A confidential settlement of a dispute between the Latvian state and Sonera, the Finnish telecommunications company, could result in a foreign controlled and dominated telecommunications market in Latvia in light of the recently announced merger of Sonera with Sweden's Telia.
If it is finalized by shareholders, the newly formed entity, TeliaSonera, would control Latvia's current fixed-line telephone monopoly Lattelekom and mobile-phone market leader LMT.
After the sale of the 26 percent state-held stake in Lattelekom, Sonera, the owner of Tilts Communications, which currently owns 49 percent of Lattelekom, could increase its stake to 75 percent of in the telecom monopoly.
Also, Lattelekom has a 23 percent stake in LMT, while Telia and Sonera both own 24.5 percent each in the mobile operator.
Thus the creation of TeliaSonera promises to have a profound impact on the future of Latvia's telecom industry.
Talks between three government ministers and Sonera officials on a possible settlement were described as constructive by Aigars Kalvitis, Latvia's minister of economy.
A settlement would bring to an end the dispute that emerged after the government decided the telecommunications industry should be liberalized in 2003, reducing by ten years Lattelekom's monopoly on fixed-lines pursuant to an earlier agreement between the government and Sonera.
In 1993 the Latvian government signed an umbrella agreement with Tilts Communications. The agreement set the level and type of investment in Latvia's telecommunications system upgrade in exchange for 49 percent of Lattelekom shares.
The agreement also provided Lattelekom with a monopoly on fixed-line services until 2013. However, in conjunction with its joining the World Trade Organization, Latvia committed itself to breaking up the telecommunications monopoly by 2003.
At the same time Inara Rudaka, director of the Transport Ministry's communication department, told Baltic News Service that the sale of the stake should supported.
The director of the Economy Institute, Raita Karnite, said that the situation in Latvia's telecommunications market was unlikely to change regardless of whether the sale takes place.
"The Lattelekom monopoly in Latvia is very conditional. Furthermore, the state of Latvia is such a weak owner that in fact Sonera already dominates anyway," Karnite said, adding that Latvia's telecommunications market has a bright future.
The TeliaSonera merger plan was announced by the companies in March 2002 and approved by the European Union in July.
In August this year, the Competition Council, Latvia's competition watchdog, gave its approval to the merger, prompting one of its members to resign. Aleksandrs Vasilevskis resigned his seat to protest what he said would lead to unfair competition on the Latvian market.
Peteris Vilks, chairman of Latvia's Competition Council, said the merger was not a threat to competition in Latvia.
According to the daily Diena, the outcome of negotiations will depend on the new government. The newspaper believes the new government will have the right to decide whether it would continue negotiating a settlement with Sonera or withdraw from the talks to proceed with the litigation.
The Latvian government is not the only one forced to deal with foreign telecommunication companies on the domestic market.
In Russia the government has prepared a plan to limit foreign investment to minority stakes of no more than 49 percent in telecommunication companies after Russia joins the WTO.
This plan has sparked criticism from European Union trade negotiators at their latest round of talks on Russia's accession to the WTO last week.
Both Telia and Sonera are among the largest telecommunication companies operating on the Russian market.
As Alexei Yakovitsky, an analyst with United Financial Group, a Moscow investment bank, said, "It's essential for these Scandinavian players to be sure that at some point in the future they will be in a position to consolidate those assets and get full control.