Successfully investing in Latvia

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last updated on 27 May 2020 | reading time approx. 4 minutes

 

 

 

How do you assess the current economic situation in Latvia?

The economy in Latvia has been growing steadily over the last decade. In 2019 the economy in Latvia grew by 2.2 per cent. The rate of development has remained above the average development rate in the EU. Latvia’s economic prospects for 2020 are, however, uncertain. At the beginning of the year the Ministry of Economics forecasted that economic growth in 2020 might generally remain at the level of the previous year, i.e. approx. 2.5 per cent. However, the Covid-19 epidemic and the restrictions on public and economic life will have an impact on the Latvian economy – the negative extent of which cannot yet be predicted. The Latvian government though has quickly reacted to the possible economic slowdown by adopting a large number of laws and regulations designed to support businesses so that the economy remains stable.

 

How would you describe the investment climate in Latvia? Which sectors offer the largest potential?

Latvia offers a wide variety of competitive advantages for investors, which make it a perfect place for doing business. These include cost effectiveness, highly skilled workforce, well-developed infrastructure, as well as easy access to other markets in the region. According to the latest “Doing Business 2020” report by the World Bank, Latvia remains ranked 19th out of 190 countries in terms of ease of doing business.

 
In recent years, the volume of foreign investment has continued to grow. Historically, most of Latvia’s foreign direct investment inflow has come from neighbouring countries in the Baltic Sea region and other EU member states. In comparison to 2018 the foreign direct investment in Latvia increased in 2019. According to the Bank of Latvia the direct investment inflow in Latvia in 2019 amounted to 705,8 million Euro. The majority of it went to real estate operations, energy, information- and technology, as well as the financial sectors.

 
Sectors such as woodworking, metalworking and mechanical engineering, information technology as well as transport and storage will be appealing to foreign investors in the future. Additionally, health care, life sciences and food processing sectors hold great potential.

 

However, in some areas improvements are still needed in order to make the country more appealing to foreign investors. Four issues are of vital importance:

  • stability of the financial sector,
  • further development of the tax system,
  • quality of the higher education and
  • workforce productivity.

 

What challenges do German companies face during their business ventures into Latvia?

Foreign investors have to take into account various challenges when starting operations in Latvia, including:

  • the small size of the Latvian market;
  • geopolitical risks due to being on the eastern border of the EU;
  • low investment in research and
  • the still widespread corruption problems causing social tensions.

 
Furthermore, in 2017 the “Law on Prevention of Money Laundering and Terrorism and Proliferation Financing” was amended introducing new regulations, including stricter rules on providing information on the ultimate beneficial owners. Legal entities registered with the Enterprise Register of the Republic of Latvia are obliged to reveal information on their ultimate beneficial owners. Therefore, enterprises must have clear structures that make it easy to identify the beneficial owner and can be traced back to a natural person. The banks in Latvia also have the right to request information on the beneficial owners of their clients.

 
In recent years, there have been frequent changes in tax legislation in Latvia, which, due to the volatility of the tax regime, may appear to be a threat, but these changes have only benefited entrepreneurs by relieving the tax burden and improving cooperating with the State Revenue Service.

 
In order to help to navigate this dynamic situation, foreign investors are supported by competent local consultants who speak several foreign languages, including German. By investing in Latvia, German companies can begin to open up the entire market of the Baltic region.

 

What influence do Germany and the EU have on Latvia?

The EU membership has helped Latvia to develop and expand its economy. It has opened Latvia’s economy to world markets and vice versa. It has also provided a certain level of security and stability. These factors have been essential in improving the general economic situation in Latvia.

 
Germany is one of Latvia’s most important trade partners – according to the “Investment and Development Agency of Latvia” Germany ranks third among Latvia’s foreign trade partners. The export volume to Germany reached 1.3 billion Euro in 2019. This is 7 per cent more than in 2018. The import volume from Germany amounted to 1.9 billion Euro in 2019; an increase of 4 per cent over 2018. The main export products form Latvia are wood and wood products, electrical equipment, machinery and mechanical devices, vehicles, vegetable produce and products of the chemical industry. The main import goods are vehicles, machinery and mechanical devices, electronic devices, products of the chemical industry as well as plastics and rubber products.  

 
According to a survey done by the German-Baltic Chamber of Commerce in Estonia, Latvia, Lithuania (AHK), Latvia has one of the most attractive investment climate’s in Central and Eastern Europe. At the end of 2019 German direct investments in the Latvian economy amounted to 1 billion Euro.

 

In 2019, Peter Altmaier, Federal Minister of Germany for Economic Affairs and Energy, revealed that Germany has been informed about investment opportunities in Latvia and is interested in extending cooperation in this area. As a result, both countries forecast a successful future cooperation between each other.

 

In your opinion, how will Latvia develop?

Due to the current uncertainty about the development of the situation caused by Covid-19, the development trend of the Latvian economy cannot be clearly assessed. Further development of Latvia’s economy will still be closely linked to export possibilities and, therefore, progress of the global economy. Important structural changes already made, however, could potentially lead to accelerated export growth. In spite of recent challenges that have shaken the global economy, Latvia is well positioned to successfully overcome any issues and experience rapid growth of it’s economy in the forthcoming years.

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Jens-Christian Pastille

Attorney at Law (Berlin, Riga)

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+371 6733 8125
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