Analytics, EU – Baltic States, Financial Services, Investments, Latvia, Legislation, Real Estate

While bankers and property agents claim the law is attracting valuable foreign investment, critics argue it is being used by shady businessmen from the former Soviet Union to enter the EU. They want it scrapped.

Since it took effect in July 2010, nearly 7,000 foreign nationals have received five-year EU residence permits after having shelled out at least LVL 50,000 (EUR 71,000, USD 96,000) on property outside Riga, or LVL 100,000 in and around the capital.

The scheme has drawn nearly EUR 600 million of investment, according to a government report published last week. Global consultants Deloitte estimate it will rake in a total of EUR 1.7 billion by 2015.

The capital injection has been all the more welcome because it helped revive a shattered real estate market as the Baltic nation of two million recovered from the world's deepest recession, the AFP points out.

The vast majority of new residents hail from former Soviet states including Russia, Ukraine and Kazakhstan. Nearly 98 percent of applications are approved.

Because Latvia is part of the borderless Schengen zone, critics point out that a Latvian residence permit is effectively a five-year visa to all 26 members of the zone, comprising mostly EU states.

That's the real selling-point for applicants from the Commonwealth of Independent States, according to Roberts Zile, a member of the European Parliament (MEP) with Latvia's right-wing All for Latvia!-For Fatherland and Freedom/LNNK. "They are not buying houses, they are buying access to the Schengen area," Zile told AFP, insisting that with only token background checks on applicants, the system is wide open to abuse.

He points to the case of Alma Shalabayeva, the wife of fugitive Kazakh banker Mukhtar Ablyazov wanted at home in connection with a multi-billion dollar bank fraud.

In May, Italian police raided the couple's house in Rome and deported Shalabayeva and her six-year-old daughter to Kazakhstan. They had been living in Italy on Latvian residency permits.

The scheme is also controversial as it is a major turnaround. Bitterness over the Soviet occupation and concern over the large Russian minority that remained after independence in 1991 had led Latvia to keep a tight control over immigration, the AFP points out.

Zile insists the scheme risks Latvia's reputation and he is lobbying both the European Parliament and the European Commission to ask Riga to scrap it. But that is an uphill battle because of its powerful backers in politics, business and banking.

According to Edgars Sins, chairman of Latio, Latvia's largest real estate agency, the system saved Latvian businesses and families caught by a huge property bubble bursting in 2008-2009 when the global financial crisis tanked the economy.

"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," Sins told AFP recently in Riga. "If they did not have the opportunity to sell their real estate to foreign investors, their only alternative would be bankruptcy," he said.

Latvia's Rietumu Bank specializes in serving foreign investors, proudly advertising its ability to obtain an "EU Residence Permit" on the Russian-language section of its website. Board member Renats Lokomets insists the cash injection from wealthy new residents has helped to jump-start the Latvian economy and that there is still plenty of room for growth. "We have already seen the economic effect in a developing real estate sector, transport, trade, private jets, yachts, executive class cars, restaurants and much more," Lokomets said in a statement. The extra cash is also broadening the financial base of the Latvian baking sector, he added. "I am sure that if the conditions are right the expatriate business will grow," he added, warning that any "drastic and ill-considered changes to the immigration law may discourage those who want to invest here and so ruin this positive trend."