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Diplomacy in Action

2011 Investment Climate Statement - Latvia


2011 Investment Climate Statement - Latvia
Bureau of Economic, Energy and Business Affairs
March 2011
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The Latvian government actively encourages foreign direct investment, and works with investors to improve the country's business climate. The Latvian Government meets annually with the Foreign Investors Council in Latvia (FICIL), which represents large foreign companies and chambers of commerce, with an aim to improve the business environment and encourage foreign investment. In August 2010 the Latvian government established the Coordination Council for Large and Strategically Important Investment Projects, chaired by the Prime Minister.

The government works to bring Latvian economic institutions, laws and regulations into conformity with EU directives.

In keeping with European Union and World Trade Organization requirements, there is generally no screening of foreign investment. However, in cases of greenfield investment requiring licenses regulated by the Public Services Regulatory Commission, or when the state offers tax exemptions or other concessions, significant due diligence measures may be applied. Tender regulations for greenfield investment projects are prepared on a case-by-case basis.

Business activities are regulated by the Commercial Law, which serves as the legal framework for establishing, registering, operating and closing a business in Latvia. The law specifies five possible business legal entities: individual entrepreneurs, partnerships (general and limited) and corporations (joint stock and limited liability companies).

The Commercial Law, which came into force on January 1, 2002, provides protection for creditors, stipulates accountability requirements for managers, requires off-shore companies to disclose their shareholders, and prohibits companies from using cash reserves to purchase their own shares

Physical and legal persons who are citizens of Latvia or of other EU countries may freely purchase real property. In general, physical and legal persons who are citizens of non-EU countries (“third-country nationals”) may also freely purchase developed real property. However, third-country nationals may not directly purchase certain types of agricultural, forest, and undeveloped land. Such persons may, however, acquire ownership interest in such land through a company registered in the Register of Enterprises of the Republic of Latvia, provided that more than 50 percent of the company is owned by: (a) Latvian citizens and/or Latvian governmental entities; and/or (b) physical or legal persons from countries with which Latvia signed and ratified an international agreement on the promotion and protection of investments on or before December 31, 1996; or for agreements concluded after this date, so long as such agreements provide for reciprocal rights to land acquisition. The U.S. and Latvia have such an agreement. In addition, foreign investors can lease land without restriction for up to 99 years.

Other restrictions apply (to both Latvian citizens and foreigners) to the acquisition of land in Latvia's border areas, Baltic Sea and the Gulf of Riga dune areas, and other protected areas.

The Law on Privatization of State and Municipal Property governs the privatization process in Latvia. The Latvian Privatization Agency (LPA), established in 1994, uses a case-by-case approach to determine the method of privatization for each state enterprise. The three allowable methods are: public offering, auction for selected bidders, and international tender. For some of the largest privatized companies, a percentage of shares may be sold publicly on the Nasdaq OMX Riga Stock Exchange. The government may maintain shares in companies deemed important to the state's strategic interests. Privatization of small and medium state enterprises is considered to be largely complete.

Latvian law designates six State Joint Stock Companies that cannot be privatized: Latvenergo (energy), Latvijas Pasts (post), International Airport “Riga”, Latvijas Dzelzceļš (railways), Latvijas Gaisa Satiksme (air traffic control), and Latvijas Valsts Meö�i (forests). Discussions on possible privatization of the above-mentioned companies have resurfaced in light of current economic fiscal conditions, but local experts do not foresee privatization of any of these companies over the course of the next year. Other large companies in which the Latvian government holds a controlling interest include airBaltic (air carrier), Lattelecom (land phone line and internet services provider), and Latvian Mobile Telephone (Latvia’s largest mobile phone operator).

The global recession of 2008-2009 was particularly severe in Latvia, leading to a reduction in overall levels of FDI along with a nearly 25% drop in GDP. The banking sector was hard-hit, leading to the failure and government takeover of one large bank, Parex, which negatively affected the government’s fiscal situation and led to fears of devaluation. However, falling wages and prices, coupled with a highly flexible labor market, have increased Latvia’s competitiveness. The government’s deficit-reduction efforts, which have been implemented in coordination with the International Monetary Fund and the European Commission, appear to have stabilized the economy as growth returned to Latvia in the second half of 2010.The chart below shows Latvia's rank on several prominent international measures of interest to potential investors.

Index

2010

2009

TI Corruption Index

59th

56th

Heritage Economic Freedom

50th

45th

World Bank - Doing Business

24th

27th

Conversion and Transfer Policies

Latvia has had its national currency, the Lat, pegged to the Euro at the rate 1 EUR = 0.702804 LVL since January 1, 2005. As of January 2005 the Bank of Latvia unilaterally limits the Lat’s exchange rate against the Euro to ±1% of the central rate.

Latvia entered the EU’s Exchange Rate Mechanism II (ERM II) on May 2, 2005. The Latvian government is committed to pursue membership in the Euro Zone, but the current and forecasted economic situation, according to government officials and analysts from the private sector, will probably prevent entry before 2014.

Latvian law provides for unrestricted repatriation of profits associated with an investment. Investors can freely convert local currency into foreign exchange at market rates, and have no difficulty obtaining foreign exchange from Latvian commercial banks for investment remittances. Exchange rates and other financial information can be obtained at the Central Bank of Latvia's web site at www.bank.lv.

Expropriation and Compensation

There have been no cases of arbitrary expropriation of private property by the government of independent Latvia. Expropriation of foreign investment is possible in a very limited number of cases specified in the law on expropriation of real property. Compensation must be paid in full within three months of the date of expropriation. If the owner of the property claimed by the government deems the compensation inadequate, the owner has the right to appeal to a Latvian court.

Dispute Settlement

The 1993 Law on Judicial Power introduced a three-tier court system. Judicial power is exercised by town, city and rural districts; regional courts; and the Supreme Court. In addition, the Constitutional Court reviews the compatibility of decrees and acts of the President of the Republic, the government and local authorities with the constitution and the law. Unless otherwise stipulated by law, district courts are the courts of first instance in all civil, criminal and administrative cases. Regional courts are vested with the authority of appellate review for district court verdicts. In addition, regional courts are courts of first instance for cases specified in the Civil Code. Such cases include claims exceeding LVL 150,000 (approximately USD 300,000), cases on the protection of patent rights, trademarks and geographical indications, and cases on the insolvency and liquidation of credit institutions. The Supreme Court consists of the Senate and two Chambers of Court: the Civil Chamber of Court and the Criminal Chamber of Court.

Judges are appointed by the Minister of Justice and their appointments are confirmed by parliament after two years of professional practice. After the parliament confirmation, judges have absolute security of office, which can only be called into question if they have committed a crime. Supreme Court justices are determined by the parliament, upon the recommendation by the Chief Justice.

City and regional courts are administered by the Ministry of Justice (www.tm.gov.lv). The Supreme Court and Constitutional Court are independent. However, improvements in the judicial system are needed to accelerate the adjudication of cases, to strengthen the enforcement of court decisions, and to upgrade professional standards. Significant backlogs exist in these courts.

A register of arbitration institutions was established in 2005. According to the information available in the Register, there are 199 arbitration institutions registered in Latvia (www.ur.gov.lv). In most commercial agreements, parties opt to refer their disputes to arbitration rather than to the Latvian courts.

The Civil Procedure Law, which came into force on March 1, 1999, contains a section on arbitration courts. This section was drafted on the basis of the UNCITRAL model law, thus providing full compliance with international standards. The law also governs the enforcement of rulings of foreign non-arbitral courts and foreign arbitrations.

Latvia joined the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and thus judgments of foreign arbitral courts that are made in accordance with the convention can be enforced in Latvia. In addition, the civil procedure law stipulates that the judgments of foreign non-arbitral courts can be enforced in Latvia.

There are two laws governing bankruptcy procedure: the Law on Insolvency that came into force on January 1, 2008 and was amended in November 2010; and the Law on Credit Institutions, which regulates bankruptcy procedures for banks and other financial sector companies, which came into effect in 1995. Recent changes to the Law on Insolvency were designed to make the process more efficient and accessible to physical persons.

Performance Requirements/Incentives

The Latvian government extends national treatment to foreign investors. Therefore most investment incentives and requirements apply equally to local and foreign businesses.

However, the Latvian government has prepared a series of incentive schemes for investment, both foreign and domestic, in several free ports, special economic zones, and in special support regions. For more information on these programs, see http://www.liaa.gov.lv/eng/invest_in_latvia/latvian_business_guide/incentives_for_investors/).

Except for specific requirements for investors acquiring former state enterprises through the privatization process, there are no performance requirements for a foreign investor to establish, maintain or expand an investment in Latvia. In the privatization process, performance requirements for investors, both foreign and domestic, are determined on case-by-case basis. Typically, these include requirements to maintain a specified employment level and to invest a specified amount of money into the company. The privatization requirements are subject to negotiation. The Privatization Control Department at the Latvian Privatization Agency (LPA) reviews the progress of each privatized company over the three years following privatization. If an investor does not meet the requirements specified in the privatization regulations, the LPA breaks the agreement with the investor. As the requirements are clearly measurable, LPA decisions in such situations are generally transparent and fair.

Under Latvian law, foreign citizens can enter Latvia for temporary business activities for up to three months in a half-year period. For longer periods of time, foreigners are required to obtain residence and work permits.

On July 1, 2010, amendments to the Latvian Immigration Law came into force. The amendments provide that a physical third-country national may obtain a five-year temporary residence permit if he or she has made certain minimum equity investments in a Latvian company, certain subordinated investments in a Latvian credit institution, or purchased real estate for certain designated sums, subject to limitations in each case.

Right to Private Ownership and Establishment

The Latvian constitution guarantees the right to private ownership. Both domestic and foreign private entities have the right to establish and own business enterprises and engage in all forms of commercial activity, except those prohibited by the law. Private enterprises have competitive equality with public enterprises with respect to access to markets and business operations.

Protection of Property Rights

Since regaining independence in 1991, Latvia has restored full legal rights to property.

In an effort to harmonize its legislation with EU and WTO requirements, Latvia has established a legal framework for the protection of intellectual property. In 1993, the Latvian Parliament passed legislation to protect copyrights, trademarks and patents. In 2000, the Parliament adopted a new Law on Copyrights. The law strengthens protection of software copyright and neighboring rights. Foreign owners may seek redress for violation of their intellectual property rights through the appellation council at the Latvian Patent Office; court action can also be sought in such cases. In copyright violation cases, the interested party can request that the use of the pirated works be prohibited, that pirated copies be destroyed and that remuneration for losses be paid (including for lost profits). The criminal law stipulates penalties for copyright violations.

In July 1994, the United States signed a Trade and Intellectual Property Rights Agreement with Latvia. Latvia has been a member of the World Intellectual Property Organization (WIPO) since January 1993, a member of the Paris Convention since September 1993, a member of the Berne Convention since August 1995, and the Geneva Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms since August 1997. In addition, the Latvian government has amended all relevant laws and regulations in order to comply with the requirements of the WTO TRIPS agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights), to which Latvia acceded by joining the WTO.

Latvia has also acceded to the following international treaties and agreements:

-- Patent Co-operation Treaty (September 1993);

-- Budapest Treaty on the International Recognition of the Deposit of Micro-organisms for the Purposes of Patent Procedure (December 1994);

-- Madrid Agreement on International Registration of Trade Marks (January 1995);

-- Nice Agreement on International Classification of Goods and Services for the Purposes of Trade Mark Registration (January 1995);

-- Rome Convention for the Protection of the Rights of Performers, Producers of Phonograms and Broadcasting Organizations (with a note to not apply the article 12 of the convention concerning phonograms of producers that are not nationals of contracting states), (August 1999);

-- Geneva Agreement on Trade Marks (December 1999).

Concerns exist regarding the enforcement of these intellectual property protection standards in Latvia. As in much of Eastern and Central Europe, piracy rates are relatively high. There have been some reports of infringement of software licensing agreements by government offices.

Transparency of the Regulatory System

The Latvian government has amended its laws and regulatory procedures in an effort to bring Latvia's legislation in compliance with the European Union and WTO GPA requirements. A number of legislative changes were aimed at increasing the transparency of the Latvian business environment and the regulatory system. At the same time, the massive legislative changes carried out in a short period of time have led to some laws and regulations that could be subject to conflicting interpretations. The Latvian government has developed a good working relationship with the foreign business community (through FICIL) to streamline various bureaucratic procedures and to address legal and regulatory issues.

Efficient Capital Markets and Portfolio Investment

Latvian government policies do not interfere in the free flow of financial resources or the allocation of credit. Local bank loans are available to foreign investors.

The regulatory framework for commercial banking incorporates all principal requirements of European Union directives. A unified capital and financial markets regulator was launched on July 1, 2001, replacing the Securities Market Commission, the Insurance Inspectorate, and the Bank of Latvia's Banking Supervision Department. Existing banking legislation includes provisions on accounting and financial statements (strict adherence to international accounting standards is required), minimum initial capital requirements, capital adequacy requirements, large exposures, restrictions on insider lending, open foreign exchange positions and loan-loss provisions. An Anti-Money Laundering Law and Deposit Insurance Law have been adopted, and an independent anti-money laundering unit is operating under the supervision of the Prosecutor General's Office. Some of the banking regulations, such as capital adequacy and loan-loss provisions, exceed EU requirements.

Total assets of the country’s banks are approximately 39.9 billion USD (exchange rate: 1 USD=0.53 Lats). At the end of November 2010, 72% of total loans had no payment arrears. In November, the number of loans more than 90 days overdue shrank for the fourth consecutive month, decreasing overall by 2.6% (approximately 141.5 million USD) since August 2010. The percentage of such “90 days overdue” loans in the banking loan portfolio was 19.3% at end of November. In July, the Committee of European Banking Supervisors conducted stress testing of large Scandinavian banks operating in Latvia, finding largely positive and stable results.

Securities markets are regulated by the 2000 Law on Consolidated Capital Markets Regulator, 2004 Law on Financial Instrument Market, and several other laws and regulations. Protection of investor interests is ensured by strict control over participants in the securities market. Transparency of the market is achieved by issuing Riga Stock Exchange (RSE) bulletins after each trading session and by offering securities market information on the Internet.

The NASDAQ/OMX Riga Stock Exchange (http://www.nasdaqomxbaltic.com) began operations in 1995. France assisted Latvia in setting up the securities market based on a continental European model. In 1997, the RSE was admitted to the International Federation of Stock Exchanges as a corresponding emerging market. The RSE was the first exchange in Eastern Europe to create an index in cooperation with Dow Jones.

Competition from State-Owned Enterprises (SOEs)

Private enterprises are allowed to compete with public enterprises on the same terms and conditions with respect to access to markets, credit, and other business operations such as licenses and supplies. The Latvian Government is currently working to implement the requirements of the EU’s Third Energy Package, which would further open the electricity market to private power producers, allowing them to compete on an equal footing with Latvenergo, the state-owned power company.

SOEs are active in the energy, air transport, postal services, telecommunications, railway and forestry sectors.

Senior managers of SOEs report to independent boards of directors, which in turn report to the line ministries. Many SOEs previously had a Council in addition to a Board of Directors, but these Councils were eliminated in 2009 due to widespread allegations that they provided little guidance and served only to provide jobs for politically connected individuals.

SOEs are required by law to publish an annual report and to submit their books to an independent audit.

Latvia does not have a sovereign wealth fund.

Corporate Social Responsibility (CSR)

Latvia has joined the OECD Declaration on International Investment and Multinational Enterprises On January 9, 2004. Adherence to these OECD principles and standards reinforces the efforts of the Latvian government to pursue investment-friendly economic reforms. Awareness of and adherence to principles of corporate social responsibility is still developing among producers and consumers.

Political Violence

There have been no reports of political violence or politically-motivated damage to foreign investors' projects or installations since Latvia regained its independence in 1991. The likelihood of widespread civil disturbances is very low. Civil unrest is generally not a problem in Latvia. While Latvia has experienced large, peaceful demonstrations related to internal political issues, there have been only occasional incidents when peaceful demonstrations have devolved into crimes against property, such as breaking shop windows or damaging parked cars. U.S. citizens are cautioned to avoid any large public demonstrations, as even peaceful demonstrations can turn confrontational. The Embassy provides periodic notices to U.S. citizens in Latvia and these announcements can be found on the Embassy’s web site (http://riga.usembassy.gov/).

Corruption

Corruption, including bribery, raises the costs and risks of doing business. Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines the rule of law.

It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the foreign country and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, by requiring them to uphold their obligations under relevant international conventions. A U. S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.

U.S. Foreign Corrupt Practices Act: In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to foreign public officials for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more detailed information on the FCPA, see the FCPA Lay-Person’s Guide at: http://www.justice.gov /criminal/fraud/docs/dojdocb.html.

Other Instruments: It is U.S. Government policy to promote good governance, including host country implementation and enforcement of anti-corruption laws and policies pursuant to their obligations under international agreements. Since enactment of the FCPA, the United States has been instrumental to the expansion of the international framework to fight corruption. Several significant components of this framework are the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Antibribery Convention), the United Nations Convention against Corruption (UN Convention), the Inter-American Convention against Corruption (OAS Convention), the Council of Europe Criminal and Civil Law Conventions, and a growing list of U.S. free trade agreements.

OECD Antibribery Convention: The OECD Antibribery Convention entered into force in February 1999. As of December 2009, there are 38 parties to the Convention including the United States (see http://www.oecd.org/dataoecd/ 59/13/40272933.pdf). Major exporters China, India, and Russia are not parties, although the U.S. Government strongly endorses their eventual accession to the Convention. The Convention obligates the Parties to criminalize bribery of foreign public officials in the conduct of international business. The United States meets its international obligations under the OECD Antibribery Convention through the U.S. FCPA.

UN Convention: The UN Anticorruption Convention entered into force on December 14, 2005, and there are 143 parties to it as of December 2009 (see http://www.unodc.org/unodc /en/treaties/CAC/signatories.html). The UN Convention is the first global comprehensive international anticorruption agreement. The UN Convention requires countries to establish criminal and other offences to cover a wide range of acts of corruption. The UN Convention goes beyond previous anticorruption instruments, covering a broad range of issues ranging from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence to the concealment and laundering of the proceeds of corruption. The Convention contains transnational business bribery provisions that are functionally similar to those in the OECD Antibribery Convention and contains provisions on private sector auditing and books and records requirements. Other provisions address matters such as prevention, international cooperation, and asset recovery.

OAS Convention: In 1996, the Member States of the Organization of American States (OAS) adopted the first international anticorruption legal instrument, the Inter-American Convention against Corruption (OAS Convention), which entered into force in March 1997. The OAS Convention, among other things, establishes a set of preventive measures against corruption provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment, and contains a series of provisions to strengthen the cooperation between its States Parties in areas such as mutual legal assistance and technical cooperation. As of December 2009, the OAS Convention has 33 parties (see http://www.oas.org/ juridico/english/Sigs/b-58.html)

Council of Europe Criminal Law and Civil Law Conventions: Many European countries are parties to either the Council of Europe (CoE) Criminal Law Convention on Corruption, the Civil Law Convention, or both. The Criminal Law Convention requires criminalization of a wide range of national and transnational conduct, including bribery, money-laundering, and account offenses. It also incorporates provisions on liability of legal persons and witness protection. The Civil Law Convention includes provisions on compensation for damage relating to corrupt acts, whistleblower protection, and validity of contracts, inter alia. The Group of States against Corruption (GRECO) was established in 1999 by the CoE to monitor compliance with these and related anti-corruption standards. Currently, GRECO comprises 46 member States (45 European countries and the United States). As of December 2009, the Criminal Law Convention has 42 parties and the Civil Law Convention has 34 (see www.coe.int/greco)

Local Laws: U.S. firms should familiarize themselves with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department’s U.S. and Foreign Commercial Service can provide assistance with navigating the host country’s legal system and obtaining a list of local legal counsel.

Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses seeking to address business-related corruption issues. For example, the U.S. and Foreign Commercial Service can provide services that may assist U.S. companies in conducting their due diligence as part of the company’s overarching compliance program when choosing business partners or agents overseas. The U.S. Foreign and Commercial Service can be reached directly through its offices in every major U.S. and foreign city, or through its Website at www.trade.gov/cs.

The Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding on foreign government contracts through the Commerce Department’s Advocacy Center and State’s Office of Commercial and Business Affairs. Problems, including alleged corruption by foreign governments or competitors, encountered by U.S. companies in seeking such foreign business opportunities can be brought to the attention of appropriate U.S. government officials, including local embassy personnel and through the Department of Commerce Trade Compliance Center “Report a Trade Barrier” Website at tcc.export.gov/Report_a_Barrier/index.asp.

Guidance on the U.S. FCPA: The Department of Justice’s (DOJ) FCPA Opinion Procedure enables U.S. firms and individuals to request a statement of the Justice Department’s present enforcement intentions under the antibribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are available on DOJ’s Fraud Section Website at www.justice.gov/criminal/fraud/fcpa. Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information, see the Office of the Chief Counsel for International Counsel, U.S. Department of Commerce, http://www.ogc.doc.gov/trans_anti_bribery.html. More general information on the FCPA is available at the Websites listed below.

Foreign business representatives and non-governmental organizations, such as Transparency International, have identified corruption and the perception of corruption as a persistent problem in Latvia. According to the latest (2010) corruption perception index by Transparency International, Latvia ranks 59th among the world's most corrupt countries. Latvia’s ranking as the 5th most corrupt EU member state held steady.

In an effort to strengthen its anti-corruption efforts, the Latvian government has adopted several laws and regulations, including the 1998 Law on Money Laundering (amended in 2009), and the 2002 Law on Conflicts of Interest (replacing the 1995 Anti-Corruption Law). The Conflicts of Interest Law imposes restrictions and requirements for public officials and their relatives. Several provisions of the law deal with the previously widespread practice of holding several positions simultaneously, often both in the public and private sector. The law includes a comprehensive list of state and municipal jobs that cannot be combined with additional employment. Moreover, the law expands the scope of the term "state official" to include members of boards and councils of companies with state or municipal capital exceeding 50 percent.

Latvia has signed the Criminal Convention on Corruption of the Council of Europe and the United Nations Convention against Corruption. Latvia has expressed interest in joining the OECD Convention on Combating Bribery. Under Latvian law, it is a crime to offer or to accept a bribe or to facilitate an act of bribery. Although the law stipulates heavy penalties for bribery, there have so far been only a limited number of government officials prosecuted and convicted for corruption.

The primary institution responsible for combating corruption is an independent anti-corruption agency -- the Anti-Corruption Bureau (known by its Latvian acronym KNAB) whose task is to carry out operational activities on fighting incidents of corruption. KNAB has recently been involved in controversies that have limited its effectiveness. The Crime Prevention Council chaired by the Prime Minister is in charge of coordinating and supervising all State authorities’ activities in the field of prevention of crime and corruption. The Prosecutor General's Office also plays an important role in fighting corruption.

There was a perceived lack of fairness and transparency in the public procurement process. A number of companies, including foreign companies, have complained that bidding requirements were sometimes written with the assistance of potential contractors or couched in terms that exclude all but "preferred" contractors.

A regulation of the Cabinet of Ministers provides for public access to government information, and the government generally provided citizens such access. There were no reports that noncitizens or the foreign media were denied access.

Anti-Corruption Resources

Some useful resources for individuals and companies regarding combating corruption in global markets include the following:

· Information about the U.S. Foreign Corrupt Practices Act (FCPA), including a “Lay-Person’s Guide to the FCPA” is available at the U.S. Department of Justice’s Website at: http://www.justice.gov/criminal/fraud/fcpa.

· Information about the OECD Antibribery Convention including links to national implementing legislation and country monitoring reports is available at: http://www.oecd.org/department/ 0,3355,en_2649_34859_1_1_1_1_1,00.html. See also new Antibribery Recommendation and Good Practice Guidance Annex for companies: http://www.oecd.org/dataoecd/11/40/44176910.pdf

· General information about anticorruption initiatives, such as the OECD Convention and the FCPA, including translations of the statute into several languages, is available at the Department of Commerce Office of the Chief Counsel for International Commerce Website: http://www.ogc.doc.gov/trans_anti_bribery.html.

· Transparency International (TI) publishes an annual Corruption Perceptions Index (CPI). The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is available at: http://www.transparency.org/ policy_research/surveys_indices/cpi/2009. TI also publishes an annual Global Corruption Report which provides a systematic evaluation of the state of corruption around the world. It includes an in-depth analysis of a focal theme, a series of country reports that document major corruption related events and developments from all continents and an overview of the latest research findings on anti-corruption diagnostics and tools. See http://www.transparency.org/publications/gcr.

· The World Bank Institute publishes Worldwide Governance Indicators (WGI). These indicators assess six dimensions of governance in 212 countries, including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. See http://info.worldbank.org/ governance/wgi/sc_country.asp.

· The World Bank Business Environment and Enterprise Performance Surveys may also be of interest and are available at: http://go.worldbank.org/RQQXYJ6210.

· The World Economic Forum publishes the Global Enabling Trade Report, which presents the rankings of the Enabling Trade Index, and includes an assessment of the transparency of border administration (focused on bribe payments and corruption) and a separate segment on corruption and the regulatory environment. See http://www.weforum.org/en/ initiatives/gcp/GlobalEnablingTradeReport/index.htm.

· Additional country information related to corruption can be found in the U.S. State Department’s annual Human Rights Report available at http://www.state.gov/j/drl/rls/hrrpt/.

Global Integrity, a nonprofit organization, publishes its annual Global Integrity Report, which provides indicators for 92 countries with respect to governance and anti-corruption. The report highlights the strengths and weaknesses of national level anti-corruption systems. The report is available at: http://report.globalintegrity.org/.

Bilateral Investment Agreements

Latvia has concluded bilateral investment agreements with Armenia, Austria, Azerbaijan, Belarus, Belgium, Bulgaria, Canada, China, Croatia, the Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Georgia, Greece, Hungary, Iceland, Israel, Italy, Kazakhstan, Kyrgyzstan, Korea, Kuwait, Lithuania, Luxembourg, Moldova, the Netherlands, Norway, Poland, Portugal, Romania, Singapore, the Slovak Republic, Spain, Sweden, Switzerland, Taiwan, Turkey, Ukraine, the United Kingdom, the United States, Uzbekistan and Vietnam. The agreement with the U.S. came into force in December 1996.

Latvia has concluded the Treaty on Avoidance of Double Taxation with the U.S., which is in force as of December 30, 1999.

OPIC and Other Investment Insurance Programs

Overseas Private Investment Corporation (OPIC) political risk insurance coverage is available for U.S. investments in Latvia. Latvia is a member of the Multilateral Investment Guarantee Agency (MIGA).

Since January 1, 2005, the Latvian national currency, known as the Lat, has been pegged to the euro at a rate 0.70284 Lat per 1 euro.

Latvia continues to suffer serious economic difficulties. In December 2008, Latvia received a 7.5 billion euro ($10.4 billion) assistance package from the International Monetary Fund (IMF) and the European Union. The IMF providing 1.7 billion euro, the Nordic countries – 1.8 billion euro, the European Commission – 3.1 billion euro, and the EBRD and other EU Member States – 0.9 billion euro. The financial assistance program's terms do not call for monetary policy changes, thus allowing Latvia to maintain its currency's exchange rate peg to the euro. To achieve the goals of the program without devaluation, severe fiscal policy tightening has been required. In accordance with the agreement with the IMF and European Commission, an additional 750 million USD of consolidation measures are needed to bring the budget deficit in 2011 below 6% of GDP. To reach its goal of adopting the Euro in 2014, the Latvian government needs to cut the budget deficit below 3% of GDP, starting in 2012.

Labor

The official rate of registered unemployment at the end of 2010 was 14.3 percent. Unemployment is significantly higher in rural areas. A high percentage of the workforce has completed at least secondary or vocational education. Foreign managers agree that Latvians generally are hard working, reliable and quick to learn. Foreign managers also praise the high degree of language skills, especially in Russian and English, among Latvian workers. However, there is a shortage of mid- and senior-level managers with western-style management skills.

Companies must keep wages above a legally specified minimum, which from January 1, 2011 is LVL 200 (approximately USD 375) per month. Union influence on the wage setting process is limited. Trade unions do not have significant influence on labor market.

One challenge that employers face since Latvia joined the EU is that many skilled employees can find employment opportunities in other EU countries. Unofficial statistics suggest that more than 100,000 people have moved from Latvia to other EU countries since May 1, 2004. Real wage growth has been negative since Q1 of 2009. Most recent statistics on Q4 of 2010 show a 4.9% drop in real wages. As wages decline, unemployment rises, and the Latvian government reduces state jobs, some experts predict an increase in the number of people leaving the country.

The Labor Law addresses discrimination issues, provides detailed provisions on rights and obligations of employees' representatives, and creates a new institution – the Conciliation Commission – that can be established in a workplace.

Full-time employees in Latvia work 40 hours a week. Normally, there are five working days per week, but employers are allowed to schedule six working days per week. Employees are entitled to four calendar weeks of annual paid vacations per year. An employer is prohibited from entering into an employment contract with a foreign individual who does not have a valid work permit.

The Latvian government is committed to adhere to the ILO Convention protecting workers’ rights.

Foreign Trade Zones/Free Ports

There are four free trade areas in Latvia: free ports are established in the Riga and Ventspils ports, and special economic zones (SEZ) are created in Liepaja, a port city in western Latvia, and Rezekne, the center of an eastern Latvian region which borders Russia. The IMF objects to free trade zones on the grounds that they distort competition and create tax collection problems.

Somewhat different rules apply to each of the four zones. In general, the two free ports provide for exemptions from indirect taxes, including customs duties, VAT and excise tax. The SEZs offer additional incentives, such as 80-100 percent reduction of corporate income taxes and real estate taxes. To qualify for tax relief and other benefits, companies must receive permits and sign agreements with the appropriate authorities: the Riga and the Ventspils Port Authorities, for the relevant free port; the Liepaja SEZ Administration; or the Rezekne SEZ Administration.

Foreign Direct Investment Statistics

Table 1: (Positions in millions of USD) 2006-2009

2006

2007

2008

2009

7476.1

10841.7

11537.5

11601.9

Source: Bank of Latvia

Table 2: FDI in Latvia (Net flows in millions of USD) 2006-2009

2006

2007

2008

2009

1664.1

2315.5

1357.2

93.5

Source: Bank of Latvia

Table 3: FDI in Latvia (Net flows in % of GDP), 2006-2009

2006

2007

2008

2009

8.3

8.1

3.7

0.4

Source: Bank of Latvia

Table 4: millions of USD), 2006-2009

Country

2006

2007

2008

2009

Estonia

870.3

1602.6

1860.9

1962.5

Sweden

1130.9

1460.3

1657.6

1601.1

Denmark

618.7

956.4

927.8

798.8

Germany

826.9

921.8

728.8

741.5

Netherlands

415.5

611.2

630.6

667.1

Ireland

23.9

109.9

425

540.4

Russian Federation

494

501

529.8

531.9

Finland

436.4

690.6

678.1

480.4

Cyprus

312.4

543.4

415.8

480.2

United States

438.2

481.6

449.7

438.8

Source: Bank of Latvia

Table 5: FDI in Latvia by kind of activity and investing country (Positions, Millions of USD), 2006-2009

 

2006

2007

2008

2009

Financial Intermediation

1799.7

3070.7

3327.8

3381.7

Of which in 2009

Estonia

37.87 %

Sweden

19.22 %

Denmark

7.33 %

 

2006

2007

2008

2009

Real Estate, Renting

1387.7

2389

2338

2520.2

Of which in 2009

Sweden

19.75 %

Estonia

12.11 %

Netherlands

9.11 %

 

2006

2007

2008

2009

Wholesale and Retail trade

980.1

1 293.4

1 617.0

1 554.6

Of which in 2009

Lithuania

14.63 %

Netherlands

13.3 %

Finland

10.99 %

 

2006

2007

2008

2009

Manufacturing

737.6

1067.6

1235.9

1339.2

Of which in 2009

Ireland

34.61 %

Finland

10.89 %

Sweden

9.02 %

 

2006

2007

2008

2009

Transport, Logistics

647.5

810.9

941.9

882.5

Of which in 2009

Denmark

21.51 %

Netherlands

19.23 %

Cyprus

11.64 %

 

2006

2007

2008

2009

Transport, Logistics

647.5

810.9

941.9

882.5

Of which in 2009

Denmark

21.51 %

Netherlands

19.23 %

Cyprus

11.64 %

Source: Bank of Latvia

Table 6: FDI in Latvia by kind of activity and investing country (Net flows, Millions of USD), 2006-2009

 

2006

2007

2008

2009

Real estate, renting

312.3

411.2

268.3

129.6

Of which in 2009

Luxembourg

91.6 million

USA

55.9 million

Cyprus

42.2 million

 

2006

2007

2008

2009

Manufacturing

74.9

213.8

275.1

62.1

Of which in 2009

Ireland

140.5 million

Sweden

12.7 million

Iceland

9.8 million

 

2006

2007

2008

2009

Agriculture, Forestry

2.5

41.9

63

21.1

Of which in 2009

Norway

15.9 million

Sweden

13 million

Netherlands

0.2 million

Table 7: Latvia's Direct Investment abroad by country (Positions, Millions of USD and Lats), 2006-2009

Country

2006

2007

2008

2009

Lithuania

81.9

165

198.7

208.5

In Lats

43.9

79.9

98.4

102

Switzerland

167.2

253.7

299.4

159.4

In Lats

89.6

122.8

148.2

77.9

Estonia

27.4

75.4

54.3

78.2

In Lats

14.7

36.5

26.9

38.2

Ukraine

12.7

27

77.3

62.2

In Lats

6.8

13.1

38.3

30.4

Cyprus

14.5

15.6

15.6

58.3

In Lats

7.8

7.5

7.7

28.5

Source: Bank of Latvia

Table 6: Major foreign investment in companies by investment in Stock (Situation as of January 11, 2011, in Lats)

Name of Investor

Country

Investment (in Lats)

Aktsiaselts Hansapank

Estonia

664,171,089.50

TILTS COMMUNICATIONS A/S

Denmark

71,581,000.00

BITE Lietuva UAB

Lithuania

69,637,536.00

PALINK Uö�daroji akcine bendrove

Lithuania

60,000,000.00

Bank DnB NORD A/S

Denmark

56,840,993.00

GE Capital International Financing Corporation

USA

55,600,000.00

Ektornet Latvia S.A.

Luxembourg

54,625,033.00

European Bank for Reconstruction and Development

United Kingdom

51,444,325.00

Tele2 Sverige Aktiebolag

Sweden

50,002,000.00

LINSTOW AS

Norway

45,359,693.00

NEW EUROPE REAL ESTATE LTD

United Kingdom

44,783,451.00

BANK AUSTRIA CREDITANSTALT AG

Austria

41,739,170.00

Eurotank Holding Sarl

Switzerland

38,485,500.00

SKANDINAVISKA ENSKILDA BANKEN AB

Sweden

38,030,759.60

Patras Holdings B.V.

Netherlands

37,632,000.00

TRANSö...EFTEPRODUKT AO

Russia

36,550,700.00

Euromin Holdings (Cyprus) Limited

Cyprus

36,314,148.00

OJAY LIMITED

Guernsey

35,280,000.00

Boswell (International) Consulting Limited

Malta

33,110,000.00

PrivatBank

Ukraine

30,359,520.00

Source: Lursoft – Electronic Database of the Latvia's State Enterprise Register. Data are systemized according to the country of incorporation/registration of the investor.



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