VII. INVESTMENT CLIMATE A1 - Openness to foreign investment Mindful of the important role that foreign investment can play in speeding the country's economic transition, the Latvian Government is actively trying to encourage foreign direct investment. Latvia does not restrict the repatriation of profits. Under the 1991 investment law, the laws of the Republic of Latvia apply equally to domestic and foreign investors. The investment law applies some limits to foreign investment. Acquisition of controlling shares in a Latvian enterprise with assets exceeding $1 million must be approved by the cabinet of ministers. Under the investment law, criteria for evaluating a proposed acquisition submitted to the cabinet of ministers are the impact of the proposed investment with regard to: -- the Latvian economy, particularly with respect to the creation of new jobs, the use of local resources and services, and the export of goods manufactured in Latvia; -- raising productivity, developing technology, and improving product quality and diversity in Latvia; -- competition in the respective industry; -- the potential for the economic domination of Latvia by foreign countries; -- the competitive position of Latvian products in the international market; and -- its impact on the ecological situation. To date, screening appears not to be a barrier to foreign investment. In the first seven months of 1994, a total of ten applications (eight in the financial sector, two in wood processing) were submitted to the council of ministers. All ten have been approved. Under the investment law, foreign investors may engage in, but not obtain control over, enterprises engaged in activities related to national defense; the manufacture and sale of narcotics, weapons and explosives, securities, banknotes, coins and stamps; the mass media; national education; acquisition of renewable and nonrenewable national resources; internal fisheries; hunting; and port management. Foreign investors may lease but not own land; this restriction may be lifted soon by the Saeima. Foreign investors appear to have fair access to many enterprises that are eligible for privatization. In other cases, company managers or employees have an inside track for purchasing an enterprise from the State. In some cases, for example privatization of milk processing enterprises, blocks of shares were reserved for enterprise employees and dairy farmers. There have been no reports of a serious foreign investor having been excluded from a privatization due to the reservation of blocks of shares. On the contrary, foreign investors frequently appear to have priority over domestic investors in a privatization when it appears that the foreign investor can bring more money to the table. A2 -Conversion and transfer policies The exchange rate of the lat is determined by market forces with limited intervention by the Bank of Latvia. Starting in February 1993, Bank of Latvia policy has aimed at stabilizing the lat at a value of 79.97 santims (one santim equals 1/100 of a lat) to one sdr. On July 1, 1994, the lat was worth roughly $1.80. Latvia does not restrict the import, export, exchange of or payment in foreign or domestic currencies inside the country. The Bank of Latvia has gold and foreign-exchange reserves of $610 million; based on these reserves, the Bank of Latvia guarantees the full convertibility of the lat. The Bank of Latvia is exercising a policy of monetary restraint consistent with International Monetary Fund guidelines. Latvia's laissez faire currency policies have drawn substantial amounts of foreign currency to the country, making it a mini- Switzerland of the Baltic and Russian region. Given the success of its foreign-exchange policies, the risk that the Government would limit the convertibility of the lat appears to be very low. If inflation is reduced to an annual rate of 5-10 percent per year in 1995, as expected by the Government, downward pressure on the value of the lat should grow only moderately over the next year. It is not clear whether the Bank of Latvia would actively enter the foreign-exchange market to try to defend the lat against fundamental selling pressure. The larger commercial banks appear to have no problem converting and remitting funds out of Latvia, although businesses have reported delays of up to two weeks before funds transferred from Latvia become available in bank accounts in the West. A3 - Expropriation and compensation Since independence, the Latvian Government has begun de- nationalizing private property seized by Soviet authorities during the occupation. The are no cases of expropriation of private property by the Latvian Government. Latvian law allows expropriation for compensation under the right of eminent domain. A4 - Dispute settlement There are no investment disputes with the Latvian Government involving either U.S. or other foreign investors in independent Latvia. Local courts are composed of three judges, only one of whom is a professional jurist. Latvia is moving to re-organize its court system according to Western standards. In general, the Latvian judiciary is independent of improper government influences. Latvia is in the process of updating and implementing the pre-war commercial code and bankruptcy laws. Business activities are regulated by the law on entrepreneurial activities and business operations, which serves as the legal framework for establishing, registering, operating and closing a business in Latvia. Legally-transferable rights to private real property are slowly being reestablished as properties are registered in reconstituted land registers. While the overall economic transition is moving ahead relatively rapidly, the legal and court system at this time (July 1994) is not sufficiently developed to allow real property or chattels to be collateralized. A5 - Performance requirements/incentives There are no performance requirements for a foreign investor to establish, maintain or expand an investment in Latvia, or for any incentives thereto. A6 - Right to private ownership and establishment Under Latvian law, foreigners may conduct business activity under one of three forms of business organization: -- limited liability companies ("sabiedriba ar ierobezotu atbildibu" or sia); -- joint-stock companies ("akciju sabiedriba" or as); and -- representative (branch) offices of a foreign company. Limited liability and joint-stock companies are established upon registration with the Latvian enterprise register and have the rights of a juridical person. (See section IV for a description of requirements for the formation of limited liability and joint- stock companies). Other full-liability forms of business organization are closed to foreigners, including sole proprietorships (individualie uznemumi), partnerships (ligumu sabiedribas), public and religious organization enterprises (sabiedrisko/religisko organizaciju uznemumi), companies with added liability (sabiedribas ar papildinatu atbildibu), and private farms (zemnieku saimniecibas). Establishment of a foreign bank branch is subject to the approval of the Bank of Latvia. To protect the domestic banking industry, the Bank of Latvia is considering limiting the number of foreign bank branches in Latvia to two or three. One French bank has announced plans to open a branch bank in Riga; a second German bank is planning to open a representative office. Private enterprises have competitive equality with public enterprises with respect to access to markets and business operations. State enterprises may have preferential access to credits such as U.S. Eximbank guarantees, since these currently are made only with the full faith and credit backing of the Latvian Government; this backing is not available to private Latvian companies. A7 - Protection of property rights Legal rights to property are in the process of being restored in Latvia. The Government of Latvia is committed to attaining a level of protection for intellectual-property rights comparable to that provided under international conventions. Pursuant to that commitment, the Latvian Parliament in 1993 passed legislation to protect copyrights, trademarks and patents. While the legal basis for intellectual-property rights has been established, Latvian law has not defined penalties for violation of these rights nor established a judicial or administrative mechanism through which foreign owners may seek effective redress for violation of their intellectual-property rights. In July 1994, President Clinton signed an agreement on trade relations and intellectual-property rights protection with Latvia. Latvia has been a member of the World Intellectual Property Organization since 1992 and intends to join the Bern Convention and possibly the Geneva Convention. Unauthorized reproductions of copyrighted video recordings imported from Russia are widely distributed in Latvia. To halt the use of pirated films imported from Russia by private Latvian television stations, the Latvian radio and television board on October 27, 1992, adopted a ruling under which the license of any domestic television company would be revoked if it is unable to show that it has legally acquired the rights to the films it broadcasts. The board does not apply this ruling to signals from the Russian television stations Ostankino and RTR that are rebroadcast directly by Latvian television. Latvia's intellectual-property practices have not had a serious impact on U.S. trade outside the film and video industry. A8 - Regulatory system: laws and procedures Latvia adopted laws on competition and restriction of monopolies in 1991 and 1993. Monopolies are not allowed; businesses are precluded from manipulating prices or quantities of goods offered for sale and may not create artificial shortages in order to boost prices. The Latvian Anti-Monopoly Control Committee oversees implementation of the laws. Companies proposing a merger that would result in concentration of more than 25 percent of the market for a particular good or service must have the approval of the anti-monopoly committee. Latvian banking is regulated by the Bank of Latvia. A9 - Efficient capital markets and portfolio investment Government policies do not interfere with the free flow or financial resources or the allocation of credit. In practice, the weakness of the entire legal and judicial system that must underpin the operation of capital markets is limiting the operation of credit and equity markets. Commercial credit is largely restricted to high-interest, short-term trade-related loans which are in theory available to foreigners but in practice are so unattractive that they are used only by citizens of former Soviet countries. As of July 1, 1994, the assets of Latvia's five largest commercial banks (Baltija Banka, Latvijas Universala Banka, Latvijas Krajbanka, Rigas Komercbanka, and Latvijas Depozitu Banka) totaled 429.1 million lats ($785.3 million). Estimates of non-performing assets are not available. The weakness of the legal and judicial system coupled with the explosive growth of deposits in relatively inexperienced Latvian banks suggests there is at least a very strong potential for serious weaknesses in the banking system. Shares in Latvian companies will not begin public trading until the Riga stock exchange is re-established in early 1995. Hostile takeovers of private companies are as yet unknown. Other than the restrictions not in the investment law, there are no laws, regulations or activities aimed per se at restricting foreign participation in the Latvian private sector. A10 - Political violence Political violence or politically-motivated damage to property has been almost non-existent, although organized crime has on occasion used violence against businesses. Since Latvia re- achieved independence in 1991, the country has not seen any mass or violent civil disturbances. None are expected absent a serious downturn in relations with Russia. B - BILATERAL INVESTMENT AGREEMENTS Latvia has concluded bilateral investment agreements with Denmark, Finland, France, Germany, Israel, the Netherlands, Norway, Poland, Sweden, Switzerland, and the United Kingdom. C - OPIC and other investment insurance programs Overseas Private Investment Corporation (OPIC) coverage is available for U.S. investments in Latvia. Latvia is a member of the Multilateral Investment Guarantee Agency (MIGA). D - Labor An unemployment rate of 8.4 percent is forecast by the Latvian employment service for 1994. Skilled and unskilled labor are both available. Labor unions are free from governmental influence, but weak. Many see the current unions as leftovers from the Soviet era. Latvia has not seen any major industrial strikes since re-achieving independence. The Latvian government appears to be attempting to uphold international labor standards but its ability to enforce them is spotty. Labor is not a significant factor in choice of technology. E - Foreign free-trade zones/free ports Latvia currently does not have designated duty-free import zones. F - Capital outflow policy The Latvian government does not have any policies on the outflow of capital. Large amounts of funds flow freely through Latvia to the West from former Soviet countries. G - Foreign direct investment statistics In January 1994, the Latvian government calculated that direct foreign investment amounted to $140 million; this statistic is based on registered statutory capital of foreign joint venture and is unreliable. H - Major foreign investors Major foreign investors in Latvia include the Consortium of Cable and Wireless (U.K.) and Finnish Telecom, which are purchasing a 49-percent share in the Latvian telecommunications company Lattelekom in return for a $160 million investment over 8 years; Polarbek, a U.S.-Finnish-Latvian joint venture which is constructing the 380-room Radisson Daugava Hotel in Riga; Kellogg's, which opened a $22-million plant to produce breakfast cereals for the Baltic, Russian and Belarus markets in November 1993; and the Danish company "House of Prince", which has purchased 51 percent of the Riga tobacco factory. Other significant U.S. investors in Latvia include Baltic International Airlines USA, Coca-Cola Baltics, ICT Inc., Intersource Inc., Jeld-wen, Lathaag, McDonald's, and Orvestco. The American Chamber of Commerce in Latvia currently has more than sixty members.