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Baltic Business Magazine Network
Editor-in-Chief
Daria Kulagina
Business editor
Ingrīda Mičāne
Contributing editor Contributors
Scott Diel
Atis Lejiņš Lauris Liepa Andris Sprūds Pēteris Strautiņš Jekaterina Streļcova Atis Zakatistovs
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Dorian Ziedonis
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The Insider, Baltic Business Magazine Network Brīvības 214b, Rīga, LV 1039, 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”. Magazine registration number: 0003574031
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www.sk.lv
Weathering the cold with Lâèplçsis Did you think the Latvians were a “Nordic” people, phlegmatic, hard to be moved? Well, perhaps. That is, until something really bothers them. In fact, Latvia's epic hero is our pagan-era Lāčplēsis – The Bear Slayer – a giant-sized part man, part bear, who defends his homeland from evil marauders. A generally kindly figure, Lāčplēsis rips enemies apart with his bare hands when his fellow Latvians are in trouble. November is the month when Lāčplēsis Day is celebrated. This month, more than a decade and a half after the barricades of 1991, the Latvians proved they are still able to put up a good fight. Weathering the first blizzard of the season in Riga’s main square to demand the change of government, they showed they are ready to fight for transparency in politics and business. Our political commentary explains how the current turmoil in Latvia illustrates a larger problem that prevails in all of the new EU and NATO states – managing transition from “wild capitalism” to “capitalism with a human face”. In fact, sometimes Latvians can get caught up in fighting - often amongst themselves. Especially if the prize is ownership of the largest oil terminal in the Baltics. Trying not to get tangled up in the web of conflicting interests that surrounds Ventspils Nafta (this month the fighting got worse), we looked at how a year ago a major foreign investor took the risk and made the plunge in the midst of turmoil. Was it worth it? Read our cover story and an independent Latvian energy expert’s opinion to find out. In fact, this month our pool of authors is bringing you an array of expert advice: a macro analyst from Latvia’s top bank looks at what growing inflation means for foreign businesses; a lawyer from a renowned international advocate bureau shares a piece of free legal advice for those brave enough to still be thinking M&A; an expert on CSR explains why engaging in corporate philanthropy is becoming come il faut for business strategy in Latvia. And this not only because soon it’s Christmas time. One last piece of advice: while trying to understand the yield margins of Latvian real estate investment funds – warm up your dark Latvian morning with a buttery croissant and a sip of freshly brewed coffee while watching the rush of Riga from a Jacob’s Barracks café run by a French ex-pat. You might never want to leave this Lāčplēsis city.
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THE INSIDER
2007.11.16. 13:51:14
Contents
Contributors
16
10
4
News
38
30
Corporate Philanthropy Wise strategy for your business Investing after the boom A look at Latvia’s real estate funds
8
Economics What Latvian inflation means for foreign businesses
10
Politics What moves Latvians?
32
12
M&A Lauris Liepa shares legal advice
36
Country tourism Taking your money out of Riga
16
Transit Up or Down? A look at the free port of Ventspils
38
Fresh from the bakery Expat success story
40
Gadgetry Discover Latvia with Route 66
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THE INSIDER
Dr.Atis Lejiņš is the director of the Latvian Institute of International Affairs. Born in Jelgava, Dr.Lejiņš has lived in Germany, Australia, the United States and Sweden. Returning to Latvia in 1991 as an active member of the pro-independence Latvian Popular Front, he founded the Riga-based think-tank. The Institute turned into a leading opinion-maker on issues of regional security, Baltic geopolitics, Latvia’s EU and NATO membership, economic development and Baltic States cooperation. Lejiņš has consulted the World Bank on the Baltic States in the EU and is the author of numerous Latvian and international publications.
Dr.Atis Zakatistovs is a change management and business ethics consultant. Zakatistovs served as an analyst for the Canadian government, has launched projects to attract risk capital into regional development, created training systems for entrepreneurs in undeveloped regions and researched ethics issues at the Canadian State treasury. Having studied at Ottawa University, McGill and Concordia University in Montreal, Zakatistovs has returned to Latvia and now works on improving business ethics in this country. He is the founder of “Partners in Ideas Foundation” and is an outspoken advocate of CSR, providing corporate training on negotiation and critical reasoning.
Issue №4 | 2007
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2007.11.16. 13:53:07
4x NEWS
local politics
KNAB AVALANCHE
know that their money is safe and their investment protected. They need to know that they will be able to do business without being asked to pay bribes or "protection money"... Potential investors are attracted to countries which strictly adhere to the rule of law," said the US ambassador.
Knab’s chief corruption fighter aleksejs Loskutovs
O
ctober was a month of political turmoil for Latvia as a snowball thrown at the country’s main institution fighting corruption caused an avalanche of a reaction. Prime Minister Aigars Kalvitis announced his descision to suspend the head of the anti-corruption bureau (KNAB), Aleksejs Loskutovs, under a dodgy pretext – a minor financial misappropriation, revealed in an audit. The State Auditor repeatedly stated that it found no significant violations that would justify Kalvitis’ decision. The government formed a legally-dubious commission to investigate Loskutovs and quickly voted for the KNAB chief’s dismissal, passing the issue to the parliament. The campaign against Loskutovs, who has investigated and arrested scores of corrupt officials, businessmen and politicians, was generally viewed as politically motivated and aimed against KNAB as a whole. "It’s a political attack," said Roberts Putnis, the chief of Delna, Transparency International’s Latvian office. "If Loskutovs is fired, it will be the end of the anti-corruption work in our country," Delna said in a statement.
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The sacking of Loskutovs coincided with an unprecedented gesture from the United States, which many took as a strong signal and which stirred political debate even before it was delivered: US ambassador to Latvia Catherine Todd Bailey called on the Latvian people to defend democracy and to not allow their country to become “the playground of a few individuals where they go to line their own pockets and those of their friends.” In a speech delivered to a University of Latvia’s packed audience, the American diplomat reminded Latvians of how they defended their right for freedom and democracy at the barricades and pointed out that it is up to the people to decide which road Latvia will take and whether it will “continue down the path of reform and strengthen the rule of law, increase transparency and further develop itself as a free and democratic state." Ambassador Bailey specifically stressed that the development of the rule of law in Latvia is an important issue for the global business and investment community. "I have actively encouraged American companies to consider Latvia as a place to do business... But investors want to
Photo: LETA
Foreign investors meanwhile sent their own "diplomatic", but strong signal: in a statement FICIL (the Foreign Investors Council in Latvia) has named shortcomings in Latvia’s tax system as one of the reasons for the present unbalance of Latvia’s national economy and suggested a program for revamping the system. Premier Kalvitis promised the suggestions will be evaluated as the economic stabilization plan is drawn. It did not take long for Latvians to prove they are, indeed, active citizens: following the announcement to sack the popular head of KNAB thousands of protestors picketed the Latvian parliament to demand the resignation of the government. An emergency Saeima session where a vote of confidence was cast, kept Kalvitis’ government in place, but showed deep divisions within it. Member of the majority ruling People’s Party, Foreign Minister Artis Pabriks, announced his resignation in protest against the government’s actions. Another party member, the popular minister of regional development Aigars Stokenbergs lost his position and was denied party membership for expressing his independent views. None of the politicians wished to accept the post of Economy Minister. An active behindthe-scenes process of building a new political force is currently underway. President Valdis Zatlers, greatly pressured to address the political crisis, pointed out that the government should stay in place to adopt the next year’s budget, although even he admitted that the present government cannot stay intact as is. The president has refused to disband Parliament. Meanwhile the Free Trade Union Confederation launched a signature drive to support changes in the Constitution that would allow the people to propose dissolving Saeima. Issue №4 | 007
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THE INSIDER
2007.11.16. 13:53:49
NEWS
local economics
An Energetic Month
October was marked by numerous events in the energy field.
I
nternational Energy Security Summit delegates in Vilnius announced the decision to finish building a new oil pipeline that could potentially supply Europe with Azeri, and even Kazakh, oil via a southern route bypassing Russia. The Odessa-Brody-Plock-Gdansk route bringing oil to Poland and from there to the Mazeikiai refinery and potentially Ventspils, is a long-standing project, with questions regarding its economic viability still remaining. Analysts suggest the Azeri oil volumes are not enough to balance the investments and that only Kazakhstan’s participation can produce the needed flow. Kazakh’s stance will depend on the balance between the interests of Russia on one side and the European Union partnered with the United States, on the other. On the downside, the Vilnius summit delayed the long-awaited decision on the new Baltic nuclear power plant, which is planned to replace the closing of the Ignalina plant in Lithuania. The reason for delay was the inability of Lithuania and Poland to reach an agreement on the quantity of electricity allocated for each country – each participant is asking for more than the other is willing to give up. The final announcement was left for after the Polish general elections.
After a thorough analysis of the effect that the imposing of new CO2 quotas will have on Latvian energy and industry
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sectors, the working group from the Ministry of Economy submitted a list of possible scenarios of distribution quotas among the different sectors of the Latvian economy. The European Commission has allocated a much smaller CO2 emissions quota than Latvia requested for the 2008-2012 period: 3.43 million tons. In doing so, the Latvian side claims, the commission did not take into consideration the extra needs of the new “Cemex” cement plant, a new cogeneration plant and a coal power plant. Latvia and several other European Union member states have appealed the commission’s decision in the European Court of Justice. EU Energy Commissioner Andris Piebalgs believes that the quota in Latvia should be divided in favor of the energy sector. The industry leaders, however, argue that production should be supported, to improve Latvia’s competitiveness. Prime Minister Aigars Kalvitis has stated that the CO2 emissions quota will be distributed fairly among Latvian enterprises. Energy, production and industry are all priorities, Kalvitis said. The quota, according to him, will be divided so that Latvia’s economic development is not hampered. He went on to say that allotting a smaller quota than required for the energy sector will cause tariffs to rise, whereas a quota smaller than necessary for industry will affect competitiveness of exports.
Energy security issues were addressed in various conferences and seminars held in Latvia last month. At the Latvian Transatlantic Organization-organized high-profile conference “Europe at the Crossroads: Agenda from Rīga to Bucharest” leading international experts discussed European energy independence within the general framework of NATO security. The Latvian Foreign Ministry together with the prestigious British Wilton Park Conference Center held a little-publicised event in Jurmala, where energy security in the Eastern and Baltic Dimension was evaluated by the UK Foreign Office representative Tim Abraham, head of the Cabinet of the European Commissioner for Energy Andris Ķesteris, Latvenergo’s Kārlis Miķelsons and other experts. A vice-president of BASF flew into Riga for a seminar on energy efficiency and clean technologies organized by the German-Baltic Chamber of Commerce. The representative of the offshore gas pipeline NordStream’s shareholders did not pass a chance to try to promote the megaenergy project. November keeps energy issues in focus: Denmark held a seminar on climate change and energy efficiency and Energy and Environment Trade Show will take place in November 22 – 24 in Riga.
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NEWS
global geopolitics
Nord Stream navigating
N
ord Stream, the controversial mega-project to build a gas pipeline from Russia to Germany via the Baltic Sea seemed to have suffered a blow, when Sweden refused to accept the route proposed by the project operators.The Swedish government demanded that the Nord Stream route be shifted eastward to the Baltic coasts to reduce any environmental danger to the country. Nord Stream AG said it would consider Sweden’s demands. A few days later Nord Stream came back with its own big news: the project was joined by Dutch gas infrastructure company N.V. Nederlandse Gasunie. The Dutch partners will work with Russia’s Gazprom monopoly and German E.ON Ruhrgas and BASF/Wintershall as the principal terms and conditions have been agreed on during talks in Moscow. Gasunie will get a 9 percent stake in the joint venture, Gazprom will keep its 51 per cent stake and the German companies will hold 20 percent each, each ceding 4.5 percent to Gasunie. This news was followed by the announcement of a contract signing with German EUROPIPE for the supply of 860,000 tons of large-diameter steel pipes for the pipeline construction. The order will cost Nord
Gas import of the European Union, 336 billion cubic metres in 2005, is projected to grow by 200 billion cubic metres to 536 per year in 2015. Nord Stream claims that connecting Russia’s large gas reserves with the European gas pipeline network, it will meet about 25 per cent of that additional requirement. (Source: Global Insight, 2007)
Stream more than 1 billion euros. The first pipeline is planned to be completed and installed in 2010. Nord Stream was set up for the planning, construction and subsequent operation of a new offshore gas pipeline from Vyborg (Russia) to Greifswald (Germany). The ambitious project is estimated to cost around $12 billion and is scheduled to be completed in 2012. The first of two parallel pipelines, approximately 1,200 kilometers (750 miles) long, each with a transport capacity of some 27.5 billion cubic meters per annum, is to become operational in 2010. In the second phase, capacity should double to about 55 billion cubic meters a year.
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The biggest challenge is coordinating the pipeline route with countries on the Baltic Sea, who have been highly critical of the project from the start. The route has been the subject of intensive international consultations for more than a year. Finnish authorities proposed laying the pipeline along an alternative route in the Gulf of Finland, which would bring it closer to Estonian shores. In late September, however, Estonia officially turned down Nord Stream AG’s request to approve research on the Baltic seabed in Estonian commercial waters because the research would involve drilling in the area. In a statement the project’s operator expressed confidence that “the route which will be presented to the Swedish authorities later this year is the best possible solution in terms of technical, environmental, and economic feasibility.” The project, which has been heralded by its operators as an important contribution to the long-term security of gas supplies is perceived by many in the European Union to be the exact opposite – a tool that would further extend EU’s dependence on the Russian monopoly.
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ECONOMICS
Western European prices in Lettonie profonde? What does inflation mean for foreign businesses operating in Latvia? In the short run the answer depends on whether these businesses are getting their revenues mainly from the internal market or whether they produce goods and services for export. In the first instance higher inflation brings both higher costs and revenues, in the second instance only higher costs, unfortunately. Besides, even for those companies who sell to Latvians – whose value scales are shifting at an accelerating rate – inflation brings trouble for the future. Andris Strazds wrote here in previous columns, he believes that the devaluation of the lat is very unlikely. On that - I agree with him. But on the assumption that the local currency is still undervalued - I don’t. Indeed, Latvia’s GDP at US purchasing power parity is still significantly higher than the nominal GDP, but this is the only possible state of affairs for a country that is still relatively poor. Given Latvia’s stage of development, its price level is already quite high, especially in areas like real estate and construction. So one can expect that the economy will soon start to feel the “pull” exerted by its currency peg, that will slow down both inflation and GDP growth. Inflation will probably stay high as long as the effects of the recent global food price jump and the last big “adjustment” of natural gas prices for Latvia, on January 1, 2008 work through the economy. This at least until next autumn, when the new harvest arrives and Gazprom’s bounty is fully priced into local heating costs. Then inflation could suddenly fall like a stone, especially if the expected global slowdown moderates energy and food costs and the local economy cools down. The last event is very probable. Inevitable, I mean. We will see a circle of falling optimism and real estate (RE) prices, smaller realized capital gains, adjustment of salaries and of profits in RE and related sectors. From this a slowing down of internal demand will follow. The first signs are already here: retail turnover rose 19 percent annually in August, significantly below the 26 percent increase observed earlier this year. This is just what the doctor ordered for improving the economy’s long term health, a remedy which might be quite unpleasant to take. The economy may land softly, but only thanks to a splash of cold water, the plunge
As
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will surprise many people, despite plentiful warnings by scores of local experts and foreign luminaries. During the times of double digit growth (2005, 2006 and early 2007) people developed some silly beliefs, like “real estate prices can never fall” or that it is somehow inevitable that prices in Latvia will quickly reach the average EU level. Of course, there is nothing inevitable about it. After Pēteris Strautiņš enjoying itself for more than is a principal 20 years in the EU, Portugal is socioeconomics expert still significantly cheaper than at Hansabanka the average member state. The reason of course is the failure to reach the average EU living standards. If Latvia is the next Ireland, then getting a haircut in Rīga will indeed become more and more expensive. Fortunately for your good looks, the success of Ireland was based on a uniquely favorable combination of external factors and wise internal decisions that Latvia probably cannot match. There are still certain catch-up opportunities but I suspect that the economy will slow down significantly before reaching the GDP per capita levels currently observed on the opposite side of the Baltic sea. The overall level of knowledge and skills is still inadequate and it will become more difficult to upgrade them as the number of young people will drop precipitously in the coming years. So, local prices and costs could remain relatively low for years to come. Until now you could make a lot of money Issue №4 | 2007
2007.11.16. 13:54:07
ECONOMICS
Price level in Latvia as % of EU-27 average, if inflation level doesn't slow down
110 100
“During the times of
double digit growth people developed some
silly beliefs, like “real estate prices can never fall…”
90 80 70 60 50 2004
2005
2006
Latvia
2007
2008
2009
2010
2011
2012
2013
EU-27 average
What will happen if prices in Latvia continue to rise as rapidly as in 2007, when the average inflation is forecast to hit 10% (Hansabanka forecast)? Assuming that prices in EU-27 will rise by 2.3% in 2007, 2.4% in 2008 and 2.2% in 2009 as forecasted by EU Commission and continue at the same pace from 2010, the EU and Latvia's price levels will fully converge in early 2014. “It is obvious that inflation in Latvia will fall as it is not possible to reach the EU average GDP per capita until 2014 and you cannot have price convergence without real convergence," says Hansabanka's Pēteris Strautiņš. Source: Hansabanka
through serving the internal market but this will change. I expect that Latvia will again become a good place to set up manufacturing operations. EU sponsored investments in infrastructure will at least partly address the notorious road quality issue. After learning that the times of easy growth are over, people will devote their energies to making themselves more useful for their prospective employers. There is a chance that many graduates in social sciences and humanities will have to gain their living in blue-collar professions. Their superior analytical and communications skills will
stay so there will be a large pool of excellent, if somewhat over-qualified middle managers available after a while. So, if your time horizon is sufficiently long, the advice would be - invest in export sectors, however unappealing these might look now. If somebody says to you that inflation will stay at current levels for “several years”, think about this: “several years” of such inflation and this country will be at, or above, the euro zone price level. From where will the money come from that could sustain Western European haircut prices in Lettonie profonde?
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2007.11.16. This chart shows what would happen if prices in Latvia continue to rise
13:54:12
Political Commentary
Quo vadis Latvia?
If 5,000 Latvians were ready to brave the rain and biting cold to demand the fall of the government, as they did on October 18 at 8:00 in the morning, and if two weeks later another 10,000 could gather in the first blizzard of the season in the main Old Town Square, then something definitely has happened in Latvian politics. Latvians are “Nordic” and hence not easily moved, unless faced by something really threatening. by Atis Lejiņš
Is
Moscow massing troops on the eastern border? No. The Latvian government instead has decided to attack KNAB, the Office for Combating Corruption in Latvia, which was established shortly before Latvia joined the EU and NATO in 2004. Prime Minister Aigars Kalvitis had gone on TV and announced that he had lost patience with its director, Aleksejs Loskutovs, and hence fired him. The alleged reason was faulty bookkeeping, which the State Audit had noted four months earlier. Just days later, after Loskutovs’ firing in a vote of “no confidence” in the parliament, Kalvitis admitted that this was a political mistake, but that he had acted in good faith. Few believe that errors in bookkeeping were the real reason for dismissal. If so, most ministers would have to be sacked, not to mention corporate CEO’s. Both the State Attorney and the State Audit itself were surprised by the harshness 10
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from Kalvitis. In fact, the State Attorney came out to say that the dismissal was illegal, while the Latvian president Valdis Zatlers announced that the “punishment was not adequate to the crime.” KNAB has to be careful with bookkeeping relating to secret operations, otherwise any leakages could bring trouble from the Bureau for the Protection of the Constitution (Latvian acronym SAB), the main secret service body that watches over state secrets. The general feeling is that KNAB was becoming too successful in fighting corruption – a “danger” faced by similar organizations in the rest of the new EU/NATO member states. This can lead to political interference resulting in the “reorganization” of the agency concerned, which, in turn, results in the removal of the “danger”, at least for the time being. In Latvia’s case KNAB was digging too deeply into party election funding sources and sharpening its knives against the power brokers in Latvian politics, the
so-called oligarchs. One is already under house arrest and facing trial, something that would have been unimaginable only a year ago. The government survived the noconfidence vote, but after the budget for 2008 is passed, Loskutovs was next on the agenda. But the Saeima (parliament) balked even before the budget vote, and threw the Loskutovs “file” back to the government. That means Kalvitis will have to go, and Loskutovs will stay. The “voting machine” of the ruling center right coalition of four parties is cracking before the onslaught of public opinion. The trade unions, dissatisfied with wage increases, are, in addition, calling for the dismissal of the parliament, a possibility that President Valdis Zatlers has not discounted. Polls show that 57 percent of voters would like a new Saeima. Already four ministries have only caretaker ministers, due to defections, a sacking, and hesitancy by a coalition member to assume a portIssue №4 | 2007
2007.11.16. 13:54:14
Political Commentary
Protest at Dome Square in Riga on Nov. 3 was one of the largest political demonstrations since Latvia regained independence in 1991
folio in a government whose days are numbered. What is the basis for this extraordinary series of events which literally exploded when the American ambassador to Latvia, Madam Catherine Todd Bailey, delivered an emotional speech to a packed audience in the Great Hall of the University of Latvia just two days before the spontaneous demonstration on October 18? This was an extraordinary event that shocked Latvia – a major ally warning that Latvia could be departing from shared values. Apparently the government was not listening to the “quiet diplomacy” channels usually reserved for such purposes. The US was instrumental in setting up KNAB as a condition for Latvia joining NATO, as indeed it was the condition for a number of other new NATO entrants. Washington was now faced with a “roll-back” in an area considered strategic by both the United States and Latvia.
The current political turmoil in Latvia illustrates a larger problem that prevails in all of the new EU/NATO states, i.e. how to manage the transition from “wild capitalism”, that reigned supreme
Latvians are “Nordic” and not easily moved, unless faced by something really threatening. during the 1990’s, and “capitalism with a human face” that is now the logical outcome after privatization has ended. Poland and Hungary, for example, show that politics will be turbulent for some time to come. The danger is that one step backwards will not always mean that two steps will be taken forward unless civil society is strong and active. In the frantic rush to catch up
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with the living standards of the older EU countries, an independent judiciary with special corruption fighting bodies that are free from political control is of decisive importance. Enormous
resources can be saved that can fill the state budget with revenue that can be spent on raising wages for the police, prosecutors, doctors and teachers who are leaving their posts for better paid jobs in Old Europe. Dr. Atis Lejiņš is the Director of Latvian Institute of International Affairs, a Riga-based think-tank THE INSIDER
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2007.11.16. 13:54:15
legal
by Lauris Liepa
Latvia has been experiencing some good times. Latvia’s GDP growth of 11.9% in 2006 was the highest among the European Union nations; GDP was 11 billion lats (15.7 billion euros) in 2006. Total reported profit of Latvian companies exceeded 1.62 billion lats. According to data provided by Lursoft IT, the turnover of companies operating more than 5 years doubled in 2006 in comparison with the previous year, while profit has grown by four times. According to statistics from SSE Riga, last year the amount of extended loans increased by 58%, or 3.5 billion lats. Accumulated direct foreign investment into Latvia has reached 4.04 billion lats, the proportion of foreign investment in the economy constituted 8.1% in 2006, in comparison with 4.6% in 2005. 12
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Issue â„–4 | 2007
2007.11.16. 13:54:16
legal
D
uring the last calendar year 13,501 new companies were established in Latvia, a record number so far; among the newly registered companies is a 30 percent increase of European Union foreign investment, compared with 2005. According to some forecasts, however, the number of newly registered entities this year may not reach the figure of 2006. Commentators suggest that one of the reasons may be increased consolidation and merger activity in the maturing market. These factors have stimulated the merger market to unprecedented levels. Similar tendencies – attractive financing conditions, continued growth of earnings have fuelled M&A market growth in the
with the first half 2006. M&A activity with European involvement exceeded 1.3 trillion US dollars, constituting a 56.9 percent increase from the last year’s total. The reports from Thomson Financial indicate that private equity firms are in the forefront of the M&A market: 24.3 percent of the overall volume of the announced deals had been handled by private equity firms, comprising a 95.5 percent (!) increase in comparison with 2006. Growth in private equity participation in the transactions has been a particularly visible tendency this year in Latvia. Public information on major completed transactions in Latvia provide evidence of this: Central and Eastern European leading private equity group Mid Eu-
the company chart, composed by Dienas Bizness, on the basis of company net turnover, had experienced a positive merger of equals: building and construction material trading companies Tapeks and Aile joined in the beginning of the year with a positive anti-trust regulatory approval. Wood processing company Wika Wood (75th in the chart) and building company Latvijas Energoceltnieks (83rd in the chart) were acquired by private equity shareholders this year. The most recent public announcement related to conditional approval granted by the Latvian Competition Council to the merger of two entities listed respectively in the 24th and 34th positions by turnover on the Dienas Bizness chart: prominent alcohol brand producing and trading company Latvijas
Assessment of transaction from the competition perspective and analysis of the necessity for clearance has become a natural part of Legal checklist in Latvia. rest of the Europe and internationally. The first part of the current year has been record breaking for the M&A industry globally. The number of announced mergers has soared; according to Thomson Financial the total announced M&A activity reached 2.7 trillion US dollars, which constituted an astonishing 62 percent increase in comparison with the first half of 2006. The global cross-border activity increase accounted for another record figure: 47.6 percent compared
ropa Partners acquired BITE, a mobile telecommunications operator in Latvia and Lithuania, in February; a private equity fund managed by one of the world’s largest investment organizations Capital International participated in the acquisition of LODE, the largest producer of ceramic building materials in the Baltic region. Many of the top-100 Latvian companies have been participants in the M&A activity. Tapekss, this year number 51 in
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balzams and AV&D, alcoholic beverage wholesaler. All the above examples indicate a specific tendency, characteristic to the Latvian merger market. Most of the material transactions had been cleared by the Latvian Competition Council. Assessment of transaction from the competition perspective and analysis of the necessity for clearance has become a natural part of the legal checklist for transactions in Latvia. THE INSIDER
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2007.11.16. 13:54:28
legal
Another noteworthy characteristic is the relatively early stage of development of the M&A activity among publicly listed companies. The most recent example this year was the acquisition of 82 percent of shares of public joint stock company Lode by Capital International for the disclosed deal value of 16.6 million lats. There are historic reasons for this exceptional situation. The transacLauris Liepa is an attortion market evolved in the early ney at law in the law firm 90’s by massive acquisitions of Liepa, Skopina/BORENIUS, state – owned enterprises within part of Borenius Group the framework of the general law offices presented in privatisation program. The pri- the Baltics and Finland. vatisation program was largely Mr.Liepa advises both incompleted within the decade ternational and domestic by the listing on the stock ex- clients in multiparty transactions and reprechange of the majority of the sents parties in Latvian privatised enterprises, albeit a courts and in arbitration number of important businesses proceedings. He is a law are still wholly or partly owned lecturer at the University by the government, e.g. energy, of Latvia and Riga telecoms, railway and general Graduate School of postal services. The latest major Law. Liepa, Skopina example of the privatisation of /BORENIUS advises lostate owned business assets was cal and international financial institutions such the sale of 38.62 percent of Vent- as Merill Lynch, Morgan spils Nafta shares to Vitol Group Stanley, UBS, Deutsche in October 2006, for a sales price Bank, OMX. of 74 million lats. The Insider has already extensively covered the forthcoming management buy-out of Lattelecom. This transaction, currently subject to government approval could become a headline deal, involving participation of a world-class private investor, a pool of banks as syndicated lenders and a class of employees as shareholders and option holders of this large telecoms company. It has been announced that the proposed deal structure envisages listing stock options on the exchange. The only licensed Latvian stock exchange, the former Riga Stock Exchange, is part of OMX Nordic Exchange, which had this year itself experienced the rivalry of two competing bidders. We shall hope that further globalisation of the stock markets as well as continued investor interest will develop the Latvian M&A practice and business culture. Meanwhile, the Latvian merger market will inevitably be influenced by the visible negative signs of an overheating economy. Record inflation is already adversely affecting the competitiveness of Latvian companies. Subject to Latvian Commercial Bank Association reports, current lending of Latvian banks in terms of total amounts has decreased three times compared with the first quarter of this year. This may affect the merger market even if the financing of major recent transactions had acquired the resources of foreign sponsors and lenders. 14
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M&A in Latvia checklist
1.
Determine the type of the target company: SIA (limited liability) or AS (joint stock company), listed vs. non-listed company: in order to be able to forecast the approximate length of the M&A deal; identify the areas of business the target company is involved to determine if the advisors need to have special qualifications or previous experience;
2. 3. 4. 5. 6.
Appoint legal and financial advisors in order to conclude a letter of intent, memorandum of understanding and carry out the respective due diligences; Conclude a letter of intent or similar documents prior to the due diligence; attempt to negotiate exclusivity;
Carry out the required due diligences. Normally those would be legal and financial (including tax), but there may be some sector specific reviews required, for instance, environmental; The due diligence should result in a general overview about the target company as well as an indication of the risk factors; due diligence reports should be used to structure the share purchase agreement, especially the section on representations and warranties;
At the end stage of the due diligence the advisors of the buyer should also be able to point out if a merger notification must be made in accordance with article 15 of the Latvian Competition law. That should also be taken into account when structuring the share purchase agreement since often times the competition clearance is defined as condition precedent to the closing;
7. 8.
Similarly, it should be determined if any other regulator must be notified and clear the transaction prior to the closing, for instance, the local financial supervisor, the Finance and Capital Market Commission;
Negotiate the share purchase agreement taking into account the need for general and specific representations and warranties, indemnities of the purchaser, retaining part of the price in escrow, as well as conditions to the closing, such as the competition clearance or regulatory consent;
9.
Conclude the share purchase agreement with simultaneous or even prior submission of the notifications to the regulators involved. It is advisable to make the notifications required to the authorities well in advance since the periods for clearance may potentially be rather lengthy, e.g., 4 months for the competition clearance and 3 months for the clearance from the Finance and Capital Market Commission;
10. 11.
Fulfil the conditions precedent to the closing and close the transaction acquiring control over the target; usually, changes to the board and/or supervisory council of the target company need to be effected prior/simultaneously with the closing; Arrange the necessary notifications about the changes of shareholders to the Enterprise Registry or, with respect to listed companies, to Finance and Capital Market Commission and the Stock Exchange. Issue â„–4 | 2007
2007.11.16. 13:54:31
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2007.11.16. 13:54:34
COvEr StOry
by Daria Kulagina
Ventspils is a Latvian paradox: a city with both huge economic success and raging political scandals. A gateway that turns this small country of 2.5 million people into a bridge between East and West and, at the same time, a tangled web of conflicting interests aiming to control businesses bringing millions. What is happening in Ventspils today and where is it headed, trying to navigate through the murky deals surrounding its main businesses? Can it retain its identity as a transit port or will it have to search for new and more high-tech solutions, other than just pumping oil through the pipes?
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Issue â„–4 | 007
2007.11.16. 13:54:37
Cover story
As for the pipelines, perhaps only the technicians responsible for their everyday functioning know their true configuration: locations, interconnections and flows. How interested these technicians would be in sharing this sensitive information remains a question. On the other hand only the prosecutor-general, probably, will one day be able to draw the full picture of Ventspils Nafta's ownership. This is exactly what Latvia’s chief prosecutor Jānis Maizītis is busy trying to do now. It is long believed that one cannot think "Ventspils" without thinking "Lembergs". Anyone who’s ever even remotely dealt with Latvia has at least heard the story. Aivars Lembergs, a millionaire and the long-term mayor of the port city, until recently was in de-facto control of Latvia’s oil transit business and, basically, all businesses in Ventspils. His influence was enormous and even Lembergs’ opponents have admitted that the city’s rapid development was basically driven by him, gaining him local popularity. During the last general elections the Greens and Farmers Union party nominated him as a candidate primeminister. Instead, a few months later Lembergs found himself behind bars, charged with bribery, money laundering and tax evasion, and abuse of elected office. To make the story more complicated, former business partners blamed Lembergs and his immediate associates of unlawful transfer of part of the shares of the Ventspils Nafta Joint Stock Company (VN) to new owners. Bitter disputes, practically turning into a transit warfare, seriously put in question the ability to continue operating the transit and transshipment business.
T
rying to untangle the tangled web of murky deals around the ownership of the main Ventspils business – the oil transit and transport company Ventspils Nafta – is as hard as trying to understand the pipeline system that crisscrosses the territories between Ventspils Nafta’s Terminal, it’s main rival, Ventbunkers and the port of Ventspils.
A good deal A new twist in the Ventspils story started earlier, a year ago, when a large international player entered the game. Something Ventspils Nafta itself later called the ending of the "more than ten-year-long privatization process" and entering into "a new stage" of the company’s development. At a public auction on the Riga Stock
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Exchange in October 2006, Euromin Holdings (Cyprus) Limited, a subsidiary of the global oil trading Vitol Group bought 34 percent of Ventspils Nafta state-owned stock, paying 75 million US dollars. What seemed at first glance as a fairly big amount of money was actually a really good deal for Vitol. The catch is, Ventspils Nafta today is not just the oil terminal, but also the Latvian Shipping Company, real-estate and even mass media. Buying a third of Ventspils Nafta stock meant gaining access to the company for a price comparable to that of a mere couple of Latvian Shipping Company tankers. Altogether the Latvian Shiping Company has more than 30 such tankers. The main "currency" that the Vitol traders used to obtain access to Ventspils Nafta was not the actual dollars, however. It was a promise to ensure Ventspils does see large amounts of oil. The problem has been that Russia, the longterm supplier of transit oil, has closed the crude pipeline and considerably shrunk the volumes passed by the oil products line.
"Russia’s reliable partner" Transport and transshipment of Russian crude oil and oil products is still listed on Ventspils Nafta’s website as the terminal’s main activity. Ironically, the company still proudly calls itself "the oldest and most reliable partner of Russia’s biggest and most influential oil companies." Latvia’s oil industry was, indeed, built in Soviet times. The three Baltic countries, then Soviet Republics, offered Moscow a set of northernmost ice-free ports – something greatly valued by the Russians since as far back as the dark times of Ivan the Terrible. The ports had been developed in Soviet times to facilitate Soviet trade. Two major pipelines linked the port of Ventspils into the USSR’s oil industry. After Latvia’s regaining of independence in 1991, its oil infrastructure was broken up and set for privatisation, a long process often suspected of lacking transparency. As a result something that once comprised one complex and THE INSIDER
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Cover story
With its large storage capacity will Ventspils become a mini-Rotterdam of the Baltics?
Only the prosecutor-general, probably, will one day be able to draw the full picture of Ventspils Nafta's ownership included the pipelines, the terminal and loading facilities, was now a network of companies with unclear ownership. Throughout the 1990s, and even in today's murky circumstances, Ventspils remained Russia’s main outlet for crude and refined oil. A quick glance at the figures gives an idea of what that meant for the Latvian economy: if at the end of the 1990s Russian trans18
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shipments represented 4-6 percent of the gross domestic product in Lithuania and 7-9 percent in Estonia, then in Latvia it reached 8-10 percent of the country’s GDP. It was a mutual Baltic-Russian inter-dependence: together the non-Russian ports handled almost half of Russia’s total North-West export, import and transit cargoes. About three quarters of Russia’s oil and liquid chemicals were shipped through
the ports of the Baltic countries. However, political tensions between Moscow and Riga and business disputes between the Ventspils group and Russian oil transit giant Transneft resulted in closure of the crude-oil pipeline to Ventspils in 2002. All efforts to have the crude pipeline reopened have failed and crude supplies now reach Ventspils by train – an option considerably more expensive than pipeline. Issue №4 | 2007
2007.11.16. 13:54:42
COvEr StOry Stepping into Peter the Great’s shoes
By the time of the crude pipeline closure the Russians, resurrecting ‘great power’ rhethoric, had already developed grand new plans to compensate for losing control over the Baltic outlets: they built their own oil loading facilities on the Gulf of Finland. A native of St.Petersburg, President Vladimir Putin liked the idea of stepping into Peter the Great’s shoes and finishing what the Tsar had started three centuries ago: Russia taking control of its own outlets to the sea in the north. Russia’s politicians and officials jumped at the idea, claiming that the Baltic countries profited for over a decade from fees charged for handling Russian oil and dry cargo passing through their ports, and that those profits came at Russia’s expense. According to their estimates, Russia lost at least $2 billion a year in duties and other fees in the Baltic transit trade. The oil loading facility at Primorsk, 100 miles northwest of St. Petersburg in the Leningrad region near the Finnish border, was built as an outlet for oil pumped from fields in the vast Timan Pechora basin in Russia’s far north. Other projects sprang up. A new port at Ust-Luga, 70 miles southwest of St. Petersburg, opened to handle up to 35 million metric tons yearly of coal, iron ore, timber and other dry cargo. Doubling up the capacity of the docks, St. Petersburg itself will by 2010 be able to handle 60 million metric tons of cargo a year with new oil-loading facilities and fertilizer ternimals. Some analysts have pointed out that the new Russian facilities will continue to be at a competitive disadvantage to the other Baltic ports, where dockworkers are more experienced and have a better service track record than in St. Petersburg, where many shippers say corruption abounds. They point out that Baltic port taxes and customs duties tend to be lower than Russia’s. In addition, one big factor handicaps the Russian projects and cannot be easily dealt with no matter how high the amount of investment or training: geography. The Russian ports are in the shallow end of the Gulf of Finland. Add to this the ice-breaking costs in the winter and the environmentally-risky all-year-round marshy areas the pipelines go through and one might start to feel nostalgic for the deepwater and closer-to-Europe Baltic ports.
Dutch traders with connections
Nevertheless, cutting the crude oil transit through Latvia disrupted business in Ventspils and delivered a hard blow to Ventspils Nafta. Some insisted that the only chance of saving the business would be to let Russians have a part in it, a thought Latvian nationalist parties opposed viciously and something Ventspils Nafta was probing, but not finding common ground with Russian companies. The ‘Dutch traders’ of the huge global network Vitol entering the scene with connections in Rotterdam and around the world and promises of high oil volumes have, therefore, been presented by Ventspils Nafta itself as a
Russia’s quest for warmer waters
Ventspils is an important ice-free port. As such it has long been sought after by the Russian Empire. Growing from a castle of the Livonian Order, first mentioned in chronicles in 1290, Ventspils quickly became an important merchant city of the Hanseatic League. Russia’s Ivan the Terrible, adopting a policy of empire-building, eyed the port in the 16th century as the gateway to the West. For twenty four long years he fought the Swedes, Lithuanians, Poles and the Teutonic Knights to gain access to the territory only to have the Russian economy and military badly damaged by the Livonian war. Peter The Great, another Russian Tsar seeking access to open seas for easier trading with the Western world, gained territories in the Baltics from the Swedes during the Great Northern War. Even then the Duchy of Courland, including Ventspils, remained autonomous - up until 1795 when the last Duke, Peter von Biron, finally ceded the Duchy to the Russian Empire. A “warm water port” was a long term aim of Russian foreign policy. Although in the Russian Empire there did exist – in the Black Sea and the Russian Far Easr - ports where water did not freeze, Russian rulers felt they had inadequate access to the open ocean. Stalin’s insistence at the 1945 Yalta conference that the Soviet Union incorporate East Prussia in order to gain the port of Königsberg might have sprung from a similar motivation. The dream of a Russian warm water port is still exploited by nationalist parties in Russia today.
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2007.11.16. 13:54:46
Cover story
THE VENTSPILS WEB Where do rival companies' interests cross? Latvijas Naftas Tranzīts
Ventbunkers
Noord Natie Ventspils Terminals
Baltijas Expresis
Noord Natie Ventspils Terminals (NNVT), multi-purpose cargo handling center; a terminal for handling a spectrum of cargoes and vessels. Ferry lines for passenger transportation from Ventspils to Sweden, Germany and Estonia.
A railroad transportation company co-owned by Ventbunkers and Kalija Parks (The Potassium Park). Baltijas Expresis can transport cargo only based on a contract with Latvijas dzelzceļš.
Latvijas Naftas Tranzīts was registered in 1995 and included Latvia’s largest oil and oil products transporters and transshippers: Ventbunkers (who controlled the company), Ventrans Rīga, Skonto Nafta, Puses, Man-Tess. LNT was the largest Ventspils Nafta shareholder, owning 47.87 % of VN stock until a number of shares were sold by part of the company’s management, decreasing Ventbunkers’ influence in Ventspils Nafta and provoking rivalry among former partners.
Others
14.13%
37.98%
Ventspils Nafta
47.89% Kalija Parks The largest mineral fertilizer transshipment terminal in Europe, handeling around 20% of the potassium sold world-wide. 2 PANAMAX type vessels (up to 75 000 DWT) can be simultaneously loaded by the berths of the terminal. The total storage capacity of the company is 120 000 tons. Kalija Parks has been losing considerable transit cargo volumes from Belarus, which get rerouted to neighboring Klaipeda in Lithuania, where railroad tariffs are lower.
Vitol
51%
Nekustamie Īpašumi VN
(real estate management) Nekustamie Īpašumi VN manages Ventspils Nafta’s real estate in various market segments. SIA Nekustamie Īpašumi VN includes SIA Namserviss VN, an entity in charge of real property management, supervision and coordination of activities between real properties of the Group located in Riga, Ventspils and in other parts of the country.
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Latvijas Kuģniecība (navigation)
Preses Nams and Mediju Nams
LatRosTrans
Ventspils nafta is involved in the printing and publishing business since 1998 through Preses nams, a major printing group, and the Mediju nams Ltd, which publishes a wide range of periodicals, including three newspapers, weekly and monthly magazines.
Ventspils nafta owns 66%, 34% belongs to the Russian partner --Transnefteproduct. Oil and petroleum are delivered to terminals operating in the port of Ventspils and crude oil goes to the refinery in Mažeikiai and the oil terminal in Butinge (Lithuania).The total length of LatRosTrans’s pipelines exceeds 700 km. The overall capacity of the oil-pipeline is 16 million ton a year, with 8 million tons-capacity in the Ventspils direction.
(printing and publishing) JSC Latvijas kuģniecība is one of the world's biggest owners of small and middle size tankers and engages in oil product transshipment. Among Latvijas kuģniecība's clients are BP/Amoco, Shell, Navion and Exxon/Mobil. Ventspils nafta acquired its 49.94% of Latvijas Kuģniecība (Latvian Shipping Company) at a public auction organised by the Latvian Privatisation Agency.
(transport of crude oil and petroleum products by pipeline)
49%
Ventspils Nafta Terminals
(transshipment of oil and oil products) VNT Ltd is the largest company in the JSC Ventspils nafta concern. In addition to transshipment VNT performs quality analysis of crude oil and oil products at the company’s chemical laboratory. The history of Ventspils Nafta Termināls SIA began more than 45 years ago, in 1961, when the oil terminal with a capacity of 3 million tons per year was put into operation. VNT is capable of handling the largest tankers entering the Baltic Sea with a loading capacity of up to 130,000 tons.
Issue №4 | 2007
2007.11.16. 13:54:48
Cover story Ventspils Nafta One of the largest groups of companies in the Baltic States, VN is the owner of one of the biggest crude oil and petroleum products transshipment terminals in the Baltic Sea region. The Group manages daughter companies operating in a number of other areas of business: transport of crude oil and petroleum products by pipeline, navigation, real estate management, printing and publishing. In 1991, after 30 years of Ventspils terminal’s operations, the company Ventspils nafta was registered among Latvian enterprises. It became a public joint stock company in 1997, with shares quoted on the Riga Stock Exchange from 1998. Ventbunkers SC Ventbunkers was established in 1994 and operates in the territory of Ventspils Free Port occupying 27 hectares.The company has the capacity to recieve oil products delivered by pipeline and rail and further can load the products in tankers from 4 berths. Products are stored in tank farms consisting of 26 tanks with total capacity of around 275 000 m³. The company owns three discharge trestle bridges with the ability to handle simultaneously multiple railway tanks, a bunkering barge equipped with a flex blender and a laboratory for quality control of delivered and discharged oil products as well as ballast and sludge waters. The Vitol Group Founded in Rotterdam in the 1960s, today it is one of the largest and most influential players in the global oil market, covering practically all segments of crude oil, gasoline, fuel oil, middle distillates, naphtha, liquefied petroleum gas. Vitol Group’s assets include oil fields in Russia, Kazakhstan, Azerbaijan, the Philippines, as well as oil terminals in Europe, the Persian Gulf, in Asia and Latin America. In 2007 the Vitol Group through its daughter company Euromin Holdings (Cyprus) Limited acquired a 49% stake in the Ventspils Nafta Terminal. Prior to that in a series of deals the group accumulated 47.89% of the mother company Ventspils Nafta. The Others In April 2007, after the arrest of Ventspils Mayor Aivars Lembergs the board of Ventspils Nafta published a list of its shareholders. Besides Vitol’s Euromin Holdings (Cyprus) Limited and Latvijas Naftas Tranzīts the list named Nirbe Enterprises Corp (4.02%), Ventbunkers (0.63%) and Ostas Flote (0.39%) as shareholders. 9.09% of the total VN shares were still left unaccounted for. The question of how much of Ventspils Nafta Lembergs controls remains open.
panacea to all the troubles. Although to some Vitol Group’s interest in Ventspils Nafta shares was unexpected, the trading group could hardly be called newcomers to Ventspils: along with British Petroleum, Russian Lukoil and Yukos, Vitol was a major client of Ventspils Nafta for years and knew the situation well. Figures presented by Ventspils Nafta a year after the initial stock acquistion by Vitol do show increased volumes and profits as well as an increase in the VN stock price. In a press-release VN reported that the volume of oil flowing through Ventspils has practically doubled: during the 10 months of 2007 Ventspils Nafta Terminal (VNT) has transported 11.2 million tons of crude oil and oil products - a 6.4 million ton increase over the same period in 2006. This includes oil and products that reach Ventspils by pipeline, rail
Buying as many terminals around the world as possible is Vitol’s philosophy and strategy, which the purchase of VNT fits perfectly into. or by sea. Pipeline and rail brought most of the transit. VN said that 1.6 million tons of oil and oil products came in tankers by sea. Vitol was praised for its input in the operating of the oil terminal and the securing of supply. The figures look like Vitol is keeping its promises. But one rarely-mentioned fact leaves room for questions: In January 2007 Ventspils Nafta Terminal took over the receiving of diesel fuel from the product pipeline, which was formerly performed by Ventbunkers.
The "anti-Lembergs group"
In Soviet times Ventbunkers, today a bitter rival of Ventspils Nafta, used to comprise a technologically united oil transshipment complex with VN. During the privatisation, however, the idea was simple: break the complex into as many pieces as possible. In this way hiding the ends of the ownership strings in various off-shore registered companies was easy. Behind the off-shores, as it eventually became obvious, stood some of the people controlling at the time both Ventspils Nafta and Ventbunkers. Conveniently, some of the same people shared seats on the boards of both companies. Insiders close to the two companies explain that originally the plans were to develop the more flexible Ventbunkers, with its direct access to the piers and the ships, into a high-tech loading facility and leave the terminal to serve a more supporting role. Then a fallout occurred among the ranks of Ventbunkers managers concerning control over both companies and all hell broke loose. A number of pro-Lembergs people left the board of Ventbunkers, some crucial documents were mysteriously destroyed and since then the bitter disputes over who owns what part in which company have surfaced. One thing that is clear today is that control in Ventbunkers lies with the so
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The Free Port of Ventspils
Ventspils: Territory occupied: 2623.9 ha Types of cargo serviced: Liquid, dry bulk and general Materials transshipped: crude oil, oil products, liquid chemicals, fertilizers, metals, forest and fish products, coal. Max aquatorium depth: 17.5m Max vessel size accomodated: AFRAMAX tankers of 130 000 DWT.
called „anti-Lembergs group”, lead by Oleg Stepanov. When asked, Vitol maintains that the inner fighting between the current and ex-management and owners of Ventspils Nafta and Ventbunkers is something it by no means wants to get into. Vitol did not object, however, to taking some credit on Ventbunkers’ account. In 2006 Venbunkers reported an increase in transshipment volumes of light and dark oil products to 9.3 million tons, which made it the Latvian leader in this sector. Railway deliveries of the heavy fuel oil grew and the pipeline kept the product flowing in. But one thing was making Ventbunkers’ success vulnerable: the diesel fuel pipeline ran to a bunker which VB rented some time back from Ventspils Nafta. Starting January 1, 2007 VN cancelled the contract and took the bunker – and with it the diesel flow- back from VB. These volumes are what is now reported as the increase of VN oil products flow and are attributed to Vitol’s management of the terminal. What Vitol today presents as the promised oil product increase can hardly be claimed as its own achievement: it is, basically, the diesel secured by Ventbunkers. 22
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Ventspils Free Port is one of Latvia’s four special economic zones. Licensed companies can operate there without any Latvian-applicable restrictions, enjoying tax advantages stipulated by a law On Tax Application in Free Ports and Special Economic Zones. The ice-free port is home to high-powered terminals for transshipment a wide variety of cargoes. The depth of port aquatorium was recently enhanced to accommodate the largest vessels entering the Baltic Sea. Liquid cargo area has 9 berths ranging in depth between 11.5 m and 17.5 m. Besides Ventspils Nafta terminals, which is one of the largest crude oil and oil product terminal in the Baltic Sea region, and Ventbunkers, which handles various light and heavy oil products, offering forwarding services, ballast/bilge water collection and treatment, oil and oil products are handeled by Ventall Terminal. Ventamonjaks handles various chemical products. A line of companies are working in the dry bulk and general cargo area. Kalija Parks is the largest mineral fertilizer transshipment terminal in Europe. Ventspils Commercial Port is specializing in transshipment of a wide variety of general cargoes: coal, ferro-alloys, grain, iron, sugar, metals, cotton, timber, etc. Noord Natie Ventspils Terminal handels a large spectrum of cargo nomenclature: containers, Ro-Ro cargoes, metal cargoes, reefer containers, trailers, heavy lift cargoes and other. Ventplac transships and stores forest products transported to Sweden, Finland, Norway, UK. Ventspils Grain Terminal is a specialised grain warehousing and transshipment port terminal with annual handling capacities reaching 2.5 million tons and loading speed capacities of 1,500 tons per hour.
Vitol’s game Vitol made sure that the game is played by its rules right from the start. It quickly placed its own people on the board of Ventspils Nafta and practically immediately gained status as the terminal’s operator, as well as the right to pick clients. And a few months later Vitol made one more purchase: it aquired 49 percent of the subsidiary Ventspils Naftas Terminal. It was another good deal for Vitol. Although the purchace was more expensive than the original buying of the third of Ventspils Nafta – 90 million US dollars, the conditions were very convenient: final payment was set for 2016, which meant Vitol has to pay approximately 10 million dollars a year. In the spring, around the time when Lembergs was arrested, it became clear that Vitol means serious business when it came to light that the oil trader owns not 34 percent, but almost 48 percent of Ventspils Nafta. At the same time the news that the second largest shareholder of Ventspils Nafta – Latvijas Naftas Transit (Latvian Oil Transit, LNT) no longer holds its 48.98 percent, but a mere 37 percent in VN came as a big surprise to its sharehold-
ers. The thing is, the controlling stake at LNT belonged to Ventbunkers. But some time before Vitol came to Latvia the management of LNT, which until recently was controlled by Lembergs, started to unload small amounts of Ventspils Nafta shares, selling them to off-shore brokerages in the British Virgin islands and other far-away places. These small packages, summed up, were later bought by Vitol. The remaining anti-Lembergs Ventbunkers management claimed the deals were made illegally, and the prosecutors got busy trying to retrace all that went on and to what extent Lembergs and his team orchestrated the share transfer. Potential Russian investors, seeing a chance opening and still hoping to get their share in the game, sent in signals, which were welcomed by people at Ventbunkers. Chairman of the Board Rūdolfs Meroni expressed his conviction that as soon as the owners of Ventbunkers get their rightful control over LNT and VN, they will enter constructive talks with partners in Russia. Cooperation with the Russians would allow us to significantly raise volumes of transit through Ventspils, Issue №4 | 2007
2007.11.16. 13:54:56
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In search of a statelevel transit vision
The Baltic Association of Transport and Logistics (BATL) is an organization which includes a dozen Latvian, mainly Ventspils-based, companies that operate in the areas of various cargo transit, transportation and shipping. The group’s mission is participating in preparation and adoption of tariff policy and transit sector legislation. The Association, whose members are often referred to as the anti-Lembergs group, lobbies its participants’ interests through various government and industry channels, while preparing an assessment of and strategies for the development of the Latvian transit sector as a whole. The president of the board of the association, ex-foreign minister and a veteran politician Jânis Jurkâns spoke to The Insider on the challenges that Latvia’s transit industry faces today. – Mr. Jurkans, what are the perspectives of Ventspils as a transit city? – Before attempting to answer this question one should first try to understand whether Latvia has any vision of developing the transit business on a state level. Today there seems to be no consistent Latvian transit policy. The actions of the Latvian Railroads and the tariffs they impose makes working out such policy even less likely. More cargo is getting rerouted to Klaipeda or Novorossijsk – take potassium or grain as examples. – What is the reason of such lack of consistent policy? – Latvian governments, probably, were too used to the fact that until recently the transit business was controlled by Aivars Lembergs. The state simply left it up to this man to set the rules. – Do you believe it will be possible to maintain and develop transit through Latvia? – Latvia’s geographic position as a country on the eastern border of the EU, its ports, closeness to Russia on one side and to Europe on the other – all this gives this country great opportunities in terms of developing its transit business and profiting from it. We could be making a lot of money with transit. But first the railroad tariff policy needs to change – to become more transparent and to take into consideration state in24
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terests. For the time being we have very little dialogue with the Latvian Transportation Ministry. The whole thing is too politicized. Lembergs was a coalition partner for too long. – Is it possible that as far as the oil business is concerned Ventspils could from a transit port turn into a regional blending center, operated by the Vitol Group? – As far as I see it – to blend anything you first you need to get the actual product. I do not foresee Russians reopening the pipeline. The Russian ambassador to Riga has been promising to achieve that for the last three years. If we wanted to get oil by pipeline we should’ve given at least part of the facilities' ownership to Russians. Latvian transit can be developed, but only if the government makes it a priority and if relationships with such countries as Russia and Belarus are worked on.
First Latvian Minister of Foreign Affairs since the restoration of independence, Mr.Jurkāns held the post at a critical time for the country – from 1990 until 1992. One of Latvia’s leading politicians and a long-time chairman of the "People's Harmony Party", defending a pro-Russian approach in foreign policy.
If we wanted to get oil by pipeline we should’ve given at least part of the facilities'
ownership to Russians.
Issue №4 | 2007
2007.11.16. 13:55:02
Cover story
Ventbunkers says, claiming the reason Russians refused to work with Ventspils before was "the big guy" himself – Lembergs. Amongst the turmoil Vitol schedueled an urgent, no-comments-to-the-press meeting with the Latvian prime minister, flying in from London a whole delegation lead by Vitol’s president. The two chatted, Prime Minister Kalvitis came out from the meeting to tell the press that reassuring a strategic investor was his duty and the delegation dashed home. Getting the 2 or 3 percent needed by Vitol to make control of one of Latvia’s largest companies final would mean "effective control": the side receiving 51 percent of a company is obliged by law to make a formal offer of buying the shares of other holders at a medium market price. This can be quite costly. The thing is, if not on paper, the de-facto control of Ventspils Nafta and its prized asset – the terminal - by Vitol Group is becoming ever more obvious.
Ventspils’ new era Even more interesting than the way Vitol took its place in the Latvian oil transit industry is what it now plans to do with it. Vitol has made no secret of its preferences. Vitol Group president Ian R. Taylor has stated that considerably more profitable than servicing the Russian oil transit would be oil product storage and preparing it for the Western European users. Vitol points out the fact that it has cooperated with Ventspils for many years prior to buying shares of Ventspils Nafta and is well familiar with the VN terminal. The terminal’s existing good infrastructure – facilities for separate storage and loading of different quality oil, the ability to handle a dozen different types of products - is something Vitol plans to further invest in and develop. As Taylor put it – Vitol plans to turn VNT into a "world-class terminal". As for Vitol’s ability to "reopen the pipeline" from Russia - as some suspected they’d be able to (Vitol has been buying oil from Russian companies for
Will the sacred cow of Latvian oil pipeline transit ever be revived?
The main "currency" Vitol used to obtain access to VN was a promise that Ventspils sees large amounts of oil. many years) – the traders don’t raise hopes high, pointing to the fact that Russians have built their own port facilities, which is not a point of concern for Vitol. The pipeline reopening to Ventspils is not a priority for Vitol. In a rare interview to the Latvian press Taylor stated that the pipeline business is not something mandatory for the terminal to work well and to profit. "Our business would basically be to bring oil products to the terminal, blend them, and then take to other destinations in other parts of the world," he said to business daily Dienas Bizness. "If there is an opportunity to transport crude oil we will, of course, use it, but if not, we shall concentrate on our oil products business, which in the long run is a better and more profitable business," he pointed out. Vitol’s business model for Ventspils is using the terminal and port facilities
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for bringing in cheap oil products, storing and chemically enhancing them to produce more expensive grades; then, when the price is right on the Rotterdam Exchange, quickly shipping the upgraded products from Ventspils, profiting on the price fluctuations. Quoting Vitol’s president: "We will use VNT as an international trade terminal." Certain steps are already being taken to develop this business model. For example, plans of building a reservoir park for heavy fuel oil storage have been announced and a feasibility study is underway. Some have already started calling Ventspils a mini-Rotterdam, famous for its large number of storage reservoirs. Also, the type of liquid cargo serviced in the port is becoming more diversified: Vitol is getting ready to transport new additives to gasoline. Not as simple as it seems, though. In October Ventspils city council held an interesting hearing: VNT requested its THE INSIDER
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Connecting links in the supply chain The group of managers from Ventspils who were close to Mayor Aivars Lembergs were accused by some of trying to enter into non-transparent deals with the Russians regarding Ventspils Nafta, and by others of their inability to cooperate with Russian partners, which lead to the crude oil pipeline closure. Representatives of the “Lembergs group” themselves claim they were – and still are – trying to find a best strategy that would allow them to develop Ventspils Nafta as the central hub of a large supply chain. The former director of investments of Ventbunkers, and managing council member of the Latvijas Naftas Transits, who approved some of the disputed Ventspils Nafta share sales, Andris Linuþs spoke to The Insider, explaining his take on the future of Ventspils and of Latvian transit. – Let’s set aside for a moment the details of local disputes around VN shares and try to look at the big picture. Can you tell me if the group you are representing has a vision of Ventspils future? – People who are far from understanding the true potential of Ventspils always saw it as a simple workshop of one big USSR oil factory, a convenient ice-free station pumping oil from Western Siberia to Rotterdam, a bunch of big barrels sitting on the coast. It was developed as part of a large, vertically controlled chain of the Soviet oil complex. When the Soviet Union collapsed, this huge chain also fell apart. So now Ventspils Nafta needs to build its own supply chain, connecting different parts into one mechanism and providing a package of services. Any serious company in the oil business tries to gain control over as many links in the oil supply chain as possible. – What exactly have you done to build this chain? – After the 90’s investments were made not only into the terminal, but also into satellite businesses and additional supply chain elements. At some point we even looked at opportunities of participating in the oil production itself – I personally spent two years in Kazakhstan, where oil reserves are huge and new production fields are being developed. 26
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But we mainly concentrated on offering a package of oil transportation services. The buying of Latvijas Kuģniecība (Latvian Shipping Company) was a logical step. Having the fleet, we are able to offer a full specter of oil and products handling – from the Latvian border to the final destination point. Our goal is participating in long-term projects with the international oil majors.
For two years Mr.Linužs represented Ventspils Nafta in Kazakhstan and today, no longer with Ventbunkers, he is the deputy Chairman of the Board of the Latvian Shipping Company which he sees as a link in the overall Ventspils Nafta oil supply chain.
owners of oil resources – was always the goal. But it had to be the right partners, all the risks had to be carefully evaluated. What would happen, for example, if we had Yukos for a partner? It is obvious, however, that without a share of Russian capital the pipeline will simply go dead. And what the Russians would be interested in – is having their own oil refinery on the Latvian border.
– What do you think of the tariffs policy the Latvian Railroads are imposing? Some claim their monopoly is costing Latvia large transit volumes. – It is more efficient to control the tariffs policy on the state level. Different small structures with their own policies would mean chaos for the transportation system. Perhaps from the point of view of the free market this is wrong. But it is more efficient from the point of promoting transit on the state level.
partner. – Vitol is one of the largest oil traders in the world. They are oil brokers and they need the terminal to blend products. Through Vitol there is a connection to the products' source.
– Your opponents say that not being able to cooperate with the Russians was what cost Ventspils the pipeline transit. – Bringing in Russian partners – real
– Would Ventspils Nafta ever consider selling the terminal? – And then what? We don’t want to cash in, we want to stay in business, to have our say.
– But now you have Vitol as your
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environmental licenses be adjusted in a way that would allow transshipments of a new type of liquid cargo. The substances in question are oxygen-holding additives to gasoline, used to produce a higher grade gasoline. According to the request, VNT plans passing of up to 800 thousand tons of these additives through the port (bringing the additives in with tankers). Experts immediately pointed out an interesting detail: the additives are mixed in a 1:10 proportion with gasoline. In this case, 800 thousand tons would allow to "fix" up to 8 million tons of fuel. But the type of substances Vitol wants to bring are no longer used in the EU or the US. Fuel created in such a mix can only go to third-world countries. As one expert pointed out, Latvia has not seen such volumes of low-grade fuel production since mid90’s.
the mother-company Vitol gets the remaining shares of the daughter. In this way Vitol would gain full ownership of the terminal whereas Ventspils Nafta would be left with the lucrative Latvian Shipping Company, which is another story full of questions. Ventspils Nafta insiders deny such a possibility, pointing out that the terminal is the key link in a supply chain that many would like to see rebuilt and controlled by Latvian owners of VN. But buying as many terminals around the world as possible is Vitol’s philosophy and strategy, which the purchase of VNT fits perfectly into. Over the last several years Vitol has spent hundreds of millions of dollars in terminal acquisitions – something the group sees huge potential in: global demand for oil products is growing, especially in the light oil products sector, so the
not insubstantial. Vitol, nevertheless, sees Ventspils Nafta Terminals as a long-term project. Looking from a long-term perspective at Ventspils in general, it is obvious that the city has all the chances of becoming a place with many investment opportunities. Great efforts are being made to develop Ventspils into a center of new technologies and innovation. Large resources are devoted to R&D, the city is attracting young specialists, a high-tech and IT park is being built, Ventspils University is opening new courses to train professionals in a wide array of technical fields. The city is the Latvian leader in terms of attracting EU funding. A big area of possible development is bringing product handling directly to the port, a new global trend, where the end processing and packaging of products is being shift-
Ventspils has
all the chances of becoming a place with many
investment opportunities
Here to stay?
Vitol states it has no interest in the other huge assets of Ventspils Nafta, such as the Latvian Shipping Company, other than using some of the company’s tankers. "Our interest is just the terminal," stressed Vitol’s president. The Latvian media, which has been closely monitoring the acquisitions around Ventspils Nafta for more than a decade, keeping all related deals in the public eye, has even speculated whether a certain quid pro quo arrangement is possible: a swap between Vitol and Ventspils Nafta where, in return for Vitol’s shares in
Huge tankers and micro high-tech solutions - a new day for Ventspils awaits need for terminals, which can provide transporting and quick blending of products is growing, too. As Taylor put it, "The terminal business is not a very sexy business," unless the terminal is part of a global supply and trading scheme, which Vitol thinks Ventspils is. "I hope to see VNT become the main terminal in all Northern Europe, this is our goal," says the group’s president. The only things that could spoil Vitol’s plans are the overall state of the Latvian economy, the continuing political crisis and conflicting ambitions of local transit players, which is
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ed from the production points to the end user points. At one point a technologically-advanced smaller terminal, Noord Natie was already considering arranging an assembly line for a global brand, but the local owners were short of the $20 million needed. But with some additional capital Ventspils, as a point of entry to the Russian market, has all the potential of picking up the trend. As Ventspils Nafta board member and Vitol Group representative Dennis Crema once put it: "Vitol is in Ventspils to stay". Hopefully, more new investors are to follow. � THE INSIDER
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In the blending niche
by Andris Sprūds
Ventspils is already developing as a regional center for the blending of oil products. Actually, this could be the only feasible alternative for the oil business at Ventspils port as apparently they can handle only one kind of business at the same time. As representatives of the Vitol group have hinted, the terminal is already full to capacity of oil blending operations and there is no spare storage capacity for transit of the crude. One year after Russia’s Primorsk port began operating, in 2001, Russian crude stopped flowing through the Ventspils pipeline, which comes from Polotsk. Although Ventspils tried to make up the lost volume by the railway deliveries, this was deemed to be economically unsustainable and transportation of crude oil from Russia to Latvian ports stopped altogether by 2005.
cally motivated. Now, however, only a political rationale, on the Russian side, could bring about a resumption in the flow. Theoretically, the Estonian events – surrounding the transfer of the
invest 15-30 million dollars for modernization purposes and pinpointed negotiations with Vitol representatives. Venspils, however, has denied that any talks are going on, though this may imply that their interest is in developing further the existing and profitable business of blending products, thus their reluctance to engage in some rather Andris Sprūds is a leadeconomically questionable ing Latvian academic and precarious venture. and expert on energy Oil product blending is issues. A scholar at the a niche business. And Latvian Institute of though, as the increasing International Affairs, a revenues indicate, it is a Riga-based think-tank focusing on Baltic serather profitable niche, curity issues, Sprūds large companies aim to has worked as research engage in extraction and fellow at such leading sale of the oil, rather than schools as Columbia and in blending. However, this Uppsala Universities, is what Vitol specializes in. and at Oxford. He has exbronze statue - could The Ventspils Nafta Termitensively written on the have redirected the nal operator has declared economic and political oil product flow (and its ambition to turn the aspects of Baltic-Russian relations for various pubTallinn’s port turnoterminal into a blending lications. ver of around 25 milcenter for the north Eurolion tons of oil prodpean region. Vitol is blenducts) to Latvia. This has yet to happen. ing the products according to mixture Some speculation on other potential and quantity demands from their buyusages of the pipeline was initiated by ers. The company operates terminals Belarusian president Alexander Lu- all around the world, including in Arkashenka’s announcements in January gentina, Pakistan, UAE, India and Sin2007 that pipelines could be used, in re- gapore; in Europe they are in Ventspils, verse mode, to supply the Novopolotsk Kaliningrad and most importantly, Rotrefinery. According to the Belarusian terdam. And though oil products could side, the crude oil could be brought in be brought to Ventspils from anywhere, from Venezuela and Iran. Belarusian Vitol is primarily working with several, representatives expressed a readiness to mostly minor, Russian suppliers.
Vitol has declared its ambition to turn the VN terminal into a blending center for the north European region. Transshipment of oil products would also stop as soon as Russia completes construction of planned terminals on its coastline. Shareholders of Lukoil, a major provider of oil products, recently expressed their reluctance to work in the Baltic direction. This led to the construction of Russia’s own facilities, its prospective oil pipelines to southern Europe and Asia and the potential closure of the Druzhba pipeline, which would make it economically and technically unsustainable to transport crude oil through Ventspils. Ironically, a few years ago Latvia argued that termination of the oil flow to Ventspils was politically rather than economi28
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THE INSIDER
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strategy
by Atis Zakatistovs
We live in turbulent and exciting times. Even here, in Latvia we see people on the streets demanding what is rightfully theirs—freedom and justice. Welcome to the world of consumers, who also happen to be citizens.
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onsumer-citizens want to live and spend their money as they wish. Consumer-citizens demand distributional
THE INSIDER
justice in order to have more money to spend. Consumer-citizens demand procedural justice in order to protect the money they have earned. Consumer-citi-
zens care about themselves, but with a twist - they also care about the future of their families, and hence about the environment and sustainability. They want to live in comfort and luxury, and hence they care about lessening the suffering that surrounds them. They want to Issue â„–4 | 2007
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enjoy new things, and hence they care about the protection of minorities and the development of pluralism. This new world of consumer-citizens has produced a new commodity that has great value. I am talking here about choice, made by consumer-citizens. Choice and decision-making patterns have become commodities—they are things of value and uniform quality that are produced within a given market.
that pretend to care about noble causes will not add anything to your brand. Hence, a company considering philanthropic engagement might be advised to outsource this task to professionals. But mere efficiency does not capture the nature of corporate philanthropy. We need to stress that it is also ‘venture or development philanthropy’. A brand feeds on success stories and in order to create them a considerable effort needs to be in-
In pure business terms, corporate philanthropy should be considered a good investment.
In this new world we see a shift of power. Traditional boundaries—languages, nation-states, systems of class and merit—are no longer impenetrable fortresses of independent decision-making. The power now lies with those who can affect decision-making patterns of the consumer-citizens. In this new world traditional sources of power, such as politicians and mass media, have a formidable competitor—the brand. Brands add value to companies in ways that cannot be mechanically described because brand-recognition is a gift that consumer-citizens can give or withhold. And if a company intends to work seriously on its brand, then there are good reasons to engage in corporate philanthropy. ‘Corporate philanthropy’ cannot be easily defined. On the first approximation, we can call it ‘managed philanthropy’. The management of philanthropic efforts is a specific skill that requires training, but most importantly it requires knowledge of the sector. As in any marketplace, there are inefficiencies, assymetries of information and a fair deal of opportunism to be found amongst non-profit organizations. Wasting money on crooks
vested in organizations that become successful. That is to say, the engagement of business often requires not only financial assistance, but also the giving of business skills, such as strategic planning, management of public relations, human resources, etc. As with all good things, developing successes that affect and indeed change lives is a time-consuming endeavor. Finally, corporate philanthropy is ‘passionate philanthropy’. Helping people improve their lives without offending them is not an easy task. Passion transforms lives, it adds meaning to the dayto-day struggles. Passion forms friendships and it also builds trust. Some even say that philanthropy is fun. Let us consider a few of the processes associated with corporate philanthropy. In pure business terms, corporate philanthropy should be considered a good investment. First, philanthropic engagement is a tax-deductable expense. Consult your tax advisor for details. You might be surprised to find that in Latvia charitable donations are afforded the highest tax rebates within the European Union. Secondly, corporate philanthropy
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can become a team-building activity if a company decides to donate the time and skills of its employees. A few days’ work in a real life situation might forge long-term friendship amongst your employees. Perhaps that is a credible alternative to hiring team-building gurus with their arrangement of entertaining gadgets and games. Thirdly, corporate philanthropy might shake up daily routines of employees just enough to give them a new perspective about their own position, and thus to retain your existing workforce. Fourthly, problem solving in new contexts might give your employees a creative edge to finding new solutions in the ever-changing business environment. Fifthly, corporate philanthropy builds new channels of communication about your company. Quite often people choose your company over another on the basis of informal communication networks, rather than through advertising. Sixthly, corporate philanthropy might become an influential factor for attracting the best future employees. Finally, corporate philanthropy can become a meaningful strategy for creating demand and building a new marketplace. All of this taken together leads to one conclusion—engaging in corporate philanthropy is a strategic decision that requires the attention of the board. If you leave the decision-making power about corporate philanthropy in the hands of your marketing department, most likely your money will not generate much added value, either for your company or for the recepient. Some might wonder if there is a difference between corporate philanthropy in Latvia and elsewhere. I trust that there is no difference in kind. Philanthropy, including corporate philanthropy, serves a number of functions: it affects the lives of those who give, and those who receive; it gives joy to all parties; it improves the quality of life for everyone. In Latvia, as everywhere else, we are in need of good people, good deeds, and good companies. Change surrounds us everywhere. Corporate philanthropy is a very effective tool for change management. Well developed corporate philanthropy is a sign of mature business. Corporate philanthropy: give it a try, you might develop a taste for it.
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Capital Markets
Real Estate Funds: investing after the boom The days when a buyer could count on rapidly rising prices in Latvian real estate, where in a matter of months prices would increase by 50 - 100 percent, are over. Does that mean this market holds no more opportunities for investors? Well, for those not quite ready to call it quits in real estate there might still be some openings, through an investment vehicle rather new to Latvia, but proven the world over, and which in the long run has been a reliable investment alternative, and that is investing in real estate funds. The real estate fund managers interviewed by The Insider agreed on one thing: in the current economic situation, investing “small” is where you can still find good returns.
by Ingrīda Mičāne
Y
es, those were the days! The past five years �������������� in real estate in Latvia was a time of prescient investing followed by unprecedented profit. Those days ended at the start of this summer. Government efforts to tame rising inflation resulted in a stabilization plan that rested mainly on one foundation stone: stricter bank credit issuing rules. Forced to change what were up till then quite liberal lending policies, the banks have been told to now base loans on customers’ ability to pay, and loan applications are to go under stricter scrutiny. The direct result of this policy change is that many potential real estate buyers are no longer able to receive credit due to their inability to show sufficient legal income. The real estate boom has stopped in its tracks. The bad news – inflation keeps rising. Predictions of the real estate bubble bursting have made a lot of property owners wonder if they should cash in while they can, and sell before prices fall.
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The fall of prices
The first four months of 2007 saw a stable rise in real estate prices. Standard apartment units, for example, gained 15.5 percent, with the medium price reaching around 1,700 euros/m2. May saw the beginnings of the first drop. From May to July standard apartment prices fell by 5 percent. The tendency continued while the public watched. Pessimists predicted prices would fall by at least by 10 percent, possibly by as much as 50 percent. Others were convinced that prices would keep rising – mainly due to the rise of construction costs, general inflation and overall price increases. Looks like reality was somewhere in between. Starting from July through September standard apartment prices fell by about 3 percent each month. On November 1 the standard Riga apartment medium price was 1,466 euros/m2. The month earlier figure was 1,493 euros/m2. The November average price brings it back to the level it was at in the beginning of this year. In the nearby seaside town of Jūrmala sales in the private housing
sector shrunk. In the second half of 2006 there were 34 sales closed in this popular resort town, each not less than 850,000 euros in price. The first half of 2007 saw only a dozen sales, none of them above 500,000 euros. Sales clearly slowing.
Funds as a new opportunity The good news, though, is that there are still opportunities for real estate investment here. Or should we say, there are new ones opening? Investing in real estate is possible not only through direct property purchases, but also by investing in real estate funds, which, in turn, look for investment opportunities around the world. This is a concept well familiar to the foreign audience, but is still a novelty for Latvians. Advantages of real estate funds lie in their flexibility and availability, and an individual investor doesn’t need a lot of money to get into the real estate investment market. To buy a reasonably sized building might require the individual to come up with 250,000 euros in equity, to buy a 1 million euro Issue №4 | 2007
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Capital Capital Markets Markets
property, for example, with the rest borrowed. And then the investor must consider lack of liquidity in the asset, or the need to buy several properties, in different markets, for better diversification, and property management costs and time. And most average investors wouldn’t put all their money in one ‘basket’, or property. A good real estate fund provides all the advantages of investing in ‘bricks and mortar’, and shares can be easily bought and sold for as little as 1,000 USD, or 700 euros. This opens the real estate market to a whole new set of investors – small investors who, due to high prices and risks involved, could not participate in the Latvian market during the boom times. Fund managers work with their specialists, who look for good investment properties, the best properties to fit with the fund’s investment goals. As market experts, they are constantly monitoring the situation, they identify sectors with prospects for growth and long-term profit. The funds’ administrators usually have more resources to
put into research in markets and properties than does the average individual investor. Investors, therefore, can allocate a portion of their assets into real estate, and have a professional team managing the real estate portfolio. Last but not least, real estate investment offers tax advantages that are not always available with other investments. And you don’t have to buy the whole building - investing in real estate funds will offer the full advantage of these tax benefits.
Two types of funds
So far only three funds are available in Latvia for investment directly into real estate. They are offered by Parex banka, SEB Unibanka and Hansabanka. These are the so-called closed funds. Information is available through the OMX stock exchange, at the Funds Center (www.rfb.lv). Closed funds can be bought by anyone, but timing of your investment is important. Usually, the closed funds are created for a specific investment period, for example, for five years, and investments are made at the
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start of the period. The money cannot be withdrawn before this period is over. The properties being invested in are listed upfront and usually the minimum investment amount, for the investor, starts at 5,000 euros. The open-ended funds present a larger interest in Latvia’s situation, in that they are far more convenient, are easier to use, are liquid, and cost less to buy into. Shares are bought in these publicly listed companies, and since shares trade every day, the individual investor can buy or sell the shares at any time. The fund buys and manages real properties, and the investors’ returns come through capital appreciation of the properties, and through rental income and any additional fees from the properties. To invest in funds two things are needed: one needs to have a valid bank account, and the other is to open a securities account. One can visit a local branch of the fund’s bank, or use the Internet. There are no separate contracts signed, and once you buy shares in one of these open-ended funds, you are participating THE INSIDER
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Capital Markets Income yield spreads 10 8 6 4 2
2002
2003
2004
Latvia
Lithuania
2005
Estonia
0
2006
All IPD Europe
Spread vs. 5-year Euribor swap rate Source: Ober-Haus (office income yields), IPD, Bloomberg
Parex Baltic Real Estate Fund performance Dynamics of the share price in US dollars. 20 18 16 14 12
2003
2004
2005
2006
Feb
Nov
Aug
May
Feb
Nov
Aug
May
Feb
Nov
Aug
May
Feb
Nov
Aug
May
10
2007
Income yield spreads, % 2002 2003 2004 2005 2006
EE 8.5 9.5 8.5 5.0 3.2
LV 8.5 9.0 5.5 6.0 3.7
LT 7.5 8.5 7.5 5.0 3.7
All IPD Europe 1.6 2.5 2.3 2.5 1.4
in the fund manager’s real estate portfolio. No investment limits or time constraints are set for your shares, and daily share prices should be quoted in the local newspaper. If the investor wishes to sell his or her shares, the fund is obliged to buy them back immediately upon request. There are about 20 open-ended real estate funds in Latvia. Among them, for example, Hansa East Europe Real Estate Shares Fund, showed a return of 50 percent last year. Hansabanka, Parex banka, Unibanka as well as Krājbanka Latvijā offer investment opportunities in a number of international open-ended funds as well.
Risky endeavour? Any investment, whether in individual stocks, bonds, properties or funds involves levels of risk, determined by the type of investment, the macroeconomic situation and other factors. 34
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An investor looking to put money into real estate in Latvia has several options. One is to buy the property outright. Find the property, do your due diligence, pay and it’s yours. Another way, and one in which you don’t need as much money or time, is to buy shares in a listed open- or closed-end fund, as we’ve been discussing. The decision depends on your cash levels, investment goals, income requirements and risk tolerance. The higher the risks, the higher are the ‘expected’ returns, though actual returns don’t always follow. A fund which is currently investing in Bulgaria, and in other Balkan state real estate markets, could be highly profitable, though at the same time will be very risky concerning business risks, the economic situation and political risks. At the same time a fund investing in Germany, a stable country with slower growing economy, should have considerably fewer risks, though less potential for tremendous profits. There could be a higher possibility for large gains in the Balkans, but also a greater risk that you can lose your entire investment, than in Germany. Open-ended funds report their performance to investors on a continual basis, mainly through Internet postings. Investors in Hansabanka funds can follow developments on the bank’s website: www.hanza.net.
Capital gains or income-producing? The largest of the real estate funds in Latvia is Parex Baltic Real Estate Fund II (BNIF II) with assets of EUR 33.7 million managed by Parex Asset Management. The fund has been launched on the back of a successful track record by first property fund - Parex Baltic Real Estate Fund closed last year, and more than doubled invested capital over three years (see chart). Today the asset management group is also managing Parex Ukrainian Real Estate Fund, and is planning to launch Parex St. Petersburg Real Estate Fund. Parex Asset Management IPAS’s first vice-president, Sergejs Medvedevs, speaking with The Insider says that the most profitable real estate investments today are in commercial properties - including existing income generating properties and development projects. These segments are the focus of Parex’s real estate investment strategy: while the portfolio of BNIF I was to a large extent comprised of development projects, 73 percent of the current BNIF II portfolio is tied to income generating properties primarily in the retail sector. A stable fixed-income stream and capital appreciation with more then 10 percent average annual returns are the fund’s targets. Regardless of today’s high real estate prices and the possibility of a downturn in the real estate market, which many now expect, Parex fund managers expect to “Invest in cash flow properties in the retail sector [which] helps us to diversify and spread risk into this asset class, and which are positively correlated with GDP and purchasing power growth in the country, rather than [investing] in the overheated residential market where developers already started to experience difficulties,” says Medvedevs. Meanwhile, the added element of cross-country investment – in September BNIF II acquired a shopping center in Kaunas, Issue №4 | 2007
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Capital Markets Lithuania – brings further diversification opportunity with the domestic Latvian market. The remaining 27 percent of the current BNIF II portfolio is tied to development projects. Here again, Parex tries to follow new trends: concentrating investments into Latvia’s regions, rather than just in Riga - a buzzword that everyone is catching nowadays. With Riga’s property market mature and quite ‘investor’ saturated, attention is now turning to regional developments.
Competition will Grow
Pēteris Ivanovskis, portfolio administrator of SEB Unifund Real Estate Fund feels that his fund has has produced a more successful selection of investments. Not all projects turned out to be as successful as expected, says Ivanovskis. Therefore, SEB has directed a part of its assets into financial instruments. Ivanovskis believes that the fund will still manage to attain its target level of return, which is 10 percent annually. At the moment, the fund pays
Hansa Funds is a part of Hansabanka Group, which together with its investment management companies in Estonia and Lithuania (Hansa Investment Funds) administers the funds, pension plans and institutional client portfolios. Hansa Investment Funds is the biggest investment management group in the Baltic states with administered assets of 1.9 billion euros. As fund administrator Andris Ogriņš explains, the fund mainly invests in properties that have a steady cash flow, specifically commercial real es-
The good news is
there are still opportunities
for real estate investment Only 4 percent of Parex’s BNIF II portfolio is in residential development. This sector is undergoing major changes, in terms of both returns and liquidity and Parex prefers to withhold investment in this area, at least in the near future. Concerning next year’s forecasts Medvedevs thinks it is obvious that the real estate market in the Baltic states has reached a certain stage of maturity. “We do not foresee any major further yield compressions in the cash flow property markets, and with such high lending rates as they are now, yields simply cannot go down any further.” Development projects – retail, office, or residential – can bring rewards for the investor only when and if the needs and requirements of the end-users are met. The days of developing anything because anything would sell or rent are definitely over. Meanwhile, according to the Parex first vice-president, the secondary residential market will definitely undergo a further downward correction – the question remains, how hard the landing will be?
greater attention to the commercial real estate segment, which continues growing, while the apartment segment has stagnated. This is explained by a number of factors: expectations (currently on the buyer side), stricter lending policies (which are now determined by the changes in legal acts), as well as more offers, which produces greater choice for the buyer. As this tendency continues, the SEB Unifond administrator expects successful investments in the commercial segment in 2008 as well.
A Fund for Institutional Investors The fact that the commercial property sector is the one that’s getting the most attention nowadays is evidenced by the rise in competition. This summer the biggest Latvian commercial bank Hansabanka offered a new investment fund. Hansa Baltic Real Estate Fund is intended primarily for institutional investors, those experienced in the sector. The investment management company
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tate and residential properties. Asked about the income yields, Ogriņš points out that historically they have been above the comparative indexes in Western Europe, but the difference is decreasing now.
Investing makes sense
Some analysts forecast an increase of the yield rate for property in Western Europe during the next 12 months. The reasons for this are the ongoing global credit squeeze, demand for rentable premises is stabilizing across Europe, and increasing investor pessimism. Similar tendencies are observed on the Baltic markets as well: a growing supply of investment properties is set off by weaker demand from the investor side, stricter bank crediting procedures and relatively high interest rates. In this situation, these analysts expect that the investment yields in the Baltics will rise and will remain higher than the average European level during the coming years. THE INSIDER
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regions
Taking your money out of Riga Latvian tourism has seen tremendous growth over the past few years, and the tourism market has one of the highest growth rates in Europe. The range of tourism products is diversifying, now offering tourists much more to do than just staying in the capital city. Latvia is not only Riga, but also an almost untouched nature's paradise.
Why the countryside?
With Europe so urbanized nowadays, no wonder many people don’t know how a cow is milked, or even what one really looks like. There are not so many places left to enjoy nature and life almost untouched by modern “conveniences,” and compared to Europe, Latvia stands out with its picturesque countryside, historical coastal landscapes, traditional farmsteads, and the genuine hospitality of Latvian inhabitants. Tired of the city life with its constant traffic congestion, stress and endless rush, people are trying to find peace of mind in the countryside, where even time runs at a different pace. A recent study by the Latvian Statistical Bureau showed that tourism, in general, is growing rapidly, with 30.2 percent of foreigners naming leisure as their main reason for visiting, compared to just 7.2 percent back in 1997. 36
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Ten years ago business trips prevailed, yet there has been a shift to leisure, which gives a chance at development to not only the capital but to the countryside as well. During recent years tourism has spread outside Riga, with more than 300 country homes, guesthouses, cottages and campsites scattered all around Latvia. There are plenty of things to do in the countryside besides resting by the lake or river. The latest trend in Latvia is the specialization in rural tourism: agro tourism (experiencing life on the farm), eco tourism (bird watching, for instance), and hobby tourism (horseback riding, fishing, sightseeing, visiting local artisans, country health resorts).
Country promotion
Foreigners comprise 58 percent of countryside visitors in Latvia, mostly coming from Germany, Sweden, Fin-
land and their neighboring countries. But locals are still the aim of government initiatives and rural businessmen. In recent years, the Latvian Tourism Development Agency (LTDA) has revamped its style and web page, started advertising Latvia more actively in foreign industry exhibitions, and locally by publishing books, maps, guides, brochures, as well as establishing tourism information centers. To promote country tourism development, a professional association of Latvian rural tourism providers called Lauku Ceļotājs (Countryside Traveler), or LC, was formed in 1993. Currently it unites around 300 members—owners of rural accommodations all over the Baltics. LC is also a member of the broader European network EuroGites. Country entrepreneurs, running small lodges, can’t afford much advertising, so LC runs most of the promotion for Issue №4 | 2007
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regions them. Besides catalogues and themed travel guides, it also offers an online reservation system and designs individual tours. LC has also created its own eco-standard, the “Green Certificate,” and establishments meeting the highest green criteria may display this document and use it in advertising. Country homes, guesthouses, cottages and campsites holding the certificate are located in clean and well-kept countryside environments and, often, they are traditional farmsteads built and furnished with natural materials and offering organically-grown food. Country tourism is mainly boosted by the flow of European money supporting various country tourism and ecological programs. In the 1990s, country tourism was supported by subsidies from the Ministry of Agriculture. When EU funds opened in 2002—such as SAPARD, the Special Action Program for Agriculture and Rural Development—millions of euros poured into the industry, giving the owners of country houses a chance to develop their enterprises.
Reasons of visiting in 2006 in % Leisure Transit Visiting relatives Business Other Shopping Sports Study Medical tourism
30,2 24,9 14,2 12,6 10,4 6,5 0,8 0,3 0,1
Visiting reason comparison Business vs. Leisure
Leisure Business try lodgings in the vicinity of small towns and natural attractions generally win, as there are always festivals and other events going on. While Latvia may not yet be like Ireland, often referred to as “the emer-
ald isle,” it is definitely set to grow. A clean environment, a natural way of life and centuries-old local traditions create great conditions for rural development, which is not just budding, but already blossoming in Latvia.
Green future Although it is unlikely tourists will abandon Riga, country tourism has serious growth prospects. Now, total tourism revenue constitutes around two percent of GDP, while if we look “behind the fence” to Finland, a country with similar climatic conditions, it is four percent. Most tourism revenue flows to Latvia during the summer months, especially in country tourism. To diminish the seasonality effect, owners of country tourism businesses continue diversifying their product range to include wintertime attractions. Many country guest houses now offer conference facilities and winter recreation, such as skiing, skating and ice-fishing. According to research, foreigners spend three days on average in the countryside, while locals typically only stay half of that. Country entrepreneurs are looking to prolong the length of stay, which may be done with the help of a more developed infrastructure. Coun
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expat success story
French Café King
By Jekaterina Strelcova
Sipping freshly brewed coffee and sinking your teeth into a puffy buttery croissant, it is easy to imagine having brunch somewhere on a Parisian street side cafe, except that this cafe is actually in Jacob’s barracks on the edge of Riga's Old Town. The owner of Cadets de Gascogne, Bernard Larane, one of the well known Riga expats, shares his insights about running a business in Latvia. How did you end up in Riga? I come from Toulouse; the first time I visited Riga was in 1994 for a short holiday, and I liked the place so much I moved here a few weeks later. That simple. Why a bakery? Well, my first business venture was trying to import shoes from France. But to do that you have to have some skills in fashion buying, which I had none, so the business didn’t really progress. Then I was selling peat moss, which also didn’t go well. Only then a partner and I started a café venture some 7 years ago. Although my profession is a mechanical engineer, the café business so far goes pretty well. 38
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First we opened the café in Old Town, a few years later another Cadets de Gascogne followed in downtown Riga on Gertrudes street. How do you find the Latvian business environment? Was it difficult starting a business in Latvia? I should say it was pretty welcoming. I find it less expensive and much easier to start a business here than in France because it’s cheaper and the documentation is easier. In France filling in papers is very complicated; in my opinion there are so many unnecessary laws and forms. In Latvia dealing with documents is much easier, in fact, you can cope on your own without much help.
Did you have any language barriers? Can business be managed without knowledge of Latvian or Russian? When I moved here I had a knowledge of English and basic Russian, so I had no problems in communicating. I find people here quite friendly and most of them speak at least English, so, no, I didn’t have communication barriers. What were the mistakes you made when starting a business here, and which you would never repeat now? I think all the mistakes I made were not specific to Latvia. I think I would have made them anyway even if I started a business in France. Issue №4 | 2007
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expat success story Has anything changed for you business-wise since Latvia has entered the EU? EU entrance has had an impact on our business. First of all, we used to buy farm produce at local prices that were much cheaper than the average European price. Since the price level has reached the European level, now it has become much more expensive. We also had to close our bakery in Piņķi as it didn’t fit the new stricter EU technical regulations. When we had the bakery, we also supplied airlines with our fresh croissants. I think the demands were quite right and in the end being forced to close the Piņķi bakery turned positive for us – look at the traffic jams from Jurmala to Riga every morning – we wouldn’t be able to deliver fresh bakery on time anyway. On the other hand, some formalities have been simplified with entering the EU. According to statistics, the biggest percentage of cafes and restaurants that close do so in the first year of operation – how have you managed to stay on top? True, the restaurant business is very difficult and fragile, which some people underestimate. I think we manage to survive due to our high quality standards, which, of course, makes our clients very loyal. Even after entering the EU, when we had to almost double the prices, we still kept our loyal customers. We use only butter in our croissants, whereas even in France many cafés use margarine or other substitutes. Due to our small production volume we can deliver the best quality. Good value for money works anywhere and is what helps us attract loyal customers. We are also trying to stay as cheap as we can afford. Your café is known for attracting local expats – what’s the key to such international clientele? On weekdays there are not so many expats as you think, I’d say the proportion is 90 percent of locals toward
10 percent of foreigners or expats. On the weekends expats do come here often and the proportion changes. A part of it is our vast selection of magazines and newspapers in French, English and Latvian, not to be found in Riga. This is not typical of French cafes, more of our invention. What do you think the future holds for you? Are you aiming at creating a French café chain? Well, of course, we have expansion plans, but we don’t jump in at the first opportunity. We are carefully looking at the market and estimating every possible place. What should a foreigner keep in mind planning for business in Latvia? Not to overestimate the conditions.
Good value for money works anywhere and is what helps us attract loyal customers. You can see a lot of expensive big cars on the streets, but don’t get fooled by thinking it’s due to people being wealthy. You have to remember that except for the outer luxury shine, Latvia is far from being called a rich country and the majority of the population is far from being well off. What are the benefits of living in Riga? I like Riga’s laid-back, not stressful environment. Another issue – it’s not as hot as in my home town. Toulouse is in the south of France, and sometimes it’s just boiling heat. Also the city’s very clean compared to other European capitals. What I also like is that people respect each other’s habits, as, for instance, smoking is prohibited in public places here, which I like very much. When in France, I just can’t enter a smoker’s café anymore.
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Ooh-la-la! The smell of fresh-baked pastries!
How do the French and Latvian dining habits differ? Dining habits do differ. For instance, the French consume a lot of alcohol, even in the morning, and there’s a lot of drinking in the workplace, whereas locals don’t usually drink during the week or at least working hours, but they go out heavily on the weekends. What is your tip for the traveler – where better to dine except your own café, to party and go out of town? I like one Lithuanian owned restaurant Saint Germain, also I often go to the French bar Belle Epoque on Maza Monetu street, and Macaroni restaurant. For easy-going dinners I prefer Spalvas Pa Gaisu and Pulkvedis. I never go further than 5 km from my café, except for maybe one a year to visit my family in France. THE INSIDER
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gadgEtry
Get your kicks with Route 66!
Anyone who has had the experience of losing his or her way in an unfamiliar place while traveling by car will confirm that the feeling is quite unpleasant. So unpleasant that we are ready to pay to fix it. And modern land and space technologies are here to help. Through the little luxuries-turned-necessities: the GPS auto-navigation devices.
For those who get their kicks from exploring the “Wild West” of foreign markets, Route 66 is the way to go! Even in the wilderness of Latgalia’s land of lakes, or amongst the ruins of Liepāja’s Karaosta, it's there. Today Route 66 is not only the 3,940 km long Trans-American highway stretching from Chicago to Los Angeles, inaugurated in 1929. The US Highway authority officially decommissioned the name from its system on June 27, 1985. The route, however, has retained the significance of its cultural and historical heritage. And the name has found its way to the electronic auto-navigation brand that has gained wide product recognition. Chicago 8000 is the second model in the Route 66 auto-navigation device family. The design of the device, the materials used, and the quality and sturdiness of the windscreen mount – these are the distinc-
tive features of the Chicago 8000. On top of this the 3.4-inch touch-sensitive display becomes quite handy. After getting used to the automatic zoom, which turns on when approaching a crossroad or a turn, navigating through Latvia will be a breeze. Chicago 8000 deserves a pat on the back for the newly updated map of Riga, where one-way streets are now appropriately marked. Total memory space that the maps use in the device is 2 GB, providing complete coverage of Europe, including both East and West. Still, one should not forget that the resolution level of the Old Europe map is considerable higher than that in the newly-included countries. So, outside Riga a wise choice is to keep to the principal routes and, when taking alternative roads, refer to the printed map.
Compare these gadgets
TomTom GO 910
GALILEO 3.5 SIKURA
Route 66 Chicago 8000
Nokia N95
+ User-friendly and comprehensible interface, high functionality.
+ Upgraded multimedia functions – supports video.
+ Large 4.3 inch display and an updatable map.
+ Compact dimensions and wide functionality.
– Not exactly successful windscreen mount solution.
– Not entirely clear signal reception.
– Not exactly successful solutions for text input and destination point seeking.
– More applicable for navigation in the “walk” mode, not for auto-navigation; complicated preparation process – one has to install maps and software.
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