Criticism grows of Latvia immigration law that buys Schengen access

By bne IntelliNews September 30, 2013

Mike Collier in Riga -

Cries of "Thank god the Russians are coming" are rarely heard in Latvia due to the Baltic state's turbulent history with its giant eastern neighbour. But that's the basic gist of supporters of a controversial Latvian immigration law that has seen thousands of Russians relocate - in theory at least - to the country.

On July 1, 2010, Latvia, a member of the EU since 2004 and soon-to-be member of the Eurozone from 2014, introduced a law allowing foreign citizens to apply for five-year residency permits provided they buy real estate worth at least LVL50,000 (€70,000) in the provinces or LVL100,000 in the capital Riga and its surrounding district, which includes the famous upscale Russian playground resort of Jurmala.

Other options are to place a substantial term deposit with a local bank or to give major financial backing to a local company, though it is the bargain-priced real estate option that has been attracting "investors" from not only Russia but also Ukraine, Belarus, Kazakhstan, and even China and India.

A report by the Latvian Interior Ministry presented to the government on September 17 suggests the scheme has been a success, bringing €596m of foreign cash into the country at a time when it has been recovering from the world's deepest recession. According to a separate report by the accountancy Deloitte, by the time the scheme is five years old it could rake in more than €1bn.

Like the Russian travellers who have almost single-handedly revived Riga's tourist industry in the winter months, the eastern arrivals are also credited with propping up a real estate market that saw prices crash by around 80% in many cases when the bubble popped in 2008.

Rietumu Bank (Western Bank) has pioneered the influx of foreign investors, even advertising its ability to obtain an "EU Residence Permit" on the Russian-language section of its website. Board member Renats Lokomets says the cash that applicants bring has been of huge benefit. "Most of those who have obtained a Latvian residence permit come here with their families for at least one or two months of the year. We have already seen the economic effect in a developing real estate sector, the transport industry, trade, private jets, yachts, executive class cars, restaurants and much more," Lokomets says, arguing that the extra cash is used to broaden the financial base of the Latvian baking sector.

"I am sure that if the conditions are right the 'expatriate' business will grow. However, drastic and ill-considered changes to the immigration law may discourage those who want to invest here and ruin this positive trend," he adds, alluding to growing opposition to the scheme.

Edgars Sins, chairman of the country's largest real estate agency, Latio agrees the scheme has been a success and also warns against tinkering with it. "The popular opinion is that it has been supporting the real estate market, but I would argue this scheme has supported those families and business that are heavily indebted. If they didn't have the opportunity to sell their real estate to foreign investors, their only alternative would be bankruptcy," Sins tells bne.

"The nationalist parties know it is enough to raise the issue to be elected to parliament. Unfortunately, we've got 5-10% of people who support almost fascistic ideas and unfortunately we have to live with that. The sad thing is, this news is read by potential investors and it could easily scare them away," says Sins.

Yet that opposition to the laws is growing, led by the right-wing National Alliance, one of three parties in the current ruling coalition.

In the three years since the scheme was launched, 6,749 residence permits were issued to foreign investors and their families, with 71% of applications coming from Russia, 8% from Ukraine and 5% from Kazakhstan. Nearly 98% of applications made under the scheme were approved - a fact which on its own is enough to raise the eyebrows of Roberts Zile, a National Alliance member of the European parliament, who is calling for the law to be scrapped as soon as possible.

Because Latvia is a member of the borderless Schengen zone, a Latvian residence permit is effectively a five-year visa to the whole Schengen area. It is that fact that has really made the programme popular with people from countries of the Commonwealth of Independent States, says Zile. Once investors have their permit and some nominal property, they can concentrate on buying their real homes in France, Italy, Germany or Spain. "They are not buying houses, they are buying access to the Schengen area," he complains. "I'm trying to raise this issue with the Conservative group in the European parliament and I'd like to ask questions to the European Commission in the nearest future, because it's an issue that affects all Schengen area member states."

The high acceptance rate is proof that the scheme is poorly policed with only token checks made of applicants' backgrounds, says Zile, pointing to the case of Anna Shalabayeva, wife of fugitive Kazakh banker Mukhtar Ablyazov.

Ablyazov is wanted in Kazakhstan in connection with a multi-billion-dollar bank fraud. On May 29, Italian police raided the couple's house in Rome and deported Shalabayeva and her six-year-old daughter to Kazakhstan - despite the fact that they were living in the EU on Latvian residency permits. "There is a serious reputational risk in this for Latvia," says Zile. "The people moving here have no interest in learning the Latvian language and over the last three years in places like Riga and Jurmala there is no doubt that the common language has almost become Russian."

Far from saving the property market, these phoney investors are keeping prices artificially high, in Zile's view. "Young Latvians are emigrating because if you are 20 or 25 years old, you don't have the opportunity to buy a home in a reasonable timeframe because this scheme is keeping prices artificially high. There are many properties which belong to the banks following the crisis, but they are not selling them. There are a lot of empty buildings but at the same time there is new construction going on of so-called 'Schengen apartments'," Zile says.

Proposals to raise the level of investment needed to qualify for the scheme would only make things worse, he points out.

But there is another implication of the residency permit scheme that is yet to be fully discussed. By being classed as residents, Russians and others with cash to place in Latvian banks are obviously no longer classed as holding non-resident deposits (NRDs), yet are arguably just as liable to participate in capital flight and similar sudden shocks as "proper" NRDs. That potentially makes comparisons of the relative levels of resident and NRD deposits meaningless - including both warnings from the International Monetary Fund about the size of Latvia's NRD sector and the assurances of the central bank and regulator that there is nothing to worry about.

Criticism grows of Latvia immigration law that buys Schengen access

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