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Wednesday 20.09.2017 | Name days: Marianna, Ginters, Guntra

Economic Diary: business event of the last decade

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Even though this event took place outside of Latvia, it has great importance for our country’s economy. What happened, you ask? Something businessmen were expecting to happen for a decade: the President of Russia has finally signed the Law on the Ratification of the Russian-Latvian convention about avoiding double tax burden.

You can thank Putin

The agreement between Russia and Latvia, which was in the works for more than a decade, was signed in 2010 – during the visit of President of Latvia (then Valdis Zatlers) to Moscow. It was expected that the two sides will need no more than six months. Our parliament ratified the convention in summer 2011. The Russian State Duma only received this document in late spring of 2011. The Federation’s Council approved it in the end of September. All that remains now to end all preparation procedures is for Russia to send a diplomatic request through our embassy in Moscow or through the Russian embassy in Riga. If the final stage is completed this year, relationships of the two countries will be built on the principles of this long-awaited agreement starting from January 1, 2013.

Latvian transport companies, in particular, should feel an immediate improvement. Current practice shows that Russians, when paying for their services, keep the income tax as an advance. This tax is then transferred to the Federal Tax Service. Tax payments from incoming and outcoming payments between companies will also decrease. This also applies to individuals. Although, the joy from the last condition will be somewhat spoiled. In 2013, Latvia will introduce a holding regime – this practice is called to reduce tax transfers on many types of international payments, and will prove to be much more beneficial than the convention.

Everything’s for sale!

A special group, dedicated to performing audits of government property in the commercial sector, shared the first result of its work. This group suggests selling the government owned shares in Latvijas Mobilais telefons. Auditors also thought the government’s participation in Jelgavas siltumtīklu uzņēmums, Latvijas starptautiskā škīrējtiesa, Piensaimnieku laboratorija, and Rīgas kinostudija to be pointless. The group also thought it to be best to hand over the shares in the Mežaparks sports centre to municipalities and/or the private sector. All these and future solution projects will end up submitted to the government, which will be required to decide which companies should be handed over to a central structure (to be created next year), which should remain under the ministries – current shareholders, and which of them should be sold. In total, the group will need to review 170 companies and their ‘daughters’ (the government directly participates in around 140 companies). Experts believe the sale of the government shares of LNT alone could give more than 100 million LVL in return. They mostly agree: the government is, finally, headed in the right direction.

How can the government use this money? According to the Finance Ministry, first of all they need to be diverted towards the reduction of the state debt. It is planned to divert 250 million LVL for this purpose next year. Latvia received a total of 4.5 billion LVL from the international creditors during the years of crisis. In 2009, the total value of assets fully or partially owned by the Latvian government was officially said to be worth over seven billion LVL, the value of only the government owned part – 2.06 billion LVL. If this amount is used appropriately, Latvia will be able to cover a significant part of the debt.

Latvia has five to seven years to spare

Latvian exporters have some five to seven years to continue developing on foreign markets by following a modern model: copying the best Western technologies in co-op with attractive low prices. Price advantage is beginning to fade away. Future work will require a deep development of familiar markets, as well as a search for new ones. These were the main conclusions of the latest Nordea vitametrs Latvian business longevity survey. According to this survey, our exporter-businessmen have an ambitious and optimistic future ahead of them. An overwhelming majority of them – 88% – are planning to expand more actively on foreign markets. Every third businessman has set a goal – to increase export volumes to foreign markets by at least 20%.

Senior economist of the Latvian Nordea Bank Finalnd branch Andris Strazds notes: ‘Even though the level of salaries in Latvia has increased notably in the last ten years, it is still far away from the indexes of ‘old’ Europe. This leads us to believe our businessmen have a minimum of five to seven years of advantage over our competitors from Europe. However, we are not the only ones in this position: there are also the Czech, Hungarians, and Lithuanians. Conquering foreign markets, according to export business representatives, should be done using high quality products and services, precision and stability of shipments, as well as a proper niche. Not the newest recipe, but it is never too late to repeat it.’

A guide for returnees

Another recent survey, by Swedbank this time, also drew a positively-negative picture of the nearest future. Even though authors of the ‘Baltic Sea report’ especially mentioned Latvia, they also pointed out the risks. They are expecting economic growth to become more rapid than average Baltic indexes show.

Among the factors that could negatively affect the country’s economic health economists of Swedbank note: the imbalance of the job market, demographic problems, inequality of work productivity and salaries, and so on. These problems cannot be solved all at once, the experts believe. This is why it is important to tend to the most vulnerable spots. One such spot – is structural unemployment.

It is important to tend to the issue of educating forced unemployed people and develop the work resource mobility project to let the people find work in their home region, to Riga and other Latvian cities, not to England. Experts also proposed stimulating the return of the people who did not leave the job market, but, instead, receive benefits equal to a salary.


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