There are some special additional regulations envisaged in the formation of the Mortgage Bond Cover Register that will considerably improve the flexibility of the system while ensuring adequate protection of the interests of the investors. These regulations anticipate the usage of the property overtaken as a result of
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the recovery of substitute cover and claim in the capacity of the cover of mortgage bonds. Retaining the underlying principle that mortgage bonds must be secured by mortgages, cash and other assets equated to money, for example government or guaranteed securities, may be used for cover alongside the mortgages. The use of such assets for the cover of mortgage bonds is restricted to 20 per cent of the total amount of the face value of the mortgage bonds in circulation taken together with the interest expenses. The law permits full or partial use of the loans guaranteed by the state of Latvia and municipalities in the capacity of Mortgage Bond Cover instead of mortgages. It is therefore not planned to issue the debt securities with a separate mortgage or public loans cover. The expediency of this solution is determined by what is currently a relatively narrow domestic capital market. The law provides, in great detail, for solutions to situations that may occur due to a coincidence of unfavourable circumstances threatening the security of investments. Considerable authority has been delegated to the supervisory institution the Financial and Capital Market Commission (FCMC). The Commission is entitled to suspend the issue of mortgage bonds if the law has been breached, but if the suspension has been grounded on the inadequacy of the Mortgage Bond Cover and no measures have been taken to eliminate it in the time period specified by the Commission, the Commission may impose full or partial suspension on the activities of the bank and identify those assets of the bank that should be added to the Cover Register. Inadequate cover may cause insolvency or even bankruptcy of the issuer maintaining the functioning ability of the already issued mortgage bonds as the interests of the investors are sufficiently secured due to the assets of the Cover Register. The law stipulates that in the event of the bankruptcy of the issuer the assets of the Cover Register may not be used to finance the process of insolvency and bankruptcy and address the claims of other creditors.
Part Four Key Sectors of Trade and Investment
4.1
Energy Industry Latvian Development Agency The most significant local energy resources are hydropower, peat and wood. Oil production has yet to be developed. A shortage of local resources means there is a high dependency on energy imports. The main import items supplied by neighbouring countries, particularly Russia, are gas, petroleum, coal and electricity. Energy imports account for a third of Latvia’s total imports; so it has been identified as a high priority market and a plan is in place is to make the country more self-sufficient in terms of energy supply by 2010. The energy sector in Latvia is almost entirely dominated by state enterprises, but the private sector began to enter the market in 1996, when the first privatization bids in the sector were held, and in 2001 the private sector’s share of energy was 12 per cent. Whether further deregulation is likely is uncertain because of the sensitivity of the market and the public interest. Currently the process of deregulation and efficiency is closely tied in with implementation of the EU acquis; however these developments will not be straightforward.
Regulation The government has a National Programme for Energy until 2020, as well as policies on the power and heating sectors. The Energy Law came into force in October 1998 and is tasked with increasing competition in the sector as well as addressing pricing and tariffs, third-party access, emergency planning, conservation and environmental protection. The law was amended to include regulations on the supply and use of electrical energy, gas and heat in March 1999. In November 1999, the authorities defined a global policy for the energy sector, covering areas such as electricity and heating and providing for diversification of energy sources. Latvia signed the Kyoto Protocol in 1998 and ratified the Energy Charter Protocol on Energy Efficiency and related environmental aspects in October
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1998. In March 1999 the Consumer Rights Protection Law was passed and in November 2000, the government approved the national energy efficiency strategy and in January 2001 took a set of legal measures in order to stress efficiency policies. Further developments in energy sector restructuring are aligned with gaps in acquis overtake. Areas that are still lagging behind are competition in the internal energy market, the opening of the electricity and gas markets and energy efficiency. An institutional structure to ensure the administration and regulation of the sector (Public Utilities Commission) has been set up. It replaced the former Council for Regulating Energy, separating the functions of devising and following up energy policies from those of regulation. The Public Utilities Commission (PUC) is an independent state institution responsible for the regulation of the energy, telecommunications, post and railway sectors. The strategic goals of the PUC are the provision of high quality, consistent and safe public utilities at reasonable tariffs; stimulation of efficiency and sustainable development of public utilities ensuring profitability levels consistent with the prevailing economic conditions; and promotion of competition in the regulated sectors.
Development of energy self-sufficiency In 1994 Latvia adopted an Energy Development Plan with the aim of reducing dependence on energy imports and achieving 85 per cent energy self-sufficiency. As part of this plan a financial support framework from public and private funds was established. The aim is a reduction in energy import requirements, production and operating costs resulting in lower energy prices and reducing demand for government subsidies. A lending programme supported by the World Bank is a part of this plan to restructure and modernize the sector. Meanwhile, more efficient uses of local resources and exploration of alternative energy sources are to be developed. A public source of financing (public investment programme) concentrates on public heating systems, gas supply and reconstruction of power stations.
Energy consumption The contribution of oil products to energy consumption (including heating and petrol fuel) fluctuates between 35 and 41 per cent, with heavy oil accounting for 15 per cent. The main consumers of heavy
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oil are heat producers (70 per cent) and industry (about 30 per cent). Consumption of oil products is mostly concentrated in the Latgale and Kurzeme regions (25 and 20 per cent respectively). Table 4.1.1 Primary energy consumption in 2001 PJ (Petajoules) Coal Oil products Natural gas Solid fuel (wood, peat) Electricity (HPP & import) Total
4.2 70.6 43.7 46.7 17.4 182.6
Source: Central Statistical Bureau of Latvia
Solid fuels include coal, peat and wood. Recently coal consumption has decreased by about 20 per cent each year. There are no plans to increase consumption of peat as a fuel, and consumption levels will probably remain stable for several years, with most of it being used in peat extraction and processing locations. Improvements are being made in the use of wood as a fuel in terms of both consumption and efficiency. The most significant use of wood as a fuel is for domestic heating (about 60 per cent) and central heating (about 25 per cent). Consumption of electricity is following a stable pattern and over the past five years electricity consumption in industry and losses in distribution have declined. Consumption in agriculture and transport has stabilized. Due to improved living standards, residential consumption has increased as has consumption in the service sector. The typical resident of Latvia consumed on average 1.5 tonnes of oil equivalents in 1999, about 58 per cent less than in EU countries. Table 4.1.2 Average prices of purchased purchased energy resources, 2001
R Gasoline, MT Diesel oil, MT Mazut, MT Natural gas, thousand Nm3 LPG, MT Coal, MT Source: Central Statistical Bureau of Latvia
650.6 499.1 128.3 119.4 436.7 55.3
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Over recent years, electricity consumption in Latvia has stabilized at an average level of 6.2–6.3 GWh. In 1999, industry accounted for 34 per cent of all consumption, and private residents for 23 per cent. Gas supplies in the Latvian market are provided by the monopolistic company Latvijas Gaze. The company offers a full range of services related to gas distribution. Natural gas accounts for approximately 30 per cent of Latvian energy resources and the share is expected to increase. Over 80 per cent of all natural gas is consumed in the Riga region, while in some parts of the country gas is not used at all. The largest consumers of gas in Latvia are the electricity utility Latvenergo which accounts for approximately half of all consumption, followed by the Riga city heating company Rigas Siltums and a metallurgy company in Liepaja city (JSC Liepajas Metalurgs). All the gas used in Latvia is imported from Russia. The continuing rise in heavy oil consumption has led to an increase in the significance of gas as an energy resource (34 per cent in 2000). The biggest gas consumers are in heat production (60 per cent) and industry (about 25 per cent). A total of 82 per cent of gas consumption is concentrated in the Riga region.
Production of electricity and heating, gas distribution The main energy producers are hydroelectrical and thermal electrical power stations, which provide more than half of all electricity, 47.3 per cent and 19.5 per cent respectively in 2000. Some 60–70 per cent of electricity is produced by local sources. Hydroelectrical power stations produce most of Latvia’s electricity, although the amount produced fluctuates due to climatic and hydrological factors and so there are frequent deficits or surpluses which necessitate import or export of electricity. The participation of small hydroelectrical power stations (around 50 in 2000) and wind generators is still limited to only 0.32 per cent and 0.07 per cent respectively. The most important player in electroenergy production is the state monopoly Latvenergo. The company covers all processes from electricity generation to distribution and transmission. It consists of several hydro and thermal power stations, as well as electricity distribution networks. Hydroelectric plants generate more than 55 per cent of domestic electricity. The rest is produced by thermal plants using natural gas and fuel oil.
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Latvenergo began the process of privatization in 1995 but the process was suspended in 1998. In 2000 a second attempt was made to privatize the company, with the introduction of its restructuring and privatization plan. After discussions and public pressure government decided that the hydropower stations would remain state owned, but that up to 49 per cent of thermal power stations may be privatized. In 2000 the market value of Latvenergo was estimated at over EUR1 billion.
Foreign investment and opportunities Major foreign investors in the energy sector are Transnefteproduct (Latrostrans, oil transportation and storage, Russia), Gazprom (Latvijas Gaze, gas storage and distribution, Russia), Ruhrgas Energie Beteiligungs AG (Latvijas Gaze, gas storage and distribution, Germany), E.ON Energie AG (Latvijas Gaze, gas storage and distribution, Germany), Lukoil (Lukoil Baltija, gasoline distribution, Russia), Statoil (gasoline distribution, Norway), Neste (gasoline distribution, Finland), AGAAB (AGA, production of technical gas, Sweden). There are major governmental investments through public investment programmes in public heating systems, gas supply and reconstruction of power stations. There are many trading and investment opportunities with these identified areas in need of improvement and new developments. In the 1960s, oil reserves were discovered in the western half of the country and in the Baltic Sea, but exploitation ceased as they were too small to be profitable. However, the latest research has revealed possibilities for commercial oil exploration. In 1996, under agreement with the Latvian government, the American oil company AMOCO and the Swedish OPAB extended their oil exploration in the Baltic sea into Latvian territory. Due to uncertainties over territory with Lithuania and the absence of a signed sea borderline these developments did not go further. In 2000 the Latvian government resolved these territorial issues and exploration of these oil fields is one of the biggest investment projects in the Baltic Sea, involving projects in the related oil industries. Today the main areas for exploration and investment are the reconstruction and new construction of hydroelectric and thermoelectric hydropower stations, increasing the use of renewable natural resources, oil exploitation, expanding the transhipment of oil and oil products, improving public heating systems and improvements in gas supply.
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Links Public Utilities Commission: www.sprk.gov.lv Ministry of Economy: www.lem.gov.lv JSC Latvenergo: www.energo.lv JSC Latvijas Gaze: www.lg.lv
4.2
Machinery and Engineering Latvian Development Agency This sector currently constitutes 19 per cent of total industrial output and provides jobs for approximately 21,000 specialists. The main sub-sectors are metal production (43 per cent), scrap processing (21 per cent), electric tool production (13 per cent), machinery production (12 per cent) and production of transport vehicles such as ships and trailers (12 per cent). There are 12 large factories and about 780 SMEs that operate in the market. Latvia has a long tradition of mechanical engineering and metalworking. There was overwhelming growth in the sector during the Soviet era when large industrial enterprises and R & D institutes were established in Latvia to serve the Soviet Union market. This produced a huge pool of specialists and large factories. Traditionally Latvian engineering companies have operated to Russian standards that to some extent lagged behind their western counterparts, particularly in the fields of material quality, ergonomy and design. However there was significant industry contribution to the Soviet military, where accuracy, technological solutions and reliability are of paramount importance and so significant engineering skills and technologies were acquired. After the end of the Soviet era, the engineering companies underwent a process of downsizing, reorganization and reorientation towards new market opportunities. The absence of marketing/ management skills and a sharp market cut-off as well as uncertain industrial policy led to the downturn of the engineering industry. The number of companies trebled between 1993 and 1996 while employment reduced from over 100,000 in 1990 to around 35,000 in 1995 (see Table 4.2.1). A number of small private companies emerged during the 1990s. A number of Soviet era companies that survived the market changes also operate; however their success is limited when
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Table 4.2.1 Manufacturing output, changes and number of employees, 2002 Output Average Number of R million, annual change employees, 2002 over 5 years 2002 (current prices) Manufacture of metal products Manufacture of machinery & equipment n.e.c. Manufacture of electrical & optical equipment Manufacture of motor vehicles, trailers & semi-trailers
79.1
9.0%
4,166
65.0
3.8%
5,069
67.0
9.9%
2,389
85.0
3.3%
4,762
Source: Central Statistics Bureau
compared with the new medium sized companies that are showing rapid growth. Many engineering companies in Latvia now have ISO 9000 accreditation. In 2001, output of the branch amounted to EUR745.9 million and the year-on-year average growth rate has been 6.9 per cent since 1995. The major export countries are Germany, Russia and the other Baltic States. Other 22% Germany 26% USA 3% Denmark 3% Norway 4% Algeria 5% UK 5%
Lithuania 8% Russia 7% The Sweden Estonia Netherlands 5% 6% 6%
Figure 4.2.1 Export destinations (HS 72–91), 2002 Source: Central Statistics Bureau
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Basic metal processing and production of metal articles This is the largest sub-sector with an output volume of EUR319 million. The metal-processing sector is growing rapidly and has very high productivity growth levels. Since 1995 the sector’s output has grown annually by 24 per cent and annual productivity (output per employee) has increased by the same amount. This is mainly because of the restructuring of the sector and more importantly the modernization of the production stock, for example introduction of computer-aided control systems, CAD design implementation and upgrade of production lines and equipment. EUR80 million has been invested in this way since 1996. There are around 10 primary metal production companies dealing with steel, iron and non-ferrous metal castings, of which JSC Liepajas Metalurgs is the largest. The turnover of this company in 2001 was EUR114 million. A number of SMEs and one or two plants are handling comprehensive metal processing operations, including metal machining (turning, milling, grinding), sheet metal processing, welding, surface treatment, mould design, and metal construction production. These processing areas are well developed and use competitive technologies like CNC equipment, welding according to MIG/MAG/TIG standards, vacuum depository, nano size coatings and electroplating. Because of this many Latvian companies are handling orders from abroad serving such brand names as Audi, Volvo, Ford, GM, Saab, ABB and Opel. Latvian companies have enough capability to handle such sub-contracting orders as well as a service culture and project management skills. The most successful and best known companies in the metal processing and mould production field are JSC Dambis, LLC Acot Technologies, LLC Tehprojekts, LLC Ripo-1, JSC Jauda, JSC DCM Montaza, LLC NOOK and JSC Kurzemes Atslega-1, JSC Severstallat. Both sub-sectors of metal processing and production of metal articles export a great deal of their product: 95 per cent and 39 per cent respectively. The export destination of these products is mainly the European market (73 per cent) while America (10 per cent), Asia (9 per cent) and Africa (8 per cent) are other, smaller export markets. The sector is likely to grow even further with its benefits of low entry barriers in the world markets of fabricated metals, established competencies and an experienced labour pool, cost advantages in terms of labour and operation as well as proximity to the metal source markets, particularly Russia and Europe.
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Electric tool, machinery and fine mechanics production This is the second largest sub-sector, accounting for output of EUR185 million in 2001. It is worth mentioning that this sector has been hammered by market shocks and so has shown uneven development over the past 10 years. The output volumes for the sector today are at 1995 levels; however until 1998 annual growth rates averaged 9.5 per cent. Although the regional downturn in 1998 was followed by ongoing reorientation from traditional CIS markets towards western markets, total output still declined. However, the export market in the sub-sectors is high and accounts for 73 per cent (machinery), 72 per cent (fine mechanics) and 58 per cent (electric tools). The upgrade and modernization of the technology used in the sector is still modest, amounting to an annual spend of EUR5 million in the machinery production field and EUR4.5 million in the electromechanical appliance production field since 1995. However there is a promising trend for increased investment, accounting for about 30 per cent each year. The main competencies carried out by Latvian companies are equipment design and assembly and, to a lesser extent, service. Fields of expertise are woodworking, agricultural equipment, control systems and specific purpose electromechanical appliances. This specialization of the industry in general has occurred due to the specific demand from local industries, ie the large and expanding woodwork industry, the technologically demanding food processing and rapidly increasing construction industries.
Automotives and shipbuilding The total output of this sub-sector accounts for 12 per cent of the machinery and engineering branch, or EUR87 million in 2001. Three principal manufacturing specializations can be distinguished: production of trailers, shipbuilding and train carriage manufacture. Traditionally these sectors are export orientated, and so development of this sub-sector is closely tied to rivalry in the foreign markets. The shipbuilding export market is 82 per cent of total output, and 73 per cent for the automotive industry. A major issue for the sub-sector is the upgrade of production stock as nearly all operating companies are long-run plants; however investment in development is growing steadily with an average annual growth
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of investment by 14 per cent since 1995. As a result, the productivity rate since 1995 has increased by some 7 per cent annually. Five companies operate in the automotive field of which MonoTransserviss is the largest. The company produces semitrailers and container trailers that are destined mainly for the Scandinavian and Baltic markets. Its turnover in 2001 was EUR1.8 millions, 20 per cent higher than in 2000. The shipbuilding industry is another traditional branch with natural and developed advantages. There are 11 companies operating in this sub-sector, but JSC Riga Ship Building (Riga port company) and JSC Tosmare (Liepaja port company) are the only companies that are capable of handling the whole shipbuilding process. Both of these belong to the Baltic Holding Group. Their production range mainly includes the building of new hulls, particularly fishing-boats, and tank ships to a lesser extent. The target niche for these companies is fishing-boats of 50–80 metres in length. Customers for the new hulls mostly come from Scandinavian countries. Their assets are the presence and ongoing development of dry docks as well as high quality manpower. Regarding repair works, Latvian shipyards have strong competition from Lithuania, Russia and Poland. The train carriage building industry in Latvia is associated with two major plants, JSC Rigas Vagonbuves Rupnica (RVR) and JSC Lokomotive. Both have experienced issues relating to market loss and financial and ownership problems, and therefore development has been uneven. The companies currently serve mainly CIS markets, but diversification of activities is allowing entrance to new markets; for instance, RVR has launched a tram carriage production line to serve the local market. Further growth is expected in this branch as a result of restructuring and market diversification. JSC Lokomotive’s turnover in 2001 was EUR17 million (an increase of 52 per cent on 2000) and JSC RVR’s turnover amounted to EUR4 million. There are also successful newcomers, such as LLC Razosanas remonta apvieniba (RRA), involved in the modernization of passenger carriage. This company’s turnover in 2001 was EUR3.5 million. The company also serves CIS and local markets.
Foreign investment Total foreign direct investment in the machinery and engineering sector amounted to EUR54 million at the end of June 2002. Particular
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areas of interest are metal processing, machinery production, manufacture of metal articles and production of electromechanical appliances. Major foreign investors are Singaporean Agrosin PTE (Liepajas Metalurgs), German Ziegler Machienbau GmbH, Austrian Vae Aktiengesellschaft Agf (LLC VAE-Riga) and Swedish ABB (REMRL).
Industry prospects Further industry development will be directed towards specialization where exploitation of engineering skills will be crucial in the areas of moulding, production of complex metal articles, manufacture of industrial equipment and service and test operations. As well as these, traditional industries, like shipbuilding and carriage manufacture, are expected to see further growth. Problems may arise in the areas of assembly operations and mass product manufacture.
Links Latvian Development Agency: www.lda.gov.lv JSC Rebir: www.rebir.lv Business Innovation Centre of Latvian Electro Engineering: www.lebic.lv
4.3
Electronics and IT Latvian Development Agency The electronics and IT sectors are high priority markets for the Latvian government because of overwhelming global demand and the potential for participation in the local market. In 2002 electronics constituted 1.6 per cent of the GDP and ITC 3.9 per cent. The development of these sectors will require high specialization and the market is concerned with the development of specific solutions, R&D and service maintenance rather than production. Before independence in 1991, Latvia was one of the Soviet Union’s foremost research and development centres, specializing in the fields of IT and electronics; considerable experience exists and there is a tradition of knowledge-based development. Today the Latvian IT services sector has grown to include over 500 private companies, and the top 20 companies employ over 3,000 specialists.
Information technologies Software design is the most significant segment of the IT sector in Latvia. The total turnover of large software companies in 2001 was around EUR46 million and the export volume was EUR19 million or 39 per cent of turnover. Software maintenance, integration, consulting and training are rapidly growing areas. Outsourcing has become a core competence of Latvian software-development companies, which have gained significant experience from large-scale software development projects undertaken for major international companies such as IBM, Microsoft, Cisco, Unisys and Sybase. Outsourcing activities accounted for 70 per cent of the sector’s export value in 2001. In order to increase the capacity and competitiveness of the IT industry on the global market, the IT Cluster Consolidation Project was implemented in 2001. Latvia’s Information System (IS) Cluster, a collaborative network of export-orientated IT businesses, educational institutions and other organizations, has been given
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Table 4.3.1 Characteristics of Latvia’s IT infrastructure
Number Number Number Number Number Number
of of of of of of
personal computers personal computers per 100 inhabitants Internet hosts Internet hosts per 100 inhabitants Internet users Internet users per 100 inhabitants
2000
2001
340,000 14.0
360,000 15.3 25,100 1.1 170,000 7.2
150,000 6.2
Source: Eurostat
the opportunity to achieve success in the IT industry. The IS cluster consists of 18 organizations whose competencies span software development, systems integration, education and marketing, as well as specific testing and IT project quality management activities: the Latvian IT industry can handle large-scale and complex projects. The aim of the project is to make Latvia the most important IT service exporter in the whole CEEC region by 2010, by selling IT services and products worth over EUR1 billion and by employing approximately 10,000 specialists. Global Software Outsourcing (GSO) and ASP have been identified as the most important service types for the future. Opportunities for foreign participants in the sector should be enhanced as a result of a reduction in the corporation tax rate for companies producing high-tech products which came into effect in January 2001, and the liberalization of the telecommunications market since 2003.
Table 4.3.2 Operational data of the top seven Latvian IT companies Turnover Gross profit Export content 2001 2000 1999 1998 2001 2000 2001 JSC Dati JSC Exigen LLC Tieto Konts LLC MicroLink Systems (previously Fortech) LLC IT Alise LLC Tilde LLC Verdi (Lattelekom) Source: Latvian Development Agency
11.0 17.7 8.9 8.3 6.9 5.3 6.4 5.2 3.6
7.6 3.4 2.2
0.04 0.45 2.2 1.8 1.0 0.9
38% 90% 70%
16.7 20.4 2.2 4.8 2.0 2.9 8.2 8 5.5 15 – –
1.1 2.1 3.8 –
5.7 1.2 – –
– –
– – – –
4% –
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The education of IT specialists is growing very rapidly and there is an average annual enrolment growth rate of 30 per cent. In 2002 there was a total enrolment in computer science courses in universities of around 4000, and 1200 students graduated. The main institutions involved in the preparation of specialists are Riga Technical University and the Institute of Transport and Communications, and at college level education Riga State Technical School, Riga Technical College and Riga Technical University. These institutions also play a major role in the preparation of specialists in the fields of telecommunications and electronics.
Electronics Around 80 companies currently operate in the electronics sub-sector, with approximately 5,400 employees and a turnover in 2001 of EUR97 million. These companies design and manufacture various products that contain electronics. The main product categories are: electronics to control and manage equipment and machinery; electronics for control and management of technological processes; communications and telecommunications equipment; medical electronics; quality control equipment for food products and electronic security devices. Before 1990, the electronics sector employed some 30,000 highly qualified specialists in Latvia. Today their number has declined to just 5,400, and the capacity of the companies is under-utilized so there are significant expansion possibilities in the market. The main players are JSC Radiotehnika RRR (audio and electronic circuits), JSC Autoelektroaparatu rupnica (automotive controls), LLC VEF Telekom (telecommunications), JSC Alfa (microcircuits), LLC VEF KTR (telecommunications) and LLC Kvant Intercom (telecommunications). Apart from companies with a significant history of market presence, a number of newly established companies also exist. LLC Hanzas Elektronika is one of the most successful examples of new electronics production. The company launched in 2001 and its core operation is the production of custom electronic components and apparatus using sophisticated robot equipment. It now has two production plants with a total investment value of EUR2.5 million. In 2002 almost 90 per cent of the production was exported, particularly to Sweden. Apart from Hanzas Elektronika, other newcomers are LLC SAF Tehnika (wireless equipment), LLC Arcus Elektronika (energy industry electronics) and LLC Anda Optec (fibreglass cables).
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Key Sectors of Trade and Investment Signalling apparatus 2%
Electronic devices 28%
Energy control devices 3% Radio & telephony devices 14% Medical apparatus 3%
Testers 19%
Other 8% Automotive components 10%
Integrated circuits 8%
Loudspeakers 5%
Figure 4.3.1 Export structure of the electronics sub-sector in 2001 Source: Central Statistics Bureau
Apart from electronics manufacture, a significant market is computer assembly and maintenance. More than 300 companies are engaged in computer manufacturing and servicing, as well as in computer and software maintenance and in peripherals retailing. These are small companies with no more than 10 employees in most cases, although four companies have more than 100 employees. The market value of both locally assembled and imported software and peripherals is around EUR130–170 million per year. The most important companies in the field of computer assembly are LLC MicroLink Datori, LLC ELVA-1 and ELKO – Vecriga.
Links Latvian Information Technology and Telecommunications Association: www.litta.lv JSC Exigen: www.exigen.lv JSC DATI: www.dati.lv LLC IT Alise: www.alise.lv Latvian Electrical Engineering and Electronics Industry Association: www.letera.lv JSC SAF Tehnika: www.saftehnika.com LLC Hanzas Elektronika: www.hansa-electronics.lv
4.4
Chemicals and Pharmaceuticals Latvian Development Agency The chemical sector is the fourth largest manufacturing industry in Latvia, with approximately 60 companies accounting for 4.9 per cent of industrial production and employing some 4,800 people. The products of the chemical, oil, plastic and rubber industry account for 9.3 per cent of total export value. The main chemical manufacturing branches include fibres, pharmaceuticals, paints, varnishes, soaps and cosmetics, rubber and plastic products.
Oil refining There is no oil refining tradition in Latvia and this branch of the industry is virtually non-existent. However, there is potential for development in the sector as Latvia plays an important role in the transportation of oil products, particularly the Novopolck – Ventspils oil pipeline, and there is also the possibility of oil exploration in Latvian territory. This should mean oil refineries will be created near to oil transportation and possible exploration points, for example in Ventspils and Liepaja. Some Latvian and Russian oil companies have already made pre-feasibility studies for such activities, although as yet there is no strong basis for a start-up decision, particularly as there are better positioned oil refinery markets in the region, ie Lithuania, Poland and Scandinavia.
Chemicals The chemical industry is historically a strong sector in Latvia and its output in 2002 was EUR90 million. There is a good research base within the chemical industry and highly skilled specialists. The most important sub-sectors are the production of phytochemical
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preparations (33 per cent), production of paints and varnishes (24 per cent) and the manufacture of detergents and perfumery (15 per cent). An important allied product is artificial fibres. The proportion of product exported in this sector was 71 per cent in 2002. The industry also implements solutions for biotechnology, medicine, the space and automotive industries, as well as its significant commitment to the architecture of new materials. The sector is dominated by medium sized enterprises, concentrated in Riga, Daugavpils and Olaine. Latvian companies compete mainly with European companies in the local as well as in the export markets. The chemical industry is one of the fastest growing in the EU and so Latvian chemical companies need to invest more intensively in development than companies in other sectors. These developments include production stock upgrades and technology acquisition, attraction of foreign investment as well as specialist pool development. Investment in technology is a little higher than in other industries, accounting for about 3 per cent of all investment stock. Since 1995, on average EUR8.3 million has been invested annually and the year-on-year investment growth rate is 3.6 per cent. Foreign direct investment stock today accounts for some EUR42 million, with the French company Rhodia the most important foreign investor. Rhodia produces artificial yarns in the Daugavpils plant. In order to encourage the production of high value-added products, the government offers corporate tax reduction to enterprises that fit Other 19% Lithuania 29%
USA 1% Switzerland 2% Germany 3% Denmark 4% Belarus 6%
Estonia 19%
Ukraine 7% Russia 10%
Figure 4.4.1 Exports of chemicals in 2002 Source: Central Statistics Bureau
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the designated criteria in terms of product range, quality certificates and practice. One difficulty faced by the industry is a skills shortage caused by low enrolment in university chemistry courses as well as weak links between industry and academia. The most important and successful companies are JSC Grindeks and JSC Olainfarm (pharmaceuticals), LLC Rigas laku un krasu rupnica and LLC Tenax (dyes and varnishes), JSC Dzintars (perfumery), JSC Spodriba (detergents), LLC Rhodia Industrial Yarns (artificial fibres), LLC Latbio (dyes and varnishes) and LLC Jumitis (fertilizers). Two companies, JSC Grindeks and JSC Olainfarm, hold environmental certificate ISO 14001 and a number of companies are in the process of accreditation. The main export goods are pharmaceutical products (EUR55.8 million), paints (EUR13.3 million), organic chemicals, perfumery and cosmetic preparations (EUR5.8 million) and casein (EUR9.4 million). As well as thriving trade with the Baltic countries, especially Lithuania, these goods are exported all over the world. Synthetic fibre and its products (EUR22.7 million) are exported, mainly to the EU (59 per cent), Central Europe and the Baltic countries (26 per cent) as well as the USA (11 per cent). The most widely imported goods are pharmaceutical goods (EUR142.8 million) followed by paints (EUR41.1 million), perfumery and cosmetic preparations (EUR34.9 million), organic chemicals (EUR25.4 million) and detergents (EUR15.5 million). Half of all chemical products are imported from EU countries, while other important suppliers are CEEC (24 per cent), Russia (8 per cent) and Switzerland (8 per cent).
Rubber and plastics Rubber and plastic output in 2002 was worth EUR41 million and plastic production is now equally as successful as pharmaceuticals in this sub-sector. Rubber product manufacture is a small field with only three companies operating, while plastics production involves about 30 companies. The export market for rubber and plastics is quite small at 44 per cent. The sector’s success can be explained by its effective local and regional market capture. The market for plastic products grew very rapidly and this trend is expected to continue. One of the most important market drivers is the development of the construction sector in Latvia as well as other countries in the region such as Lithuania, Estonia and Finland. Another target market is industry, ie
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machinery manufacture, production of electromechanical appliances and food processing. The consumer goods market is also important, accounting for an average of 25 per cent of total production. Due to these market prospects, the industry has excellent expansion prospects and the acquisition of new technologies is more widespread compared to other industries; for instance nearly EUR10 million was invested in R&D in 2001. The annual investment growth rate is overwhelming, with an increase of 80 per cent per year since 1995. However, foreign investment in this sector is still small and in mid-2002 FDI stock was worth only EUR6.4 million.A major investor in the industry is Nordic Industries Limited (Iceland) running Nordic Industrial Ventures while other major players are companies such as Nordic Industrial Ventures, LLC European Plastic Industries (plastic pipes), LLC Nordic Plast (plastic packaging and recycling), LLC Industrial Plastic (consumer and industrial plastics), JSC Adazu Polietilena Industrija, LLC Ogres Buvplastmasa (sanitary plastics) and LLC Acot Technologies (industrial plastics). Several machinery companies that also have plastic workshops are engaged in the field of plastic production, ie JSC Rebir and JSC Daugapils Pievadkezu Rupnica. The production of industrial plastic articles is comparable to that of moulding operations such as those of Acot Technologies. Rubber production is associated with JSC Baltijas Gumijas Fabrika (industrial rubber) and its allied company JSC Baltijas Apavu Fabrika (rubber footwear).
Other 9% UK 7%
Germany 20%
Denmark 8%
Estonia 19%
Russia 11%
Sweden 12%
Lithuania 14%
Figure 4.4.2 Exports of rubber and plastics in 2001 Source: Central Statistics Bureau
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The main export products are plastic semi-products and remains (EUR19.7 million). Import volumes exceed those of exports but some imports are raw materials for local industry. The main import products are plastic raw materials (EUR28.4 million) and semiproducts (EUR99.4 million), as well as tyres (EUR14.3 million). The main suppliers of these goods are the EU (58 per cent), CEEC countries (31 per cent) and Russia (6 per cent).
Links Latvian Chemistry Resources: www.rtu.lv/dedicate/sample/cilc/ LatChRes.htm JSC Dzintars: www.dzintars.lv JSC Grindeks: www.grindeks.lv LLC Nordic Industries: www.nordicindustries.lv
4.5
Food and Agriculture Latvian Development Agency The food and drink industry is the largest industrial sector in Latvia. There are about 700 companies employing almost 29,000 people, 22 per cent of total industrial employment. While there has been a decline in the added value of the agricultural sector, it is still important in the Latvian economy and about 15 per cent of the labour force is employed in agriculture. However agriculture’s contribution to the GDP has decreased from 10.8 per cent in 1995 to 4.0 per cent in 2002. Total production during this period decreased by an annual average of 7 per cent; however in 2000 it actually increased by 3.3 per cent.
Agriculture A relatively low contribution to the GDP and the high level of employment in agriculture make the sector comparatively inefficient by EU standards. Causes of low efficiency include small farm sizes, old equipment, out of date technology and limited specialization. 38.5 per cent of the country’s land mass is used for agriculture with the majority being arable land. The cultivation of plants accounts for some 50 per cent of total agricultural output and cereals, potatoes and beetroots are the main products. Breeding is the next most important business activity (see Table 4.5.1).
Table 4.5.1 Products of cattle breeding 1996
1997
1998
1999
2000
2001
2002
Meat (thousand MT) 75.7 70.9 70.8 63.8 61.7 60.3 62.1 Milk (thousand MT) 922.7 987.6 950.2 798.7 825.0 846.0 811.5 Eggs (million) 470.8 465.0 455.7 415.7 437.1 452.5 508.6 Source: Central Statistics Bureau
Food and Agriculture
169
Exports of agricultural products have been steadily decreasing. In 1995, food production contributed 16.4 per cent of Latvia’s total exports, compared to 5.4 per cent in 2000: a decline of 65 per cent. This fall can be explained by the crisis in Russia causing the loss of major export markets and difficulties in market re-orientation. The total export/import balance for agricultural goods is negative and continuing to fall – by 10.3 per cent in 1995 and 11.8 per cent in 2000. In an effort to restructure the sector, the government is pursuing a policy tailored to EU strategy. This agricultural policy is based on the law ‘On Agriculture’, the Annual Agricultural Programme and various state programmes and regulatory acts. The main goals of this policy are to improve the rural infrastructure and enforce competitive agricultural production technologies. The most important elements of the policy are subsidies, credit policy, local market protection and tax gains. The total annual subsidy has grown significantly from EUR7.3 million in 1994 to EUR35 million in 2001. Animal breeding, plant growing and equipment modernization were the areas that benefited the most. Progress was also made in the field of credit policy. Thanks to guarantees of the Rural Support Fund since 2001, agricultural producers have been able to access long-term credit lines at a rate of 7 per cent instead of the 13–16 per cent rate offered by the commercial credit market. It is projected that this credit policy programme will attract more than EUR145 million worth of investment by 2016. Meanwhile it is planned to introduce a similar credit guarantee programme for rural land purchase at a rate of 4 per cent. Since 2001 Latvian agricultural producers have been able to access help from the EU support programme SAPARD in the fields of modernization, rural activity diversification, forests and improvement of rural infrastructure. Up to 2003 some EUR15 million was acquired, mainly for modernization and rural activity diversification programmes.
Food and beverages The Latvian food sector mainly serves the domestic market although a quarter of all production is exported, particularly to the neighbouring non-EU markets. Production is only running at around 65 per cent capacity. The local market is limited and now saturated so companies need to intensify their activities in order to acquire new markets abroad.
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Key Sectors of Trade and Investment
Sales to the traditional markets of Russia and the CIS are troubled by uncertainties and negative experiences. Latvian food producers have been hit several times by the Russia’s economic crises: during 1998 exports decreased by 13.5 per cent and total production volume was reduced to 60 per cent of its pre-crisis level. The industry’s recovery was uneven, but overall production rose by 6.7 per cent in 2001 compared with 1999. Some sectors have successfully reoriented their exports to new (EU and Baltic) markets, while others have had difficulty with obtaining export permits. Attracting EU markets depends on competitive production and food companies are investing intensively in technology to raise quality and implement new standards. Some EUR85 million was invested in production stock in 2001. The government has also launched several initiatives to promote quality, such as the Food Quality Assurance Programme as well as the SAPARD programme, and marketing promotion programmes aimed at stimulating domestic consumption. The industry is also facing financial problems. Latvian companies have to operate in a huge and over-saturated world food market where price competition puts them at a disadvantageous position against the subsidized products of other countries. In addition, many supplies of raw materials for food production are seasonal, which requires additional financial resources and the lack of available loans represents a serious problem for the industry. Many Latvian processing companies solve these problems in the short term at the expense of suppliers by purchasing agricultural products at low prices and then delaying payment, which weakens the domestic sub-supply base, and this will have long term implications for the food processing industry.
Table 4.5.2 Foreign trade in food, 2002 (R million) Export Total Russia USA Lithuania Estonia Germany Cyprus Belarus
Import 152.5 42.7 39.2 25.7 11.1 7.7 3.1 2.8
Source: Central Statistics Bureau
Total Lithuania Germany Estonia Russia Poland France The Netherlands
250.0 55.3 24.7 23.6 19.6 13.0 10.5 9.3
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171
The main export goods within the food industry are canned fish (EUR19.9 million), constituting about a third of the total export volume of the sector. The main markets are the CIS countries (62 per cent); however sales in the EU and other western markets are increasing. Other export goods from prepared food are sweets (EUR4.6 million) and sparkling wines (EUR2.5 million) with export markets all over the world. Latvia’s food industry shows good prospects as there are plentiful raw materials for the processing of meat, milk, fish and grain and the market for ecologically sound, non-traditional food is promising.
Links Ministry of Agriculture: www.zm.gov.lv Rural Support Service: www.lad.gov.lv JSC Rankas Piens (dairy): www.rankaspiens.lv JSC Aldaris (beer production): www.aldaris.lv
4.6
Textiles and Clothing Latvian Development Agency Textiles is the third largest industrial sector in Latvia, with a share of 9 per cent of total industrial output and a value of EUR105 million. There are approximately 300 textile companies and 82 of these are medium and large enterprises, employing 20,000 employees (18.8 per cent) of the total industrial labour force. The main sub-sectors in the Latvian textile industry are the manufacture of garments (53 per cent), manufacture of semi-finished products and fabrics (35 per cent), production of underwear (6 per cent) and knitwear (6 per cent). The textile sector has been very successful in terms of market reorientation. Despite the overall downturn in Eastern markets, industry output growth rates are still high with an annual average growth rate of 13.2 per cent since 1995. Unstable markets in the East were successfully replaced by Western markets, attracted by high quality articles and competitive prices. Quality and productivity go hand in hand with intensive investment in production stock – EUR36 million in 2001 – and investment is growing by an annual average of 47 per cent. The main strengths of the Latvian textile industry are low labour costs and relatively high productivity. The annual output per worker in the industry as a whole is around EUR10,000, while the average annual gross wage is around EUR5,000. Particular manufacturing niches show more impressive productivity volumes, for instance production of cotton or artificial fibres, where the annual output per employee is as high as EUR20,000. The most successful companies in terms of productivity are LLC Snickers Production Latvia and LLC Triteks where the productivity rate is EUR40,000. Another feature of the sector is its pool of highly skilled engineers. Most have graduated from technical universities, which provide a high quality technical education, and so are well versed in sophisticated technologies. Short delivery times and disciplined order management allow the sector to compete successfully in the international market and are particularly important when competing with countries in the
Textiles and Clothing
173
developing world. Some sewing companies and yarn spinners offer delivery lead times of as little as two weeks for small orders. The geographical proximity to the main markets ensures rapid delivery turnaround times. The majority of textile producers of Latvia are now working with modern production machinery. Most companies that have received foreign direct investment have state-of-the-art equipment and many domestically owned firms such as Lauma, Rimako, V.O.V.A., Viola-Stils and Ogre have also recently invested large amounts of money in modern production equipment. Most companies that design finished goods internally have computerized design workshops. Further development of the sector is closely linked with the demand pattern for textile products in the EU, maintaining competitiveness and improving marketing. The textile industry is a labour intensive sector where labour costs play a crucial role in international competition and the sector does not require high start-up costs and large capital investments. However, in the medium to long term taking into account the growth of labour costs these advantages may disappear. The sector has attracted a considerable amount of foreign direct investments, particularly from Sweden and now more than 90 per cent of the sub-sector’s exports go to the EU. The presence of foreign investment is a good indicator of future trends of market capture and retention. The disappearance of labour cost advantages will lead to efforts to strengthen product competitiveness. International Other 22%
Sweden 14%
Germany 14%
Russia 4% USA 4% Estonia 5%
Denmark 13%
Lithuania 5%
The Netherlands UK 5% 7%
Italy 8%
Figure 4.6.1 Exports of textile products in 2002 Source: Central Statistics Bureau
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competition in the area of textile industry is very vulnerable to fluctuations in demand and attention should be paid to the design and introduction of new models, advertising and marketing and development of brand names. Even Latvia’s strongest textile brand Lauma has difficulties in approaching the over saturated markets in the West. While Latvian textile companies by themselves will have limited success in solving these issues, foreign companies and joint ventures would bring new machinery, technologies, management and marketing skills.
Semi-finished textiles This sub-sector’s output is worth is EUR56 million and there are currently 15 companies operating. Preparation and spinning operations constitute the majority of this output (EUR41 million). The most important products are cotton yarn and woven cotton fabrics, knitted fabrics, woollen fabrics, flax yarn, raw and finished flax and combined (flax with cotton) fabrics and synthetic threads. Major players are JSC Juglas Manufaktura, JSC Ogre, LLC Klippan-Saule, LLC Kokvilna, JSC Rimako, LLC Rhodia Industrial Yarns and LCC Larelini.
Clothing The sewing and work clothing sector has an output volume of EUR87 million. A total of 55 mainly medium sized companies operate in the sector. These companies usually exploit their own design skills, which although of a high standard suffer commercially from a lack of designer brand names. A common practice is pattern cutting to customers’ designs. Effective sewing is supported by computer aided patterning systems, for example ASSYST, ASSYCAD and ASSYLAY systems. The largest product group is knitted/crocheted hosiery (EUR5.3 million) and the biggest companies are JSC Lauma (underwear), JSC Ogre (knitwear), JSC Rita (cotton knitwear) and LLC New Rosme (women’s lingerie). Lauma was founded in 1971 and it is the largest company in Europe in its two principal business lines of production of material for women’s lingerie as well as the manufacture of ready-to-wear lingerie. The company has the largest lycra processing plant in Eastern Europe. Its growth rate in recent years has been considerable: its
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productivity rate grew by 30 per cent in 2002 compared with 1999. Annual turnover growth rates are also high, at 15 per cent.
Links JSC Lauma (lingerie): www.lauma.lv JSC Ogre (knitwear): www.jsc-ogre.lv LLC Larelini (flax): www.larelini.lv
4.7
Wood Processing and the Furniture Industry Latvian Development Agency This is the second largest sector of the Latvian manufacturing industry, accounting for some 26 per cent of its output. The total output volume, including sawmilling, board production and the furniture sub-sectors, is about EUR680 million per annum and the average increase in output is around 23 per cent each year. The sector is associated with intensive use of natural resources and the level of wood processing has recently increased. Sawing and drying process technology is being upgraded. However, the export of minimally processed wood has been replaced to some extent by the export of plywood (particularly large sheets and laminated plywood), wood panels and furniture.
Resources and harvest Around 44 per cent of Latvia is forest: 60 per cent of the total area is covered by softwood, two thirds of which are pine and the rest spruce. The main hardwood species is birch (72 per cent). Other widespread species are aspen, white alder and black alder. Oaks and ash trees are represented in small areas of about 0.5 per cent each. The total growing stock accounts for 500 million cubic metres and the annual increment is 16 million cubic metres. The annual cut permitted is 8.35 million cubic metres, however in reality the commercial harvest comprises an average of 10 million cubic metres. State-owned forests constitute 56 per cent of the total area, private forests 40 per cent. Some 300 companies are working in the state forests under long term agreements. Reforestation following harvesting is mandatory in Latvia. Due to the huge demand from the processing industry extra resources beyond local forests are currently being explored, and
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Wood pulp Other & paper 7.1% 2.8% Fuel 4.0% Plywood 8.7% Particle board 1.4% Furniture 10.7% Hardboard 0.6% Veneer 1.2% Roundwood 12.1% Matches 0.3%
Sawn wood 50.8%
Charcoal 0.3%
Figure 4.7.1 Value structure of wood and wood products exported from Latvia Source: LDA calculations
Russian and Belarussian forests with their huge resources, low cut and round timber costs and proximity to Latvia, are the most likely options for exploitation.
Woodwork While 63 per cent of the output of the woodwork sub-sector is exported, the local construction sector plays an important role with rapid construction giving rise to a huge demand for building materials, including wood, and so a significant part of the output stays in the local market. Currently the most important woodwork products are sawn materials (60 per cent of total output), followed by particle board and plywood (15 per cent). The main export commodity is sawn materials (EUR408.9 million) followed by round wood (EUR124.9 million) and plywood (EUR72.5 million). Firewood (EUR11.3 million), paper and paperboard (EUR21.0 million) and to a lesser extent plates from wooden chips (EUR8.5 million) and hardboard (R3.6 million) are also exported. Approximately 90 per cent of these goods go to EU countries, the rest to other regions such as America, Asia and Central Europe. The most important purchasing partners in the EU are Great Britain and Germany.
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Other 12%
Ireland Egypt 2% 2%
France Finland 2% 3% The Netherlands 3% Denmark 4%
UK 38%
Germany 13%
Sweden 17%
Estonia 2% Belgium 2%
Figure 4.7.2 Exports of wooden materials in 2001 Source: Central Statistics Bureau
The most important advantage of the wood industry is its stable source of raw materials. The woodwork production line in Latvia has access to 8.3 million cubic metres of wood from local sources and additionally 198 million cubic metres of wood from Russia and Belarus, which only take three days to import. The industry also has the advantages of a skilled workforce and proximity to the stable markets of the EU. The sawmill sub-sector is occupied by a number of small companies that comprise some 75 per cent of total output. Approximately 1,500 companies with a capacity of up to 1,000 cubic metres per year operate here. Around 40 companies have a yearly production capacity higher than 10000 cubic metres. Despite the appearance of more medium sized companies, the dominance of small mills is set to continue. The biggest sawmills are JSC Incukalns Timber, LLC Vika Wood, LLC Nelss and LLC Komiss. As well as sawmills, plywood, fibreboard and particle board producers operate, such as JSC Latvijas Finieris and JSC Bolderaja. Foreign direct investment in this sub-sector is modest, accounting for EUR45 million at the end of June 2002. However, there has been significant local investment of EUR370 million between 1995 and 2001, with an annual growth rate of 24 per cent.
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Furniture The furniture industry is an important sector in the Latvian woodwork industry, with a value of EUR90 million and an average annual growth rate of 14 per cent since 1995. It exported 60 per cent of its output in 2001. There are currently more than 300 companies in Latvia producing furniture or furniture components: 40 of these are medium sized and the rest are small and micro companies. Furniture producers are mainly concentrated in Riga and other cities. Domestic investment and FDI in the branch is still relatively small. EUR40 million have been invested by local companies since 1995 while foreign investment accounts for only EUR4 million. However, the growth of local investment is promisingly high with an annual increase of around 40 per cent since 1995. The furniture industry in Latvia is still in need of capital, experience and distribution solutions to allow it to take full advantage of its potential to produce high value products. The most attractive branches of activity are the production of office and garden furniture, glued details and construction (pre-fabricated buildings). Companies mainly specialize in the mass production of wooden furniture, mainly using birch and pine. The production of veneer, fibreboard and laminated furniture is on a smaller scale. The most important assets for the sector are the availability of raw materials, production traditions and the availability of a skilled USA Lithuania 3% 4% Finland 4% Other 12%
Germany 31%
France 6% Estonia 3% Poland 2%
Sweden 6% UK 7% Denmark 22%
Figure 4.7.3 Furniture exports in 2001 Source: Central Statistics Bureau
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workforce as well as a tradition of good education in the areas of joinery and material processing. Approximately 80 per cent of furniture (EUR88.2 million) is exported to EU countries, and Central Europe is an important export market. The biggest mass producers of wood furniture are LLC Dailrade koks, LLC Malteks, LLC Rondeks and LLC Amber Furniture. The main specialist furniture producers are JSC Bolderaja, LLC Larme and LLC Ventspils Koka Mebeles.
Pulp and paper Paper and pulp processing industry is virtually non-existent today, but it was once a strong branch and would be an effective way to process local resources. Scandinavian Metsäliitto is currently developing a new factory with a planned capacity of 0.6 million MT per year.
Links Ministry of Agriculture (forestry): www.zm.gov.lv JSC Latvijas Finieris (plywood): www.finieris.lv JSC Bolderaja (fibreboard): www.bolderaja.lv LLC Silva (sawmill): www.silva.lv
4.8
Transportation and Logistics Latvian Development Agency Latvia’s geographical location is important to an understanding of its transport and logistics sector. Traditionally Latvia has been a gateway between east and west, ie Russia and Western Europe, and so the transit and international distribution business is the most strategically important aspect of this sector. In 2002, 8.3 per cent of workers were employed in the transport field and the sector contributed 13.7 per cent of Latvia’s GDP. Transit traffic has for a long time accounted for a considerable proportion of the Latvian GDP and its importance has remained high despite the economic downturn at the beginning of the 1990s. As the transit traffic and related services industry has recently accounted for nearly 30 per cent of Latvia’s GDP, the government is emphasizing the need to play a part in the development of the EU’s integrated transit networks and has recently invested actively in the transport and distribution infrastructure.
Infrastructure Latvia has a relatively developed international transport network, including three large, ice-free seaports, 2,400 kilometres of railroad and more than 20,000 kilometres of road network linking east to Table 4.8.1 Cargo traffic by type of transport (million MT)
Rail Road Sea
1993
1996
1998
2001
2002
28.8 20.0 24.7
35.3 29.5 45.0
37.9 34.1 52.3
37.9 32.3 57.0
40.1 36.9 52.2
Source: State Statistical Bureau
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west and north to south, particularly Helsinki-Warsaw. There is also an international airport at Riga.
Ports There is a total of 11 ports in Latvia. The biggest are Riga, Ventspils and Liepaja ports who mainly handle transit cargo. The eight smaller ones reload local cargo and accounted for only 2.0 per cent of total cargo turnover in 2002. In terms of specialization, Ventspils and Liepaja ports are mainly export ports while Riga port is an importing route. Ventspils port is the biggest port in terms of reloaded cargo – 55 per cent of all cargo reloaded in Latvia – as well as ranking among the 15 biggest in Europe. Liepaja port handles general cargo, particularly wood materials and metals. Riga port traditionally handles the largest amount of incoming cargo (70 per cent of cargo received in all ports). All ports are being developed as multi-functional commercial ports. Eight smaller ports have more regional and local importance in the handling of cargo and servicing the fishing and tourism businesses. The major port development project is the government-run Programme for Port Development with an estimated cost of EUR545 million. In parallel with this, private sector investment in port
Table 4.8.2 Cargo turnover in Latvian ports in 2001 (thousand MT)
Bulk cargo Chemicals Liquid cargo Oil Oil products General cargo Containerized cargo t.t. Containers TEU Roll on/Roll off t.t. Number Timber t.t. Timber t.m.3 Metals Total Source: State Statistical Bureau
Ventspils
Riga
Liepaja
6,280.40 5,171.50 25,706.20 13,050.70 11,276.40 2,150.80 3.30 195.00
2,619.60 1,111.20 2,360.30 – 2,176.90 7,032.60 863.70 85,911.00 229.90 17,847.00 3,461.80 4,426.20 1,679.80 12,012.50
296.94 0.50 296.52 – 241.24 1,730.60 60.43 4,044.00 330.22 20,444.00 634.18 1,361.76 563.95 2,324.07
589.00 699.97 1,475.80 34,136.50
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infrastructure projects is growing substantially, accounting for some EUR650 million since 1992. Approximately EUR300 million came from foreign direct investment in 2001.
Rail Railways also play an important role in transit traffic, as some 80 per cent of all transit cargo enters Latvia by rail (a similar proportion leaves by sea). Latvia has 3,400 km of railway that fits the track gauge standards of the Eastern European and CIS railway network. There are regular trains to Moscow, St. Petersburg, Vilnius and Tallinn. About 90 per cent of all transit haulage goes through Latvian ports and nearly half of the ports’ mainland cargo turnover is provided by railways. There is a regular train service that carries containers from Riga Commercial Port to Moscow Container Terminal. The number of passengers carried by rail has been in decline, although the share of passengers carried on suburban routes, particularly Riga, amounts to over 90 per cent of all domestic passengers. A plan for a EUR750 million extensive expansion and renewal of the east-west railway corridor (linking Latvian ports with Moscow) is currently being carried out with the help of IFI financing. As well as this project, further plans to modernize the Latvian railway are under negotiation.
Road This is the most important means of transport for domestic cargo haulage and passenger transportation; however only 5 per cent of total haulage is for international transportation. Latvia has over 20,000 kilometres of roads, of which less than half are asphalt. The most important road transport corridors are, again, the east-west corridor connecting Latvia’s ports with Moscow and other regions in Russia, and the north-south corridor linking Tallinn with Kaunas, Warsaw and other parts of Central Europe. The Via Baltica upgrade project will connect Finland, parts of Scandinavia and St Petersburg in the north and Poland, Kaliningrad and Belarus to the south.
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Air Air transportation in Latvia centres around Riga international airport, although there are two other, smaller airports: Liepaja and Daugavpils. The airport at Liepaja is also capable of handling international traffic and Daugavpils will soon serve international carriage. Practically all flights are international, as at present the demand for domestic flights is limited. Cargo transportation by air is relatively small – only 5,200 tons of cargo and mail were transported by air in 2001 – while passenger traffic has increased over recent years. However, cargo and mail turnover in Riga airport represents over 80 per cent of the Latvian total airfreight. Riga airport is located 13km from the centre of Riga and 2 million passengers pass through it each year. The airport infrastructure has been modernized and new air traffic control equipment installed to allow it to cater for the needs of international air transportation.
Pipelines Latvia has traditionally been strong in the transhipment of oil and oil products. The largest foreign investment in the energy sector is the joint venture company LatRosTrans which manages the oil pipelines running through Latvia. There are three major pipelines, one for crude oil, one for oil products and one for gas, which comes mainly from Russia. Another oil pipeline running through Latvia from Russia is planned and will be managed by Western Pipeline Systems, which is owned by LatRosTrans, the European Bank for Reconstruction and Development (EBRD) and other companies in Russia, Belarus and Western countries. Latvia has large (third biggest in Europe) underground natural gas storage facilities located near Riga, with the capacity to cover the gas storage needs of all three Baltic countries. Latvijas Gaze (the gas monopoly) is actively planning to double the gas storage facilities to guarantee stable deliveries of gas in the Baltic States region. Negotiations are also being held to build a pipeline that would be included in the proposed Northern Gas Ring project, to transport Russian natural gas to Scandinavia via Latvia. Latvian gas storage facilities could become an important part of the Northern Gas Ring.
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Storage and distribution facilities The storage and distribution business has grown as a consequence of the rapid growth in transit, export and import operations. The main business centres are situated at and nearby the three major ports in Riga, Ventspils and Liepaja. These territories are facilitated with a complex of multipurpose terminals and warehouses as well as supporting businesses like customs brokerage, banking and insurance businesses and business parks. Alongside these cities, important distribution centres are located in Daugavpils and Rezekne, mainly to serve rail and road cargo flows. Meanwhile, Riga plays the most important role as a distribution centre for the Latvian and regional markets. Many internationals use Riga as their logistics headquarters for exporting and distributing in the Latvian, Baltics and Russian markets. Ventspils, Liepaja and Daugavpils have a lesser role in terms of distribution of goods.
Links Ministry of Transport: www.sm.gov.lv JSC Latvijas Dzelzcels (railway): www.ldz.lv Association of International Carriers: www.lauto.lv Freeport of Riga Authority: www.rop.lv Ventspils Commercial Port: www.vto.lv Port of Liepaja: www.lsez.lv
4.9
Financial and Insurance Services Latvian Development Agency The Latvian financial system can be seen as fully liberalized in the sense that it ensures a free flow of capital, absence of Forex and bank interest rate level controls. The banking sector also is recognized as stable and secure enough for long term operations, mainly thanks to successful maintenance by the prospective monetary policy and the tight supervision of commercial banks carried out by the Bank of Latvia. At the end of 2001 the assets of Latvian commercial banks accounted for 73 per cent of the GDP or EUR5.7 billion and the average annual growth of their assets is 28 per cent. Around 90 per cent of the financial market assets belongs to the banking sector, while leasehold companies manage 6 per cent and 3 per cent is controlled by insurance companies. Since 2001 financial market supervision comes under one public body, the Finance and Capital Market Commission.
Banking At the end of 2002 23 banks were operating in the market and 68 per cent of the bank’s fixed capital belonged to foreign investors. Twelve banks had a foreign strategic investor and the main origins of foreign capital were Scandinavia and Germany. The last investment deal took place at the end of 2002 when the Swedish Skandinaviska Enskilda Banken (SEB) increased investment in the second largest Latvian commercial bank – JSC Latvijas Unibanka – to almost 100 per cent. Thus SEB is the major player in the Baltic market while other important foreign players are Nordea and Vereinsbank. Private shares in the banking sector accounted for 95.5 per cent at the end of 2001 and the remaining state share is held by JSC Latvijas Hipoteku un zemes banka and JSC Latvijas Krajbanka. This share will further reduce as a result of ongoing privatization. Today the biggest banks are Parex Bank, Latvijas Unibanka and Hansabanka.
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Table 4.9.1 Operation data of Latvian commercial banks (R million) 1995 Assets Credits Savings Capital & reserves Profit
1996
1997
1998
1999
2000
2001
2002
1,327 1,860 2,789 2,786 3,236 4,464 5,734 6,691 350 444 807 1,197 1,384 1,778 2,696 3,215 883 1,143 1,800 1,737 2,151 3,108 3,883 4,660 172 248 366 327 321 380 514 580 9 50 77 –47 30 64 83 85
Source: Bank of Latvia, Association of Latvian Commercial Banks
Most Latvian banks are universal commercial banks providing the full range of banking services, although some services are still limited due to uneven market development as well as limited integration into the international capital market. However Latvian banks are capable of carrying out services that are essential for local business development, ie transactions, Forex, savings, credit and trade finance. The Latvian banking sector is also successfully pursuing the introduction of the latest banking technologies such as electronic payments and e-banking. Internet and wireless banking operations are accessible and the use of credit and debit cards is also growing rapidly. Banking fields in development are investment instruments, security and stock market instruments and management of financial funds. At present the main sources of bank earnings are interest payments (42 per cent) and commission (24 per cent). Increasing the volume of the issued credits ensures that interest earnings will be sustained or grow along with other types of earnings in the medium term. In the meantime commission earnings would decrease due to the growth in e-banking operations. Operation in Table 4.9.2 Characteristics of the Latvian banking sector, 1991–2002 1991 Number of banks Employees Number of customer accounts (000) Number of credit/debit cards (000) Number of ATMs Number of POSs
16 – – – 0 0
Source: Association of Latvian Commercial Banks
1993
1996
1998
2001
2002
61 33 28 23 – 7,500 8,230 7,943 – – 1,387 1,651 – – 207 893 0 0 238 791 0 0 3,390 6,908
23 8,240 2,041 1,022 842 8,326
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the external markets changed in 1998 following the downturn in the Eastern markets and banks re-orientated their activities from CIS markets to the local, regional and EU markets. Credit issue is a very rapidly growing service category, which explains why credit remainder per capita in 1995 was EUR137 while at the end of 2001 it had grown to EUR963. The latest growth figure was about 50 per cent. At the end of 2001, 80 per cent of credits were long-term and the trend over the past year shows further increase for long-term credits. Consumer and payment card credit account for some 5 per cent. The main target areas for credits are trade (23 per cent), manufacturing (18 per cent) and financial intermediation (17 per cent). The share for credits in the trading sector is still declining and credit lines are supplied to long-term development such as manufacturing and real estate. In 2001 the average short-term credit rate was 9.8 per cent (5.6 per cent for credits in OECD currencies). However, credit interest rates are still high and this is explained by the huge demand for this service, periodical changes in bank liquidity and relatively high inter-bank interest rates as well as the dominance of short term resources in the banks.
Non-banking activities The most rapidly developing sub-sector is leasehold activities, with growth rates just behind those of the investment fund sub-sector. Leasing and factoring are the most important services apart from bank activities. It is worth mentioning that these services are carried out mainly by banks through their sub-branches or on their own. The insurance market is also dominated by foreign companies and at the end of 2001 foreign capital share in insurance assets accounted for 52 per cent. The total stock of gross insurance premiums were about 2 per cent of GDP and 95 per cent of these
Table 4.9.3 Results of the four biggest Latvian banks in 2001 (R million)
Parex Bank Latvijas Unibanka Hansabanka Latvijas Krajbanka
Assets
Credits
Deposits
Equity
Profit
428.6 366.8 226.6 128.9
170.7 237.1 94.2 35.1
315.9 200.1 183.9 111.2
39.5 36.8 19.2 4.3
2.8 2.5 1.2 0.2
Source: Association of Latvian Commercial Banks
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189
were in the non-life insurance field. The Latvian insurance sector has been significantly consolidated and 21 insurance companies were operating in the market at the end of 2002. Major players in the non-life insurance market are ISC Balta grupa (previously Rigas Apdrosinasanas Sabiedriba, Balta and Latva consolidated by Danish Kogan), ISC BTA (the only Latvian company), ISC Ergo grupa (includes Alterna and Latgarants un Rigas Fenikss, consolidated by German Ergo), ISC IF Latvia (Finnish Sampo), ISC Seesam Latvia (American International Group and Finnish Pohjola Group). Major life risk insurers are ISC Latvia (Balta Group), Seesam Life, ISC Baltikums Dziviba and ISC IF Latvia. As well as insurers, more than 20 brokerage companies are in operation. The development of pension funds began in 1997 when the Law on Pension Funds was adopted. Today the importance of these services is small; however further growth is expected due to the purchasing parity growth and stipulating policy (25 per cent income tax does not apply to deposits). Today there are four private pension funds, three of which are open funds (NPSC Pensiju fonds Baltikums, NPSC Parex Atklatais Pensiju Fonds and JSC Unipensija) while one is a closed pension fund (JSC Pirmais Slegtais Pensiju Fonds). Since 2003 a new market niche has emerged: management of state-funded pensions. Table 4.9.4 Insurance market overview 1997 1998 1999 2000 2001 2002 Gross premium volume share in GDP (%) 2.0 Gross premium volume per capita (R) 46.2 Of which: life risk insurance 4.5 Non-life risk insurance 41.0
2.5 61.0 5.5 55.5
2.4 66.0 4.7 61.2
2.2 67.2 2.7 64.5
2.0 69.0 2.5 66.5
2.1 72.4 2.8 69.6
Source: Finance and Capital Market Commission
Table 4.9.5 Overview of the private pension fund market 1998
1999
2000
Number of pension plans 3 Participants in pension plans 167 Enrolment in pension plans 167 Dissolved participants from pension plans 0
8 5,657 5,490 0
16 14 9 6,991 17,359 20,064 1,370 9,638 n/a 44 1,402 n/a
Source: Finance and Capital Market Commission
2001
2002
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Links Bank of Latvia: www.bank.lv Ministry of Finance: www.fm.gov.lv Association of Latvian Commercial Banks: www.bankasoc.lv Latvian Finance portal: www.financenet.lv
4.10
Construction and Real Estate Development Latvian Development Agency Construction The construction industry is one of the most successful industrial sectors, with a sustainable average annual growth rate of 9.3 per cent since 1995: this exceeds the growth rate of the GDP. The construction industry’s contribution to the GDP was 5.4 per cent in 2002 (EUR428.3 million). Activity is concentrated in the commercial property sector (50 per cent), followed by public infrastructure (23 per cent) and private residential property (6 per cent). In 2000, the most significant growth was in the construction of administrative buildings (87 per cent), followed by building for trade (63 per cent), education (60 per cent), and industry (54 per cent) while infrastructure construction declined. These changes were due to a need for new industrial and trade buildings, as well as public expenditure through the Public Investment Programme and other development projects. One major cause of rapid development is the renovation of the country’s infrastructure, including roads, railways and ports, and there is also a huge demand for better housing. The rapid growth and sophistication of business has stimulated the demand for modern and fitted business premises. Participation in the international environment has raised demand for large scale building such as halls and conference buildings. Economic growth has raised inhabitants’ income levels as well as allowing them access to loans and this has created a demand for individual housing. As a consequence, centres for construction and real estate business can be found in the economically successful cities of Riga, Valmiera, Venstpils and Liepaja. Some 75 per cent of all building activities are carried out in Riga city. Latvia has good resources of gypsum, quartz, dolomite, clay sand and gravel that can all be used to produce building materials, and
192
Key Sectors of Trade and Investment
timber for frame housing, windows and doors is readily available. Steel construction and materials are imported from Russia, Sweden and Finland. The local plastic industry also delivers high quality materials such as pipes, PVC windows and plastic fillings. The biggest Latvian construction material producers are JSC Lode (clay bricks), JSC Broceni (concrete), LLC Knauf Marketing Riga (gypsum products), LLC Siguldas Bloks (concrete articles) and LLC Saulkalne S (dolomite, gravel). The further development of the construction materials industry as a sector will depend on the growth rate of domestic demand as well as on the efforts of producers to follow advances in technology and global trends in building materials and fashion. The largest construction companies by turnover in 2001 were LLC Kalnozols un Partneri (EUR38 million), LLC Skonto Buve (EUR32 million), LLC Re & Re (EUR30 million), LLC LEC (EUR23 million) and LLC Kalnozols Celtnieciba (EUR22 million). Of architect practices, the biggest in terms of turnover in 2001 were LLC Olimps (EUR20 million), PC Re&Re Kalnozols Sesi Plus (EUR11 million) and LLC Vincents (turnover EUR9 million). About 35 companies have ISO certificates.
Real estate market The real estate market really began to develop in 1991. The catalyst was the reform of property rights which included overall privatization. There was little development in the sector in the first five years due to a lack of financial resources: credit was more or less unavailable for the majority of businesses and individuals since interest rates were extremely high (120 per cent in 1992) and since it was difficult to ascertain risk, banks were reluctant to give credit for development. These issues stagnated market development and only a few significant reconstruction or greenfield projects were undertaken. However, by 1996 rates had declined to 20 per cent and rapid development of the real estate market began in 1997 when banks started to issue credit to consumers at rates of 10–16 per cent. This gave rise to huge demand in the real estate market as well as in the construction sector, and particularly in Riga and its metropolitan areas, although market sophistication was, and still is, modest outside the Riga region. As a result market prices for real estate rose at least tenfold, and market prices stabilized at levels that are comparable to the world property market. However, property prices today are around 30 per cent lower than the EU, and are significantly lower outside the Riga region.
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The annual land tax is 1.5 per cent of the government-determined assessed value. Building taxes range from 0.5 to 4.0 per cent per year and are levied according to a sliding scale based on the value of the structure. Table 4.10.1 Average price of land in urban areas, 2002 (R/m2)
Riga Jurmala Ventspils Liepaja
Residential land
Commercial land
Industrial land
12.1 12.8 3.0 6.4
27.2 9.7 9.1 20.7
12.1 – – 4.1
Source: State Land Service
Table 4.10.2 Average price of land in rural areas, 2002 (R/ha) Region
Arable
Forest
Residential*
Central part Western Northern Eastern
450 234 214 143
593 441 623 523
0.6 1.9 1.9 0.3
*R per m2 Source: State Land Service
Table 4.10.3 Average price of apartments and family houses, 2001 (R/m2)
Centre of Riga Riga Jurmala Ventspils
1–2 room apartments
3–4 room apartments
Family houses
400–950 200–550 160–900 60–200
460–1,100 220–500 140–1,000 65–250
– 400–1,200 550–1,000 90–500
Source: State Land Service
Table 4.10.4 Rent prices of non-residential space, 2001 (R/m2 per year)
Central Riga Riga Ventspils Liepaja
Office
Retail
Industrial/warehouse
108–336 54–240 22–44 12–240
204–480 42–408 33–108 7–120
– 7–72 6–30 3–6
Source: State Land Service
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Key Sectors of Trade and Investment
Links State Land Service: www.vzd.gov.lv State Real Estate Agency: www.vnia.lv Association of Latvian Real Estate Brokers: www.lanida.lv
4.11
Telecommunications and Media Latvian Development Agency Telecommunications The Latvian telecommunications market was fully deregulated on 1 January 2003 when the monopoly status of LLC Lattelekom (Sonera) was revoked. However monopolies were still in place in the fields of voice telephony, ie local communication, domestic long-distance, international communication and provision of voice services to closed user groups, until 2003. A regulator now supervises, issues licences and controls the telecommunication market. This regulatory body can intervene in the activities of operating companies if their actions violate principles of fair competition. This intervention is legitimized by the Law on Regulators of Public Services and according on the Law on Telecommunications. Another public body, the Competition Council, is responsible for competition. Fixed voice communications, led by LLC Lattelekom, is the only market niche that has deteriorated. In the case of LLC Lattelekom, there were disputes between the government and foreign investors, particularly Sonera, because of the unilateral bringing forward of the end of monopoly status from 2013 to 2003 as a result of the WTO’s stance on market deregulation. Some kind of reconciliation will have to be reached. Licences have already been granted to 11 companies for operation in the field of local and domestic fixed voice telephony, as well as 12 licences to companies operating in international voice telephony. The most important company is still LLC Lattelekom, but notable competitiors include JSC Latvijas dzelzcels (railway company maintaining its own network), JSC Latvenergo (energy company maintaining its own network), JSC Telekom Baltija (international IP telephony), LLC Telekomunikaciju grupa (international IP telephony) and LLC Telia Latvija.
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Key Sectors of Trade and Investment
Table 4.11.1 Penetration of fixed and cellular lines
Cellular phone penetration Penetration of fixed lines
1999
2000
2001
12% 31%
17% 31%
27% 31%
Source: Central Statistics Bureau
LLC Lattelekom is valued at approximately EUR2.19 billion. In 2001 the company was the second largest in Latvia with a turnover of EUR240 million. The market value of JSC Latvijas Mobilais Telefons was approximately EUR750 million in 2001 while turnover was EUR175 million. The company’s shareholders are Sonera Holding BV (24.5 per cent), Telia AB (24.5 per cent), LLC Lattelekom (23 per cent), Digitalas Televizijas centrs (23 per cent) and the Ministry of Transport on behalf of the state (5 per cent). The company is the biggest and longest established in the cellular communications sector and had 410,000 users in 2002. The market value of its nearest rival Tele2 is about EUR300 million with EUR61 million turnover and 350,000 subscribers. Both JSC Latvijas Mobilais Telefons and LLC Tele2 have licences to develop a 3G (UMTS) network.
Written media The Latvian newspaper market really came into existence in 1991 with the regaining of independence. The publishing industry output is worth around EUR44 million, with a turnover of EUR20 million. There are about 90 newspapers in Latvia, 18 dailies (11 national and 7 regional dailies), 72 non-dailies and 24 regional newspapers. The average total circulation per issue for dailies is 280,000 and for non-dailies 510,000 copies. Around 60 per cent of newspapers are delivered to homes. Home delivery is carried out by the national postal company but other delivery types are being developed by some private businesses. The advertising market turnover in this kind of media is significant; 37 per cent or EUR21 million in 2001. The newspaper market has three segments: the national dailies (morning newspapers), national evening newspapers and regional newspapers. Media is published in both Latvian and Russian. The biggest national dailies are Diena (41,000 subscribers), Lauku Avize (70,000 subscribers), Vestji Segonja, Neatkariga Rita Avize
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(40,000 copies and 25,000 subscribers), Chas and Dienas Bizness (10,000 subscribers) and Telegraf (10,000 subscribers). The largest evening papers are Rigas Balss and Vakara Zinas. Million, Kurzemes Vards Nasha Gazeta and Zemgales Zinas are major regional newspapers. Important companies are JSC Diena and LLC Mediju Nams (a division of JSC Preses Nams) and LLC Fenster. There are about 100 magazines. The most popular are Santa (35,000 copies), Ieva (70,000 copies), Privata Dzive and Musmajas Metropolitean. Major publishing companies are Zurnals Santa (eight magazines), Egmont Latvija (nine children’s magazines) and Petit. The advertising turnover in the magazine industry is EUR6 million.
Broadcasting The broadcasting market also began in 1991 when new private media companies launched activities separately from state media. Today the market has been fully liberalized, with a state regulatory body in the National Radio and Television Council that issues and rejects broadcasting licences as well as supervising content. There are 31 registered radio broadcast companies with 36 stations, 27 TV broadcast companies with 28 channels and 37 cable TV providers as well as one cable radio company. Television is the second largest advertising market apart from written media, with a turnover of EUR19 million in 2001. The most significant players in terms of audience share are all national broadcasters: JSC Latvijas Neatkariga Televizija (24 per cent), LLC TV3 Latvia (15 per cent) and the state non-profit company LLC Latvijas Televizija (18 per cent over two channels). There are 36 registered radio stations, 7 national and 29 regional. Today the most widely listened to are Latvijas Radio 2 (24 per cent), Latvijas Radio 1 (14 per cent), SWH and SWH+ (10 per cent each). In Riga city, SWH+, SWH and Radio 100 FM are the leaders. Radio advertising market turnover was EUR7 million, accounting for 12 per cent of the total advertising market. There are 37 companies operating in the field of cable television. The majority of these are operating locally in Riga and other large Latvian cities; regional coverage is limited. The only companies with significant geographical coverage as well as customer share are LLC Telia MultiCom and LLC Baltkom TV. Both companies are extensions of Scandinavian media companies.
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Key Sectors of Trade and Investment
Internet In 2001 the Internet penetration rate was 7.8 according to the Latvian Internet Association. One of the drivers of the growth is the computer penetration rate of 10–12 per cent. Internet usage in households is still small, accounting for only 1 per cent of the total population. However the annual growth in Internet usage is high at 32 per cent since 1995 and over the next five years growth at the same levels or even faster is expected. The Internet advertising market is very small at EUR0.5 million, but grew by 235 per cent in 2001. The starting point of the market’s development was the appearance of Internet portals and vortals. Today around 20 Internet portals can be considered as important media units. News, business, trade and leisure are the most popular areas. 40 per cent of users have dial-up modems and 60 per cent have cable or other permanent connections. The largest portals are Delfi (Microlink), TvNet (Grafton Entertainment), One (Lihmus Haavel & Viisemann) and Apollo City (LLC Lattelekom). The number of ISPs remains at around 45 companies, with Delfi (Microlink), Latnet, Apollo (Lattelekom), Telia Latvija and BKC taking the majority of the market.
Links Latvian Information Technology and Telecommunications Association: www.litta.lv Ministry of Transport: www.sam.gov.lv National Broadcasting Council of Latvia: www.nrtp.lv LLC Tele2, (cell phone operator): www.tele2.lv LLC Latvijas Mobilais Telefons (cell phone operator): www.lmt.lv
4.12
Travel and Tourism Latvian Development Agency One of the most important and growing sectors of the European economy, as in the rest of the world, is tourism. This sector is a strategic priority for economic growth and employment. Tourism experts, including the World Tourism Organization, predict that the profile of the Baltic Sea region in the world tourism industry will be raised. Tourism abroad currently contributes 1.8 per cent to the Latvian GDP, about three times lower than the EU average. The lack of development in this sector is mainly due to the weakness of local demand and low purchasing power. However, the growth in local demand has been rapid and incoming tourism is growing so further growth of the sector and all sub-sectors is expected.
Infrastructure About 250 companies operate in the Latvian tourism and travel market and all of them are SMEs.
Accommodation There are around 230 hostels and 77 appraised hotels (3 five-star, 6 four-star and 26 three-star), 46 guest houses, 8 motels and 10 resort hotels. Most of this accommodation is concentrated in Riga. Recent years brought improvements in the quality of tourist accommodation while capacity remained static, therefore at peak times there can be a shortage of accommodation which in turn makes the area less attractive to tourists. Further efforts should be made to increase accommodation capacity in Riga and other cities as well as in rural regions close to places where tourism is being developed. The biggest and best known accommodation companies are Radisson SAS, Park Maritim and Reval.
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Key Sectors of Trade and Investment
Hospitality The restaurant and catering business is one of the most successful in the tourism sector. There is good geographical distribution as well as high service quality. Some 2,500 companies are involved and more than half of these are located outside Riga. They can cater for 95,000 diners – 35,000 in Riga. Another rapidly growing business is conference, exhibition and cultural event management. Since Latvia has a favourable geographical location in the Baltic Sea region, a number of international events take place here. The demand for suitable premises boosted entrepreneurship in building and fitting them, but it should be noted that all large-scale activities, including Europe-wide events such as the EBRD annual meeting, Eurovision Song Contest 2003, take place in Riga. The World Ice Hockey Championship 2006 will also take place in Latvia.
Retail The retail sector has also seen very rapid growth in response to local demand. The majority of the growth was in supermarkets, and development of small shops that could serve the tourist market is slow.
Healthcare There are modern healthcare facilities of a Western European standard and several private clinics exist where a visitor can receive basic medical care, dentistry and in-patient services. Diagnostic services with the most modern equipment are also available. This type of healthcare is offered by companies such as ARS, Healthcare centre 4 and Latvian Maritime Healthcare Centre. Pharmacies and 24 hour healthcare centres are also widely available.
Transport Considerable development of the transport infrastructure is still necessary. The basic infrastructure is in need of repair and public transport coverage and quality also needs to be developed, particularly in the regions. Most kinds of transport are available to the public; however the most popular means are buses, ferries and air links with the railway of lesser importance in public carriage. Bus links are good and serve all kinds of local as well as international routes and are an alternative to the railway. The railway today serves mainly the Riga metropolitan area, although there are also
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201
links to Vilnius, Tallinn, Saint Petersburg and Moscow. In the future a high speed train route is envisaged that will connect Western Europe with Scandinavia via Riga. Nowadays a number of sea transportation links exist and while they fulfil current demand capacity needs are expected to grow. Ferry links exist on routes Riga-Stockholm (Sweden), Ventspils – Vesterviik (Sweden), Riga-Lubeck (Germany), Liepaja-Karlshamn (Sweden) and Liepaja – Rostock (Germany). Further developments are also needed to reconstruct and newly develop the ferry stations in Riga, Liepaja and Ventspils ports. As to air links, there is a good service and an extensive range of routes. Riga international airport is the regional airport in the Baltic Sea region with the capacity to handle 600,000 passengers per year. Liepaja international airport also exists but has very few flights. Local air transportation is underdeveloped due to the absence of demand.
Tourism development There was a respectable growth in the number of incoming foreigners in 2001 and 2002. The total number was 2.3 million in 2002, the highest in the last nine years. This is a result of stable economic growth, foreign investment, growth of activity in most sectors of the economy, a planned state policy to develop the sector and co-operation between government and the private sector. Other factors have been the reconstruction of Riga international airport, the success of the national economy and rural tourism development. In 2002 the Latvian tourism industry showed stable development. In future it will concentrate on quality assurance, the further development of rural tourism and ecological tourism, and co-operation between industry members. The number of incoming foreigners in 2002 compared to 2001 went up by 11 per cent. Although there was a large number of transit travellers, the number of tourists who stayed in country for more than one day in 2001 went up by 16 per cent. The credit for this goes to the remarkable celebration of Riga’s 800-year anniversary and changes in the world tourism industry following 11 September 2001, after which some Europeans avoided long distance travel and aeroplanes. The average duration of stay in Latvia was 2.1 days and average daily expenditure was EUR32. About a third are business travellers and these spend the highest amount of money: about EUR67 per day and a total of EUR61 million in 2001. The largest number of
202
Key Sectors of Trade and Investment
visitors came to Latvia from the neighbouring countries of Lithuania, Estonia, Russia and Finland.
Assets and niche markets Latvia lies on the coast of the Baltic Sea and its landscape is similar to Ireland. The nature and climate here creates a unique environment with many attractive beaches, plains, valleys, lakes and hills. Latvia is renowned for its beautiful scenery and unpolluted environment. According to several surveys Latvia has some of the least polluted air in the world. Some 490 kilometres of long, mostly sandy beach stretch from the western to the northern points of Latvia offering excellent places for recreation. Flat beaches interchange with steep sand dunes and in some places the beaches are stony. There are more than 3,000 lakes and 750 rivers whose untouched surroundings are attractive for recreation. The ‘green environment’ is created by forests covering almost half of the territory of Latvia. Riga today is a major centre for cultural tourism. Riga is classified as a ‘World Heritage Site’ for its exceptionally fine examples of Jugend style architecture. The interesting Old Town has been restored and many historical and cultural tourist attractions can be found here. There is also an Opera House with fine opera and ballet productions. Specific tourism development possibilities lie in the exploration of natural coastal amenities. The main urban areas are Liepaja, Ventspils and Jurmala but as well as these, small port cities are attracting significant interest. The main exploration areas include riverside and seaside development, historically significant buildings and museums as well as yacht tourism development. In Jurmala the potential definitely lies in spa development. This city already has strong traditions in this field, but the economic situation has prevented it from being fully explored. The Vidzeme region has hilly, scenic and unspoiled natural areas. There is potential for summer and winter sports, boating, lakes and river tourism. Sigulda and Cesis are the most attractive cities for tourism. Madona and Aluksne cities lie near Vidzeme highland and there is potential for mountain skiing there. Kurzeme region has pleasant, undulating, unspoilt countryside, agriculture, woods and coastline. There is potential here in the areas of castle tourism, country retreats, winter and summer sports and yachting.
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Other inland tourism places for potential development include the Latgale region, whose biggest cities are Daugavpils and Rezekne. Today this region is experiencing an economic and social downturn due to the collapse of industry there but tourism could be developed around its churches, museums and other buildings of historical interest. The area is also interesting because of its natural beauty and many lakes.
Links Latvian Tourism Development Agency: www.latviatourism.lv Travel Latvia: www.travellatvia.lv Countryside tourism: www.country.holidays.lv List of hotels: www.allhotels.lv
Appendix 1
Business Risk Assessment Coface Latvia Rating: A4 Assets • Reforms are ongoing, driven by the prospect of EU membership in 2004; • Cheap and skilled labour, attractive tax laws and secular trading tradition between east and west; • External financial position strengthened by foreign direct investment.
Weaknesses • High current account deficit; • Dependent on Russia, especially for energy transit business; • More effort must be put into improving the administrative and legal environment; • Lack of cohesion between political parties has led to a succession of coalition governments.
Risk assessment Growth slowed noticeably due to the sluggishness of the economic situation in the European Union, yet Latvia continues to post one of the highest growth rates in Central Europe. The economy should perform better in 2003 as consumer spending strengthens and foreign demand picks up slightly.
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The main problem with this small, open economy remains the sizeable current account deficit. While exports to CIS and other Baltic countries held firm, partially offsetting the impact of poor economic conditions in the EU, imports, stimulated by the economy’s modernization, have risen faster than sales. However, foreign direct investment should continue to cover the current account deficit without much difficulty. Despite internal differences, the centre-right coalition government, formed as a result of the parliamentary elections in October 2002, is expected to carry out reforms in taxation, public administration and the judicial system in view of the country’s forthcoming membership of the European Union.
MIG analysis Introduction Elections in October 2002 returned another centre-right coalition government, this time led by political newcomers the New Era party, led by former central banker Einars Repse. Latvian coalition governments are traditionally fragile and fluid, and this one is unlikely to be any different. The economy continues to outperform relative to the EU as a whole. Despite the global downturn, GDP growth of 5 per cent is expected. Unemployment, at 7.8 per cent, has crept up since last year but remains relatively low. FDI has recovered, hitting US$300 million for the first six months of 2003, the equivalent to the whole of 2002.
Practice Corruption and bribery
Latvia remains one of the most corrupt EU candidate countries. The problem is endemic. The civil service, local government and law enforcement are all badly affected. Bribery indicators have fallen slightly with government anti-corruption efforts, but greasing palms still significantly speeds progress in Latvia, particularly on government contracts. This can be time consuming and difficult.
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Table A1.1 Econometric data Change from previous year
1999
2000
2001
2002
2003 2004 (forecast) (forecast)
GDP (actual) Industrial output (actual) Gross fixed capital formation (actual) Consumer prices (annual average) Unemployment (annual average) Budget balance (% of GDP)
2.8 –8.8
6.8 3.2
7.7 6.9
5.0 5.8
5.5 6.2
6.0 6.5
–4.0
20.0
17.0
4.5
8.0
9.5
2.4
2.6
2.5
1.9
2.2
3.0
14.3
14.4
13.1
13.5
12.7
12.1
–5.3
–2.7
–1.6
–1.8
–2.5
–2.9
1,774 2,229 2,472
2,715
3,000
3,390
2,731 3,379 3,980
4,347
4,746
5,254
–607 –9.8
–859 –9.7
–983 –10.6
–1,034 –10.2
324 445 196 3,582 5,099 6,225
481 6,400
492 6,805
508 7,331
57.6
65.7
73.7
73.2
73.1
72.2
2.8
2.6
3.2
3.0
2.7
2.5
0.63
0.56
0.56
0.58
0.59
0.59
0.59
0.61
0.63
0.62
0.57
0.58
R million Merchandise exports Merchandise imports Current account Current account (% of GDP) FDI (inflow, net) Gross foreign debt (end of period) Gross foreign debt (% of GDP) Import cover (in months) Average exchange rate: LVL/EUR Average exchange rate: LVL/US$
–538 –6.9
–821 –9.7
Sources: IMF, Bank Austria Creditanstalt Economics Department
208
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Table A1.2 Fourth Quarter 2002 Grey Area DynamicsTM: 49 (Europe and FSU GAD Rating: 60. 87) Fighting Index: Crime Levels: Bureaucracy: Cultural Integration: Religious Extremism:
Low Medium Medium to High Medium Low
Regulation and judiciary
Banking and financial services regulation has been improved, but insurance and securities regimes remain problematic. Judicial capacity has improved, but the backlog of cases continues to rise, and major reforms of the criminal law are still awaited. Organized crime
Criminal gangs take advantage of Latvia’s well-developed banking system and role as a trade gateway to smuggle illegal commodities and launder money, to the extent that despite large year-on-year increases in the volume of Latvian imports, revenues from excise taxes actually fell in 2001. EU enlargement
Latvia is set to join the EU in 2004, following the likely conclusion of negotiations this year. Russia’s increasingly close relations with the US have eased the tensions associated with NATO accession, also due in 2004.
Essentials Latvia is a particularly popular investment destination for Scandinavian companies. The largest single investor last year was Sweden, with 12 per cent of the total. Issues of language and cultural integration, traditionally extremely sensitive in Latvian politics, have seen progress recently. June 2002 saw the scrapping of laws demanding proficiency in the Latvian language for candidates for parliamentary or local government elections. Further progress is likely under pressure from the EU and NATO.
Concerns Privatization and structural reform have stalled, and popular opposition to EU accession demands has grown. Popular hostility has
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209
led to the postponement of the sale of the state oil transit firm, Ventspils Nafta, and the state power company, Latvenergo. Russian leverage over the Latvian energy sector looks set to cause tensions. Gas prices will rise in the next few years, following agreement with Russia’s Gazprom early in October 2002 on a 15–20 per cent increase of supply price. Russia’s Baltic oil pipeline has already cut cargo turnover at the north-western port of Ventspils. Russia’s Lukoil, which owns 34 per cent of the pipeline, looks likely to extend its control, increasing Moscow’s political leverage over Riga. Despite improvement, the position of Latvia’s substantial ‘noncitizen’ minority remains of concern. Only an estimated 60,000 out of half a million of these people, mostly Russians, have been naturalized. Compulsory language tests continue to generate tension, which occasionally spills over into violence. Organized crime groups continue to thrive in Latvia, exploiting relatively porous borders to transport drugs, counterfeit products and human beings, often working closely with Russian groups.
Appendix 2
Quality of Life and Recreation Latvian Development Agency Sights and experiences Apart from being the capital of Latvia and the largest city in the three Baltic States, Riga is also Europe’s art nouveau capital and one of the ‘greenest’ cities in the region. Entertainment options for all ages and tastes range from upmarket clubs, cinemas and casinos, to traditional theatres and exhibitions, as well as a zoo and open air folk museum for family visits. The recently rebuilt Latvian National Opera in the very centre of Riga is a proud architectural symbol of a newly independent nation, hosting internationally renowned orchestras, operas and ballet troupes, and it also attracts major international artists touring Europe. Riga’s Old Town is on UNESCO’s Cultural Heritage List and offers a variety of historical and contemporary influences captured in a number of Lutheran, Catholic and Orthodox churches, a synagogue and naturally a mix of international restaurants and Irish and British pubs all within a few blocks. Latvia’s own distinctive cuisine is becoming a major attraction for visitors to Riga, with a number of local ‘ethnic’ restaurants arriving on the scene throughout the capital. Nevertheless Riga makes up only half of the country. The rest offers an array of recreational options from cosy B&Bs to open-air medieval theatre or rock and pop festivals with international stars. Staying in a country house combining a Latvian ‘herbal sauna’, horseback riding across scenic hills or fishing in a murmuring river makes for a refreshing shared break whether for a team or a family. For a more culturally oriented country trip there are numerous castles and manors and a variety of museums. The extensive Baltic seashore is full of traditional fishing villages welcoming hungry visitors with delicious freshly smoked fish or proffering pleasant boat trips.
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211
The most important national celebration in Latvia is St John’s Day, the natural summer solstice on 23 June, when the entire nation gathers at bonfires to greet each other with seasonal flowers and herbs, and to consume a slice of traditional cheese or a mug of specially brewed beer. Latvia also boasts its own renowned quadrennial event, the Song and Dance Festival, which culminates in an open-air mass choral concert featuring several thousand singers. For sports fans Latvia can offer all the traditional activities including basketball, football, tennis, ice hockey, as well as golf, swimming and ten pin bowling. Of outdoor activities, the most popular are jogging, hiking, biking and orienteering. In addition, there are a number of rivers with good facilities for recreational rafting and canoeing, and for winter sport enthusiasts several hills equipped for downhill skiing. The most popular spectator sport is the Latvian Basketball League, along with international matches and regional and European competitions.
Natural treasures Despite being a relatively small country of northerly latitude, Latvia features remarkable biodiversity as a result of low intensity agricultural and forestry activities during the years of worldwide industrialization. This, together with low rural population density has ensured the survival of ancient forests, which host an incredible variety of small and large fauna. White and the rarer black storks have a number of colonies in northern Latvia, along with other rare plant and animal species. This has made Latvia a hot spot on international bird watchers’ maps. For less ‘professional’ eco-tourists there is a national park and four nature reserves spread across the country, each with educational nature trails, observation platforms and herds of wild horses.
Settling in Latvia Along with international chain hotels, Riga and other large cities have high quality residential property available for purchase or rent. The prices for these vary greatly, depending largely on location. The purchase of a comfortable country home in close proximity to any major city is guaranteed to be a valuable investment, since prices remain far below those in urbanized Western Europe.
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Appendices
Latvia has one of the highest numbers of doctors per head of population and this ensures medical service quality both in the public and private health centres and clinics. The combination of this with reasonable costs has recently caused a wave of ‘medical tourism’ from neighbouring EU countries where medical costs can be excessive. The International School of Latvia in the seaside suburb of Jurmala is highly valued by the children of diplomatic staff and expatriate populations of the country. In addition, most Latvian universities and colleges offer education of international quality within the humanities, social and natural sciences and technologies for English-speaking exchange students. Apart from organizations such as various foreign chambers of commerce, informal circles of expatriates have formed in Riga, uniting people from various countries and professional backgrounds for regular cultural and recreational activities.
Links www.inspirationriga.com www.latviatourism.lv www.allhotels.lv
Appendix 3
Human Resources Latvian Development Agency General facts about the labour market The total size of the Latvian labour market is 1.2 million, the largest share of which is concentrated in the largest cities of Riga, Daugavpils, Liepaja and Jelgava. The overall unemployment rate is moderate yet stable, fluctuating between 7.9 and 8.2 per cent from 2001–2003, but there are significant regional differences.
Education and skills Along with location, the key economic asset of Latvia is its people, who have historically benefited from a sound education system, even under different ruling powers. With the first technical Table A3.1 The Latvian labour market Economically active population (thousands) Latvia 1,195.9 Riga region 544.7 Riga 463.4 Vidzeme region 153.6 Kurzeme region 150.5 Liepaja 51.1 Zemgale region 157.1 Jelgava 38.9 Latgale region 190.0 Daugavpils 68.5 Rezekne 25.6 Source: Central Statistical Bureau of Latvia 2001
Unemployed (thousands)
Average gross monthly salary (T)
158.0 49.9 40.7 22.6 20.4 8.0 24.2 5.5 40.9 9.7 4.6
277.0 314.1 319.7 217.1 256.8 246.7 218.9 233.8 197.2 205.3 206.2
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university established in 1862, Latvia currently boasts a modern three-level education system, which has achieved international recognition through good average standards and outstanding results in international student competition. The inflow and availability of new specialists in the labour and intellectual capacity markets of Latvia is maintained by the country having the second highest per capita ratio of students in Europe, after Finland. As a result of an underestimation of need for some social science subjects, like business and law, during the Soviet period, and the resulting shortages in specialists, these subjects have become popular with students in recent times. However, natural sciences and technology, particularly IT and applied technologies, are currently experiencing increased demand as a direct result of the need for these skills in the expanding industrial sector. As well as offering high academic/technical competence, a number of educational institutions provide higher education in an international atmosphere, successfully participating as host universities within various mobility schemes such as EU Socrates/Erasmus and Leonardo da Vinci, Nordplus and HESP. Latvia also ‘exports’ higher education services, especially within the areas of technology, transport and health sciences, as Latvian universities provide highly competent, but very cost-efficient education. Vocational education institutions throughout the country provide a variety of programmes for the industrial sectors such as metalwork, forestry/woodwork and construction as well as the service sectors. These also serve as a base for the further qualification of those already in the labour market. In 2001 a new vocational education centre was opened in the northern town of Valmiera. The centre is partially financed by benefactors from Germany and provides a competitive range of courses in metalworking and industrial electronics/automation utilizing up-to-date training equipment.
Labour costs Latvia offers significant labour cost advantages across virtually all industries and positions, within a short distance of Western Europe. Although labour costs are rising steadily, the increases remain lower than the productivity, which means that currently labour costs in a variety of positions, from factory worker to software engineer,
Human Resources
215
amount to only 20–30 per cent of those in Western Europe. It should be noted that regional differences in labour costs are considerable, as much as 40 per cent when comparing those in the city of Riga with the remote Latgale region, a significant additional advantage when choosing locations for highly labour-intensive operations.
Recruitment procedures and HRM services An employer can either carry out all recruitment and staff selection himself or use the services of recruitment companies. When either establishing a new business or taking over an existing local operation, foreign investors can rely on the internationally proven HRM competence and in-depth knowledge of local conditions available at a number of recruitment service providers, whose specialization ranges from the advertising of vacancies to customised executive search. General feedback from the market indicates that recruitment and selection procedures for specialists and middle management for a medium-sized company require no more than 60 days, whereas the selection and recruitment of senior management may take up to 90 days. Staffing is another service recently introduced in the Latvian market; however it is some way from achieving the popularity it has gained in Western Europe. Other HR-related services available include management assessment, organizational structure audits, HRM procedure improvement, performance improvement, motivation, internal communication, job satisfaction assessment and employee training/ re-training. The most common reasons for requiring these types of service in an increasingly dynamic economy are: company takeovers, mergers and acquisitions, privatization, strategic changes and restructuring, revitalization and repositioning of companies, benchmarking or structuring of organizational effectiveness (to downsize-restructure). These services can provide key decision-makers with professional expertise about the competencies of individual team members, the functioning of the whole team/organization, as well as bottom-line recommendations on improving the efficiency of organizations for the future. The State Employment Service is the national authority responsible for the labour market, and can assist with entry level candidate selection from the non-employed population. They can also arrange state-subsidised training programmes tailored to the employer’s requirements.
216
Appendices
Link www.nvd.gov.lv
Legal aspects of employment relations The legal status of an employee and an employer, the rights and obligations of both parties, as well as other aspects of labour relations are governed by the Labour Law. The new Labour Law, which came into effect on 1 June 2002, is harmonized with the relevant EU legislation. The law includes several major changes in areas including employment contracts, job vacancy advertisements, interviews, the form and duration of employment contracts, employment record cards, trial periods, termination notices and the restriction of competition. The employment of foreign nationals and expatriates is regulated by the relevant legislation of Latvia, as well as bilateral agreements with particular countries (for additional information see chapter 2.6 Employment Law). Matters related to work safety, labour disputes etc are governed by several legislative acts: Law on Labour Inspections; Law on Collective Work Agreements; Law on Work Safety; Law on Employers’ Organizations and Their Associations. The material contained in this appendix was contributed by the Latvian Development Agency with the assistance of the following Latvian companies: Amrop Hever Baltics (www.amrophever.com), Eiro Personals (www.eiropersonals.lv) and MERCURI URVAL MU-Consultants Latvia (www.mercuriurval.com)
Appendix 4
Supporting Infrastructure for Business: Additional Notes Latvian Development Agency Transport and logistics Latvia’s transport system forms a logistics hub with all the necessary infrastructure to facilitate trade flows between Western Europe and Russia/CIS and to serve the needs of local export/ import operators: • Free ports in Ventspils, Riga and Liepaja, with a total cargo throughput of 57 million metric tons in 2002, predominantly transit; • Well developed and intensively used road network, connecting with both European and CIS road networks, as well as Latvia’s ports; • The shortest route between Western Europe and Moscow; • Specialized high capacity railway corridor, linking Latvian ports with Russia and the Far East; • Riga International Airport – competitive Baltic passenger hub and high-speed cargo distribution centre; • Pipeline systems for Russian oil/natural gas transit and distribution.
Ports The three largest Latvian ice-free ports can ensure reliable access 365 days a year and are vitally important export and transit transhipment points for Latvia itself, as well as several neighbouring states. Connections to all other transport routes along with
218
Appendices
attractive tax-free zone incentives have resulted in the ports becoming regional centres of industrial activity. Nonetheless, there are still a number of port locations available for businesses, within customs-free zones and with direct sea access. Latvian ports are highly export-orientated, mostly shipping cargo for transit and export from Latvia, with Riga the leading port in terms of unloaded cargo volume. RO-PAX transport connections with Germany and Sweden are an important logistics service available at all three free ports. All the ports are equipped with the necessary infrastructure, ie tanks for liquid bulk, terminals, warehouses and cranes, communications infrastructure, and have operating service-providers: stevedores, agents, customs brokers and banks, with a number of internationally recognized names such as Kuehne & Nagel, Maersk Sealine, P&O Nedloyd included in the service offer.
Links www.ventspils.lv www.rop.lv www.lsez.lv Table A4.1 Port statistics Cargo turnover (million MT in 2001)
Export Maximum Specialization orientation draught and facilities (metres)
Ventspils 37.9
98.9%
17.3
Riga
14.9
89.2%
12.0
3.2
84.7%
9.5
96.0%
4–7
Liepaja
Minor ports
0.8
Oil products, crude oil, fertilisers, RO-RO/RO-PAX General/container cargo (timber), oil products, dry bulk, RO-RO/RO-PAX General/container cargo (metals), oil products, dry bulk, RO-RO/RO-PAX General cargo (timber), dry bulk (seafood
Source: Central Statistical Bureau of Latvia/Latvian Development Agency, 2002
Supporting Infrastructure for Business: Additional Notes
219
Roads Having received significant investment as part of the Soviet transport system, Latvia is now between Austria and Portugal in the European rankings for road density. The Latvian road system provides direct access to destinations in the east (Russia/CIS) and south west (Central/Western Europe), and is, through other countries and/or RO-PAX serving ports, connected to Northern Europe (Finland and Sweden). Generally all roads are fully public and tollfree, as funds for maintenance are collected from excise tax on fuel and vehicle registration fees paid to the Road Traffic Safety Directorate. With further financial support from the EU, Latvia’s major upcoming road infrastructure development project is the upgrading of the Latvian section of the ‘Via Baltica’ – the first PanEuropean transport corridor connecting Finland and the Baltic States to Poland and Western Europe. The forwarding services market is comparatively well developed with a large number of actively competing operators, including international companies like Schenker, Danzas and DFDS Transport. Transport freight intensity is increasing rapidly together with the growth in foreign trade and transit operations: international freight volumes through Latvia have risen by 42 per cent since 1998. Link
www.lad.lv
Table A4.2 Forwarding costs and duration to/from Riga (tent trailer, one way)
Moscow (Russia) Warsaw (Poland) Budapest (Hungary) Amsterdam (The Netherlands) Frankfurt am Main (Germany) Mainz (Germany) Milan (Italy) Source: DFDS Transport Latvia, 2002
Export
Import
Duration (days)
1,130 581 1,130 1,270 1,162 1,162 1,700
1,100 950 1,450 1,500 1,600 1,600 2,400
2.5 2 4 4 4 4 6
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Appendices
Railways Latvia possesses a dense railroad network connecting the country to destinations as far as the Russian Far East, as long as the former Soviet railway gauge standard is in operation. There are additional opportunities for trade connection with Japan and south-east Asia. Currently Latvia’s railways mostly serve as a transit trunk line with as much as 75 per cent of total freight volume being transit connected to Latvian ports and 60 per cent of freight rolling-stock being tanker-wagons. Movement in the opposite direction, to Moscow and other parts of Russia/CIS, is dominated by container cargo. In order to facilitate trade flows in the north-south direction, a pan-Baltic railway route with Estonia and Lithuania is planned, connecting Finland to Central Europe. This project would also serve as the first step in Latvia’s transition to European railway gauge technical standards. Link
www.ldz.lv
Air connections Riga International Airport is the leading air transport centre of the three Baltic States, serving a number of airlines including Latvia’s flag carrier Air Baltic, linked to the Star Alliance through its shareholder, Scandinavian airlines SAS, and European leaders like British Airways and Lufthansa. These and other companies ensure fast and reliable direct travel from the recently reconstructed Riga airport to European cities including Helsinki, Stockholm, Copenhagen, Berlin, Frankfurt and London, all of which provide connections to transcontinental air routes. Air cargo and/or the express package services of international providers like SAS Cargo, Lufthansa, DHL, UPS and TNT ensure same day delivery within Europe or two days for the rest of the world. Link
www.riga-airport.com
Pipeline systems The pipeline system in Latvia provides transport and storage of oil, oil products and gas. The total lengths of oil and oil product
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221
pipelines within the territory of Latvia are 437 and 329 kilometres respectively. They connect oil extraction and refinery plants in Russia/CIS, the nearest being Polock (Belarus), to Latvia’s ports. Having gradually increased their throughput to 26.6 million metric tons of crude oil and 4 million metric tons of oil products, the pipeline management company LatRosTrans provides a competitive alternative option to railway transport. Link
www.latrostrans.lv
Utilities A number of utility services in Latvia are still state-owned or corporate monopoly operations. In order to ensure reasonable pricing in these areas, the tariff policies of monopoly utility providers are regulated by the Public Utilities Commission of Latvia, whose responsibilities include power, gas and telecommunications. Link
www.sprk.gov.lv
Gas Latvia is endowed with a unique natural resource – the Incukalns Gas Reservoir, which is the largest natural gas storage in Europe with a capacity of approximately 50 million cubic metres. As a result, the country is in a very favourable position in terms of gas supply costs. The reservoir enables the operator Latvijas Gaze to avoid problems arising out of seasonal demand fluctuations and to use the existing gas pipeline networks more effectively. The future plans of Latvijas Gaze and its strategic investors, Russia’s Itera and Germany’s Ruhrgas, include connection of the Latvian gas supply system to Western Europe’s, which will make Latvia a transit route for gas and create extra cost savings in the European market. Link
www.lg.lv
222
Appendices
Electrical power Latvia’s electricity supply is controlled by a single operator, the state company Latvenergo, whose restructuring/privatization is a major issue to be resolved in the next few years. Latvenergo operates the whole electrical energy cycle from power generation (heat and hydropower plants) to distribution down to substations and user networks. A very small share of power is produced by independent producers operating small capacity hydropower plants, wind generators or heat and power co-generation plants. However, this ‘new energy’ production is growing substantially and is expected to be of increasing importance in the future. Connection of a new facility to the power network can be carried out by Latvenergo, or by any other licensed power engineering supplier. Link
www.energo.lv
District heating and water supply District heating and water supply services are generally provided by separate operators in each municipality; however, where necessary or more convenient, any company is free to construct its own system as long as it meets existing technical/environmental regulations. The local operators are mostly owned by the municipality, even though some are privatized and have attracted foreign investors.
Waste disposal General waste disposal services are provided by several local/ regional waste management companies throughout the country. The present capacity for recycling, re-use and recovery of packaging in Latvia is very limited. Some facilities exist for metals, glass, paper and cardboard recycling, but these are not currently operating at full capacity or on any significant scale. There are also installations for hazardous waste incineration, mercury recovery from luminescent lamps, water-oil separation facilities, incinerators of oil waste, medical waste incinerators, and three new installations for the disinfection of medical waste. One of the recent changes in this area is the planned semi-mobile hazardous waste incinerator. This facility is due to become operational from mid-2002.
Supporting Infrastructure for Business: Additional Notes
223
Link
www.varam.gov.lv www.zalaispunkts.lv
Telecommunications Once lagging behind in the telecom infrastructure field, when Latvia regained independence in 1991 it secured massive ‘hard’ investment after concluding a privatization deal with Tilts Communications (now owned by Finland’s Sonera) who became a minority shareholder (49 per cent) of the national operator Lattelekom. The monopoly position of Lattelekom expired on 1 January 2003 and the country is now widely equipped with digital communications networks. To date, telephone line digitalization has reached 70 per cent and the number of ISDN subscribers has risen to 29,000 from none in 1999. Other advanced fixed voice and data transmission services offered by Lattelekom include the leasing of digital lines, DSL, LANs and ADSL. Lattelekom’s current UltraDSL package also includes a number of additional services such as conference calls, call waiting and number detection. Internet services ranging from simple dial-up or radio link to leased line connections, are provided by around 35 ISPs. Internationally, Latvia is linked by high capacity broadband optical networks to Estonia, Lithuania, Russia and Sweden. There are two mobile operators – LMT and Tele2, with around 30 per cent of Latvia’s population as subscribers and an additional number of pre-paid card users. GSM network coverage of the largest operator (LMT) is as much as 92 per cent of Latvia. WAP is a common service both for Latvian mobile operators and online media. Both mobile phone service providers have bought UMTS licences and are going to introduce service, depending on global trends. Links
www.lattelekom.lv www.lmt.lv www.tele2.lv
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Appendices
Real estate As a country with a relatively low density of population, Latvia can provide a range of location choices for both industrial and office operations. There are a number of factory buildings in all the largest cities, along with historical city centres that are gradually developing from residential into commercial, entertainment and shopping areas. In addition to the availability of individual properties, several business-hosting parks have been established or are being developed for different types of tenants. These include: • • • •
Nordic Industrial Park, Olaine (Riga area); Siva Industrial Park, Ogre (Riga area); Ventspils Industrial Park, Ventspils Free Port (north-west Latvia); Karosta Industrial Park and BHC Industrial Park, Liepaja (south-west Latvia); • Daugavpils Industrial Zone, Daugavpils (south-east Latvia); • Timber processing Industrial Zone, Jekabpils (south-east Latvia); • Cesis Business Incubator, Cesis (north-east Latvia). For greenfield projects there are no barriers to using the services of local real estate agents and construction companies. The construction services market in Latvia is an area of stiff competition among a number of local and international players like Skanska, NCC and PEAB who provides high quality at very competitive prices – the domestic construction market experienced a 5.5 per cent price drop in 2001. Table A4.3 Indicative commercial rents (T/m2 per month) Riga city Office Retail Modern warehouse/industry Commercial suburban land (sales price, T/m2)
Riga suburbs Other cities
7.1–22.3 3.0–15.2 20.3–50.8 7.1–15.2 4.1–6.1 1.0–4.1
Source: Ober-Haus Nekustamie Ipasumi 2002, except asterisked (*) item
2.6–18.0* 3.0–10.3 1.0–2.0 10.2–41.6
Supporting Infrastructure for Business: Additional Notes
225
Table A4.4 Indicative construction and architectural design costs
Renovation Minor site construction Major site construction
Construction costs (T/m2 )
Architectural design costs (as share of total construction costs)
305–410 508–610 712–915
0.8–1% 5–8% 5–8%
Source: Latvian Construction Association/Latvian Development Agency, 2002
The material contained in this appendix was contributed by the Latvian Development Agency with the assistance of the following Latvian companies: LEC (www.lec.lv), RBS SKALS (www.rbsskals.lv), RE&RE (www.rere.lv) and Skanska Konstrukcija (www.skanska.lv; www.skanska.fi)
Appendix 5
International and Regional Trade Fairs 2003* Latvian Development Agency January 4th Regional Technical Sports Fair Motor sports federations and clubs. MOTOR SPORTS 2003 Racing teams and racers. Event 17–19 January organizers, motor sport equipment, life and safety devices, souvenirs and accessories, technical sports racetracks. Demonstrations. February 10th International Travel Trade Fair BALTTOUR 2003 14–16 February
Tour operators, travel agents, national tourism associations. Air companies. Transportation service. Hotels. Media.
8th International Trade Fair For Textile And Leather Industries INTERTEXTIL BALTICUM 2003 20–22 February
Supplies and materials. Leather and fur clothing and accessories. Textile industry equipment and technologies. Fashion design.
1st Exhibition For Work Wear And Personal Protective Equipment DROŠAM DARBAM 2003 (SAFE WORK) 20–22 February
Work wear. Technical textiles. Personal means of safety engineering. Supervision of working area. Legislation. Conferences. Seminars.
5th Festival of Erotica EROTS 2003 (EROS) 28 February–1 March
Love art and sexual pleasure enhancers. Sexy underwear for women and men. Special literature, posters, magazines, video cassettes, music. Leather articles. Tattooing. Lectures, consultations and discussions. Show programme.
International and Regional Trade Fairs 2003 March 9th International Exhibition For Education SKOLA 2003 (SCHOOL) 6–9 March
227
Educational establishments, centres and courses. Teaching aids, school furniture. Education abroad. Children and youth summer camps.
6th International Trade Fair For Books, Publishers and the Printing Industry ¯ MATU LATVIJAS GRA ¯ SVE TKI 2003 (LATVIAN BOOK FAIR) 6–9 March
Publishers, booksellers, wholesalers. Printing enterprises and printing houses. Libraries. Museums, second-hand bookshops. Professional associations.
17th International Building Industry Trade Fair ¯ JA I 2003 (HOUSE I) MA 19–23 March
Architecture. Building. Interior design. Reconstruction. Building machines and materials. Plumbing and thermotechnics. Lighting, electrical installations. Home technology and equipment. Environmentally safe construction. Conference. Contact Market.
April 3rd International Forestry and Timber Processing Exhibition ME S UN KOKS 2003 (FOREST AND WOOD) 3–6 April
Forest management, forest machines, timber processing machines and tools. Labour protection, safety engineering and work apparel. Consultations and presentations.
1st International Exhibition For Agricultural Production And Infrastructure RIGA AGRO 2003 3–6 April
Agricultural, stock farming, gardening, fish farming technology and equipment. Infrastructure. Agricultural production management, novelties and consultations in economic management. Logistics, finances, scientific developments.
7th Garden And Floristic Exhibition ¯ RZS. FLORA 2003 DA (GARDEN FLORA) 3–6 April
Landscaping, greenery and territory arrangement. Seeds and plants. Agricultural and gardening machines and tools. Soil amelioration.
10th Baltic Regional Trade Fair for Tourism, Sports and Recreation ATPU¯TA UN SPORTS 2003 (RECREATION AND SPORTS) 11–13 April
Goods for recreation, tourism and sports. Sports and recreation complexes. Sports medicine. Tourist, sports and recreation services, travels. Hobbies.
228
Appendices
7th Exhibition For Boats And Yachts Boats, sailing boats, watersports outfit BOAT SHOW 2003 and fishing tackle. 11–13 April 4th Exhibition For Motorcycles And Accessories MOTOCIKLS 2003* (MOTORCYCLE) 11–13 April
Motorcycles and accessories. Bikers’ clubs.
6th National Exhibition For Health Promotion SVEIKS UN VESELS 2003* (SAFE AND SOUND) 11–13 April
Health care, recuperation. Beauty care. Wholesome food. Health education.
September 8th International Trade Fair for Food Industry, Drinks, Food Processing Technology and Packing International Food Competition RIGA FOOD 2003 10–13 September
Foodstuffs. Delicatessen, seafood, spices. Tinned, frozen products, convenience goods. Soft and strong beverages. Catering technology and products. Shop and restaurant equipment.
4th International Specialized Exhibition For Hotel Equipment, Household Equipment, Disinfectants, Antirodents, Cleaning Agents And Equipment, Table Design And Accessories. RIGA GASTRO 2003 10–13 September
Hotel equipment. Household and kitchen utensils. Disinfectants and cleaning aids. Table decorations and design. Souvenirs and gift ideas.
5th International Pets and Zoo Industry Exhibition PET EKSPO 2003 (PET EXPO) 20–21 September
Pet food, accessories. Veterinary. Education and information.
October 8th International Furniture Exhibition ME¯ BELES 2003 (FURNITURE) 2–5 October
Furniture for public and residential premises. Furniture fittings and components. Finishing materials. Interior and design.
5th Trade Fair For Crafts AMATNIECI¯ BA 2003 (CRAFT) 2–5 October
Craftsmen, pieces of handicraft work. Craftsmen organizations. Vocational training establishments.
International and Regional Trade Fairs 2003
229
International Trade Fair For House And Flat Arrangement and Security ¯ JA. DZI¯ VOKLIS 2003 MA (HOUSE APARTMENT) 16–19 October
Architecture, design and reconstruction of apartments. Repairs and refurbishment. Finishing and decoration materials. Plumbing and thermotechnics. Lighting. Home security and alarm systems. Consumer electronics, electric appliances and equipment. Home designs and current trends.
1st Regional Energy, Ecology and Public Utilities Exhibition-Forum ENVIRONMENT. ENERGY. ECOLOGY 2003 16–19 October
Generation of ecological and efficient energy. Public utilities. Recycling and recycled raw materials. Environmentfriendly energy input. Electric power. Heat supply. Economic consumption of energy resources. Industrial and domestic water treatment equipment and technology.
November 8th Specialized Exhibition For Perfumery And Cosmetics 7th Specialized Exhibition For Jewellery ŠARMS UN ROTA 2003 (BEAUTY AND JEWELLERY) 31 October–2 November
Decorative and curative cosmetics. Beauty parlours, hairdressing salons, solaria and tanning equipment. Haircare and nailcare. Plastic surgery. Aromatherapy. Jewellery, bijouterie, watches, eyewear. International competitions.
4th Specialized Exhibition And Forum Of Entrepreneurs BIZNESA DIENAS 2003 (BUSINESS DAYS) 6–8 November
Business management solutions. Information technologies. Office equipment and facilities. Conferences, seminars, discussions, business meetings.
December ¯ VANU GADATIRGUS 2003 DA (GIFT FAIR) 19–23 December
Applied arts production. Gift wrapping.
*Dates for events are subject to change at organizer’s discretion. Please see homepage of exhibitor nearer to the time.
230
Appendices
Exhibitors AML Tel: +371 7600409 Fax: +371 7600447 Email:
[email protected] Web: www.aml-ramava.lv BT 1 Tel: +371 7529918; 7542628 Fax: +371 7550493 Email:
[email protected] Web: www.bt1.lv JANUS UN PARTNERI Tel: +371 7281994 Fax: +371 7284549 Email:
[email protected] Web: www.latexpo.lv PRIMA Tel: +371 7020921 Fax: +371 7020922 Email:
[email protected] Web: www.prima.lv Director: Roberts Leja RASA EKSPO Tel: +371 7213637 Fax: +371 7212598 Email:
[email protected] Appendix 6
Useful Contacts Latvian Development Agency Government State Chancellery Brivibas Boulevard 36 Riga LV 1520 Tel: +371 7082900 Fax: +371 7280469 Email:
[email protected] Ministry of Foreign Affairs Br¯v¯bas bulv. 36 Riga LV 1395 Tel: +371 7016210 / 7016201 Fax: +371 7828121 Email:
[email protected] Web: www.am.gov.lv / www.mfa.gov.lv Ministry of Economy Brivibas Str 55 Riga LV 1519 Tel: +371 7013101, 7013195 Fax: +371 7280882, 7013208 Email:
[email protected] Web: www.em.gov.lv
232
Appendices
Ministry of Finance Smilsu street 1 Riga LV 1919 Tel: +371 7095502 Fax: +371 7095503 Email:
[email protected] Ministry of the Interior Rain¸a Blvd. 6 Riga LV 1050 Tel: +371 7219263 Fax: +371 2271005 Ministry of Justice Brivibas boulv. 36 Riga LV1536 Tel: +371 7036801 Fax: +371 7285575 Email:
[email protected] Other institutions Latvian Development Agency Pe¯rses iela 2 Riga LV 1442 Tel: +371 7039400 Fax: +371 7039401 Email:
[email protected] Web: www.lda.gov.lv, www.exim.lv Bank of Latvia K. Valdemara iela 2a LV 1050 Riga Tel: +371 7022300 Fax: +371 7022420 Email:
[email protected] Useful Contacts
Central Statistical Bureau of Latvia 1, Lacplesa Street Riga LV 1301 Fax: +371 7830137 Email:
[email protected] European Integration Bureau Basteja blvd. 14 / 4th floor Riga LV 1050 Tel: +371 7287904 Fax: +371 7286672 Email:
[email protected] Union of Local and Regional Governments of Latvia 1 Maza Pils str. Riga LV 1050 Tel: +371 7226536 Fax: +371 7212241 Email:
[email protected] Web: www.lps.lv Riga Stock Exchange Doma laukums 6 Riga LV 1885 Tel: +371 7212431 Fax: +371 7229411 Email:
[email protected] Latvian Privatization Agency Valdemara 31, Riga LV 1887 Tel: +371 7021358 Fax: +371 7830363 Email:
[email protected] 233
234
Appendices
Latvian Chamber of Commerce and Industry K. Valdema¯ra iela 35 Riga Tel: +371 7225595 Fax: +371 7820092 Email:
[email protected] Web: www.chamber.lv Association of Latvian Commercial Banks Perses street 9/11 Riga Tel: +371 7284528 Fax: +371 7828170 Email:
[email protected] British Chamber of Commerce in Latvia Valdemara Centrs Kr.Valdemara 21, Suite #605 Riga LV 1010 Tel: +371 7035216 Fax: +371 7035318 Email:
[email protected] Latvian Embassies Belgium Molierelaan 158 1050 Brussel Belgium Tel: +2 344 16 82 Fax: +2 344 74 78 Email:
[email protected] Canada 280 Albert Street, Suite 300 Ottawa Ontario Canada K1P 5G8 Tel: + 613 238 6014 Fax: +613 238 7044 Web: www.magmacom.com/ latemb
Useful Contacts
China 3–2-21 San Li Tun Diplomatic Offices Building Beijing 100600 China Czech Republic Elizabetes iela 57, 2nd floor Prague Tel: +371 7016 182 Web: www.am.gov.lv/e France 6, villa Saïd 75106 Paris France Tel: +33 (0)1 53 64 58 10 Fax: +33 (0)1 53 64 58 19 Germany Reinerzstr. 40–41 14193 Berlin Deutschland Tel: +49 (0)30 82 60 02 22 Fax: +49 (0)30 82 60 02 33 Email:
[email protected] Web: www.botschaft-lettland.de Lithuania Èiurlionio 76 Vilnius LT-2009 Lithuania Tel: +370 2 231260 Web: http://latvia.balt.net Russia Ulitsa Chapligina, 3 Moscow Tel: +7 095 925 27 07 / 924 88 86 Fax: +7 095 923 92 95
235
236
Appendices
Sweden Odengatan 5 Box 19167 S-104 32 Stockholm Sweden Tel: +46 8 700 63 00 Web: www.lettland.nu/ambassad United Kingdom 45 Nottingham Place London W1M 3FE Tel: +44 (0) 20 7312 0040 Fax: +44 (0) 20 7312 0042 United States 4325 17th St NW Washington DC 20011 Telephone +1 202 726 8213 Fax: +1 202 726 6785 Email:
[email protected] Web: www.latvia-usa.org
Appendix 7
Contributor Contact Details AWS Structured Finance Ltd Tel: +44 (0)1892 667891 Fax: +44 (0)1892 610891 Email:
[email protected] Web: www.awsconsult.co.uk BICEPS Alberta Iela 13 Riga LV-1010 Latvia Tel: +371 7039317 Fax: +371 7039318 Contact: Alf Vanags Baltic International Centre for Economic Policy Studies Mob: +371 9660232 Email:
[email protected] Deloitte and Touche Biskapa gate 2 Riga LV-1050 Latvia Tel: +371 781 4160 Fax: +371 722 3007 Contact: Steve Austwick, Vita Dumpe Email:
[email protected],
[email protected] Ernst & Young Baltic 11 Novembra krastmala 23 Riga LV-1050 Tel: +371 7 043 890/801 Fax: +371 7 043 802 Email:
[email protected] Web: www.ey.com/latvia Contact: Mr Egons Liepins, Partner
238
Appendices
FIAS 1818 H Street NW Washington DC 20433 Tel: +12024733791 Contact: Jacqueline Coolidge Email:
[email protected] Web: www.fias.net Groupe Coface 12, Cours Michelet 92065 Paris La Defense Cedex Tel: +33149022000 Fax: +33149022713 Web: www.trading-safely.com Kronbergs Law Office (an Ernst & Young Law Practice) 11 Novembra krastmala 23 LV 1050 Riga Tel: +371 7043801 Fax: +371 7043804 GSM: +371 9208166 Email:
[email protected] Latvian Development Agency Rïga office: Pérses iela 2, Rïga LV 1442, Latvia Tel: +371 7039400 Fax: +371 7039401 Email:
[email protected] Web: www.lda.gov.lv The Latvian Institute Smilsu iela 1/3, Riga, LV-1050 Latvia Tel: +371 7503663 Fax: +371 7503669 Email:
[email protected] Contributor Contact Details
Lejins, Torgans & Vonsovics (Law Office) Kr. Valdemara iela 20, Riga LV-1010 Tel: +371 7 821 525/240 689 Fax: + 371 7 821 524 Email:
[email protected] Web: www.ltv-v.lv Contact: Mr Girts Lejins, Senior Partner/Managing Partner Ms Dace Silava-Tomsone, Partner Mortgage and Land Bank (Hipoteku un Zemes Banka) Doma laukums 4, Rïga, LV1977 Tel: +371 7 222 945 Fax: +371 7 820 143 Email:
[email protected] Web: www.hipo.lv Contact: Mr Juris Cebulis
239
Index accommodation, tourist 199–200 accountancy 125–26, 128–31 essentials and concerns 130–31 practice 130 structure 128–29 Action Plan 26–27 agency agreements 73–76 agriculture 15, 168–69, 168 impact of EU accession 20, 21 air transportation 184, 200 annual reports 128, 130 anti-dumping 20–21, 117 Appeals Council of the Patent Board 93 arbitration 109–10 Association agreement 20, 112 audit 129 automotive industry 156–57 banking sector 121–23, 186–88, 187, 188 barriers to land acquisition 104 beverages sector 169–71, 170 block exemptions, competition requirements 81 book-keeping, tax requirements 137 branches of companies 66–67 broadcasting 197 business obstacles survey 27–34, 28 business organization 62–67, 132–34 choice of merchant presence 67 types of merchant 62–66 units of merchants 66–67 cargo traffic 181–85, 181, 182 Central Customs Board 98 charitable donations, as tax-allowable expenses 136 chemicals sector 163–67, 164 rubber and plastics 165–67, 167 children, employment of 88 citizens of Latvia, employment of 86 city courts 106 Civil Law 54–55, 73, 140 Civil Procedure Law 110 clothing sector 174–75
commercial agents 73–76 statutory rights and obligations 74–76 Commercial Law 53–54, 62, 72 Commercial Register (CoR) 54, 71 commercial ‘support’, law relating to 58–59 Common Agricultural Policy (CAP) 21 communication problems, as administrative barrier 33 companies incorporation procedures 68–72 joint stock 65–66, 67, 132 limited liability 63–64, 67, 132 Competition Council, Latvian 78–79 competition law 78–83 agreements between market participants 79–81 concentration 81–82 regulatory body 78–79 unfair 82–83 compliance–enforcement issues 33–34 concentrations 81–82 conference management sector 200 confidentiality requirements of employees 87 Constitutional Court 111 construction industry 191–92 construction permit process 31 consummation of contract agreements 55 contract law 54–56 contracts of employment 86–91 copyright 94–98 legal substance 95–96 rights to work 97–98 scope of law 96–97 CoR see Commercial Register corporate assessments, taxation 137 corporate governance 126 corporate law 53–54 corruption 31–32 costs of litigation 108 court system 106–07 cultural tourism 202
242
Index
culture 10–11 currency 5–6, 12 customs administration 29, 36–37, 112–17 payments and storage 115 port of entry and inland transport 115–16 related party transactions 114–15 customs value 113–15 damages 56 debt collection procedures 110–11 deductions, tax-allowable 136 depreciation rates 37–38, 37, 135–36 dispute resolution 106–11 arbitration 109–10 Constitutional Court 111 court system 106–07 debt collection 110–11 trials 107–09 distribution agreements 73 distribution facilities 185 district courts 106 economy 5, 12–18 labour markets 15–16 macroeconomic overview 12–13 political perspective 16–18 structure 13–15 electrical tool production 156 electricity consumption and production 149–50 electronic documentation and signatures 34 electronics industry 159–62, 162 information technology 159–61, 160 employment law 84–91 employing Latvian citizens 86 terms and conditions 88–91 work permits 84–85 Energy Development Plan 148 energy industry 147–52 consumption 148–50, 149 foreign investment 151 regulation 147–48 engineering industry see machinery and engineering industry European Union (EU) membership 6, 16–18, 19–24 impact of 20–21 long term challenge 22–24
excise tax 113, 138 expenses, tax-allowable 136–37 exports see foreign trade FCMC see Financial and Capital Markets Commission FDI see foreign direct investment ferry links 201 FIAS see Foreign Investment Advisory Service Financial and Capital Markets Commission 126–27, 144 financial sector 15, 121–27, 186–90 banks 121–23, 186–88, 187, 188 insurance and pensions 124–25, 188–89, 189 investment funds 124 regulation 126–27 trade and project finance 123–24 fine mechanics production 156 fixed assets, depreciation rates 37–38, 37 fixed voice communications 195–96, 196 food and drink sector 168–71, 170 agriculture 168–69, 168 foreign direct investment (FDI) 12–13 administrative barriers 25–34, 28 customs procedures 116–17 energy industry 151 experience with 40–41, 42–43 impact of EU accession 22–23 incentives 35–41, 37, 42–43 legal framework 53–61 machinery and engineering industry 157–58 Foreign Investment Advisory Service (FIAS) 27 foreign policy 6–7 foreign trade 14, 44–49, 45, 46, 48, 112–17 anti-dumping 117 international framework 112 machinery and engineering sector 154, 154 national laws 112–13 principles 113–17 franchising 76–77 free ports 39, 57–58 free trade agreements 49
Index free zones 39–40 furniture industry
jurisdiction for claims
243
106–07
179–80, 179
gambling licences 138 gas supplies and distribution 150 GDP statistics 12–13, 19, 21 geography 3–4 governing law, contract agreements 55 groups of companies, law on 54 healthcare facilities 200 hearings, court 107–09 hiring of staff 87–88 history 4–5 holiday entitlement 89 hospitality sector 200 hotels 199 hours of work 89 house prices 193 hydroelectricity 150 immoveable property tax 138 imports see foreign trade income tax 103–04, 132–34 individual merchants 62 industrial designs 94 information technologies 15, 159–61, 160, 198 infrastructure see transportation and logistics sector insurance 124–25, 188–89, 189 intellectual property 92–98 copyright 94–98 patents 94 protection measures 98 regulatory bodies 92–93 trademarks 93–94 interest, as tax-allowable expense 136 international commitments 40, 61 Internet use 159–60, 160, 198 inventions 94 investment see foreign direct investment investment funds 124 investment incentives 134–35 joint stock companies (JSCs) 67, 132 judges 106, 107
65–66,
Labour Law 84 labour markets 15–16 Land Book Law 140 land prices 193 languages 9–10 late payments law 56 Latvenergo 150, 151 Latvian Competition Council (LCC) 78–79 Latvian Development Agency (LDA) 26–27 Latvian Patent Board 92–93 Law on Accounting 128 Law on Annual Reports of Enterprises 128, 131 Law on Certified Auditors 129 Law on Companies Income Tax 59–60 Law on Control of Commercial Activity Support 58–60 Law on Corporate Income Tax 37 Law on Foreign Investment 35–36, 57 Law on Real Estate Tax 38 lawyers, role in court hearings 107 LCC see Latvian Competition Council LDA see Latvian Development Agency leases on land or buildings 102–03 leasing activities 188 leave 89 parental 88–89 legal framework 53–61 contract law 54–56 corporate law 53–54 financial sector 125 foreign investment promotion 56–60 international treaties 61 real estate purchase 60 liability rules, contract law 55–56 licensing requirements, businesses 68–69 Liepaja Special Economic Zone 39, 40, 57 life insurance 124 limited liability companies (LLCs) 63–64, 67, 132 litigation costs 108 LLCs see limited liability companies
244
Index
logistics sector see transportation and logistics sector lottery licences 138 machinery and engineering sector 153–58, 154 foreign investment 157–58 types 155–57 magazine publishing 197 management boards 64 management of companies 64, 65–66 manufacturing overview 14 media 196–98 ‘merchant’ types 62–66 mergers 81–82 metal and metal article processing 155 mobile telecommunications 15, 196, 196 Mortgage Bond Cover Register 142–44 Mortgage Bonds Law 142 mortgage lending 140–44 municipal government administrative barriers 27, 29–31 property acquisition rights 101–02 NATO membership 6, 7–8 natural resources tax 138 newspapers 196 non competition clauses 86–87 non-resident entities 133–34 notarization 32–33 ‘obstacles to business’ survey 27–34, 28 oil consumption 148–49, 150 oil refining 163 ownership vehicles, property acquisition 103–04 paper processing sector 180 parental leave 88–89 partnerships 63, 67, 132–33 Patent Board 92–93 patents 94 penalties, contractual 56 pensions 124–25, 189, 189 permanent residents, employment of 86
personnel costs, as tax-allowable expense 136 pharmaceuticals industry 163–65 pipelines 184 plastics industry 165–67, 166 police, municipal 30 political system 4–5, 16–18 ‘port of entry’ requirements 115–16 ports 182–83, 182 PPPs see public-private partnerships probation periods 88 project finance 123–24 property legislation 99–105 provisions, as tax-allowable expense 136 public-private partnerships (PPPs) 123–24 publishing industry 196–97 pulp and paper industry 180 purchase and sale agreements 99–100 radio 197 rail transport 183, 200 real estate 99–105, 192–94, 193 leases 102–103 ownership vehicles and tax considerations 103–04 purchase and sale agreements 99–100 purchase by foreigners 60 registration of title 100–01 rights of first refusal 101–02 real estate tax 38 ‘real trade costs’ 20 recruitment of staff 87–88 regional courts 106 registration of land title 100–01 regulation energy sector 147–48 financial sector 126–27 related party transactions, customs procedures 114–15 rent prices 193 representative offices 66–67 research and development, taxallowable expenses 136 resident entities 133 restaurant and catering industry 200 retail sector 200
Index Rezekne Special Economic Zone 39, 40, 57 Riga airport 184 Freeport 39, 58 real estate 105 ‘right of first refusal’ property legislation 101–02 road transportation 183, 200 rubber and plastics industry 165–67, 166 rules of origin, imported goods 116 salary levels 16, 22 self-employed sector 16 semi-finished textiles sector 174 services sector overview 14–15 SEZs see Special Economic Zones share capital, companies 63, 65, 71 shareholders, limited liability companies 64 shipbuilding industry 156–57 SIMPB see State Internal Market Protection Bureau social insurance contributions 38–39, 138 social integration 9–10 sole proprietorships 133 Soviet occupation 4, 6–7 Special Economic Zones (SEZs) 39, 57–58 State Internal Market Protection Bureau (SIMPB) 117 stock exchange 126 storage facilities 15 structural funds 23–24 supervisory boards of companies 64 Supreme Court 106 tax-free zones see free ports; free zones; Special Economic Zones taxation 132–39 essentials and concerns 138–39 investor incentives 37–39, 37 practice 134–38 property acquisition 103–04 reform 27–29 structure 132–34 telecommunications 15, 195–96, 196 television 197
245
temporary imports, customs procedures 116 termination of employment 90–91 textiles and clothing sector 172–75, 173 title to land or buildings forms 102 registration 100–01 tourism sector 199–203 assets and niche markets 202–03 development 201–02 infrastructure 199–201 trade see foreign trade trade finance 123–24 trade permits, municipal 30 trademarks 93–94 traditions 10–11 transportation and logistics sector 181–85, 181 air 184 pipelines 184 ports 182–83, 182 rail 183 road 183 storage and distribution 185 tourist requirements 200–01 trials, court 107–09 ‘undertakings‘ 66 unemployment 16 unfair competition 82–83 value added tax (VAT) 112, 116–17, 138 land and building sales 104 vehicle tax 138 Ventspils Freeport 39, 58 wage levels 16, 22 withholding tax 104, 137 wood processing industry 176–80, 177, 178 furniture 179–80, 179 woodwork sub-sector 177–78, 178 work permits 84–85 working hours 89 working procedures manual 87 World Trade Organization 40 written media 196–97
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