10.10.2022 - Economy

Russia's investments into Latvia fell in first half of 2022

In the first half of this year, the volume of Russian investment in Latvia continued to decrease, while other countries' investments have not decreased significantly. The most important factor for investors in Latvia is the availability of the workforce, Latvian Radio reported on October 10.

According to data compiled by the Latvian central bank (Bank of Latvia, LB) foreign investment in the first half of this year was 3.5% of gross domestic product (GDP), which means that investment remains at medium levels in the long term. Businesses from Lithuania and Estonia, as well as Sweden and Germany, are still the most active investors in Latvia. Meanwhile, investments by Russian investors continue to shrink.

Russian investment in Latvia's economy has been shrinking since 2018 when the audit of Latvia's financial system took place, but investment will now be reduced due to sanctions.

Bank of Latvia economist Matīss Mirošņikovs explained: "In the long term, Russia is not the biggest partner and has not been so important. Russia's share of accumulated foreign direct investment is only around 8% of the total and is currently falling. [..] There is, of course, the group from which the most investment flows – it is our neighboring countries, Estonia, Lithuania, for example, Sweden, is clearly the largest partner in the long term, including the highest share of investments, Germany is also a quite large [partner] and then the other countries are less. There are professional services, financial services, and quite a lot invested in wholesale and retail, and in the manufacturing industry, also in real estate operations."

Citadele Bank economist Pēteris Strautiņš estimated that this year fewer new industrial projects have started work in Latvia, but the construction of offices in Rīga will continue actively.

“In Latvia, the Lithuanian and Estonian companies are very strongly involved in the development of offices. In industry, there will be more investment from Nordic countries, from Germany. [..] And it is likely that Lithuanian and Estonian companies take these so-called geopolitical risks more peacefully."

Asked what impact the Russian opposition media, such as “Dozhdj”, might have on Latvia, Strautiņš said: "So it is about Russian opposition media fleeing Russia. An interesting event, but I do not think that the size of their activities would be such as to influence the overall figures of the Latvian economy in any way. It should be asked whether Russia has been a major source of direct investment at all. I would say that Russian businessmen through their businesses in Cyprus, the Netherlands, and elsewhere, have done a lot in different industries, such as Food Union, Liepāja iCotton, also the Riga electrical machinery building plant.

"In the future, I suppose there will be no real investment from Russia. One is the political factor, more caution on money [..]. It must also be noted, of course, that the world economy as a whole is not in a good position. There will certainly be a recession in the eurozone. There are a variety of factors, both the loss of the Russian market and the impact of energy prices, which are much harsher than elsewhere in the world. If there is a recession, it has an impact on investment, which is such a volatile economic component and, of course, could also have an impact on investment from our partner countries, from the Nordic countries, from Germany, and from the US. They will invest less [..].

"There are risks that we previously probably didn't assess. This creates stress, of course, can disrupt investment engagement, but in fact the death of a large part of the Russian army, the approach of the Nordic countries to NATO, and the change of German foreign policy, all of that improve our security."

Zlata Elksna-Zščirinska, Chair of the Foreign Investors' Council in Latvia (FICIL), said that for investors, the geopolitical factors will not be critical but the availability of the workforce: "We see that investors' interest in Latvia still exists and that investors are looking and studying, and what is important for them, whether Latvia is able to provide the right workforce, both in capacity and adequate skill levels. [..] If we are talking about replenishing the mass of people there are two key points – one is the smart migration and the other is the retraining of people so they can meet what the [investors] expect. How we will think about this will be the key to our ability to attract foreign investors in Latvia."

Global factors – the Covid pandemic and the war in Ukraine – also affect other countries, but as energy prices are higher in Europe, Latvia is unlikely to be interesting for energy-intensive foreign companies in the near future.

Source: Daina Zalamane (Latvian Radio), eng.lsm.lv

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