Latvia deemed thoroughly corrupt state

RIGA - German companies in the Baltic States have faced a noticeable upward trend after a prolonged crisis period, and plan further investments in capital and personnel, reports BBN referring to the 2011 business survey of the German-Baltic Chamber of Commerce in Estonia, Latvia, Lithuania (AHK) conducted among 97 German companies. At the same time, both the general business environment and the situation on the labor market might still “be better.”

German investors in Estonia, Latvia and Lithuania feel positive about the future: more than 60 percent of the investors are expecting an improvement of the economic situation. Currently, the mood, in general, is still rather restrained: more than half of the respondents assess the situation only as “satisfactory” and about one third as “bad.”

In Estonia and Lithuania, the majority of respondents consider their companies’ situation as good. In Latvia, German companies assess their operations predominantly as “satisfactory.” In all three Baltic States respondents see their companies going in a positive direction in the upcoming years: more than 90 percent foresee a further improvement of their business situation or expect at least a steady development of their companies.

“Expectations of the German companies are showing a clear upward trend - not least because of the stabilization of the economic situation. The pre-crisis level, however, has not been reached yet,” Jorg Tumat, deputy president of the German-Baltic Chamber of Commerce in Estonia, Latvia, Lithuania (AHK), said.

Being sure about the future, German companies are ready to further invest in capital and personnel. About 85 percent of the respondents are planning to increase their investments in 2011 or at least to keep them at the current level. One in three of the respondents is planning to increase its workforce and hire new employees.
Despite criticism regarding certain conditions for doing business, the Baltic States are still being considered as attractive business locations in comparison with other Central and Eastern European countries as well as Germany and China, they say.

More than 80 percent of the respondents have still confidence in their business location and would repeat their engagements in the Baltic States. German companies are thus still committed to Estonia, Latvia and Lithuania.
A rather different view is held at the German embassy in Latvia, where the complaint is about the country’s investment climate. This position came to light as Latvian Prime Minister Valdis Dombrovskis sought financing for projects, reports Bloomberg.

The diplomats raised their concerns after Dombrovskis submitted a list of such projects to German Chancellor Angela Merkel during her visit in September, the weekly magazine Ir reported on May 19. The German embassy answered with a letter listing complaints from German companies about the Latvian court system, public procurement and tax administration. The Austrian embassy sent a similar letter to Dombrovskis.

Foreign investors, who have poured in funds since Latvia joined the European Union in 2004, are complaining about competition from other firms that avoid paying taxes, tax administration, judicial and legal issues. The country’s grey economy was estimated at around 38 percent last year, about twice as high as in neighboring Lithuania and Estonia, economists Talis Putnins and Arnis Sauka from the Stockholm School of Economics in Riga said in a report.
“I have received the letter and we plan to look at it in the next large investment monitoring and coordination project council meeting,” Dombrovskis said at a news conference in Riga. “Undoubtedly there are further ways to improve,” he said, citing the corporate bankruptcy process and court system. This seems to be more bluster from the prime minister, as these problems have been going on for years in Latvia with little or no action taken.

Investments from Germany, the fifth-largest source of investment into Latvia, fell by about 20 percent last year, says the magazine.
Similarly, Estonian entrepreneurs wrote a letter to Prime Minister Andrus Ansip earlier this month, complaining about the Latvian business environment and the grey economy, business daily Aripaev reported on May 16.
The German investors assert that there is a disorderly business environment that is not investor-friendly; the biggest complaint is dishonesty which, according to German investors, is preeminent on all levels, which is why German investors are leaving Latvia, reports LETA. Tired of corruption, unfair competition and a complicated judicial system, investors usually exit without making an issue of it.

The Germans, however, have had enough, though they were still ready to show the Latvian government how exactly investments worth millions of euros could be secured in Latvia, and not neighboring countries.
The list that Merkel was handed showed projects German investors would like to participate in, including a power plant in Liepaja, Ampere Institute in Salaspils, Messe Riga conference and exhibition center near Riga Airport, an aluminum product plant and a modern diagnostics project in healthcare.

The German side did not rush to invest, however; on the contrary, Latvia was presented a list of ten problems that threatened the safety of investment in Latvia which need to be dealt with.

The yet-unpublished letters, which Dombrovskis received from the German Embassy this past February and March and from the Austrian Embassy in April, are unusually blunt for diplomatic practice. The letters tell of five German companies’ experiences of doing business in Latvia, and offer solutions to problems based on Germany’s experience.

According to these letters, the main problem with Latvia is not the frequently-mentioned lengthy territorial planning processes, getting various permits or a lack of labor force - although one letter from the German Embassy to the Ministry of Education and Science did offer suggestions for revamping the vocational education system. If each German company’s individual complaints are noted, what it boils down to is dishonesty - in the state as a whole, in the judicial and investigative system, in public procurement procedures and in the actions of business partners.

Investors note shortcomings in the court distraint procedure, very lengthy legal proceedings, unnecessary costs, problems with tax collection and a large number of shortcomings in the public procurement procedure.
Ir also describes several German companies’ accounts of their attempts to invest money in Latvia that failed due to the said problems, or companies that did make investments but had to withdraw from the Latvian market after encountering these same problems. The magazine says that foreign investment in Latvia has decreased so much that one might think that Latvia has quit the European Union.

Prime Minister Dombrovski and his government’s unwillingness, or inability, to clean up the corruption endemic in the society will only serve to push the state deeper into the economic and educational abyss, versus its neighbors and the rest of the EU, it finds itself in today.