Strategic Analysis: Russian Business Activity in Latvia (Abstract)

Of the three Baltic states, Latvia has the biggest portion of ethnic Russians comprising about 25% of the countrys population. Some 34% of Latvians speak Russian as a first language, which is also the highest figure of any EU country.The leading pro-Russian political party in Latvia is the Harmony Centre, a five-party coalition that depends primarily on an ethnic Russian voter base. Many Latvians reportedly view the party (and its leader, Nils Uakovs) as a proxy for Moscows business and political interests. Indeed, Harmony Centre has even signed a cooperation agreement with President Putins United Russia party in Russia.

The strategic, geographic position of Latvia between Lithuania and Estonia makes its natural gas infrastructure critical to the realization of a properly functioning natural gas market for the region, including the ability of the Baltic states to coordinate in a way that makes maximum use of Lithuanias new, game-changing Klaipeda LNG terminal.

Latvias financial sector also plays prominently in the countrys economy and in its relationships with both East and West. Latvia has established an international reputation for its strict privacy laws, competing with Luxembourg, the Cayman Islands, Cyprus and other locales viewed by many as safe havens for establishing offshore companies and maintaining discrete offshore bank accounts.

Russian depositors are well known to hold a prominent position within Latvias banking sector, giving rise to a number of troubling challenges having to do with the financial access Latvia provides to the EU market as well as the leverage that can come with an inordinate dependency on Russia for a sector that has become so pivotal to the overall economy and competitive positioning of the country. Statistics published in 2012 showed that the Russian portion of Latvias non-resident deposits were steeply on the incline (rising, for example by 25% in the 12 months ending in June 2012).

A prominent Latvian banking executive, Valeri Belokon, who also owns a Russianlanguage newspaper, has offered his views that these threats are real. Moscow, he says, is certainly seeking to return Latvia to its sphere of influence,

Unfortunately, its true. Im afraid of all this Russian capital. Capital is influence. Latvia is an open country. And Im not against tourism or business. But the danger for a small country is that we become dependent on Russia. We definitely have to defend ourselves.

Even prior to EU ascension and the Cyprus collapse, Russian bankers understood the strategic benefit of being favorably positioned within Latvia. Its banking industry has been a popular destination as a safe haven for many years (especially for Russian business persons). In 2011, Latvian media described the spike in Russian bankers looking to enter the Latvian financial market as an invasion, a trend that continued in the years that followed.


Excerpted Deals and Transactions:

  • In 1994, Latvijas Gze, responsible for the countrys natural gas supply infrastructure, was reformed to make it a state stock company prepared for privatization in the years that followed. The company emerged from privatization with its largest shareholders being Russias Gazprom, Germanys E.ON Ruhrgas and Itera Latvija (a subsidiary of a prominent Russian company, Itera).This privatization also incorporated one of Latvias most prized and significant assets, the Inukalns Underground Gas Storage Facility (the only such facility in the region). Due to special exemptions from the Third Energy Package through April 2017, Gazprom continues to hold a 34% stake in Latvijas Gze.
  • Electric Capital Bank GE Money Bank was bought by one of Russias largest financial groups, Otkritie
  • In May 2013, Latvijas Biznesa Banka (LBB) was acquired by Russian banker, Andrey Vdovin (the co-owner of Russias VMHY Group, who indicated his plan was to have the new bank specialize in private banking to high net worth clients).
  • In September 2014, a Ukrainian scrap metal company, called KVV Group, owned by two individuals, Valery Krishtal and Yevgany Kazmin, won a bid to purchase an insolvent Latvian rolled steel manufacturing company, Liepjas Metalurgs, for some $138 million.Liepjas Metalurgs is the only steel-making company in the Baltics and, prior to its insolvency, was the largest company in Latvia.
  • KVV Group has subsequently been called into question for the opaque backgrounds of these two owners, the recent re-registration of one of their other business ventures in Crimea and their business portfolio that is comprised of projects all over Ukraine, including in key parts of eastern Ukraine. For example, the company has reportedly been engaged in recent talks to acquire Donetsk Electro-metallurgical Factory for $80 million.
  • Russias Dalpolimetals Chairman, Eduard Yanakov, was mentioned in 2013 in connection with a number of Russian media take-overs in Latvia that were operating behind Cyprus-registered companies.