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Monday 15.10.2018 | Name days: Hedviga, Helvijs, Eda

Economic Diary. Latvia Week 14 of 2012

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The coming Easter festivities did not weaken political and business activity in the country. On the contrary: several iconic events took place in Latvia during this short week.

Passport replacement

The event we have been waiting for a decade, has finally happened. Starting from April 1, ID-Cards – modern passport replacements, which will be able to hold additional holder’s information, such as his/her driving license, can now be officially issued. Keeping in mind the possible uses for these cards, it is unsurprising why thousands of people have already filed in their requests.

The necessity of introducing ID-Cards has been talked about on the highest political levels since the 90s, when the specific concept was developed. However, at first, the realization was hampered by the absence of electrical signature system in the country, then – the introduction of new passports with biometric data, which were necessary for the country to be included into the Schengen Area. Our neighbors resolved these issues quicker than we did: Estonia issues ID-Cards since 2002, Lithuania – since 2003 (and, according to Latvian car rental companies, employ them for a long time now).

Nevertheless, progress has come to us as well. The introduction of the electronic equivalent to a paper passport is estimated to cost the country LVL 9 million. In most cases the ID-Card can become a full replacement to «the document» with two exceptions: it cannot be used to participate in elections, and cannon be used to visit third countries. It can, however, grant access to e-services.

The end of gas monopoly is nigh

One more event which will undoubtedly touch all Latvian residents is linked to the negotiations between the Ministry of Economy and Latvijas gaze (LG) company about the cancellation of LG monopoly on the Latvian gas market. Most likely, it will happen before LG’s exclusive rights expire in 2017.

Latvia is troubled by the realization of the so called EU Third Energy Package, which proposes the division of the natural gas sales and transport business. The Ministry of Economy plans to present the government their report with specific proposals. Latvia, Estonia, and Finland all have the right not to adhere to the requirements of the Third Energy Package, but only until they acquire some alternative source of blue fuel. They are currently 100% dependent on supplies from Russia. The same goes for Lithuania, which, on the other hand, decided not to wait last year and approved the law which dictated the division of the transmission and distribution capacity in Lietuvos dujos Company until 2014. The Russian Gazprom Concern, which owns 38.9% of shares, filed a plea against the Lithuanian government to the Arbitration Tribunal of the UN Commission on International Trade Law.

After alternative sources are found in Baltic States, Latvia will need to separate the transport system operator and allow third party access to gas transport and storage infrastructure. According to the privatization agreement with the government, LG has the right to monopolize gas trade until 2017.

It is unlikely that a new natural gas source could be found before then. But it is possible that Baltic States could reach an agreement about creating a unified regional LNG terminal. Right now, though, each country wants to build the terminal on their own territory, and this is why the European Commission is conducting surveys to determine where the terminal’s construction would be most beneficial.

We can when we really want to

The other event, linked to the EU, can be considered to be sensational. Latvia, which silently followed every single requirement since its inclusion into the European Union, suddenly started to defend its interests. During the visit of the European Commissioner for Regional Policy Johannes Hahn, which took place this week, the Latvian Minister of Finance Andris Vilks suddenly rained down on the Commissar with criticism.

The reason lies in the European Commission’s proposal to impose a limit on the EU 2014-2020 budget for member countries to receive money from European Funds. It is possible that this limit is going to be 2.5% of a given country’s GDP. According to the calculations of the Ministry of Finance, Latvia would lose EUR 1 billion (LVL 700 million) worth of funding, or 20%, compared to the plan period of 2007-2013. The Commissar was met with similar criticism in Lithuania, which would lose around LTL 1 billion (LVL 200 million) as a result of the changes in the funding system.

«Latvia has done enormous work to ensure macroeconomic stability, which is reflected in both GDP indexes and future projections. However, the level of our country’s development is only 51% of the average European country development level. This puts us in the category of the least developed regions», – Vilks claims. According to him, it is vital for Latvia to preserve the current level of support (3.8% of GDP) for the next period.

European Commissar Johannes Hahn admits that the arguments of the Latvian government are sound. According to him, negotiations about the future budget will continue across 2012. The final decision will be made by the European Council, but the European Parliament needs to give their consent as well. Clearly this statement means that Latvia still has a chance.

Baltic paradox

This week, the KPMG Company presented their latest research on the Baltic business environment, during which surprising facts were uncovered. A particular paradox was discovered: only 1% of businessmen in Lithuania, 15% in Estonia consider Latvia to be a good place for foreign investments. However, in the next three years’ time Estonians and Lithuanians (23% and 14% of respondents respectfully) plan to invest their capitals in Latvia.

Senior Manager of KPMG Baltics Edgars Bolskis explains this significant difference between business evaluation and business plans with Latvia’s negative reputation, which was formed under the influence of the constantly changing tax policy of the country and the general uncertainties about the application of collected tax funds. Still, it is good to know that, despite these inconveniences, businessmen from our neighboring countries are prepared to invest money in Latvia.


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