Latvia lost in the international court of arbitration in Stockholm earlier this month. As a result Latvia will have to repay the Swedish company $2.5 million in damages and $600,000 in fines for dismantling and selling the ship.
In 1993 the vessel was anchored at Kipsala without the consent of the Riga Port Administration. SwemBalt AB's subsidiary in Latvia, SwemBalt Ltd., signed an agreement with the Riga Kurzeme District Board on the lease of a plot of land, though the agreement did not comply with Latvian legislation.
The Swedish company hoped to convert the ship into a floating business center near the Daugava River.
Latvian officials said they warned the company to move the ship.
When the warnings were ignored, the vessel was towed to the Mangali Shipyard where it remained moored until 1996, when its deteriorating condition started to pose a safety threat - the vessel had become a wreck, said Arnis Lapins, the prime minister's spokesman.
The ship was later cut into scrap metal and sold.
The court ruled that Latvia violated an intergovernmental agreement with Sweden on promotion and mutual protection of investments.
In response, Latvia has requested that the arbitrators explain several points of the verdict which were unclear and even contradictory, said Kristine Malinovska, director of the legal department at the Ministry of Foreign Affairs.
The Ministry argues that there is no evidence that an investment was made in the first place and the question is whether the investment was made in accordance with Latvian law, she said.
Also, Latvia claims that the Swedish company had not complied with regulations that required it to have a company registered in Latvia and valid contracts for the lease of land where the ship was placed.
In 1994 the company entered into an agreement with the Riga municipality. The agreement was to be effective from December 1993 through December 1998, but in March 1994 the boat was moved.
Latvian officials explained that a new law had entered into force in Latvia that was retroactive and that the previous agreement on the rent was no longer binding.
The Latvian Maritime Administration announced a public auction of the ship in May 1996 because it was causing navigation problems where it was moored. But the Swedish company said that the vessel was towed away from the coast not by them, but by the Latvian authorities.
Latvian Prime Minister Andris Berzins believes that the case is a well-planned fraud.
"It was a deliberate fraud because that vessel was moored without engines, without propellers and with 3,000 tons of cement placed in its bottom so it would not capsize," he said in an interview with Latvian Radio on Nov. 16.
The row has not helped Latvia's image in the Swedish business community.
"Latvia has been criticized not only in the recently conducted poll carried out by Swedish trade organization, where the opinion of business people has been voiced, but sharp remarks have been expressed by Swedish officials as well," said Sandra Veinberg, a Latvian journalist working in Stockholm.
In a recent poll on Swedish investment in the Baltics and Russia released in October, many Swedes said that Latvian laws are unclear and unprepared and that the country's justice system is corrupt. They also criticized the frequent changes of Latvian legislation.
The Swedish foreign trade minister meanwhile has said he might try to raise the case of the vessel to the EU.
SwemBalt attorney Ulf Andersson in an interview with the daily Neatkariga Rita Avize accused Latvian officials of releasing false information to the international court.
"Latvia's political leaders want to close their eyes to this conflict, like ostriches who put their heads in the sand when problems must be ascertained and conflict settled," he said.
Berzins has admitted that responsible officials have delayed solving the case and noted that not all the possible steps have been taken to reach a favorable conclusion.
"It should be put clearly in this case that the matter was to be taken to the government. A working group was to be set up two governments ago - in March 1999, and representatives were to be sent to the court of arbitration. Latvia had to fight," he said.
The ruling of the international court of arbitration cannot be appealed, but the Latvian prosecutor's office has launched a probe to determine whether any Latvian officials are to blame.