Located in the Baltic region of northeastern Europe, Latvia is a member of the EU, Eurozone, NATO, OECD, and the World Trade Organization (WTO). The Latvian government recognizes that, as a small country, it must attract foreign investment in order to foster economic growth, and thus has pursued liberal economic policies and developed infrastructure to position itself as a transportation hub. According to the 2019 World Bank’s Doing Business Report, Latvia is ranked 19th out of 190 countries in terms of ease of doing business, which is same as the previous year. As a member of the European Union, Latvia applies EU laws and regulations, and, according to current legislation, foreign investors possess the same rights and obligations as local investors (with certain exceptions). Any foreign investor is entitled to establish and own a company in Latvia and has the opportunity to acquire a temporary residence permit.
Latvia provides several advantages to potential investors, including:
Regional Hub: Despite ongoing tensions between Russia and the European Union, Latvia remains a transportation and logistics bridge between West and East, providing strategic access to both the EU market and to Russia and Central Asia. Latvia’s three ice-free ports are connected to the country’s rail and road networks and to the largest international airport in the Baltic region (Riga International Airport (RIX)). Latvia’s road network is connected to both European and Central Asian road networks. The railroads connect Latvia with the other Baltic states, Russia, and Belarus, with further connections extending into Central Asia and China.
Workforce: Latvia’s workforce is highly educated and multilingual, and its culture promotes hard work and dependability. Labor costs in Latvia are the fourth lowest in the EU.
Competitive Tax system: Latvia ranked 3rd in the OECD’s 2019 International Tax Competitiveness Index Rankings. To further boost its competitiveness, the Latvian government has abolished taxes on reinvested profits and has established special incentives for foreign and domestic investment. There are five special economic zones (SEZs) in Latvia: Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone, and Latgale Special Economic Zone, which provide various tax benefits for investors. Latgale Special Economic Zone covers a large part of Latgale, which is the most economically challenged region in Latvia, bordering Russia and Belarus.
Latvia’s GDP grew by 2.2 percent in 2019 yet in the last quarter of 2019 GDP growth slowed to 1.0%, which was the weakest growth since the third quarter of 2016. Commentators attributed the slowdown to increased global uncertainty and unfavorable developments the transport sector, which saw a swift reduction of cargo turnover in ports and railways. In addition, financial services decreased by 10.7% year on year, owing to Latvian government implementation of strong anti-money laundering (AML) legislation and increased oversight of the financial sector. The most competitive sectors in Latvia include woodworking, metalworking, transportation, IT, green tech, healthcare, life science, food processing, and finance. Recent reports suggest that some of the most significant challenges investors encounter in Latvia are a shortage of available workforce, demography, quality of education and a significant shadow economy.
The non-resident banking sector has come under increased regulatory scrutiny in recent years because of inadequate compliance with international AML standards. On August 23, 2018, MONEYVAL, a Council of Europe agency that assesses member states’ compliance with AML standards, issued a report that found Latvia deficient in several assessment categories. The Government of Latvia has been working to restore confidence in its financial institutions and has passed several pieces of reform legislation.
In late 2019 and early 2020, MONEYVAL and the Financial Action Task Force (FATF) concluded that Latvia has developed and implemented strong enough reforms for combating financial crimes to avoid increased monitoring via the so-called “grey list.” While it will continue enhanced monitoring under MONEYVAL to continue strengthening the system, with this decision, Latvia became the first member state under the MONEYVAL review to successfully implement all 40 FATF recommendations.
Despite these advantages, investors note a perceived lack of fairness and transparency with Latvian public procurements. A number of companies, including foreign companies, have complained that bidding requirements are sometimes written with the assistance of potential contractors or couched in terms that exclude all but “preferred” contractors.
The chart below shows Latvia’s ranking on several prominent international measures of interest to potential investors.
|TI Corruption Perceptions Index||2019||44 of 180||http://www.transparency.org/
|World Bank’s Doing Business Report||2019||19 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2019||34 of 129||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, historical stock positions)||2018||191*||http://data.imf.org/regular.aspx?key=61227424|
|World Bank GNI per capita||2018||USD 16,510||http://data.worldbank.org/
*These figures significantly underestimate the value of U.S. investment in Latvia due to the fact that these do not account for investments by U.S. firms through their European subsidiaries.