Global Economics

Al Capone Might Feel at Home in Latvia


Charges of corruption and oligarchy plague the Latvian business scene. Also recalling Russia in the 1990s: two recent murders

With corruption, oligarchy, bureaucracy, and murder in the mix, it seems on the surface as though Latvian business is reverting to the old days of 1990s biznyesman, the Russian word used to describe a peculiar class of entrepreneur-cum-criminal.

Two businesspeople were gunned down near Riga in January, sparking fears that recently released convicts are out to settle old scores.

On the night of 11 January, 27-year-old Aigars Lusis, director of a meat processing factory and one of the rising stars of Latvian business, was shot dead in the town of Garkalne. Less than a week earlier, businesswoman Ella Ivanova, co-owner of a sports and concert venue, was shot and killed in the same town.

Meanwhile, Aivars Lembergs, one of the country's most prominent business leaders and politicians, is being tried on charges of racketeering, money-laundering, and tax evasion. Two judges have just been sentenced to eight-year jail terms for taking bribes in return for favorable decisions in other cases.

One of the best-selling books in 2007 was a transcript of cozy conversations between leading lawyers and members of the judiciary, while the biggest story of all last year was a dubious effort by the ruling elite to sack Aleksejs Loskutovs, the country's anti-corruption watchdog. Loskutovs won the day and forced the resignation of Prime Minister Aigars Kalvitis, but the government that replaced his contains the same faces in 16 out of 19 cabinet posts.

Is this the European Union in 2008 or Chicago in the 1920s?

Government agencies paint a picture of Latvia as a progressive, modern business environment. According to the website of the Investment and Development Agency of Latvia (LIAA), the country "is ripe with potential business ventures as there is a great entrepreneurial spirit that runs through the country."

"With the fastest GDP growth rates in Europe, it's clear to see that there is also an enthusiasm here that an investor would be hard pressed to find anywhere else," the website continues.

And in general, foreign investors have been lapping it up. Foreign direct investment in Latvia for the third quarter of 2007 was 249 million euros, up from 282 million euros in 2006. Of the 60,000 registered commercial enterprises in the country, one-quarter are foreign-owned or financed, according to an LIAA estimate.

But all is not well, some foreign investors say.

TRIPPING OVER TAPE

Theo Postma, a board member of international wholesalers and warehousing group B&S International, is a businessman who had high hopes of making a long-term investment in Latvia. Those hopes turned into frustration, however, because of red tape and what he believes is a culture that doesn't back up its business-friendly statements with action.

"The main problem we as foreign investors experience is a lack of decision-making and support from the Latvian government," Postma said in an interview. "Regions make decisions, not quickly perhaps, but in the end they come. The problem is that there is no upper level that helps or coordinates."

As an example, Postma described an initiative of B&S's Baltic distribution arm, Karsten, to expand its existing warehouse. The investment was worth 30 million euros. However, the land earmarked for the expansion was unexpectedly re-zoned as a residential district, forcing Postma to look elsewhere.

"In one way, this was good news since it increased the value of the land, but if you hear the full story it turns into a Kafkaesque nightmare," Postma said. "To cut a long story short, we are still sitting there, cannot expand, cannot buy new land, and cannot sell the old land."

"In Latvia everybody only thinks of his own local area of decisions -- and pockets -- but for the bigger picture there is absolutely nobody available," he continued. "I heard this same story of pure frustration from more or less all foreign investors I met."

B&S, which is based in the Netherlands, is a company that employs more than 1,000 people and claims 630 million euros in annual turnover. Postma said the company seriously considered moving its international headquarters to Latvia but chose Luxembourg instead "because as foreign investors there you are welcomed."

"Latvia thinks of itself as the middle of the Baltics, but Estonia and Lithuania will take the business," he said. "We have warehouses in China and Kabul, but these places are paradises compared to Latvia when it comes to doing business."

Postma's dilemma was due partly to the way responsibility for different sectors is divided among government departments. Ralf Dakters, LIAA's head of investment promotion, said: "There are certain sectors we don't cover, and those are the ones which are doing well anyway. For example, [we don't cover] retail and wholesale activities, residential housing, and most real estate activities."

So as soon as B&S's land was rezoned as residential housing, it ceased to be within LIAA's remit.

But while red tape and a confused bureaucracy was what frustrated Postma in Latvia, another businessman's experience was wrought with fraud and deceit.

BAD BUSINESS

Basim, who spoke on a first-name-only basis, is a British citizen and successful property investor who said he was swindled out of houses and money by a Latvian businessman. "Without a doubt, this experience is the biggest nightmare of my life," he said.

According to Basim's account of what happened, he offered to sell some of his investment properties in Riga and met a 26-year old Latvian business contact in March 2007. The contact seemed pleasant at the time, but Basim later described him as "a master of fraud and acting."

Basim agreed to exchange two apartments in Riga plus two apartments in Dubai for a large house supposedly owned by the contact. He later discovered that the house came with outstanding credit and unpaid penalty charges that exceeded the value of the house itself. This only became clear after the contact had registered Basim's flats in Riga under his own name.

The troubles didn't stop there. The contact falsely accused the Briton of stealing 14,500 euros in cash. Basim was arrested and spent more than two weeks in jail as the police investigated, though charges were never filed against him.

"The police made me give my testimony without a lawyer present, giving the excuse that no English-speaking lawyers were available at the time," he said.

Basim isn't keen to do more business in Latvia.

"I would probably not invest in Latvia any more due to this horrible experience plus the fact that it's hard to do business here based on trust," Basim said. "Corruption in the police and prosecutors' offices seems very high."

NOT ALL BAD NEWS

Two examples do not prove that Latvia is backsliding on tackling bad bureaucracy and graft, but a September 2007 report by the global anti-corruption monitor Transparency International backs up the anecdotal evidence. In the group's annual annual Corruption Prevention Index, Latvia received a score of 4.7 out of 10. A rating of 5 is viewed as satisfactory; anything less as "worrisome."

Commenting on the report, Transparency International Latvia executive chairman Roberts Putnis said: "The last election involved massively illegal campaign finances, and there has, in fact, been stagnation in anti-corruption efforts."

Dakters at LIAA said he is optimistic about prospects for 2008, although he admitted that foreign direct investment is likely to level off or even dip this year rather than increase. However, he points to external macroeconomic factors, like the global "credit crunch," as the causes of a possible decline.

His upbeat assessment was echoed by Andris Laucins, chairman of the Foreign Investors Council in Latvia. Laucins described the rash of recent corruption cases as "good news for the investment community," because it shows that the means of investigating and prosecuting bad business practices does now exist.

"Years ago, many people were speaking about corruption, but we didn't see many cases being brought," Laucins said. "Now we see that the system is up and running. Fairly serious cases are being discovered, and people are being named. It creates a bit of negative publicity about the country in the short term, but it shows that we have a system for dealing with it, and it works."

"If anyone in the investment community is concerned about corruption, they should be strong and responsible enough to report it instead of spreading rumors."


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