M a c r o e c o n o m i c s :
h o w
s t a b l e
i s
t h e
L at ? Issue №3, 2007
Baltic Business Magazine Network
PUBLICATION
CITY DEVELOPMENT MEGA PLAN
How Riga’s municipality is changing the city concept over the next two decades by Ingrīda Mičāne
Biggest Legal Blunders
Latvians beyond the border
Jānis Bordans talks about the biggest and most Who are the cross-border wizards from a country of common mistakes foreign businessmen 2.5 million people? Success stories from Latvia’s make when entering the Latvian market. international business veterans. by Daria Kulagina Insider#3_Cover.indd 1
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Baltic Business Magazine Network
Senior business editor
Ingrīda Mičāne
Business editors
Daria Kulagina Ilgonis Zaļais Bob Traut
Leisure editor
Jekaterina Streļcova
Contributing editor Recent contributors
Scott Diel Scott Diel Andris Strazds Harold Cleaver
Copy editor
Dorian Ziedonis
Art director
Aleksandrs Golovins
Images
Target Studio f64.lv corbis.com
Advertisement department Ļuba Cimbere adv@riganow.magazine.lv
The Insider, supplement to RigaNOW! Ganību dambis 24a, Rīga, LV 1005, Latvia Tel. (+371) 738 3499, Fax (+371) 738 3099 e-mail: insiderpr@riganow.magazine.lv All rights reserved. Reproduction in whole or in part is strictly prohibited. The Insider is a registered trademark of “SK Latvia”.
Is Standard & Poor’s God? Hardly. But sometimes, we listen too carefully to others. In this case, we’re not sure S&P’s cautious words about Latvia are to be heeded. See the commentary of economist and lecturer Andris Strazds. We’re a believer in Latvia. And we’re believers in the lat, our national currency. Sometimes the herd instinct gets too much momentum. And S&P has been wrong before. Behind the Latvian currency are of course real people making real products. You’ll read about those in this issue. Stenders Soap Factory. Sakrets. Parex. Double Coffee. All are part of Latvia’s movement to markets abroad. And all are backing up the lat. But enough about Latvia. Tell us about you. In your enthusiastic support for The Insider, you told us you wanted us to carry company news. Introducing Comings & Goings: a page of information on the movements of expatriates in Latvia-based companies and the diplomatic community. Please keep us apprised of your own news by writing us at insiderpr@riganow.magazine.lv. Please include four or five sentences about yourself and your company plus a photograph. For our pan-Baltic traveling businessmen, you may also be pleased to know that we’ve launched The Insider-Vilnius. Look for it in your favorite hotels starting right now. Good reading, Ingrīda Mičāne Senior Business Editor
Magazine registration number: 0003574031
© SK Latvia Publishing House Reg. Nr. 50003574031 SK Latvia Publishing House is also publisher of:
www.sk.lv
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Contents
Contributors
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Daria Kulagina is a Latvian journalist and new media specialist writing on business and foreign policy and developing Internetbased systems. Over the years Daria has worked in Moscow, Sydney and Washington, DC as a news correspondent, radio broadcaster and IT professional. Her previous workplaces include Radio Echo of Moscow, Australia’s Special Broadcasting Service and LETA news agency.
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4 News 10 Economics How stable is the Lat? 12 Riga’s future portrait City development plan 18
Latvians beyond the border Local businesses in global markets
22 A Latvian soap opra How Latvian soap sells in more than 12 countries
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28 Is FDI really good? How much is enough 30 Baltic Commodities Does Hanseatic history repeat itself? 32 Biggest legal blunders Jânis Bordans on what to avoid 36 Agriculture Exotic birds on a nordic farm 40 Gadgetry Three reasons not to repeat Van Gogh’s mistake
Scott Diel is an American writer based in the Baltics. He first came to the Baltic region in 1992 and has lived and worked in Estonia, Latvia, Lithuania, Ukraine, and Belarus. His stories have appeared in the magazines Outside, Iconoclast, Sports Afield, Gray’s Sporting Journal and other American magazines. His essay, “69° North, 33° East: Running from the Russians,” will be published in the fall edition of the literary journal, Agni. He was formerly editor-in-chief of the monthly, City Paper.
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4x NEWS
local economics
Will Guest Workers Overrun Latvia?
G
uest workers seem to have taken a fancy to Latvia, the greatest number come from Ukraine, Moldova, and Uzbekistan. In the first half of this year, 1,989 foreign citizens officially arrived in Latvia, a number expected to double by the end of next year (last year, 2,398 people arrived). In the past, Latvia was not an attractive place for guest workers because of high unemployment coupled with low incomes, as well as the difficulties in getting residence permits. It now seems, however, the Latvian government is allowing this to change by simplifying the procedure for third-country workers to enter the country. Labor unions have called the government’s new plans hasty and thoughtless and have accused the government of making an emotional decision, rather than one based on a thorough analysis of the economic situation. Under the new policy, Romanians, for example, could move to Latvia with their entire families and receive social care higher than in their native country. Since the greatest number of guest
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Who are they and what they do? In the first half of 2007 the branches of the State Employment Agency have confirmed 1,370 work summons for the foreigners from third countries. In comparison to the first half of 2006, the number of confirmed work summons has increased approximately 4 times. Ukraine Moldova Uzbekistan Belarus Russia Armenia Turkey
447 420 109 95 77 55 41
The greatest number of third country labor force is drawn to such spheres as construction, followed by production, hotels and other spheres constituting (education 0.1%, transport 3.7%, trade 2.3%, agriculture 1.7%, commerce1.2%; recreation 0.4%) Construction Production Hotels Other
67.1% 14.6% 6.3% 12% Source – State Employment Agency
workers are employed in the building sectors, construction companies have of course taken a keen interest. “It is possible to earn 3,000 euros per month working general construction on a building site,” said V. Puriņš, director of the Latvian Construction Association. Three thousand euros is indeed an impressive amount for a laborer to earn, considering that a university-educated bank manager earns a similar amount and that the figure is roughly ten times the official salary of what a general construction laborer would earn. Such salaries are undoubtedly attractive to third-country labor. The State Employment Agency claims that there are enough people in Latvia, and that it is necessary simply to re-train them properly, provide good working conditions, and to pay good salaries. Unfortunately, that idea does not correspond to reality. The Employees’ Confederation of Latvia characterizes that opinion as evading the problem and not a solution. The CEO of the Confederation, Elīna Egle, says Latvia’s negative birth rate is a problem one cannot ignore. Also, she adds, “[the] educational system is not effective, and there is an insufficient number of reclassifiable human resources,” meaning an insufficient number of people who may be re-trained for new careers. “But the government seems to be taking too little notice of these problems. We appealed to the government to popularize Latvia as a destination for guest workers in order to attract labor from foreign countries.” Most agree that the current statutory provisions make legal employment of workers from third countries an exceedingly complex procedure. The employer must pay monthly a state tax of 49 euros per employee; a residence permit can cost as much as 240 euros; 67 euros must also be paid for the inspection of education certificates. The law also requires the entering worker be paid no lower than the average in the country—approximately 355 euros. Some argue that this in itself discriminates against Latvian citizens working for the local minimum wage of 215 euros per month. Given these complications, the majority of guest workers work illegally. Is this situation changing? Or does it only seem to be changing? Only time and statistics will tell. Issue №3 | 2007
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NEWS
local economics
How Vulnerable is Latvia?
Standard & Poor’s Liquidity Vulnerability Index
In
its latest report, the international rating services agency Standard & Poor’s, with its Liquidity Vulnerability Index which includes fifteen countries, listed Iceland, Turkey, and Latvia as among the countries most exposed to increasing risks in bonds. The index was formed to analyze the ability of countries to cope with the situation after the crisis in the US mortgage credit market in August. The report’s authors noted that hedge funds will probably be forced to sell government bonds after unloading investments in real estate market securities. “In recent years there had been much talk that a rising tide lifts all ships,” said one of the authors of the report, Moritz Kraemer. “Now when the tide is out people want to know how it will affect different credit takers.” Latvian financial experts considered the question and remarked as follows: The chief socioeconomic expert at Hansabanka Pēteris Strautiņš: The Standard & Poor’s report does not reveal anything that is not already known—the current accounts deficit is exceedingly heavy,
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high inflation causes the increase of the real effective exchange rate. In other words, external competitiveness is endangered. Still, if this tense situation in the financial markets continues, the influence of more expensive funding upon the economic development can become significant. The important role of the Nordic banks and their subsidiaries in the financial sector can partially absorb this influence but cannot eliminate it completely. Standard & Poor’s believes that Latvia will probably have to devalue its currency. These assumptions are nothing new yet the Standard & Poor’s analysts, who work directly with Latvia, do not regard the risk of lat devaluation to be high. However, even they estimate a dramatic deceleration of economic growth to be quite possible. In order to lessen the risk of these hard turns, the government must act energetically. Today the priority should be to put on the restraint of budget expenditures, as well as on export stimulation and on stabilization of the labor market. Nordea Finance financial product expert Andris Lāriņš: The Standard & Poor’s report concerning the exchange rate against the background
of the present economic condition is poor form, for it only produces extra rush. It is not pleasant to see the word “devaluation” in the headlines, no matter in what context. The more it is used, the more frightened people get and rush to sell lats, exposing their national currency to additional stress. There are no exclusively negative tendencies in Latvian economics—it is important from which basket the data is taken and for what purposes it is used. Standard & Poor’s statements are correct, but their report indicates only one of the possible negative scenarios. Positive scenarios for the development of Latvian economics are equally possible, but these scenarios seem to be a more boring subject to talk about, since they do not produce any effect upon the behavior of inhabitants. SEB Latvijas Unibanka Senior Economist Andris Vilks: Standard & Poor’s has not said anything new, only noted the already present global risks of financial markets. The majority of the Latvian banks have already made their conclusions, taking into consideration the requirements of the parent banks for reducing the risks, as well as by decelerating lending and by reducing the volumes of resource utilization. For the time being, it is not apparent whether the Scandinavian banks will have difficulties with availability of resources. Undoubtedly, there is nothing good about the constant reference to Latvia. Therefore, it is vital to put the entire plan into effect entirely and not only some of its points, in order to create a more comfortable environment for economic development and to lessen speculations about the chances of the Latvian currency and the economic development. Nordea Vice President Tomass Nermārs: We invest more and more funds, expand the area of activity in Latvia and do not prepare to retreat. We expect that Latvia will experience considerable development during the coming 20 years. Certainly, there will be both ups and downs, but the long-term players should not worry. Read a thorough analysis of the situation by economist Andris Strazds on page 10 of this issue. Issue №3 | 2007
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NEWS
local politics
Latvia’s Watergate
Better than a bestseller
L
atvia’s judicial scandal continues. Already, four district judges of Riga have been dismissed due to corruption. And it all began with a package of audio transcripts dropped anonymously in the mailbox of a journalist. The journalist, Lato Lapsa, immediately carried the transcripts of tapped fixed-line telephone conversations of the prominent Latvian attorney Andris Grūtups (recorded from 1998-2000) to the office of the Pros-
meet in person for a chat or a cup of coffee or tea. Or, most conveniently, appointments are made to read case materials in the office of a judge, while that judge is in the courtroom. The transcripts raised suspicions concerning appointment of “the right judges” for particular civil cases, agreeing upon trial tactics, and preparation of “the right judicial decisions.” Among the conversations are even decisions dictated to judges by attorneys.
legal wiretapping of conversations. On September 6th, in response to the scandal, Latvia’s parliament, the Saeima, established an investigation committee to examine the possible unlawful and unethical actions in the judicial system. The committee has the right to summon and interrogate private persons and, if necessary, by drawing in specialists to recommend revisions in governmental, self-administration, and also in private institutions and organizations, provided
Latvia’s parliament established an investigation committee to examine the possible unlawful and unethical actions in the judicial system. ecutor General and asked them to verify whether the wire tapping took place and who carried it out. Then Mr. Lapsa started writing. His book, Judicial Proceedings as a Kitchen: ‘Regulation’ Recipes by Attorney Grūtups, portrays attorneys speaking with judges and court administrators, where conversations are conducted on various subjects, though more frequently meetings are made to
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Though the author altered names and characters in the book, judges have recognized themselves and have not denied that the conversations actually took place. Prosecutor General Jānis Maizītis said it will be necessary to verify the transcripts though he said they appeared to be “plausible enough.” His office is examining the materials from two perspectives: the conversations’ content, as well as the il-
the latter directly or indirectly receive state money. The former director of the Bureau for the Defense of the Constitution (Satversmes aizsardzības birojs) Lainis Kamaldiņš believes that the simplest equipment was used in wiring the telephone conversations of the judges and the monitoring opportunity was available for many employees in police or military structures. Issue №3 | 2007
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ECONOMICS by Andris Strazds, Lecturer at the Stockholm School of Economics in Riga and business consultant.
Several of Latvia’s macroeconomic indicators, most notably the accelerating inflation that reached 9.5 percent y-o-y in July, and the current account deficit that exceeded 20 percent of GDP during the last quarters, have recently tripped the red lights on the control panels of international analysts and rating agencies. Several of them, including S&P’s, have even pointed at a possible devaluation of the lat, the national currency of Latvia. However, this view appears to be expressed without performing an in-depth analysis.
Anatomy of the peg
The lat, the national currency of Latvia, is currently pegged to the euro at a central rate of LVL/EUR = 0.7028. Fluctuations of one percent are allowed in each direction from the central rate. In case the market exchange rate reaches either end of the band, the Bank of Latvia intervenes by buying or selling foreign exchange to keep the exchange rate within the band. The peg has been in place since February 1994. Initially the lat was pegged to the SDR basket of currencies, and at the end of 2004 it was repegged to the euro at the then-prevailing market rate. Latvia has no history of devaluation, and most of the time the lat has been trading at the stronger end of the band. The Bank of Latvia has thus been intervening in the form of acquiring foreign exchange for lats. Its foreign exchange reserves currently stand at and all-time high above 3.6 billion euros. To assess potential threats to the stability of the lat, we need to examine the trends in both trade and capital flows to and from Latvia.
Trade flows
Looking at the composition of the current account deficit, we can see that it is mainly due to skyrocketing imports rather than weak performance in the export sector. After a relative slowdown in 2006, Latvia’s exports during the first half of this year grew by 22.6 percent compared 10
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to the corresponding period in 2006, which is the second highest growth rate in the EU—bested only by Slovakia. Even though the relatively high inflation in Latvia during recent years has resulted in real depreciation of the lat, it still remains undervalued. According to the World Bank, in 2006 Latvia’s GDP in purchasing power parity terms stood at 36.3 billion international dollars, whereas it was 20.1 billion US dollars in nominal terms. In other words, the lat could buy about 1.8 times more goods and services in Latvia than abroad. On a less serious note, the most recent Big Mac index from The Economist showed that, at the current fixed exchange rate, the lat could buy about 1.5 times more in Latvia on average than in the euro zone. Furthermore, the availability of cheap funding has played a key role in accelerating the growth of imports. In 2005, the growth in loans to resident borrowers was about 3.5 billion euros, and in 2006 it exceeded 5 billion euros, considerably surpassing GDP growth and resulting in a worsening trade balance. Most loans are denominated in euros and refinanced by European banks. Thus, given the recent measures taken by the government to cool down the lending boom the banks having become more prudent in their lending practices; we can expect the current account deficit to decrease considerably. In addition, even at the present unsustainable levels of the current account Issue №3 | 2007
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ECONOMICS
deficit, the central bank reserves would be sufficient to cover it for more than a year. Thus, analysis of the trade flows clearly speaks against the hypothesis of imminent devaluation.
Financial flows However, currencies tend to be more vulnerable to short term financial flows. Let’s examine them in turn. The current account deficit of Latvia is mainly financed by inflows of financial investment in the form of bank loans. This is probably the main reason that has lead some analysts to predict that a reversal in these financial flows might put the lat under pressure and force the central bank to devalue. A more detailed analysis, however, reveals that the five largest banks in Latvia—Hansabanka, SEB Unibanka, Parex, DnB Nord and the Latvia branch of Nordea—accounted for more than 76 percent of all loans outstanding as of the end of June 2007. Four of these five banks are owned by European banks and predominantly financed by loans from the parent entities. Parex, the exception, has a deposit base that fully covers the loans issued. The hypothesis of reversal in capital flows thus implicitly assumes that the respective European banks will stop financing their group entities in Latvia, which appears close to impossible.
The last point to examine is the possibility of a speculative attack by borrowing large amounts of lats within a short period of time, converting them into euros and thereby making the central bank run out of reserves and devalue the currency. In March and April of this year the lat briefly came under pressure, and the central bank was forced to sell 332 million euros from its reserves during a three-week period. However, this led to a sharp rise in interbank market rates and a subsequent liquidity squeeze. The lat quickly recovered and the Bank of Latvia soon had Andris Strazds to buy back the foreign currency it had sold from its reserves. The explanation for this is the poor liquidity of the domestic money market coupled with limited possibilities to borrow from the central bank, which act as a barrier against short term speculative attacks. The average daily turnover of the lat interbank loan market is equivalent to about 100 million euros.
Conclusion
The symptoms of the current account deficit and inflation clearly indicate overheating of the economy in Latvia. Given that the boom is driven by domestic demand, it is also clear that it can’t continue long-term, and things need to return to normal. However, the history and setup of the peg, the still favorable real exchange rate, the structure of the financial account of the balance of payments and poor liquidity of the local money market all speak against the possibility of devaluation. The adjustment can thus be expected to take the form of slower domestic demand growth, resulting in slower growth of the domestic economy, as well as a falling current account deficit and inflation.
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Cover story
by Ingrīda Mičāne
U
ndoubtedly, one can say that the future will come unsought, without our help. But will it be the future we want? We need to make sure it is. Investors today are drawn by the Baltic region’s rapid growth. And a combination of two factors: the Baltic States recent joining of the EU coupled with past decades of Soviet stagnation seems to create perfect conditions for the fast development of Riga. In the regional context, Riga is ideally 12
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located—it has all the necessary preconditions to serve not only as the capital of Latvia, but as the central city of the entire Baltic States. It is at the crossroads between East and West, has an ice-free seaport, is technologically connected to the rest of the world, and in constant motion.
There is no straight way forward – it is time to change
There is no simple way forward, however. To empower Riga in its role as
Baltic leader, it must be first seriously changed. It does not take an expert to recognize a simple fact: today’s Riga has exhausted itself. At its base is an obsolete, centralized city, where the historical center, in addition to the cultural and historical attractions carries the business and economic loads. Needless to say, there is simply not enough space for further development in the presentday center. But if the city stops, money and development also stop. So what’s next? Riga’s prospects are laid out in a Issue №3 | 2007
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The territory of Íîpsala program of development until the year 2013 and in its long-term strategy for development until the year 2050. The inhabitants of Riga are witnessing a growing number of new building projects. But is this activity similar to chaotic Brownian motion, or is there a clear goal and view of how the city should look and how it will function in the future? What solutions and development scenarios are the city government and the development planners proposing? How do developers view the situation? Asked what the main role of the accepted Riga development plan is, the Managing Partner in the Baltic States and Belarus of one of the largest real estate consultants, Colliers, Mihails Morozovs sneers, “its existence”. Then he adds seriously, “From the legal point of view it defines the status of the ground area of the city and sets the process of decision-making for developers, investors and builders.”
The days when designers worked under uncertain conditions, not knowing what the city fathers wanted to see in one place or another have passed. Another bright spot is that there is high perceived interest on the part of responsible officials and employees of the Riga Council toward the magical vision. The foresight of the plan’s decentralized development allows the possibility to change the load of transport infrastructure but also suggests roles for some of today’s often-forgotten districts, giving them a clear place in Riga’s future. To compare to the Lithuanian capital Vilnius, where building projects have been carried out without taking into account the capability of the existing transport infrastructure, Riga’s plan brings transparency and allows the avoidance of past mistakes. Characterizing the current situation, the chief architect of Riga and the director of the development plan Jānis Dripe states,
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“This is the turning point when the proportion of new buildings changes the ordinary balance, sets new landmarks and lays claim to a new system of an urban area. The new Riga development plan provides for the decentralization of the city during the next 12 years. Along with the long-term strategy of Riga development till 2025 and the Development program for 2013, the plan makes a joint city concept. The vision of Riga’s future is similarly expressed by Igors Graurs, the associate director of the City Development Department and the manager of the economics department: “The city is reminiscent of a growing, living organism with its own biorhythms. To continue this comparison, one should emphasize the fact that the major functions of Riga are concentrated in Old Riga—the historical center of the city. In the future, we plan to discharge many functions from Old Riga, THE INSIDER
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Cover story Ezerkrasta komplex
Riga Technical university at Íîpsala
Development of Zaíusala
image. The Insider is pleased to bring you the outline of currently the largest investment projects in Riga:
leaving only the emotional biorhythm, creating a dynamic cultural and tourist center. The function of power will be moved to Torņakalns (across the river from the Old Town). It will become the State administrative center. At the same time, the territory around the Riga airport was chosen as the most appropriate to become the intellectual center for science and education.”
The New State Administration Center in Torņakalns For the first time in the 800year history, a new state administration center is the subject of consideration. Historically, the departments and other struc-
The Palace of Light is considered to be the most important Latvian buildings of the 21st century. The Future in the Foreground
In Torņakalns a comparatively compact and effective system of administrative and office buildings will be created and charged up for the evening hours and weekends by adding entertainment industry objects. A science and technology park will grow in the direct vicinity of Riga airport. Multifunctional business and residential centers are planned for development outside the historical center. The most important role in the near fu14
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ture will be delegated to the new center of Riga on the left bank of the Daugava, beside the Sun Rock office tower and Radisson SAS. Modern fruits of worldfamous architects’ creative thoughts will rise there — the Da Vinci Project (architect Bernhards Gerkāns), the Symbiotic Towers (architect Ginters Šauers), the National Library or The Palace of Light (architect Gunars Birkerts), and others. It is clear now that after only 10 to 15 years Riga will have an absolutely new
tural units of the Riga Council were located in several different places of the Riga city. To allow the city government to work more efficiently, the decision was made to join the administration of the Riga Council within one single building. This move will help to significantly reduce both direct and indirect expenditures. The new administrative building will be constructed outside the historical center of Riga, requiring the formation of infrastructure on yet undeveloped territories of Torņakalns. This, Issue №3 | 2007
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Cover story trade centers, restaurants, a modern cinema, and recreation facilities. The project will start this year and is planned to be completed over a period of 5 to 7 years. The visual solutions are still under development by the architects. The Latvian National Library – the Palace of Light
in turn, will enable the development of Pārdaugava, the “other” bank of the Daugava river. Pārdaugava is conveniently located close to both the center and to the airport. Overall, the new administrative center of Riga will be composed of 43 hectares of land where local government establishments, office buildings, and the state television complex will be smoothly combined with residential buildings, parks and recreation areas. Riga wishes to escape the mistakes of the largest West European cities, where after the working day business districts become virtually deserted. For this reason, Torņakalns will include residential zones, developed in an active cultural and entertainment environment. The currently existing parks will be preserved and new green zones created. The administrative center in Torņakalns is planned to start functioning in 2012. Riga Science and Technology Park Around 50 hectares near the Riga airport are reserved for the new technology park. The key objective of this project is to create a favorable environment for innovation companies. This will be a place for developing modern and innovative entrepreneurships, as well
as a business support infrastructure equipped with the latest technologies. The planned expenditures for this ambitious project are estimated at around 50 million euros, and today the work on detailed planning and development of the business plan continues. Carrying out the project of the Riga Science and Technology Park will mark the start of science and entrepreneurship facilities development in Riga. The Territory of Ķīpsala The southern part of Ķīpsala and its adjacent territories will be further developed. A number of multi-story buildings will be built on this narrow half-island, directly across from the Riga passenger boat terminal. The Riga Council is in the process of determining the admissible number of floors within the framework of the left bank of Daugava’s silhouette. The development will need to go hand-inhand with providing an effective traffic infrastructure, connecting this area to the rest of the city. Development of Zaķusala A number of multi-story buildings will rise here as well. These will contain flats, hotels, high-class offices,
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Riga Concert Hall The Riga Concert Hall has all the potential to become an important center of music, culture and a conference center of international scale. The project is currently still in the planning phase, and its actual construction could start in one and a half or two years. In addition to the big projects named above, improvements are planned for the existing smaller city districts, as well as new developments around perspective transport hubs. Regarding the city’s transport system problem, it is clear to anyone who ever tried to navigate Riga’s rush-hour traffic that a completely new approach needs to be taken to solving it. A possible alternative to today’s situation could lie in a new decentralized traffic infrastructure. Ambitious plans of reorganizing traffic flows exist: a new bridge and thoroughfares. By 2012 the Southern bridge route is due to be finished and six years later the Riga Northern Transportation Corridor will start functioning. A convenient EastWest transit line will thus be created, becoming one of the major transport arteries of Riga. This artery will connect Riga’s southern and northern THE INSIDER
Images: Venta Didrihsona Arhitektūras studija
DnB/Nord Bank complex on Skanstes street.
The Palace of Light is considered by many as the most important Latvian building of the 21st century. Together with the Latvian National Library itself the project covers many technical details: suitable garage and underground car parking, a small bridge joining the complex and the bank of the Daugava, as well as construction of the underground passages under the Victory Boulevard and reconstruction of the adjacent Mūkusalas street.
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Cover story tial? No, never! Now is the time to act and to pass from something in mind to something in kind—there are so many examples around!
What do We Learn from the Experience of the Neighbors?
border. With the eastern and western thoroughfares linking together access roads to the Southern bridge and the Northern corridor on the left bank of Daugava, the circle will be locked.
Riga – the Capital with Untapped Potential?
Everything looks perfect on paper. Yet, looking back at the recent past one can see that at the time when Tallinn and Vilnius were being developed, in Riga everything stopped at papers and words. One might see consolation in the fact
much more serious problem - difficulties in financing the city development objects due to rapid economic growth and inflation - needs an urgent solution. An attractively sketched vision of the future must not remain on the level of dreams and plans due to swiftly increasing realization expenditures. The first signal was an unpredictably high increase of expenditures for building the Southern bridge. Now a new signal is received regarding the calculated expenditures for the Palace of Light construction. There are no cit-
If we look north, we can see an entire section on the website of the City of Tallinn dedicated to investors. One can easily view projects by topics, learn how much exactly the local government is involved in these projects, as well as what kind and what amount of investment is required for each of them. The requirements, goals and the necessary input from investors are clearly defined. Even further north we see Stockholm, with its unique experience of sea coast development. Looking to the south, we see how a skillful and long-term proprietor has managed to successfully maintain the development of the city, effectively addressing the ever-increasing demands of the city and its transport infrastructure. The experience of Vilnius in building a quadruple public partnership, in which the government designates land, while builders, developers, and insurance companies accomplish the rest, can also
Investments are drawn by a dynamic development in an orderly environment of the city that when Riga will be ready to show off her new beauties, inhabited and functioning, the newly-built projects of the neighboring capitals will already become tatty and worn. However, the indecisiveness of the past could make one doubt the chances of all planned Riga projects becoming realized. Today, two serious problems in Riga’s daily functioning are obvious. The problem of traffic jams, as mentioned above, could be resolved with the help of decentralization and construction of new transport infrastructure objects. A 16
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ies in the world that can afford spending one billion dollars for a library. New solutions are needed for drawing investments as well as the will and reason to carry out the development plan harmoniously. The development of transport infrastructure must be just one step further from the construction of new buildings, not limping ten years behind. Investments, after all, are drawn by a dynamic development in an orderly environment, not by building “castles in the sky.” So is Riga the city of untapped poten-
serve as an excellent pattern for Riga. It is understandable that even a correctly planned transport flow cannot completely drown a persistently growing transport wave. The chief architect of Riga, Jānis Dripe, became convinced of this fact during his appointment as the ambassador to Stockholm in the nineties. Nevertheless, Riga urgently needs responsible and concrete action in decentralizing the city and in developing efficient transport. Both Riga natives, who daily spend undetermined amounts of time in infinite traffic jams, and guests of the city, who Issue №3 | 2007
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Cover story
What are the Developers Interested in?
If we ask the developers which of the city development projects should be supported, the reply is that there is still unused potential in existing residential and commercial property which has not been assessed up to now. Mihails Morozovs stresses that in the present situation old Riga real estate reconstruction is more important than new construction – a client purchases not only square meters but also confidence. Clients want to see clearly the results of their investments – improving life and work conditions, more time for work and for home, and less time spent on the way between the two. According to Morozovs, today the cooperation between the developers and the Riga Council has improved and is becoming more active. Riga is finally able to serve as an example for the whole region in giving aging city districts a new
Jānis BIRKS, Riga City Council Chairman
W
e have been through German, Swedish, Polish and Soviet times, and now it is high time to make a Latvian Riga that will fit the European context. Riga City Council aims at Riga’s harmonious development keeping a balance between business and culture. How are we going to reach it? Through decentralization: business centers and government establishments will be gradually moving out of the city historical center. On the left bank of the Daugava a business center along with the National Library and a concert hall will be built. Foreign investors like investing in an open, modern city. This is a path to choose – to save the best and think about future developments. boost, preserving at the same time the balance between historical and modern values. Among these examples are the Tango project in the center of the city, the Valdemāra Park situated on the territory of the former Riga beer factory, and others. Millions invested in them will be returned to the investors with interest. As for the new construction projects,
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what truly amazes is the speed with which office buildings and logistics parks are popping up. The rapid development in the segment of hotels and shopping centers are not far behind. Today supply cannot cover demand, and the developers know perfectly well that, in order to attract serious international companies, they have to act fast. If quality projects are carried out, then, Morozovs is certain, what Riga will have to offer will be newer, better and more interesting than what Tallinn or Vilnius has to show. The first signs are obvious – the chain of five-star Sheraton hotels has made a decision to enter Riga opening in 2010 a hotel in the ZTowers multi-story building. A similar decision was announced by the Hyatt hotel network. The fact that international players enter the segment of lux hotels proves that Riga is an attractive place for investments as the Baltic business center and as the bridge between Scandinavia and Russia.
The Course of Riga – Metropolis
Similar to a person striving to find his own identity, each city wants to uniquely position itself – Helsinki as the congress center, Stockholm as the capital of Scandinavia. And Riga? Riga is the Baltic metropolis. The city’s chief architect says: “We will be not be shy and will insist on the status of metropolis. We are in the middle of the Baltic States, and Riga with its 750 thousand inhabitants is bigger than Tallinn or Vilnius. Moreover, geographical coincidence gives greater advantages – proximity of the sea, the seaport, railway hub, and more modern airport.” Riga cannot develop further with the existing pattern. But the development, as a winding river, will find its path. Just as the future that will come without our help. Nevertheless, Riga wants to make the development foreseeable and is working hard on it. Riga has got a good plan and the desire to make it real. There are people, investors, builders and developers who are ready to join the plan and together create the new Baltic metropolis – Riga. The die has been cast – there is no other way. THE INSIDER
Images: Venta Didrihsona Arhitektūras studija / Target Studio
become its hostages on the way from the airport to the center, have no doubt that these are priority issues. The new routes and crossings might not be enough to solve the situation. It may take more than that, like breathing new life into the city’s public transportation system by creating the “Park & Ride” service infrastructure. Today, the inhabitants of Riga are weary of using public transport that stand in the same traffic jams bumper to bumper with other automobiles. Plus there is the hard-to-resist desire of enjoying the improved living standards – during Soviet times the majority of people could only dream about having their own car, and a strong link between a successful life and possessing a personal automobile has settled deeply in the conscious of Latvians. The city leaders will have to try hard to make public transport an attractive alternative to the personal auto. Perhaps comparing the expenditures, public transportation being an undoubtedly cheaper solution, will do the trick. Alongside with decentralization and the construction of new routes a new public transport system will be able to revive and enrich the economic and cultural “blood circulation” of the city.
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Company & stretegy
Latvians Beyond the Border Latvian businesses making waves in international waters
F
rom small aroma soap balls and cups of well-brewed coffee to sacks of concrete and birch plywood panels to high-tech internet-based systems and banking offices—Latvian businesses are increasingly trying to prove that they have what it takes to successfully compete in the international marketplace.
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by Daria Kulagina It can be a franchise shop in Osaka, Dublin or Bishkek, a newly-built factory in neighboring Lithuania, Estonia or Russia, a bank branch in London or Geneva, a software project manager on a weekly business trip to a major client in Hamburg or Stockholm. They come from different backgrounds and operate in different ways. One thing that unites them
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Company & stretegy
is the drive to succeed and an understanding that for a business coming from a country of 2.5 million people true success can be found only by looking beyond the borders.
employees are more willing to work in Latvia than to undertake expansion internationally. And even more surprisingly, those who did are often not outspoken about their successes abroad. Valdis Birkavs, a former prime minister who now represents the Latvian Builders Strategic Partnership—a group of the country’s largest construction companies—says that there is a whole community of Latvian businesses which successfully work abroad. However, he points out, it is hard to gather information on these companies. “They have found a niche in a foreign market and they are guarding it.” The companies have acquired some know-how, a client base, but they are not too quick to share this information with others. As for Latvian builders, according to Birkavs, they are concentrating their efforts on the domestic market for the time being and simply do not have the capacity to go international. A recent scandal in Sweden, when a Latvian building company received a contract, provoking harsh criticism from competing Swedish companies, did not help. Though this does not mean Latvians builders will not attempt to try their luck abroad again at some point later, added Birkavs, when there is not so much work at home. The Latvian Investment and Development Agency (LIDA), the organization which promotes Latvian
Switzerland to Tokyo is the one most aggressively pursuing its goals. In recent years, Parex opened representative offices in 15 countries. In addition, Parex is the owner of AP Anlage und Privatbank AG, a fully-licensed bank in Switzerland. International branches of Parex are located in Estonia, Germany and Sweden. It is a bit of a wonder that small Latvia can offer the world such a wide range of products and services—from the franchises of Stendera Soap Factory and Double Coffee diners to the heavy-duty production lines of Sakret and Latvijas Finieris. And if the tactics of one company include placing a shop in dozens of European and Asian capitals while eyeing the Americas, others are more cautious and prefer to operate not far from their own neighborhoods. Even so, Double Coffee bosses, whose DC Holding four years after opening the first restaurant in Riga was named among the fastest growing European companies in 2006, were able to turn their Baltic answer to Starbucks into the region’s largest coffee shop chain. Double Coffee has come to Vilnius, Tallinn, Kiev and Minsk and is planning to add a few dozen more outlets. Most of them are to be opened in Ukraine, a huge new market. At the same time, DC Holding is getting ready to expand the brand through franchising in countries like Poland
The paradox, however, is that this simple truth is not so obvious. Departure of (some claim) hundreds of thousands of Latvian workers for greener European pastures is old news and harsh, but accepted reality. However, many Latvian business leaders still claim that they themselves and their
business abroad, provided a list which is dominated by banks with branches in the West and the East. Latvian banks may be considered the most visible and successful of the businesses abroad. Among the few Latvian-owned banks remaining, Parex Group with it’s presence from
and the Czech Republic. “Mostly we’re looking not at Old Europe but at New Europe, because Old Europe is full of restaurants and it will be much harder to compete there,” Nick Ustinov, one of Double Coffee’s founders, told Business Week in a recent interview.
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Company & stretegy Those companies that open factories instead of coffee shops are even more likely to stay close to home. The leading dry building material mix producer in Latvia, Sakret (a
bitious plans for extending the scope of services provided by Lattelecom in international markets. The services are expected to include business process outsourcing and
franchise of the international brand), started its production in a newly-built plant in October 2004. In 2007, Sakret Latvia opened another plant in Estonia and another is under construction in Lithuania. These projects are, in fact, the first industrial investments of Latvian companies in the neighboring countries. The producer of high-quality birch plywood, Latvijas Finieris, is following the example: it is building a factory in Lithuania and is in the final stages of sorting out the paperwork for one in Russia’s Tver region. It has, however, a very prominent international presence with representative offices in ten countries, from the United States to Europe to Japan. According to the company’s representative, Jolanta Medne, these are not simply import bureaus, but true client-service centers, through which Latvijas Finieris works with the buyers in different countries, shaping its product around the client’s needs. Latvia’s true international veterans, however, come from the hightech crowd—a fact which should duly make Latvia proud. Latvian software services have been exported since the early 1990s. One of the key players in the Latvian software market is Valdis Lokenbahs, the new Director of Business Development for Lattelecom. His company, Dati, has provided software services to customers in Western Europe and the United States. Lokenbahs sold Dati to Exigen and now has am-
enterprise resource planviet brand, Prima, ning solutions. “Latvians and taken through need to overcome the crash courses in Gersmall country syndrome man.” He noted that and take up the challenge the cultures were so of going global,” says different that many of Lokenbahs. the Latvian software Besides the high specialists were relucqualifications of Latvian tant to go on extended software engineers and business assignments a shortage of specialists abroad even with in the West, he attributes good pay. An interculthe international success tural background and of Latvian software deexposure to different velopers to partnerships cultures—be it trips Latvia’s international vetwith Latvians abroad. across the former Soeran, Valdis Lokenbahs, In fact, Lokenbahs’ maviet Union, from Ruslooks at opportunities jor partner was Latviansia’s Far East to the in a wide perspective. American Jānis Gobiņš, Caucuses to Central Mr.Lokenbahs considered nicknamed the godfather Asia, or graduating the sale of Dati, the comof Latvian IT exports. from the Stockholm pany he created to provide software services to Gobiņš made his name School of EconomEuropean and American first in the United States ics in Riga—is one clients, to the competand later in Germany. obvious characteristic ing Exigen as a good His work was real rocket uniting the successful opportunity. Now the science: at Bell Laborainternational business new Director of Business tories he coordinated the people of Latvia. Development for anti-missile Safeguard Today, communicaLattelecom, V. Lokenbahs system development for tion skills of Latvian does not hide his ambithe US Army. It was he IT people that were tious plans for extending the scope of services who helped in getting the lacking in the early provided by the company first contracts for Latviyears have improved internationally. an software developers radically, says Lokenin Europe, starting his bahs. The language “shuttle diplomacy” in 1988. barrier is no longer a problem. When Lokenbahs remembers “Communication is everything in sending the first groups of Latvian our business!” he stresses. Those in engineers to work for weeks at a time the IT industry who are able to both
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abroad at foreign client headquarters, he seems amused by how much things can change. “People had to be dressed in decent suits, taught to smoke cigarettes with filters instead of the So-
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Company & stretegy
Latvian Prime-Minister Aigars Kalvītis and his Estonian colleague Andruss Ansips launched the Sakret production line at Paide, Estonia this summer. The leading Latvian dry building material mix producer’s turnover is projected to exceed 14.2 million euros in 2007. The plant in Estonia aims to produce 150,000 tons of materials a year, tripling the company’s production capacity in the Baltic region. A new Sakret plant is being built in Lithuania; investments into new plants this year are projected at 10 million euros.
communicate freely and understand client needs are priceless employees, he explained. He added that the employer’s obligation is to allow people to communicate freely in any way they can—including in a pub, raising a mug of beer. “Many are afraid to send their people abroad, afraid that
they will want to stay there, leave the company,” observed Lokenbahs. “But not letting them go is not a solution. Motivating people is what’s important.” There are some very talented and able specialists in Latvia who are very welcome all over the world, he says.
Latvia’s direct investment abroad by country in mil. euro. Various sources attribute the major investments in Switzerland to one of the Latvian banks.
However, he is sure that today more and more people understand that they don’t have to go away to be successful. With European Union membership there are plenty of opportunities to work in the foreign markets while being based in Latvia. Some leading experts are more critical. A long-time Secretary General of the Latvian Chamber of Commerce and Industry, Jānis Leja, thinks that “the biggest problem of Latvian businesses is that they want to work on familiar territory.” According to Leja, who has recently left the post to work on his own business developments (he did not specify whether his business is setting sail for international seas), claims new Latvian companies are very reserved about moving to unexplored markets. Despite the reservations Latvians might have about conquering foreign markets, those who have done it are not always eager to promote their successes. “Many people hide these things,” said Lokenbahs. “They think it’s not in their interest to be open about it. They fear competition. As far as I see it— they should tell the whole world about it. They should be proud.”
Latvia’s direct investment abroad by type of activity in mil. euro.
Wholesale and Retail Not Classified Information and Communication Services Hotel and Food Services Finance and Insurance Energy and Heating Construction Total Source: Bank of Latvia
71,3 8,7 56,6 19,4 1,6 340,9
Source: Bank of Latvia
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151,0 24,2
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Company & stretegy
A latvian soap opera Stenders soap factory cleans up in Latvia and abroad. one are the days when Latvians would buy franchising rights to copy someone else’s well-established business concept. With over 140 franchise shops operating outside Latvia, Stender’s Soap Factory is one of the most successful companies here and abroad. The company has gone from producing 300 kilograms of soap per month in 2001 to the current production of a full ton each day. Have Latvians started washing more often? No, but thanks to Stenders’ unique marketing formula, 22
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the rest of the world is. We spoke to Jānis Bērziņš, a co-founder of Stenders about the company’s global success.
Love from the first bubble
Stenders Soap Factory was founded in 2001 by the entrepreneurial couple, Jānis and Zane Bērziņi. The couple decided it was time start to their own business, and went abroad for some inspiration. They soon discovered that the segment of affordable yet unusual body care was not well-enough represented in Latvia. First, Jānis and Zane began selling other company’s
by Jekaterina Strelcova
soaps in Riga, which was a canny step—testing the market without actually investing too much into production set-up. The special aromatic soaps proved successful, and Jānis and Zane began to work out the concept and design of their soap factory. Their goal was to create products that would be appreciated not only for their superb cosmetic qualities but also for the feelgood mood they would bring to the customer. This was achieved through the traditional design of the shops, ecologically-sound wrappers and, of course, natural hand-made products. Issue №3 | 2007
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Asked who was the creative head and who was left to deal with the figures, Jānis admits, he was more the marketing person, while his wife did the calculations. “Yet she gave a lot of precious advice, because she had a woman’s perspective, and women have been our main target market.” In the beginning Stenders factory was
invest the money that could be spent on massive advertising campaigns into other areas: staff rewards, product research and charity. “We try to support some less fortunate people, maybe it’s not that much, but what is important, we don’t do charity just on Christmas, we are involved all year long,” says Jānis.
Our simple idea was to try not to sell simple soap but to sell joy.
boiling just 300 kilos of soaps per month, supplying just a few shops in shopping malls. “Today,” says Jānis, “we manufacture around a ton of soaps per day to supply all our shops—22 in Latvia and more than 140 abroad.”
Marketing formula
How much pleasure can one gain from a simple bar of soap? Apparently a lot, if you get your four Ps of marketing right, proves Stenders. Stenders’ boutiques are instantly recognizable, whatever part of the world you happen to find yourself. Once inside the shop, you are surrounded by the trademark atmosphere and fragrance. And, of course, you see the name–Stenders. The initial brand was Stendera Ziepju Fabrika (Stenders’ Soap Factory), but for markets abroad the name was reduced to only Stenders to serve a uniform design and pronunciation in different languages. Stenders’ price niche is rather affordable, yet tends to the upscale. As Jānis puts it: “The customer pays fifty percent of the price for a qualitative product, another fifty for the highlevel service we provide: a smile from the shop assistant and her expert advice. We try not to sell soaps, but to sell joy.” One may be surprised that Stenders follows a zero-advertisement strategy. The management has chosen to
What does the future hold?
Of course, no one at Stenders is thinking of resting on his laurels: there are still markets to conquer. With just one shop in China and one in Japan, Jānis sees Asia as an immediate priority with great perspective for development. Russia, where 96 shops are run under the Stenders logo, is “a risky, yet a very interesting region to work in” according to Jānis, which should be further expanded. And although there are 22 shops in Latvia, the Stenders team is following construction of new shopping malls and assessing new possible locations for its shops. Stenders looks forward to diversifying, as well. Today Stenders produces not only colorful soaps in plenty of shapes but also bath bubble-balls, liquid soap, bath milk, salts, foam and extracts,
Stenders at home and abroad
Number of Stenders shops in respective country
Russia Latvia CIS Poland Estonia Lithuania Hungary Ireland Finland Japan China Netherlands
96 22 20 6 6 6 4 2 1 1 1 1
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One of the first two Soapranos, Jānis Bērziņš, Stenders’ co-founder
body scrubs, yoghurts, and body butter. There is also an aroma therapy range consisting of massage butter, essential oils, candles and aroma sticks, and an array of sauna product accessories. Stenders current product line contains around 200 items, and more are coming every month. In the future, the company will also look beyond word-of-mouth communication and develop advertising. Currently, the company engages in public relations (they term it “providing consultations and assisting the media with advice”).
Affiliated enterprises
Stenders is not the only creation of Jānis and Zane. In 2003, they opened the chocolate factory “Emihls Gustavs Chocolate”, featuring the same concept: providing the ambiance and traditions of days gone by through products hand made with great love. Duties have been divided: Zane took over the chocolate business, while Jānis remained faithful to soaps. Another project by the Stenders founders is Roadside Inn Rožmalas, which involved the renovation of a 140-yearold windmill. Rožmalas is a country drive-in, where a traveler can enjoy a meal and stay overnight. THE INSIDER
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capital MARKETs by Harold Cleaver
Ironically, the Middle Ages were the Baltic region’s years to shine as a commodities market. Will they ever recover this past glory?
In
1450, any Baltic merchant would have had an intimate understanding of the commodities market. A rich Baltic merchant might have warmed his outsides with a cape made of squirrel fur and warmed his insides by consuming claret with his fellow Hanseatic League merchants in front of a blazing fire in Riga’s Old City (which hardly would have been considered old, at the time). The claret would have been Rhine wine, spiced with cinnamon, nutmeg, paradise seed, ginger, galangal, and saffron. One kilo of the saffron used to spice the merchant’s claret traded for more than two tons of rye, and the claret was sold exclusively in village apothecaries. The luxurious claret, three times more expensive than Rhine wine thanks to saffron, was given to members of the Town Council free of charge (to taste, of course) as a friendly gesture to the town’s leadership. The secret of the Baltic Hanseatic cities’ (see table) success hinged on their role as mediator between western Hanseatic cities and Novgorod, the Russian outpost which funneled all 24
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Hanseatic League products into the vast eastern lands. Russia wanted salt (“white gold”), textiles, herring, metals, wines, spices. Westbound through the Baltics, Russia sent rye, timber, flax, limestone (this produced in the Baltic region), plus wax, animal fat, train-oil (obtained from whale blubber), hemp, and huge quantities of fur. Riga was known for its hemp and butter, Tallinn for wax and flax. Between the 13th and 17th centuries, the Hanseatic League, an alliance of
England, Denmark, and most significantly, Holland. Ironically, the scale of the Baltic’s participation in the international economy reached its apex in the Hanseatic League.
Soviet Collapse 1992
Some argue that the Baltic States have never truly been independent. Almost always a part of some alliance (voluntarily or not), their unfortunate history made them a player in one of the most
The glory days of the Hanseatic League may be over, but the
Baltic’s strategic positioning makes it an interesting player trading guilds, commanded a monopoly of the Baltic Sea and most of Northern Europe. In the 16th century, the league began to lose its significance, primarily due to the growing prominence of
powerful economic alliances of the 20th century, the Union of Soviet Socialist Republics. The Soviet Union’s practices in producing and trading commodities have Issue №3 | 2007
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been the subject of many books. Most rally be found. When the Soviet Union famously, in what is now called the collapsed, commodities again made Harvest of Despair, in 1932, while Sta- men rich. Some Baltic businessmen lin dumped millions of tons of wheat became famously rich brokering Kola on Western markets, one quarter of the Peninsula riches (apatite, nepheline, iron, and nickel) to population of the the West, while their Ukraine starved. In Hanseatic cities, poorer brethren pilmore recent times, names old and new fered iron (swords Baltic kolkhozes Dorpat – Tartu and drumsticks from worked to fulfill Fellin – Viljandi local monuments) five-year plans writGoldingen – Kuldiga to melt and sell as ten by Moscow and Kokenhusen – Koknese scrap. products were orLemsal – Limbazi The lawlessness dered grown on land Memel – Klaipeda was coupled with which was not ideal Pernau – Pärnu Reval – Tallinn shortages of goods for them. So what Riga – Riga and disruptions in if wheat would be Wenden – Cesis grown where wheat delivery systems. As Windau – Ventspils could not be grown, early as 1991, comWolmar - Valmiera and dairy cows raised modity exchanges on lands whose soil throughout the Balstructure did not provide the ideal food. tics replaced the centralized delivery But even absurd central dictates and system of the former Soviet Union. five-year plans could not completely In 1991-1992, when commodiwreck Russia’s precious metals. Not ties were bought from Russia and even the densest Party official would profitably resold in Baltic or Western have suggested digging for gold in countries, some 15-20 exchanges were Latvia. The Soviets knew enough to established in each of the three Baltic dig for gold and oil where it could natu- countries. Most were “universal” ex
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changes, handling not only different commodities, but also various money market instruments. In June 1992, the twenty commodity exchanges operating in Lithuania established the Lithuanian Exchange Association (later renamed the National Commodity Exchange in March 1994). In 1993, its turnover was slightly exceeded by that of the Baltic Commodity Exchange. Estonia and Latvia also formed exchanges. These exchanges, says a Bank of Finland report, “...served as a basis for establishment of the first securities market institutions, i.e. stock exchanges and privatization investment funds as well as brokerage firms and other securities intermediaries.”
International Efficiencies and Government Tinkering
What happened to those exchanges? According to Anne E. Peck of Stanford University, the collapse of the planned economies was accompanied by the opening of hundreds of exchanges throughout the continent in the 1990s, trading agricultural resources, and other physical commodiTHE INSIDER
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capital MARKETs
ties. The vast majority have closed, of course, since countries often termed New Europe are free to buy and sell on international exchanges. Interestingly, Peck writes that some exchanges met their demise because of transparency: governments saw the money and quickly imposed taxes and customs duties, which served to drive away trade or turn the exchanges into little more than state agencies. When asked to comment on the demise of the Baltic markets for this story, a commodities trader with Hansabanka Latvia noted that “There’s really nothing to talk about. We trade on international exchanges.”
The new Hansa
The glory days of the Hanseatic League may be over, but the Baltic’s strategic positioning still makes it an interesting player in goods moving westward from Russia. While wealthy Baltic merchants no longer wear squirrel firs (at least in public), the list of commodities passing through the Baltics is not so dramatically different from that in the fifteenth century. Wood and wood products are the most significant commodity group in 26
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Latvian exports. Metals and metal products, machinery and mechanical appliances, electrical equipment and mineral products follow. Chemical and allied industries for plastics and plastic products is significant, as well. Latvia is bringing in machinery and electrical equipment (19.8% of total imports), with mineral products (15.6%) and transport vehicles
(10.8%) close behind. What will surprise no reader who has spent time in Latvia: the sharpest increase in imports in 2006 were seen in transport vehicles, compared to the same period January-October 2005. The Hanseatic merchant might well have imported a thoroughbred from Germany. Indeed, not much has changed, as their modern counterparts import BMWs and Mercedes from the same.
The famous index with nothing to do with the Baltic The magazine Slate has called it “The best economic indicator you’ve never heard of. The Baltic Dry Index (BDI) is an index of dry bulk shipping rates and managed by the Baltic Exchange in London, which also has nothing to do with Estonia, Latvia, and Lithuania. According to the Baltic Exchange, the index provides:
...an assessment of the price of moving the major raw materials by sea. Taking in 40 shipping routes measured on a timecharter and voyage basis, the index covers supramax, panamax and capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain. What makes it the best economic you’ve never heard of? Since costs of shipping vary with cargo amounts, and because dry bulk like cement, coal, and iron ore are directly tied to production, watching the BDI is a good leading indicator of what may be happening with the world economy. Can readers become rockstar rich by monitoring this index and investing accordingly? Please let us know. Issue №3 | 2007
2007.10.15. 13:04:56
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2007.10.15. 13:04:59
Capital Markets
FDI: Too much of a good thing? Currently, the Baltic region’s Foreign Direct Investment (FDI) volume is approximately 15 percent higher than the EU average and Eurostat forecasts the gap will increase. Is this a good thing?
T
he World Bank defines FDI as net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. There are two types, Greenfield, where the investors build a plant, and cross-border acquisitions, where investors purchase interest in an existing operation. But is there an unsafe level of FDI? Latvia has historically operated with a trade deficit, purchasing more than it exports. Perhaps natural for a small, emerging economy with no real natural resources to speak of but, in Latvia, FDI is seen as a tool for closing that gap. Dr. Ralfs Dakters, head of the investment promotion division at the Investment and Development Agency of Latvia (LIAA), is Latvia’s point man for closing that gap. “I would say there has never been an indication at which point it [FDI] might be too much. 28
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Capital Markets Since 1993, when our agency was set up, investment promotion has been a priority. Is there a magic number? I’m personally not aware of it,” says Dakters. “I was in the Czech Republic at the end of May, and their economists tend to think too much of their GDP depends on production (40 percent) where ours is service-oriented. Other countries do exactly the opposite.” Given the number of Latvians, Lithuanians, and Estonians who have left their country to work in Old Europe, building and maintaining a service-oriented economy is no easy task. Some in the Baltics have argued for the opening of the borders to laborers from third countries, though that is complicated, highly politically charged, and not likely to happen in the very near future. In previous years, Latvia viewed FDI as an aspect of job creation. “In 2003, when I joined the agency [LIAA],” says Dakters, “the unemployment was above 10 percent. That has changed. In Liepaja, in 2003, they had 14 percent unemployment. Now they are at something like seven. In Riga, one of the last figures is 3.9 percent.” Dakters says that, concerning FDI, the agency is careful not to target labor-intensive FDI and focuses on
FDI as percent of GDP 40%
Estonia
Latvia
Lithuania
2004
2005
2006
EU ave.
35% 30% 25% 20% 15% 10% 5% 0%
2007F
2008F
FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.
Source: Eurostat
Silicon Valley, and its primary goal is to assist Estonian businesses with contacts and business development in the United States. At public meetings, EAS’s staffers have been careful not to misrepresent themselves. They recognize the labor issue is not one which will be sorted out quickly, and while, like Latvia, their past focus may have been using FDI to solve the issue of
unemployment, today’s situation is completely different. Foreign companies, however, have not always adapted well. There is no shortage of foreign businessmen who will complain about the labor shortage. Privately, some have said that they feel duped by the government, having been courted and wooed to set up a business, and then when the
...it may not be accurate to conclude that Estonia is truly the second largest investor in the country of Latvia. technology-intensive businesses. “Last year,” he says, “we had a large investment inquiry for something with jobs in the thousands. It’s not easy to turn down an inquiry. But at the same time I have to be realistic and professional enough. A six thousand-person plant! I can come up with fancy marketing stories, but at the same time we’re involved in implementing the project. And on one day or another, it will come to finding those six thousand people!” In Estonia, the story is similar. Estonia’s EAS has set up an office in
Current Top Investing Foreign Countries in Latvia
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Sweden Estonia Germany Denmark Russia Finland USA Netherlands Norway Cyprus
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commitment is made, the same governments which courted them now make it difficult to find labor. Others argue that these businesses should simply learn to adapt. An excellent case of adapation in Latvia may be the American company JELD-WEN, the world’s largest producer of windows and doors, which has been in Latvia since the early days of independence. “JELDWEN made a forty million euro investment which only requires 72 work places,” says Dakters, speaking THE INSIDER
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Capital Markets of the fiber skin manufacturing plant in Aizkraukle. “It is all technology based.” Sweden’s Syntagon also recently invested one million euros in Latvia, renting a onethousand-squaremeter facility and employing twenty people, many PhD research personnel. While Sweden tops Latvia’s list of top investing foreign countries (see chart), the rank of investors must be tempered with a healthy respect for the origins of statistics. Shakespeare wrote that the devil may cite scripture for his purpose, and so it may not be accurate to conclude that Estonia is truly the second largest investor in the country of Latvia. “If you go and track back how much FDI in Estonia is from Finland,” says Dakters, “then there’s no surprise that Finnish companies have invested in Latvia via Estonia.” Dakters says he has even seen a chart twisted to place the United States in the number one position. (It is a fact the US has a reputation as an aggressive investor, as the country accounted for around three-quarters of the world’s new FDI between 1945 and 1960.) True, Dakters notes, that Coca-Cola has made investments in Latvia through its Swedish facility using money which may be argued is American, but the tone of his voice is enough to convince one to view the statistics with a grain of salt. Though, Dakters argues, “I think the US and Norway should be higher on this table.”
“It’s not easy to turn down an inquiry. But at the same time I have to be realistic and professional enough.”
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Indeed, how can Cyprus occupy the tenth position? Cyprus markets itself as “the land you will love” for good reason: it has no inheritance tax or wealth tax, personal income tax is just 20 percent, with corporation taxes lower still at 10 percent, and a pension tax often less than five percent. It is no mystery that Cyprus shows up in the percentage rankings in all three Baltic states. Latvia, while not Cyprus, does make major efforts to create a favorable tax environment. In the CIT and EU27, Latvia has the fourth lowest overall tax burden. Concerning speed, how do different nations stack up as speedy decision makers who commit and invest quickly? Dakters says the JELD-WEN decision to invest the forty million euros took eight months to make. The longest decision on record belongs to a Norwegian company, who took two and one half years. “But it so much depends on the corporate cultures,” says Dakters. “I have another Norwegian company who turns around these decisions in only six months.” Dakters admits that Scandinavians, in general, focus more on the details, while Americans may concentrate on a few key strategic criteria. “From my personal experience, US companies are the ones which tend to be very concise and fast in terms of their decision-making process.” No one may yet know whether a level of “perfect FDI” exists in the Keynesian sense, but no one can dispute that FDI has played a major role in the world since the end of the Second World War. And while its face may change— moving from factories to high-tech—it is certainly no less sought after. Issue №3 | 2007
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THE INSIDER
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The Insider spoke with Janis Bordans, partner with the law firm Bordans & Belyaev in Riga. He serves as a legal advisor to both local and foreign companies, including Business Software Alliance, Inc. We asked him to discuss the biggest blunders and most common mistakes foreign businessmen make when entering the Latvian market. by Harold Cleaver
The Gun-slinging ‘90s
Most of the problems foreigners had in Latvia occurred in the 1990s when Latvia was making its transition from a planned to a market economy. The main risks were connected with the vacuum or lack of regulations to protect an individual doing business. Those who had experience in emerging economies did well; those who lacked experience sometimes suffered by assuming that certain blanket legal structures were in place to protect them. The most common mistake in those days was failing to make agreements with enough protections. Today, all Latvian commercial law has been harmonized with EU legislation. That is not the problem. The problem is enforcement of those laws. Today we have the situation where
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more commercial laws are in place, but there is a lack of understanding of commercial law by our judges—I do not know many who have studied commercial law. There is no specialized commercial court, so all disputes are litigated in civil court. There are some judges who are more specialized in commercial issues, but practical and academic experience is not there. In order to protect themselves, companies are often writing very long American-style contracts—but imagine a contract of hundreds of pages when our judges are accustomed to ten-page contracts. The good news is that many of our judges are highly intelligent people who will read the contracts, hear both sides of the argument, and make a decision. The situation is improving constantly.
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legal was auditor of this bank, and the litigation is still not finished between the insolvency administrator and the Central Bank of Latvia. Bank Baltija was offering a 100 percent interest rate on deposits and suddenly everyone was surprised that there was no money in the bank. The auditor was Coopers & Lybrand, who used the argument in court that the bank’s financial statements were technically fine and the interest rates were in accordance with local practice. An interest rate of 100 percent didn’t startle Coopers & Lybrand? The judge ruled in favor of the Coopers & Lybrand arguments and assigned guilt to the Central Bank. But, still, 100 percent interest on deposits should have been a clue that all was not well. You should not act against your better judgment just because you’re in a foreign market.
It’s important to make the traditional checks which you might be tempted to overlook in your own country.
What Appears Too Good to be True...
If you come from a nation with a strong market economy, don’t think that you should change your practices here. An economy is like nature, and it works the same everywhere. Mentally, there are commonalities save for an interruption of fifty years. What I mean by this is that if something sounds too good to be true in Latvia, it probably is too good to be true. A good example is the Bank Baltija case in 1995. Coopers & Lybrand 34
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Local Managers Pocketing your Profits
There have been cases of local managers pocketing company money, and there are precautions you can take against it. Most important is to be very careful when you employ someone. It’s important to make the traditional checks which you might be tempted to overlook in your own
country. Verify the CV; ask for letters of recommendation; talk to his previous employers; ask your local partners. It is especially critical to investigate your directors and financial managers. You can employ a detective to do that, or some law firms can do it. Latvia is a quite close-knit community, and usually the information on someone is available. The services of a law firm in Latvia may go beyond what a foreigner is traditionally used to.
The Price of Ignoring Government
In the case of big investments which touch on the public interest, you need someone who can communicate with government. Stockmann department stores is a good example. Stockmann built a store which was located in an area where pedestrian access was quite critical. It happened that when they completed the store, the government demanded they build an even more sophisticated structure of tunnels and walkways for pedestrians. Once you’ve already built something, it’s more expensive to fix the problems. It’s critical to have an ongoing dialogue with the government, even if you have all your documents in order, so the government can trust you and you can trust them. Another example is the Finnish pulp company who wanted to build a factory on the banks of the Daugava river. They seemed to want to push the government to conclude an agreement on forest use and factory construction. They did not investigate the surrounding situation vis-à-vis the environment. Fishermen and swimmers on the other side of the river made an inexpensive effort to push the government, insisting that even more environmental impact research be conducted. In the end, an entity was created to conduct a study and finally nothing happened. A lot of time and money lost.
Cheap Software Becoming Quickly Expensive
This is something to be concerned with if you have a local partner who encourages you to save money by usIssue №3 | 2007
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legal
Janis Bordans – Lawyer and consultant at Bordans & Belajevs ing pirated software. Latvia has had a very interesting history with the enforcement of intellectual property law. In the beginning, software companies pointed out that from 1993 to 2000, since the copyright law was on the books, there was not one single enforced case, though we knew that 85 percent of all software was pirated. Getting the law enforced was difficult, because nobody felt it was something we should protect. The thinking was “the owners are a thousand miles away; it’s a foreign product.” So we made the decision to go with a public awareness campaign: seminars for police, prosecutors, judges. We created a system where no one could hide. Now, there are contracts between software producers and the Latvian government about legalization of software. We have an agreement with tax police and the state revenue service that they check software licenses when they check financial documents. The first case of enforcement was
in 2001—just a few cases for minor offenses where companies were fined 100 lats [145 euros]. But they had to pay compensation to the software producers of 300 lats on two computers for a total of 600 lats [870 euros]. Not a lot of money, but they were forced to pay for what they used. The biggest case was in 2004 when the publishing house Fenster had about 70 office computers confiscated and paid 40,000 lats [58,000 euros] to settle. That year we gained 150,000 lats [217,000 euros] in compensation which went directly to the software producers. That may not sound like a huge amount of money, but the punishment is severe when you risk losing your computers and the information on them. In practice, the police may allow you to copy some of the information, but it’s still quite a risk. You also may be fined up to double the price of the software and then forced to buy it legally, effectively forcing you to pay triple the market price. It helps create an environment where it’s smarter to simply buy and use legal software. There has been a criminal case where managers at a software dealer were copying software on PCs and selling it illegally. They received jail time but the sentences were suspended. So no one has gone to jail yet, but it’s good not to listen to anyone who tells you this is a clever way to save money on software. There was an American investment fund who started a publishing house called Balodis Printing. The printer was caught and is now insolvent. The American minority investors got nothing.
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agriculture
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THE INSIDER
Issue â„–3 | 2007
2007.10.15. 13:05:40
by Jekaterina Strelcova
Among the 223 species of birds nesting in Latvia, you may be surprised to find ostriches. While not indigenous to Latvia, the flightless African Struthio camelus seems to have adapted well to northern European weather conditions. And Latvians are adapting well to it: Most are only more than glad to eat an ostrich when put on a plate in front of them.
O
striches are the biggest birds on the planet, reaching over 100 kilograms during their more than 70-year life spans. They are truly multi-purpose birds, serving as tourist-magnets, healthy nutritional products, and providing precious skins and feathers. Taking into consideration that the bird can run up to 60 kilometers per hour, they can be used as efficient country vehicles if straddled (they are raced occasionally on the streets of Miami Beach, Florida). The birds are adaptable to a variety of climates and are almost always raised outdoors. They can endure temperatures up to minus 20 degrees Celsius as their expensive skins protect them while outside during cold Baltic winters. (Ostriches are also raised as far north as Finland and Sweden). To raise the animals requires only large amounts of sandy real estate and the means to supply the animals with grain and hay. The only meat breed grown in Latvia is the black African ostrich—the others are grown for “decorative� purposes. Birds are
harvested somewhere between nine and 15 months, though it will take a hen at least three years before she lays eggs. Such a long growing cycle (chickens are harvested at 45 days) contributes to the high price of their meat and eggs, sending ostrich products directly to the deli counter at upscale groceries. In the name of greater profits, some have tried to speed the process, but they have failed. Ostrich meat, free of any chemicals or other contributions of modern science, is some of the healthiest meat available.
The rich in Ostrich
The commercial ostrich industry began in Cape Colony, South Africa, in the mid-nineteenth century. China, Brazil, Australia, the US and South Africa now lead the world in commercial ostrich production, though Europe is not far behind. Today, it has become a thriving industry in the Baltics, as well, with Lithuania leading the pack, where ostrich farmers have built relationships with distributors and supermarket chains such as IKI.
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agriculture The first farm in Latvia to introduce ostriches was Viesturi in Robežnieki in 1993. Now the number of farms is already into the dozens. Yet, says Armands Zdanovskis, chairman of the board of Latvian Association of Ostrich Producers, the number of farmers is insufficient to meet the demands of the market. Zdanovskis and his wife Ilona own Ozoliņi AB, which raises black African ostriches, and they are the only certified ostrich breeders in Latvia. Zdanovskis keeps about 250 birds at his farm, which pales in comparison to Chinese and Brazilian farms where birds number in the thousands. Zdanovskis says Latvian farms are both few and small and cannot keep up with the market’s demand. “However,” he says, “there is very little or no cooperation with the large supermarket chains, who tend to be very inflexible in their contract terms. Without long-term contracts, farmers are not rushing en masse to fill the void in the market.” Despite inflexible contracts, a few dare to enter the market. To set up an ostrich farm you need at least 100 birds. “There is a new farm being built in Ergli which will have a thousand birds,” says Zdanovskis. “But even that leaves
Facts
The mating process of ostriches differs in different geographical regions. Territorial males will typically use hisses and other sounds to fight for a harem of 2 to 5 females (which are called hens). The winner of these fights will breed with all the females in an area but only form a pair bond with one, the dominant female. Ostriches are oviparous. The females will lay their fertilized eggs in a single communal nest, a simple pit scraped in the ground and 30 to 60 cm deep. Ostrich eggs can weigh 1.3 kg and are the largest of all eggs, though they are actually the smallest eggs relative to the size of the bird. The nest may contain 15 to 60 eggs, with an average egg being 15 cm (6 inches) long, 13 cm (5 inches) wide, and weigh 1.4 kg (3 pounds).
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space for more farms. Growing ostriches in Latvia is a field full of potential. It doesn’t require many special conditions and the costs are approximately the same as running a traditional farm. The only condition is the rather large amount of space required to keep the birds—about 15 square meters per ostrich. As in every other business there is initial investment, but after a few years the balance turns into plusses and the profit can be very high.
Growing ostriches in Latvia is a field full of potential. Asked which is more lucrative, tourism or commercial farming, Zdanovskis argues the two go hand in hand. “Tourism acts as an advertisement for commercial farming. Most of the farms grow birds for meat and eggs but keep some birds for tourists. Visitors often purchase ostrich eggs, processed meat and feathers.”
Another aspect of the ostrich business is the skins. “In Latvia, there still isn’t the leather currying know-how, though it could be a luxury segment of its own,” says Zdanavoskis, pointing to a Lamborghini ostrich leather furniture ad. “The price level, quality and durability of skins can be compared to crocodiles. If the skin processing technology is introduced here, why can’t we make expensive bags, wallets, furniture and car seats? We have producers and the market, but we don’t have processors who can make ostrich products.”
Top 5
Jaunklētnieki – Pheasant and ostrich farm organizes excursions, as well as provides an opportunity to taste ostrich eggs or order an omelet. Jaunklētnieki, Straupe, Straupes parish, Cēsu district. Tel: 64134159, 26399959. Salmiņi – Exotic bird farm raises African ostrich and South American Nandu. Over 50 kinds of poultry: chicken, ducks, black-cocks, peacocks, a collection of nine breeds of pheasant. Picnic place available. Mores parish, More, Riga district. Tel: 9146176. Jāņsēta - Offers tasting and selling of ostrich eggs and meat on request. Also offer souvenirs from ostrich feathers. Mežāre, Mežāres parish, Jēkabpils district. Tel: 26519231. Viesturi – One of the first ostrich farms in Latvia, where you can see African ostriches. Robežnieki, Robežnieku parish, Krāslavas district. Tel: 5669233. Jozdreijas farm is the home for African ostriches and South American rhea. It is possible to organize an excursion and also buy ostrich eggs and make an omelet yourself. Jozdreijas, Medzes parish, Liepajas district. Tel: 26558164 Issue №3 | 2007
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Consumer awareness
With only a couple of upscale restaurants serving ostrich, the average (or even average upscale) Latvian consumer knows little about ostriches. Zdanovskis says more attention must be drawn to the industry. In 2003, the Latvian Ostrich Society was established to popularize ostrich production, implement European programs, train farmers, and set up international partnerships. The association also organizes the annual Ostrich Days in More. “Not so long ago people would say, ‘you must be crazy to eat ostrich meat,’” he says. “A few steps have been made in order to promote the industry, but there is still a long way to go.” This October, Riga will host the biggest event of the industry, the World Ostrich Congress 2007, which is gathering professionals and farmers from all over the world. After successfully presenting itself at last year’s congress in Brazil, Latvia managed to get its chance. Latvia’s goal for the congress is to present an overall positive image of the country, as well as offer a networking base for producers and distributors. Latvia’s proximity to Russia and the CIS countries is one of the congress’ appeals, since it should attract trading partners from that region.
Expert opinion
City Ostrich If you prefer ostrich, try one of these ostrich-friendly establishments in Riga:
Ostrich Nutrition
It’s not just for breakfast, anymore. Ostrich meat is considered the healthiest of meats, containing half the calories of beef and one third that of pork. Ostrich is considered “red poultry.” It is dark, sweet, looks like beef but has less fat. Doctors even recommend using this meat, which is high in iron and protein, as a substitute for white poultry meats. And due to its pH balance, the meat does not attract bacteria like salmonella. In exclusive European and US restaurants the meat has already become the choice of a new century, as no other meat can unite such brilliant taste and nutritional features. Gordon Ramsey, Raymond Blanc, Alice Waters and other renowned chefs have ostrich on their menus. Ostrich meat is tender, so when asked what it tastes like I answer that I “didn’t manage to grasp it, as it has melted in my mouth.”
Mārtiņš Ritiņš, chef of top restaurant Vincents, and founder of the Slow Food movement in Riga.
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Vincents – Ostrich meat is broadly used. May be ordered on request La Boheme – Slow-cooked ostrich steak with Cauliflower purée and carrot seviche. mc2 delicatessen Stockmann’s culinary Sky delicacies store Ozolini AB has a stand at the Green Market at Berga Bazars
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gadgerty
Pumping iron. Sipping a cocktail. Polishing your mahogany desk. Some activities require two hands. Bluetooth makes your range of movement almost limitless, turning hands-free technology from a businessman’s “toy” to an almost-necessity. But what sort of device to hang from your ear? The Insider’s tech department has tested some of the better Bluetooth devices. Here are our results.
Nokia BH-700 – Baby Bluetooth
Weighing in at just ten grams, the BH-700 is the hummingbird of Bluetooth devices. The plastic adjustable “ear stirrup” (yes, that’s what they call it) provides a comfortable fit and makes sure the headset stays on when shaking your head in adamant denial. The headset features a call accept button and volume regulator. Despite its small size, the battery lasts up to six hours in talk mode and 160 hours on standby.
Sony Ericsson HBH-610a – The Classic
Sony was one of the first companies to introduce Bluetooth, so it ought to be ahead of the game. Besides its lightness (20 grams), classic design, the benefits of this device include an auto pairing regime, last number redialing from the headset, and an automatic volume adjustor. The headset functions for 6.5 hours in talk mode and up to 12 days in standby.
Sony Ericsson HBH-GV435 – Fashion Forward
The unusual design that draws attention to this Bluetooth might make you think it is not really comfortable, yet don’t be misled—this headset is highly recommended by users for its comfortable fit and great sound clarity. In comparison to the Nokia BH-700, which plays music, this device is limited to voice. Maximised talk and standby times—8 hours, 12 days, respectively—make it a truly endurable headset.
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