Latvian Republic Ambassador to Ukraine: "It's not VS Energy winding down its business here, it's Ukraine forcing them to do this"

Ukraine is one of Latvia's priorities in implementing its cooperation policy, particularly in the investment sphere. It is also one of the few EU countries that consistently supports Ukraine's intentions to move towards European development. Almost 10 years ago, Latvia was one of the first to clearly express its position on the illegality of the annexation of Crimea, and morally and humanitarianly supported Ukraine in the military confrontation in Donbas (in terms of the country's territorial integrity).

The presence of Latvian investors in the domestic economy has been and remains important for Ukraine, although the potential of our investment relations has not been fully realised, even before russia's full-scale invasion of Ukraine. Currently, Latvia is actively helping our country to resist russian aggression and is ready to share its experience in building a modern European state, as well as attract its investors to Ukraine after the war.

Our conversation with the extraordinary and plenipotentiary Ambassador of Latvia to Ukraine, Ilgvars Kļava, will focus on the lives of Latvian investors in Ukraine during the war, their successes and disappointments, business plans and prospects.

On Latvian investments in peacetime and now

– Evaluate, please, the dynamics of Latvian investments in Ukraine in recent years. According to Ukrainian statistics, the total amount of investments from Latvia in the Ukrainian economy in 2021 was $112 million. How has this figure changed in 2022?

– The war has definitely had a negative impact on Latvian investments. Our statistics show a decrease: by the end of 2022, only 94 million euros were recorded. This is a 20% reduction (at the end of 2021, this figure was 117 million euros).

Of course, this year we want to maximise economic cooperation between our countries. First of all, we are talking about the transport and logistics sphere. This issue was discussed at the IX meeting of the Latvian-Ukrainian Intergovernmental Commission on Economic, Industrial, and Scientific-Technical Cooperation, which took place on March 23 in Riga. In particular, how to cooperate with Ukraine under the current serious complications in the Black Sea.

– And how?

– The cargo flow should go by land – by rail, and then – to Baltic ports. Poland and Lithuania no longer have free pass-through capacity in ports, while Latvia has – Ventspils, Liepaja, and Riga – and they are currently not being fully utilised. But this requires resolving issues with the railway: simplifying transportation procedures, reducing tariffs, etc. At the same time, the cargoes can be different: from grain to other goods exported from Ukraine. But everything comes down to the main obstacle – the gauge width in Ukraine and Poland (which differs), through which the cargo is transported. The issue is being resolved. For now, there will be a technical transitional period.

Today, some cargo from Ukraine also goes through our ports, but it is not on the same scale: only road transportation through Poland is used, which is more expensive and does not allow for an increase in cargo volumes.

– And what is the forecast for investment in our economy for the current year?

– All forecasts are currently very vague due to the ongoing war. Moreover, there are issues that need to be resolved in the financial sphere. This concerns the entry into force of restrictions on capital transfers, which pose certain difficulties for companies that want to work in Ukraine: capital outflow is currently impossible (only allowed for strategic goods). We understand that these are forced restrictions during wartime, and enterprises (if they wish) can find various ways of settlement – barter with goods/services, etc. However, such a situation complicates the work of our our and any other investors.

We also have entire industries that have stopped since the beginning of the war, such as air transportation. Our airline Air Baltic, like other global airlines, has not been operating in Ukraine since the closure of the airspace. Of course, the loss of the Ukrainian, as well as the russian and belarusian aviation markets due to the war initiated by russia, has affected the financial performance of Air Baltic. For now, the company continues to operate successfully in the regional sphere. But when the Ukrainian sky opens up, it will definitely return to Ukraine because it is a promising market.

On why there are few investments from Latvia and what repels investors:

– Name the three largest Latvian companies operating in Ukraine and three industries that interest Latvian businesses the most in Ukraine.

– Unfortunately, we mostly have trade relations between us now. Among the top 10 exporters are two pharmaceutical companies, two companies engaged in trade and processing of solid and liquid fuels, IT companies, and a company trading household chemicals. There are also companies engaged in transport and logistics (loading/unloading of cargo) and sales of luxury spirits, and so on. I don't know how they settle payments during this difficult wartime, but the process is going well.

– So, are there no such investors in Ukraine now?

At the end of 2022, our investments in Ukraine amounted to 94 million euros.

One specific example: a small entrepreneur, Dainis Aleksejevs, used to work in Chernigiv Oblast. His wood processing company is located 30 km from the russian border. Currently, the DVM Les firm remains in Ukraine, but after February 24, 2022, it practically froze its activities, including financial problems related to the increased cost of logistics and problems with delayed VAT refunds.

The thing is, initially, the company's assets had russian capital, although formally these are Latvian investors, citizens of Latvia – Vilis Dambins, Arturs Altbegs, and Valtis Vigans. And after February 24, 2022, this became a huge problem. After the events of 2014, the company more or less operated in different regions of Ukraine, and now the situation has changed dramatically. Currently, there are ongoing court proceedings. Ukrainian media recently wrote about this.

Significant investments have been made in the company, and it has been represented on the Ukrainian market for quite some time. As Ukrainian media write, the scope of VS Energy's activity was due to significant russian capital investments. There is a complex history with owners from the Russian side: they have changed.

The Ukrainian justice system needs to resolve this issue in a transparent and understandable way.

– Speaking of the comfort of our business climate, what repels Latvians, besides the war?

– Mostly, the nuances of law enforcement and the legal system. In particular, difficulties in resolving disputed issues through the local legal system. Because if a case is delayed for a long time in the courts, it causes significant losses for entrepreneurs and affects Latvian investors' decisions to come to Ukraine.

All of this, of course, has a negative impact on potential investors from Latvia – bad news spreads very quickly. Therefore, the sooner the Ukrainian judicial and law enforcement systems are streamlined, the more willing investors will be to invest in Ukraine. I have no doubt that there will be progress in this area as Ukraine moves towards its goal of becoming an EU member. Reforming the justice system is one of the prerequisites for this process.

But there are also successful examples of cooperation. For example, in Drogobych, Lviv Oblast, our company Eco Baltia operates a waste recycling and sorting facility. The local administration was very interested in creating a cleaning system, and the Latvian company has been successfully operating in this region for several years and has even expanded its activities.

– Some ambassadors say that their businessmen are being pressured for paying bribes in Ukraine to solve certain issues. Do Latvian entrepreneurs complain to the embassy about such "features" of doing business in Ukraine?

– During my term in office (since 2021), none of our entrepreneurs have filed such complaints. I think that even if there were such precedents, Latvian businessmen would consider it very risky and simply not invest in such cooperation. But I do not rule out that such proposals are made to solve some business problems.

Basically, before coming to Ukraine, our entrepreneurs mostly get in touch with the local authorities of a particular region or locality in advance. This gives the most tangible and predictable result, as it is easier to resolve business issues when both parties are interested in promoting a particular business project.

On the investment of Ukrainians in the Latvian economy

– What has been the dynamics of Ukrainian investment in Latvia in recent years (according to our statistics, in 2021 the volume of Ukraine's investment in  Latvian economy was $80 million)? How many companies with Ukraine-based investments are registered in Latvia and in which industries are they most concentrated?

– Ukrainian direct investment in the Latvian economy is on the decline. In 2022, there was an understandable decrease (compared to 2021) – by about 12%. As of the Q4 of 2022, EUR 185 million of Ukrainian money was recorded in Latvia. According to our statistics, Ukrainian capital ranks 16th among foreign investments in the Latvian economy. This is an arguably low level, given Ukraine's size and the fact that it is in the Euro-region and in our neighbourly proximity.

– Does Latvia have any form of ultra-large Ukrainian business – financial-industrial groups owned by Ukrainian oligarchs?

– 75% of the financial sector in Latvia is generally controlled by Scandinavian, mainly Swedish, banks. For some time, starting in 1992, we had Privat Bank Latvia, which belonged to the orbit of oligarch Igor Kolomoisky's influence. In 2016, the bank was ranked 11th largest out of 16 banks operating in Latvia. But the same year, it faced problems due to allegations of money laundering and the nationalisation of Privat Bank in Ukraine. In 2020, most of its banking outlets in Latvia were closed: only nine branches remained in the country, including four in the capital. To date, Privat Bank Latvia has not liquidated itself, but in July last year it transferred most of its assets to the local Industra Bank. This means that Privat Bank Latvia exists only formally.

In addition to the banking sector, there are significant Ukrainian investments in Latvian real estate with the subsequent sale/lease of apartments, business hotels in Riga and the resort of Jurmala. But during the pandemic, they suffered heavy losses as Latvia had a very strict lockdown in 2020-2021. Some hotels went bankrupt or closed during the pandemic. Of course, our government has compensated some of the losses, but this cannot fully compensate for them.

On Latvia's military and economic support and assistance to Ukrainian refugees

– At the end of 2022, Volodymyr Zelensky said that more than a trillion dollars was needed to rebuild Ukraine after the war. Ukraine is currently developing a system that allows partner countries to "patronise" regions, cities/enterprises. There is already interest from a number of EU countries, including Latvia. Whom is your country ready to patronise, or have you already decided?

– Latvia is too small a country to take on patronage in the full sense of the word. But we intend to work actively in the Chernigiv Oblast. There is an honorary Latvian consulate there, and before the war started, we had business contacts in the agricultural and timber processing sectors. Last year we began to help the oblast: we repaired a garment factory in Chernigiv, where windows were damaged during the russian offensive. But there is still much work to be done – the region's housing stock and other businesses have suffered significantly.

In all matters, we cooperate with the local administration, which points out the most important and damaged facilities. Of course, Latvia cannot allocate a lot of money. However, in 2022, we invested about 160,000 euros in the repair of a regional garment factory and in the suburban village of Yagidne, purchasing building materials to restore the damaged houses. This year, the Latvian budget has earmarked €5 million for the restoration of Chernigiv Oblast.

– The EU is ready to accept refugees from Ukraine in 2023, but with less support. Some governments will cut funding as the war continues and the cost of living in Europe rises. What is the picture in Latvia?

– It all depends on the specific circumstances. Decisions on a particular support programme are made for a certain period and then prolonged as needed.

Currently, the government has approved the extension of assistance measures for Ukrainian refugees until 30 June 2023. In addition to state aid, refugees receive social rations, and donations from the public are also received on a regular basis – 68% of Latvians provided material support to Ukrainians, from non-governmental charities and municipalities.

In general, I do not see any reason for a large influx of refugees from Ukraine. Winter is the most critical time of the year, and it's over. And I don't think there is a threat of a strong russian offensive on the territory of Ukraine in the near future. russia no longer has the resources to capture Kyiv or other large Ukrainian cities.

– What is the amount of social benefits for our refugees, how many of them are currently living legally in Latvia, and what kind of jobs are they engaged in? And what is the state policy on the labour migration market in relation to Ukrainians, is there any difference in wages compared to local citizens?

– Speaking of the assistance to Ukrainian refugees, the amounts vary – they depend on the categories of people in need and their financial situation. For example, one-time assistance in a crisis situation is €272 for an adult and €190 for a child, and an additional monthly allowance is €109 for the first family member and €76 for each subsequent one. Other financial support or social services are provided according to individual needs.

As of 22 March 2023, we had 34,753 Ukrainian refugees registered in Latvia, primarily concentrated in Riga. And 40,682 temporary registration certificates have been issued, meaning that some Ukrainians have already left Latvia. Local governments have accommodated 4,739 refugees in the country and there are still 912 free places. There are 2,198 people in refugee centres. However, many refugees from Ukraine rent housing, hotels or stay with friends/relatives at their own expense.

Ukrainian doctors are also in demand here. By the way, our state provides 620 euros in severance pay when you get a job.

– Latvia was one of the first countries to provide us with military assistance, although it does not produce weapons. At the beginning of the year, Bloomberg calculated how many weapons countries have transferred to Ukraine since the beginning of russia's invasion – Latvia was in 8th place. Is there any criticism of this policy within the country and will military aid continue to flow to us?

– Of course, we have opposition actors that oppose military support for Ukraine. But this is not the predominant trend. However, according to statistics, every second Latvian is against the country's direct intervention in the military conflict in Ukraine. And the government's policy on this issue is very clear: it will not change, and military assistance will be provided as long as necessary, as the Prime Minister of Latvia stated on his visit to Kyiv in March.

"In 2023, we intend to continue providing military assistance to Ukraine: weapons, including air defence systems, technical equipment, ammunition, and uniforms. This is hundreds of millions of euros. We will also continue to train the Ukrainian military in Latvia. Last year, we trained hundreds of Ukrainian soldiers, and this year their number will increase many times over. Since the beginning of the war, the total amount of Latvian military assistance to the Ukrainian Armed Forces has reached 370 million euros, or about 1% of Latvia's GDP.

On the losses of the Latvian economy due to anti-russian sanctions

– Latvian Prime Minister Krišjānis Karinš said that among the EU countries, the Baltic states have suffered the most from anti-russian sanctions. Is there a general estimate of Latvia's economic losses?

– The russian federation has launched an aggressive war against Ukraine, and the EU's economic sanctions against russia are one of the logical and justified steps in response. It is obvious that the economies of all EU countries are suffering from the consequences of the war. I don't have exact data on Latvia's economic losses because the war is still underway. But there is no doubt that the economies of the Baltic states are feeling the effects of the war. And we can talk about both direct losses and lost profits.

As for russian companies operating in Latvia, we froze their assets – 35 legal entities (companies, enterprises) and 6 individuals. In total, they amounted to 81 million euros. Although this is not a lot of money, the interruption of any business activity has a negative impact on economic processes. However, Latvia is not in recession, although it is balancing. This year we are planning some economic growth, although it will be insignificant. On the other hand, the small economic growth and the country's balancing on the brink of recession are also the consequences of the COVID period. The same tourist flow in Riga is recovering, but slowly.

Our economy is quite successfully undergoing the process of reorientation. For example, we had a trade turnover of only 11% with russia, and it was primarily energy resources (oil products). And there is not much else to buy from russia.