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Economic Diary of Latvia. Main events of 2014

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe recurring topic of the main economic events of 2014 lead to believe that their development will continue in the future and their echoes will remain for a long time in our memory.

Adoption of euro: fears and hopes have not paid off

On January 1st, 2014, Latvia joined Eurozone and refused the use of the country’s national currency – lat.

Even now it is safe to say that the main concern related to the shift to euro – artificial increase of prices by dishonest traders – has not come to pass and residents’ purchasing power has not declined.

Furthermore, according to data from the Central Statistical Bureau of Latvia, over the course of the past 12 months, the average level of consumer prices has increased by a mere 0.6% compared to the same period of 2013.

The average wage growth is progressing much faster than inflation: annual growth of net wages reached 7.8% in Q3 2014.

The Bank of Latvia mentions the following indexes as benefits acquired from the transition to euro:

-Latvian residents and entrepreneurs had spent nearly EUR 730 million on currency conversion in the period of 2007-2013;

-the expected savings from reduction of commission payments on SEPA is EUR 100 million a year;

However, the main hope of euro transition – inflow of investments in Latvia – has not come to pass as well. According to information from the Bank of Latvia for Q3 2014, direct foreign investments in Latvia reached EUR 13.5 million (EUR 69.6 million one year ago). Analysts admit that the tense geopolitical situation serves as a deterrent for investors, not the situation with Latvia’s economy.

Latvia’s population drops below 2 million

The most unfortunate and worrying piece of news of 2014: Latvia’s population has dropped below 2 million (data from the Central Statistical Bureau of Latvia for July).

Latvia’s population was 2.15 million at the beginning of 2014. However, by the beginning of May, Latvia’s population was already 1,997 million people.

It is generally known that the demographic balance remains negative because of low birth rates and high emigration rates. Population decline was equal to 1.1% in 2013. In 2012, however, it was 1.03%. 45.8% of the population are men and 54.2% are women. Population density has reduced to 31 people per 1 km 2 by the end of the year.

Actual population decline rates may be even more dramatic than that, believes Prof. Mikhail Hazans from the faculty of economics and management of the University of Latvia.

«It is most likely that the number announced by CSB is slightly lower. I believe that we are below 2 million,» – said the economist.

Selling Citadele: deal or scam of the year?

Considering the constant surfacing of different facts related to this deal, one can come to the conclusion that that average taxpayers may never find out the truth about this whole affair.

Bare fact: Latvia sold 75% of shares of Citadele Bank to American Ripplewood Advisors for EUR 74 million at the beginning of November.

The Latvian government received heavy criticism due to the fact that this amount of money does not cover what it had cost the state to save Parex Banka.

But the story does not end there. At the beginning of December, LTV journalists uncovered one fact that has been kept secret: nearly all funds the state received from selling Citadele will be handed to the European Bank for Reconstruction and Development.

«In 2009, when the European bank had basically lent Latvia EUD 126 million, there was a condition set that the bank would be able to sell shares back to the state for the same EUR 126 million at any moment,» – explains Latvian Economy Minister Dana Reizniece-Ozola.

In the end, however, it turned out that EBRD will receive more money for 25% of Citadele shares that what Latvia received from selling 75% of shares of the bank.

Consultants from Societe Generale will also be generously rewarded for their service of attracting investors – EUR 2 million. Linklaters will be paid EUR 640 thousand.

The sale process was accompanied by scandals all the way until completion.

According to Diena, several representatives of the ruling party had met with representatives of Ripplewood Holdings on the eve of the deal in Georgia. Those involved in this whole story claim they did not travel to Georgia together, no deal was discussed and that the choice of country was purely coincidental.

Chairman Ansis Spridzans and board member Guntis Lausks of the Privatization Agency had both left their posts on the eve of the signing of the deal. They were supposed to sign the sale contract, but decided to leave their posts instead.

Liepājas metalurgs – factory remains idle

One of the largest enterprises in the country acquired a new owner this year – Ukrainian KVV Group, which has paid EUR 18 million as the first instalment. The remaining EUR 89 million are planned to be paid later.

«We plan to continue active work in order to restore production as soon as possible. Best case scenario – in November,» – said the owner of KVV Group Valery Krishtal in his prior interview to journalists. He plans that the factory’s production output will reach 100 thousand – 120 thousand tons per month or more than 1 million tons annually in the future.

Nevertheless, the factory has yet to restore functionality and more than one thousand workers of LM remain unemployed.

Increasing investor visa threshold – investments or security

Until September 1st, 2014, citizens of foreign countries were able to receive residence permits in Latvia in exchange for purchase of real estate properties worth EUR 143.2 thousand or EUR 70.1 thousand (depending on the geographical location).

Starting with September 1st, 2014, the threshold was increased to EUR 250 thousand. This was the decision of Latvian legislators.

After amendments had come into force, foreigners’ interest for this programme has become non-existent: less than 30 applications have been received in the past month. For example, more than 4,000 residence permits had been issued in the first eight months of 2014.

The value of this programme is difficult to underestimate – it has attracted more than EUR 1 billion of investments to the country since July 2010.

It is worth mentioning that 70% of residence permit recipients are citizens of the Russian Federation. The Saeima continues it work on the draft that provides for a full halt of the issue of residence permits to Russian citizens in exchange for the procurement of real estate permits.

The National Alliance stands the author of these amendments. This is the party’s way of averting threats to national security, which are allegedly presented by the mere presence of Russian citizens in Latvia.

Echoes of war: Europe’s sanctions and Russia’s counter-sanctions

Ever since the beginning of the conflict in Ukraine and the annexation of Crimea, USA, Europe and a number of other countries have introduced sanctions against Russia. As response to these sanctions, Russian President Vladimir Putin signed an order aimed to limit trade and cooperation with countries that have introduced economic sanctions against Russia. Trade restrictions have mainly impacted imports of agricultural goods.

The Russian embargo has mainly impacted milk producers and processors – the loss of the Russian market has put this industry on the verge of bankruptcy.

Additional and significant impact on Latvian exporters working with Russia has come from the rapid decline of Russian rouble in relation to euro and dollar.

According to official information from CSB, exports of fish products have declined by 40% in October 2014. Exports of milk and milk products have declined by one-fourth.

It is clear that this conflict is far from over and that Russia can expand the list of sanctioned goods at any time. This is why many companies now work cautiously.

Russia was Latvia’s main partner in terms of trade relations with third countries: the proportion Russia held in Latvia’s exports reached nearly 11%; that of imports was 8%.


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