International investment: an overview of Latvia

Latvia is experiencing unprecedented changes, from post-soviet republic a decade ago, it now is to become a member of European Union.

Latvia has appeared as a promising novelty on the global investment map, and ten years of development have strengthened it’s positions as a trustworthy partner for investment and business community. By accessing international treaties for support of foreign investments and elaborate domestic regulation of investments, Latvia has boosted the investor confidence.

Infrastructure

Located on the Baltic coast, Latvia has always maintained vivid trade routes between East and West with it’s capital Riga dominating as a significant centre of international trade and industry. Latvia maintains good transport and communications infrastructure, vital for business. The road density in Latvia is 92,0 km per 100 sq. km, to compare with European Union average 85,3 km. Roads as well as railway connections are linking Latvia with neighbouring Russia and CIS countries ensuring market advantages in transit business. Two of Latvia’s major ports, Liepaja and Ventspils are open all year for vessels despite icy winter in the Baltic Sea.

The capital city Riga is, beyond doubt, becoming one of the major cities of the Baltic region. It is located conveniently in the centre of the three Baltic States and is an important transport hub, a rapidly growing financial and commercial centre, the metropolis of culture, tourism, education and entertainment. Number of population of Larger Riga (with suburbs and satellite towns) is over one million inhabitants. Many foreign companies select Riga to be the location of their Baltic operations. During the recent years the business conditions in Latvian special economic zones and free ports are particularly beneficial, special complex-service business parks are designed to suit variety of interests of foreign businesses. It is therefore expected that economic activity will particularly foster in the specifically designated areas due to beneficial tax, customs and licensing rules.

Legal environment

Since the declaration of independence of Latvia on May 4th, 1990, major efforts have been directed by the government to implement and develop appropriate legal regulation beneficial for foreign investments. As a result complex domestic legislation has been created, defining commercial and business activities, banking and securities environment. The law applies equal regulation for international investments; there is no unreasonable discrimination for acquisition of real estate or strategic assets.

Latvia has joined more than a hundred international treaties and conventions to guarantee and secure a proper framework for investments. International and bilateral agreements have been concluded on reciprocity basis on protection of investments and assets. Latvia has concluded agreements on mutual promotion and protection of investments with 36 countries, including European Union states, and USA. International agreements to prevent double taxation and non payment of taxes are effective with 25 countries, including USA, United Kingdom, Germany, France, the Netherlands, Finland, Sweden, Norway, Denmark and others.

Latvia is a party to international conventions on recognition of arbitration awards, enabling smooth operation of international and domestic arbitration procedures on commercial disputes, Latvia joined to international treaties on protection of intellectual property, thus offering audio – visual product market for local consumers and also ensuring strict policies against piracy of copyrighted software. Latvia was the first Baltic state to become a member of the World Trade Organization, thus it has committed itself to the liberalization of international trade and elimination of protectionism.

Business conditions and Currency

Almost a decade ago Latvia introduced its own currency Lats. The national currency is since 1994 tied to IMF Special Drawing Rights criteria at the rate of LVL 0,7997 = 1 SDR. The basic principles of Bank of Latvia’s monetary policy are free convertibility of the national currency, no restrictions on capital import and export, external and internal stability of the currency. The central bank has exercised strong monetary policy; the bank is independent from the government or political agendas. As a result since the introduction of the national currency, its exchange rate against the main currencies has remained virtually unchanged. During the last five years Latvia has maintained one of the lowest inflation rates in Central and Eastern Europe. Already for several years 23 banks are operating with total of LVL 4,251 million assets, three major banks are holding more than 50% of banking sector market share, by capital, assets, loans and deposits. Shareholders of major banks are reputable Nordic and German banking and financial institutions.

Identical rules for business and banking apply to both domestic and foreign business ventures. There are no capital repatriation limits or restrictions to foreign shareholders.

Latvia is highly rated among it’s counterparts to EU accession. Latvia received A- rating for Long-term Loans in Local Currency and for Long-term Loans in Foreign Currency Latvia was rated BBB by Standard & Poor’s and Fitch IBCA, positioning itself in the fourth place among Central and Eastern European countries. Latvia’s GDP growth in past five years was 4,5 % to compare with average growth rate 2,6% of European Union member states.

Over the past ten years Latvia has succeeded in attracting significant amounts of foreign direct investments. With an open and dynamically growing economy, liberal trade, one of the lowest corporate tax rates in Europe (15% tax by 2004), a developed transit infrastructure and a low-cost, highly skilled labour force, Latvia has developed into an attractive country for foreign investments.

Foreign investments

As a result, accrued direct foreign investment increased over LVL 110 million (183 million EUR) at the end of 2002. Bank of Latvia has announced that rate of direct foreign investment growth annually ensures that DFI volume reaches average of 5% of GDP per year.

Foreign investors have evaluated the advantages of Latvia as a suitable place for investment. Latvia is among the five leaders of Central- and Eastern European countries by per capita accumulated foreign investment. By the end of 2001 the amount per capita reached 602,7 LVL (944 EUR). The EU countries, and in particular Nordic states, are the leading foreign investors in Latvia.

In the mid-1990s major investments were made in port facilities and telecommunications, largely based on state asset privatization. As the privatization process developed, investments in manufacturing increased diversifying from early investments in food and wood processing to include textiles, clothing, chemicals, metal products and machinery. With 45% of Latvia covered by forests, wood products still are its principal export commodity.

By the end of 2001, the trend changed: trading was the leading business area of foreign investments (23%) finances and processing industry each had high stake of foreign investment (18%), the commercial business services (12%), then transport and communication (11% and 8% respectively) followed.

Potentially strong area of future growth is information technologies. Latvia has already experienced remarkable growth in the IT service sector. In accordance with data of Latvian Development Agency, gross sales of packaged software have reached one of the highest figures among European countries, amounting to 0.74% of GDP in 2000. Annual turnover of Latvia’s software industry is EUR 28 million, with an annual growth rate of 150%. There are more than 10,000 information technology and telecommunications specialists and a developed network of universities, schools and research and development institutions. Some of Latvian companies are now widely recognised for their capacity to manage large-scale projects and have international experience in providing customised IT solutions. The Latvian government has introduced several programs in order to support the IT service sector and to promote Latvia as a favoured location for high-tech industries. To strengthen the industry’s growth, Latvian companies, producing high-tech products, including hardware and software, are granted a 30% corporate income tax reduction. It is predicted that by the year 2010, the Latvian IT sector will provide services worth EUR 0.5–1 billion in annual revenues.

By the year 2003 Latvia has taken all necessary steps to become an integral part of the international investment community. 2003 is the historically important year with long anticipated signing of the Treaty on accession of Latvia to European Union and beginning of integration of Latvia with European Union and North Atlantic treaty Organisation. These landmark events will provide positive impact towards confidence of foreign investors to Latvia.

Information and materials of Bank of Latvia, Latvian Central Statistics Bureau, the Ministry of Economics, the Latvian Development Agency, the Latvian Institute, Riga Stock Exchange have been used as sources for the article.

By Lauris Liepa,
Attorney at Law at Liepa, Skopina/ BORENIUS.

Published: 2003, Evromoney Publication International Investment Review.