MEMBERSHIP IN EU PROVIDED LATVIA WITH NEW OPPORTUNITIES FOR ECONOMIC DEVELOPMENT

 

Caspian Energy (CE): Mr. Popkovs, how would you evaluate the current relations between Azerbaijan and Latvia? What fields of cooperation are considered as primary ones?

Mikhails Popkovs, the Ambassador Extraordinary and Plenipotentiary of Latvia to Azerbaijan: Over the last two years our countries have done a lot to develop the bilateral relations. First of all, this is the visit of President of Latvia Vaira Vike-Freiberga to Azerbaijan in autumn 2005 and the return visit of President of Azerbaijan Ilham Aliyev to Riga in October 2006. Over 10 intergovernmental and interstate agreements on cooperation in different fields, which cover mainly all areas of our cooperation today, were signed during these visits. In September 2006 we held consultations at the level of Ministries of Foreign Affairs, formed an intergovernmental Azerbaijan-Latvian commission on economical, scientific, educational and cultural cooperation. The first session of this commission is held in February-March 2007 in Baku.

At the same time, mutual state visits at other levels indicate the development of the bilateral relations. Thus, last year Speaker of Milli Majlis of Azerbaijan Ogtay Asadov has paid a visit to Riga at the invitation of Latvian counterpart. We expect the Speaker of the Latvian Seym to pay a return visit to Baku. We intensively exchange visits and meetings at all levels and hope to enjoy results in practical areas of cooperation.

I would like to remind that two business forums were held in Baku and Riga within the framework of mutual visits. These forums hosted the significant number of leading entrepreneurs from both countries with establishing very useful contacts that already have a concrete output. Thus, two contracts have been signed within the framework of the meeting of entrepreneurs in Riga. One of them is the contract between MKT of Azerbaijan and Parex Bank, one of Latvia's leading banks. It concerns issue and placement of securities in the international securities market. This is the first issue of corporate securities in the history of Azerbaijan. The implementation of this project enabled MKT attracting funds for its business development. The second contract signed between R.I.S.K of Azerbaijan and SAF Tehnika of Latvuia cocnerns acquisition of equipment for mobile telephone communciation from Latvian manufacturers. This is quite specific an equipment that provides connection between mobile telephone stations. Thus, there are concrete examples of cooperation that will expand in the future, I hope. Some more projects are underway now. In particular, Parex bank, which has already setup its Azerbaijan-based subsidiary Parex leasing and faktoring Azerbajan, is now examining the possibility of setting up one more subsidiary in Azerbaijan - a branch office or a bank subsidiary. This credit organization expressed its readiness to enter Azerbaijan market as a full-status participant. The interest towards the Azerbaijan market is not limited by Parex bank only. Aizraukles banka has already registered one of its subsidiaries in Baku. Rietumu banka, which is quite a large credit establishment, also shows interest in opening its branch office in Azerbaijan. Thus, the Azerbaijan market is very interesting for Latvian businessmen, first of all in such fields as financial services and tourism. By the way, these two areas are viewed as most interesting for development of our dynamic cooperation during state visits of presidents.

 

CE: What is the structure of export-import relations? What is the level of the trade turnover between the two countries? What level is going to be achieved over the next few years?

Mikhails Popkovs: Surely, all above-stated issues influenced the trade turnover between our countries, which grew much over the last years. Thus, following the growth dynamics of the trade turnover between Azerbaijan and Latvia, it quadrupled over the last 5 years and exceeded $4 million. I would surely like to add we are very pleased with the growth dynamics of our trade turnover and its annual increase but we are not satisfied with absolute figures of this trade turnover, which could have been much higher considering the available potential. However, we face great perspectives in future.

Speaking about the structure of Latvian export I would like to say that Azerbaijan imports from Latvia mainly chemical and pharmaceutical products, food products, metalware and household appliances. In its turn, Latvia mainly imports from Azerbaijan oils and other petrochemical goods, food and cotton products. 

 

CE: What is Latvia's long-term development strategy? What changes has it undergone after entering the EU?

Mikhails Popkovs: The membership in the EU provided new opportunities for economic development. The entry to the common market of the European Union is very advantageous as we have got a huge and stable market with free movement of goods, services, manpower and capital flows. One of the great challenges Latvia is facing now is to continue formation of efficient and competitive economy, to complete launched structural reforms so as to raise labor productivity in various sectors of economy, to develop innovation technologies, scientific research, to improve our system of education and healthcare. Within the last years Latvia significantly improved its business environment due to the process we carried out when preparing for joining the European Union. The new commercial code in our country took effect in 2002. It marked the completion of very important reforms in entrepreneurship. I would like to note that currently Latvia has one of the lowest income tax rates across the EU. Today they make up just 15%. Latvia is working thoroughly on opening new markets of telecommunication, electricity and gas supply, gas and electricity distribution, as well as mail and transport services. Opening such spheres for healthy competition and eliminating monopolies in branches that are still governmental property is one of the Government's top economic objectives.

 

CE: ...So these branches have not been privatized yet.

Mikhail Popkovs: Well, some stock is still in governmental possession. In general, privatization process in Latvia is complete at 95-96%, i.e. almost all entities and all areas of economy have been privatized. The Government still holds the stock in some monopolies, in particular Lattelecom or Latvian Railways. Just in late 2006, the governmental stock in oil transit monopoly, Ventspils Nafta, has been sold. So, privatization in Latvia is about to complete.

 

CE: How did the dynamics of cargo turnover in port of Ventspils and other Latvian ports change after the suspension of Russian oil pipeline operation?

Mikhails Popkovs: In general, over 20 million tons of oil products have been transshipped via Latvian ports. From this amount, 2.1million tons falls for crude oil, which is 4 times as much as in 2005. Since Polotsk-Ventspils pipeline operation was suspended in 2003, oil suppliers switched to other methods of oil delivery to the ports of Latvia, in particular using railroads.

Ventspils is a universal port that handles not only oil and oil products, but also bulk cargos, in particular potash fertilizers, and grain.

During 2006 the port of Ventspils has processed nearly 29 million tons of cargos. This is almost half of all cargos processed in Latvian ports (59.5 million tons in 2006).

I would like to underline that Ventspils is still one of the largest Eastern Baltic ports and cargos processing amounts remained stable compared to previous years. The port is progressing, last year the seabed at its quayside was deepened, and the amounts of bulk cargos processing are growing up. 

 

CE: How much is the general external trade turnover between Latvia and countries within and outside the EU? Which CIS states are the largest economic partners of Latvia?

Mikhails Popkovs: Naturally, the whole governmental work I detailed has influenced the structure of Latvian cargo turnover. Today, three-quarters of this amount fall for the EU and only 11% for the CIS countries. Our main trading partners in Europe are UK, Germany and Sweden. As to the import, most goods are delivered to Latvia from Germany, Lithuania and the Russian Federation. I would also add that as to the Russian Federation, energy resources are dominating. Latvia purchases 100%  of its natural gas in Russia.

 

CE: What are the long-term economy development programs in Latvia and how are they implemented?

Mikhails Popkovs: I already mentioned the national Lisbon program devised to strengthen the competitiveness. The Government has also developed the 2007-2013 national development plan and the uniform national economy progress strategy. These major projects consist of a number of local programs, for example plan of actions developed to improve business environment and the concept of governmental development of export programs. One more successful issue in effect is the 2005-2009 Government Program for export promotion. The tourism development program and a number of local programs pertaining development of self-governing and further attraction of investments, which, we hope, will help us keep the current high rates of Latvian economy development. 

 

CE: What is the investment environment in Latvia and how have the investments in Latvian economy changed following its joining the EU?

Mikhails Popkovs: In my opinion, our country is quite attractive for foreign investments, and this is evidenced by figures; in particular, over the last year direct investments in Latvian economy have grown more than twice compared to the year 2001, displaying the average annual growth of 18-20%. These investments are distributed quite equally in various spheres of economy. Some 19% of direct foreign investments fall for commercial services, 12% for processing industry, the same amount for power engineering, 15% for trade, nearly 24% for financial sector, 7% for communications and 6% for transport.

According to the statistics for the early 2006, direct foreign investments per capita amounted to more than $2,000.  Thus, the total amount of foreign investments in Latvian economy at that moment amounted to more than $5billion. It is very important for us that the foreign investment growth rate in Latvia remains stable over the last years. Naturally, it is affected by such factors as financial stability, modernization of entrepreneurship regulatory, high internal demand that is very important for foreign investors, as well as low interest rates in the financial capital market. Moreover, this positively characterizes our fiscal system; foreign investors consider Latvia an attractive place to invest in.

 

CE: What is the dynamics of gas consumption in Latvia and how does the country handles its energy security issues?

Mikhails Popkovs: Latvia's need in gas is around 1.6 billion m3 a year. The country's demand for this fuel is satisfied by Russia. As to the pricing, last year the gas price was $180 per 1,000 m3, but starting this year it reached the EU level.

 

CE: What is the dynamics of oil consumption in Latvia?

Mikhails Popkovs: We do not have any oil refineries in Latvia. We purchase 82% of gasoline from Lithuania. Other oil products are purchased from Norway and Finland. 

 

CE: In this respect, does Latvia suggest importing energy carriers from Caspian region?  How possible is it to transfer Caspian oil via Latvia to Northern Europe?

Mikhails Popkovs: Our Government is considering this issue and sees much in potential in it. We realize this is quite a large-scale project that suggests using Georgia and further tie-up to Odessa-Brodi system. This is an interesting idea, moreover, there could be the place for Latvia too as Byelorussia expressed its concern in such transport corridor and Latvia has operating oil pipelines with Byelorussia. In case this project gets the further boost Latvia will surely do its best to participate and offer all capacities it wields for both transfer and transshipment of oil products.

 

CE: Are there any prerequisites for Caspian gas supply to Baltic countries?

Mikhails Popkovs: First of all, one should be realistic in this respect. The implementation of such projects is quite a long and expensive process. There is no doubt that the EU is interested in the long-term diversification of risks pertaining to energy resources supply. In such case, oil supply projects are quite possible as one can transfer Azeri oil through the tie-up between Odessa-Brodi-Plotsk and Byelorussian transfer corridors that, in turn, run straight to Latvia. One may talk on what suppliers and on which terms oil might be offered for this project. In this issue, much depends on Kazakhstan as Azerbaijan has already satisfied its oil export requirements by launching Baku-Tbilisi-Ceyhan pipeline.

But in case with gas, we should start from a blank page. Here we still have nothing but an idea to diversify risks. In this case we are discussing transportation of liquefied natural gas (LNG). However, this is all linked to huge capital investments, creation of related infrastructure pertaining natural gas processing. The gas condensate supply is theoretically possible, though.

 

CE: How does the Government and national companies modify their policy in accordance with the EU's Green Paper?

Mikhails Popkovs: Latvian specialists took an active part in the development of the EU Green Paper related to reliable, competitive and long-term development of energy sphere for Europe. This document is especially important for our country as it contains some significant provisions. In particular, it specifies the energy isolation of Baltic region and sets the objective to solve this problem. As a first step, one should perform a detailed analysis of Baltic energy market problems. Some aspects of the Green Paper stating the principles of solidarity in development of European energy market security mechanisms in emergency situations are quite important for us. Here we can see the possible role of the Republic of Latvia in development of European energy market's security issues. As known, Latvia has significant gas storage potential. Latvia's gasholders are among the largest in Europe. One of them, Inchukal gasholder, has been successfully operated over many years, helping provide fuel to both Latvia and neighbor countries in winter when gas consumption significantly increases. We also hope for the possible use of Dobelsk gasholder, one of the largest in Europe. It could be used in the event of NEG's branching to Latvia, enabling us offering services on storage and further distribution of Russian gas.  

The Green Paper pays much attention to the energy use efficiency. Unfortunately, Latvia is still among the countries where this ratio is 2 to 5 times lower than that in the EU's old countries. For example, we spend 70 % of heat energy for apartments and public buildings. We have already developed the national energy efficiency policy, which suggests a number of measures concerning buildings insulation and reconstruction with the purpose of increase of heat energy use efficiency. In this respect, one should mention the preliminary work regarding the possibility of nuclear power plant construction in Latvia with our Government as a co-investor. Our country would be interested in construction of such new type power plant to provide all Baltic countries with reliable electric energy.