The moment when Latvia will have exhausted its ability to keep living as it has so far, endlessly increasing the national debt, is fast approaching. Raising taxes and mechanically cutting spending are not the answer. This process could be cushioned by developing entrepreneurship, underpinned by the creation of a Latvian growth fund. The fund would make investments where every euro invested multiplies into at least four.
This is according to Andris Kulbergs (Apvienotais saraksts), deputy chairman of the Saeima's Audit Committee, chairman of the Parliamentary Inquiry Committee on the causes of the rise in district heating prices in the City of Riga and future energy security risks, and a board member of the Auto Association, in an interview with Dienas Bizness. He notes that you can study any research you like, but the conclusions never change – Latvia is a valley of problems, dominated by a poorhouse mentality, over-zealousness in implementing European Union (EU) directives and regulations, and a panicked fear of making bold, responsible decisions. The result is a high level of bureaucracy, because, out of fear of making mistakes and taking responsibility, every procedure has been artificially stretched out, made needlessly long and complicated, while also being opaque. In the literal sense of the word, responsibility gets diluted across a document, with twelve signatures required instead of one. Kulbergs believes this is a key reason why Latvia is falling behind Lithuania and Estonia in national development.
What is the current situation in Latvia?
In a word – dismal! Why? Because Latvia has too few politicians, and even fewer political decision-makers, who understand where the money in the state budget actually comes from. In the EU, and in Latvia too, it is businesses that fill the state treasury with taxes: they employ people and pay them wages, from which labour taxes are collected, and from people's spending – consumption taxes too. It is precisely the taxes paid by businesses that provide the foundation allowing the public administration, and political decision-makers themselves, to draw a salary and, in turn, pay tax on it. At the same time, tax generators are frequently branded as crooks, fraudsters and so on, even without a court ruling. That approach will not bring more money into the state budget. Meanwhile, financing the services society needs requires ever more funds. To put it figuratively, if you keep pouring weedkiller onto your crops, they will wither and eventually die. Unfortunately, that is the average temperature of business in our country – of the 185,000 active companies, only around 20,000 are ones banks could realistically lend to, and fewer still (just a few thousand) can be confident of getting a loan. It has to be said, with regret, that there are Latvian entrepreneurs who have moved their tax residence to other countries. Employees are shifting their tax residence too.
For example, one bank relocated its intellectual property, or software development, department from Latvia to another EU member state – Cyprus, which offers an IP Box (Intellectual Property Box special corporate income tax regime), under which companies pay corporate income tax of just 2.5%. At the same time, if a similar, sensibly designed regime were introduced in Latvia, it could win back not only these specialists but also their family members, as well as attract similar international companies, thereby boosting consumption and the tax revenue that comes with it.
What is the solution?
Right now we are watching other countries lure our specialists to relocate their activities there, without stopping to think that Latvia, too, has plenty of opportunities to draw active entrepreneurs here, letting them earn money, which in turn would let the state earn too.
Latvia has to fight for opportunities to earn money, all the more so given that all of the country's prosperity to date has been built on the back of a growing national debt, which our children and grandchildren will be forced to pay off in future. The national debt grows by 1.2 to 1.8 billion euros every year. Although it is officially stated that Latvia's debt-to-GDP ratio is still comparatively favourable (around 50%) next to other EU member states, that is not really accurate.
Specifically, the loan granted to Latvia under the European Security Action Fund (SAFE) is close to 3.5 billion euros, and since the national debt already stood at nearly 20.5 billion euros at the end of 2025, the country's total debt is in fact already 24 billion euros, which is already more than 50% of GDP of 40 billion euros. What's more, these total national debt figures do not include the 1.2 billion euros for Rail Baltica. Of course, there are EU member states where the debt-to-GDP ratio is even more striking, but – should that really be our benchmark? We must not forget 2008. Back then GDP shrank in an instant, while the national debt quintupled, and its share suddenly shot up. Right now, too, the country is close to the edge of bankruptcy, which is why the most important thing is to bring in fundamentally new thinking and a new economic vision. If we carry on as before, we will find ourselves back where we were nearly 20 years ago, when Latvian businesses and residents carried the burden of the crisis on their own shoulders. And I have absolutely no wish to let that happen again.
Is another crisis looming, caused by rising energy prices?
It is a fact that, since real hostilities began, shipping through the Strait of Hormuz has been paralysed and oil and gas supplies from the Gulf states to international markets have stopped. This region accounts for around 20% of world consumption, so energy prices on the exchanges rose by more than 40% in an unprecedentedly short time by recent historical standards. As a result of mutual missile strikes, hydrocarbon extraction, so vital to the energy sector, has been hit hard in the Gulf states, and it is also a blow to agriculture, since nitrogen so essential for fertiliser, and helium needed by industry, were shipped through the strait. All of this will affect inflation, which in Latvia could climb to 4.5% this year and cut GDP growth to 1%. Recovering from it will require not only an end to the fighting but also time to deal with the aftermath.
By the end of March, the most pressing question for many governments was how to soften the negative effects of the avalanche-like rise in fuel prices. In Europe, at least, there are no reports of shortages of crude oil and fuel of the kind seen, for example, in the final years of the USSR or in the early days of renewed Latvian independence. Governments have several options. First, they can hope that things will simply resolve themselves before long – the war will end and life will gradually return to its usual rhythm, while extra money flows into the treasury in the form of value-added tax on the higher fuel prices, or even by introducing a windfall tax on fuel retailers (which is utterly absurd, since fuel retailers are not making any such windfall profit).
Second, they can take an active stance, for example, curbing fuel prices by temporarily cutting the excise duty rate, as Italy did already in March, and Latvia too, to a moderate extent. Strategic fuel reserves can also be released onto the market to hold prices down. A particularly sharp, unexpected rise in energy prices can trigger immediate corporate insolvencies and a general inflationary spike. To prevent that, governments need to make sufficiently swift decisions, since this affects both companies' competitiveness on the market, including by shortening the economically viable delivery distance for goods, and consumers' wallets. Everyone will feel the effects of these decisions. While releasing the state's strategic fuel reserves onto the market to normalise fuel prices might initially seem like a highly effective move, it must be borne in mind that the country cannot do without these reserves, and replenishing them would mean buying fuel at very high prices.
Unfortunately, it is not within Latvia's power to halt the rise in the final price of fuel over a longer period. It is also an open question whether using the state's fuel reserves would stabilise the situation in the long term or only temporarily.
Which sectors will be hit hardest by rising fuel prices?
First, sectors where fuel makes up a large share of production costs, so transport service providers, and passenger carriers, both by land and by air. There's no denying that companies can adapt to a situation and factor a 5% or even 10% rise in fuel prices into their costs. But it is not possible to absorb a 43% jump within a single month, and, moreover, changing already-signed contracts is next to impossible. That means existing agreements on service prices, made with cargo owners in advance, still have to be honoured. For example, a company that used to spend around one million euros a month on fuel, but now spends 1.43 million euros, faces a serious dilemma. Whose account should cover the extra 430,000 euros? The company's profit, if there is any?
Or operate at a loss, hoping to cover it later through higher service prices down the line? That is exactly why it was, and still is, necessary to halt the jump in fuel prices, so that transport service providers can build the rise into their price lists. Otherwise a wave of insolvency filings, followed by bankruptcies, will follow. For manufacturers, too, transport costs are becoming ever more significant, shortening the economically viable distance over which goods can be transported. Unfortunately, consumers will have to reckon with higher prices on shop shelves under these conditions, which for lower earners means a smaller basket of purchases and services.
While it might initially seem that, with prices rising, the state can hope for higher VAT receipts, in reality what is happening comes with a very negative side effect.
Namely, every public procurement will become more expensive: for road maintenance, repairs, construction, passenger transport, all of which already involve direct or indirect state subsidy. That means the Crisis Management Centre once set up in Latvia should have been activated in this situation, to analyse the situation, know what other countries are doing and how, at least at EU member-state level, with the government then offering the best possible solutions to shield the economy from the sharp rise in energy prices as far as possible.
What would you propose doing?
To halt the rise in fuel prices, it is possible to temporarily cut not only the fuel excise duty rate, but also to scrap the fuel-reserve levy (around 9 cents a litre) and the mandatory biofuel-blending requirement (a further roughly 5 cents a litre), which together would amount to a reduction of around 20-22 cents per litre. What's more, the additional excise duty collected from fuel and transport service companies in March needs to be refunded.
At the same time, the tax authorities need to speed up refunds of overpaid VAT to exporters in these conditions. There is also another important energy resource whose sharp rise in exchange prices has largely gone unnoticed right now, while the outdoor temperature is above zero.
Which energy resource are we talking about?
Natural gas! This January and February, when the outdoor temperature hit –20 °C, the stability of electricity supply not only in Latvia but across the whole Baltic region was maintained by Latvenergo's gas-fired combined heat and power plants (CHPs). Paradoxically, even after a winter like that, when without the CHPs' operation electricity availability would have been seriously at risk, there is still a segment of society that wants to significantly restrict CHP operation from 2028 and make it almost impossible after 2030. In today's conditions, when energy security and energy independence are tantamount to national security, I cannot call such ideas anything other than anti-state and harmful to Latvia. What matters most is the reliability of electricity generation throughout the whole year, not just in summer, when demand can be covered by solar panels, or during spring floods and high water – with hydropower plants, and in future with wind farms.
It has to be concluded that, for balancing the power system, especially in conditions when solar and water resources are unavailable, wind farms will not be able to provide the necessary volume of electricity even in future. That is why CHPs are irreplaceable, and restricting or shutting down their operation would, to put it mildly, run counter to the interests of Latvia and the whole Baltic region.
What are the risks going forward?
In practice, over 30 years the Baltic states have given no thought to controllable electricity capacity, of the kind that a small modular nuclear plant, for example, could provide. Yes, there's talk of it, but that's as far as it goes, because building such a plant requires a great deal of groundwork that hasn't even really been mapped out yet. Going back to January-February 2026, Estonia's own electricity self-sufficiency was only 52%, Lithuania's – 67%, Latvia's – 99%, thanks to its CHPs. Estonia has already grasped the situation and put out a tender for building five small-capacity CHP plants, while Latvia has no answer to what will happen to its CHPs in 2028, when the fixed payment for electricity capacity – 23 million euros a year, comes to an end. I am concerned this cost will be passed on to consumers, who will also have to pay CO₂ emission allowance costs on top.
Unfortunately, as of 2026 there is still no decision on what will happen in 2030, since the equipment installed years ago is approaching the maximum lifespan set by its manufacturers – 20 years. It is interesting that Estonia's own plans envisage ending the use of oil shale for electricity generation in 2027, since using it comes with a significantly higher CO₂ emission allowance cost, yet Estonia wants to base its baseload capacity on CHPs operating in Latvia, even though it is not known whether these CHPs will still be running in a few years' time. So Latvenergo will be forced to buy CO₂ emission allowances to keep its CHPs running in order to supply electricity not only to Latvia but also to Estonia and Lithuania, which, as electricity importers, will bear none of that cost themselves. What's more – in three out of four scenarios, CHP operation in Latvia is not envisaged after 2030, which would mean self-sufficiency falling to 54%. That must not be allowed to happen.
Although Latvia has a unique advantage in the form of the Inčukalns underground gas storage facility, it has no gas terminal of its own, so its gas supplies depend on the delivery schedule set by the Klaipėda terminal. That means a ship carrying gas for Latvia can only be unloaded at Klaipėda when a slot has been allocated to it, it cannot simply wait until the blockade of the Strait of Hormuz ends, hydrocarbon transport from Gulf production sites resumes, and liquefied natural gas prices fall. So, if Latvia wants natural gas, it has to, and will have to, buy it at today's elevated market price.
The Inčukalns underground gas storage facility was 53% full in autumn 2025, which means it could theoretically have held considerably more natural gas, especially since, last autumn, prices had returned to pre-war levels after the sharp rise in 2022, and, moreover, signs of tension in the Middle East and around Venezuela were already clearly visible and audible.
Of course, the situation in spring 2026 is much better than in autumn 2022, when there were practically no natural gas reserves at all. But the factors mentioned above call for the efficient use of resources. Yet each party involved – producers and regulators alike – mostly focuses only on its own patch, rather than on whether the country as a whole benefits.
As a result, natural gas is being burned to generate electricity, while the by-product – heat – is simply used to warm the air, rather than heating the homes and businesses of Riga's residents.
In my view, it is in the interests of the state, residents and businesses to bring the Ministry of Climate and Energy, AS Latvenergo (the owner of the CHPs), AS Rīgas Siltums and its shareholders, the Ministry of Economics and Riga City Council, together with the Competition Council and the Public Utilities Commission, to the same table, in order to create effective synergy between electricity and heat production at the CHPs, thereby preventing heating tariffs from rising. It should be remembered that electricity and heating costs are a very significant expense not only for residents but also for many businesses, especially energy-intensive ones.
It's a simple formula: higher electricity prices = higher production costs = lower competitiveness.
Our neighbours, it seems, understand this axiom rather better.
Why has Latvia been falling behind Lithuania in recent years, when it used to be ahead?
I remember times when Riga was bustling with life and neither Tallinn nor Vilnius could stand alongside it, but times have changed, and, as a result of decisions taken, or not taken, at national and city level, Latvia's capital has lost ground to both Tallinn and Vilnius. Just a few facts – Tallinn has ferry connections to Helsinki and Stockholm; Riga has had none in recent years, only dreams – visions of procurement tenders, hoping ferry operators will be desperate to work here. Tallinn is a place where a great many cruise ships call. There it's an everyday occurrence, whereas in Riga a cruise ship's arrival is a special event. But both regular ferry traffic and cruise ships bring in tourists who, through their spending, not only generate income for cafés, restaurants and the whole hospitality sector, as well as retailers, but also create jobs and generate tax revenue for the state!
The root of Latvia's problem of falling behind lies at the level of the state's decision-makers. Just one example – instead of catching and punishing actual fraudsters, Latvia carried out a wholesale overhaul of its financial system. This was justified by citing huge volumes of grey, or even black, money, and as a result that money simply flowed out to Lithuania, Germany and other EU member states, where exactly the same EU anti-money-laundering conditions and requirements apply as in Latvia, except that in those countries the money was no longer grey or black. Worse still – Latvia managed to build an anti-money-laundering system so strict that even the US ambassador to Latvia was unable to open an account at any Latvian bank. What are potential investors supposed to do in such circumstances? Latvia has an attractive MiCA framework for crypto-asset markets, but the question is whether foreigners working in that field can actually make use of it. No, they can't, because they cannot open a settlement account with a bank! But in Lithuania they can, and our southern neighbour has already issued 43 licences for crypto-asset activities, compared with just two in Latvia. And it isn't fair to blame the banks for these excesses, especially when a bank board member responsible for anti-money-laundering compliance faces personal liability of up to 5 million euros. There is also a requirement that essentially forces businesses to carry out continuous client monitoring, even though exactly the same monitoring is already carried out by both state authorities and the banks where those businesses hold their accounts. How much time and how many resources are spent complying with such requirements? Isn't this part of the answer to why Latvia lags behind its neighbours? There is only one rational explanation – Latvia has over-implemented the rules, because it cannot be that EU requirements are somehow different in Latvia than in Lithuania or Germany. Responsibility for these decisions rests with the political leadership of 2018, which still hasn't managed to revise the unworkable policing function imposed on banks and businesses by that inadequate overhaul of the financial sector.
The economy needs investment that creates new jobs and tax payments for the state budget, yet some potential investors cannot open an account here because of the requirements mentioned above. At the same time, they can do so simply by going to Lithuania. The result is that our neighbour's economic prosperity grows instead.
At one point there was a unique opportunity to attract IT specialists leaving Belarus (around 25,000 of them in total), but although Latvia initially appeared to offer a relatively favourable solution, before long it made it harder for these specialists to stay in the country, and, as a result, they ended up in Vilnius. Lithuania gained well-paid residents and gave a boost to the related sectors of its economy. That is one concrete example of a wrong political decision, with concrete, long-term negative economic consequences that our neighbours turned to their own advantage!
What should, or shouldn't, be done to change the situation in Latvia?
Latvia needs a genuine reset, but that can only be achieved if the people preparing and taking decisions know and understand where money comes from and how. To me it is clear that its source is business, whose representatives should not be branded as crooks and thieves, but should instead be given a favourable environment for growth and development. A favourable business environment is a precondition not only for existing sectors to survive and, still more, to reach their development potential in Latvia, but also for attracting new sectors not yet present here. For example, entrepreneurs who want to operate in the crypto segment, or ICT specialists who, while living in Latvia, can work for clients anywhere in the world but spend what they earn here. That could, for instance, boost demand in the real estate market and related services and products, while also having a positive effect on domestic consumption. It would help retain jobs, or even create new ones, in the services sector. In such a situation, it would also be possible to seriously address re-emigration.
Would that be enough?
That's the bare minimum. The most important thing is to bring a new way of thinking into Latvian politics, one that would prevent Latvia's potential bankruptcy and lay fundamentally new foundations for the Latvian economy. In my view, Latvia, working together with its national security institutions, needs to attract successful entrepreneurs from around the world by introducing what could be called a tax residency programme. The programme could set a fixed annual subscription fee of 50,000 euros, along with a requirement to make a one-off investment of 100,000 euros in a Latvian company, for example in Latvian-registered start-up and fintech companies, which find it relatively difficult to raise funding. That could also include investments in existing companies in the special economic zones, such as the Liepāja SEZ, Rēzekne SEZ and Daugavpils SEZ.
Why would this offer be relevant to entrepreneurs?
Given that entrepreneurs' home countries often impose a tax burden of more than 45%, tax residency is already a widespread practice around the world. For Latvia this would mean signing agreements with international tax-management agencies, set up for exactly this purpose – finding their clients the most favourable country to hold tax residency in.
Calculations show that attracting 10,000 tax residents could directly generate 600 million euros a year. Such a programme could potentially bring 5 to 7 billion euros into the Latvian economy over seven years. I hope that, thanks to such a programme, those Latvian entrepreneurs who have themselves moved their taxes elsewhere would return home.
This vision also matters in the context of Latvia's population. It has to be acknowledged that Latvia's population will not grow over the next 20-30 years, quite the opposite – according to estimates from the University of Latvia, the Latvian Institute of Strategic and Economic Solutions, and EU institutions, Latvia will have around 1.5 million residents in the coming years, and in the worst case – as few as around 1.3 million. Today we are around 1.8 million. What's more, the share of seniors will be far higher than it is now, which means a serious shortfall of working-age people. This problem can be addressed through immigration, which, as many European countries show, comes with very significant side effects of its own. There's no denying these issues will be decisive for the Latvian state and for the people living here in the coming years, and at some point we may face a choice with no good solution, unless we start acting immediately and boldly.
Is EU fund support enough for us?
To carry out the projects Latvia strategically needs, a Latvian growth fund has to be created, because at present Latvia's state investment plans are dictated by EU structural funds, which is not a bad thing in itself, but the basic rulebook for using them is set in Brussels and Strasbourg, not in Riga. Unfortunately, the rules for using EU structural funds do not always align with the interests, needs and actual situation of Latvian society, and fail to produce a multiplier effect for the Latvian economy.
What concerns me even more, though, is the fact that nobody has promised Latvia will receive EU fund money forever.
We have to be realistic that, in these tense geopolitical circumstances, a moment could come when this stream of money dries up. Of course, there's also the question of how much of the 4.3 billion euros allocated to Latvia for the 2021-2027 period we have actually absorbed by today, 2026? Unfortunately, only 18%! That means projects worth 3.5 billion euros have to be carried out within two, at most three, years. It's a fair question whether that's even achievable. That is precisely why, in my view, it is important that we first and foremost build an economically strong country of our own, one that earns its own money for security, social needs and other purposes.
What would be the intended funding source for the Latvian growth fund, and where would its accumulated resources be used?
Many countries already have such a fund, so this is not some ‘know-how from scratch’. Italy, and, closer to home, Poland, for instance, are among the more recent countries to have adopted the tax residency concept to attract successful entrepreneurs, and both have this kind of national growth fund. The job of a Latvian growth fund would be to invest in projects that produce a multiplier effect. In other words, every euro invested should turn into at least two or, better still – three to five euros. The money for this fund would initially come from dividends paid by state-owned companies, which currently flow into the state budget and are, in a sense, a kind of hidden tax, on electricity, on power transmission and distribution, on forests. Unfortunately, at present these more than 400 million euros a year in dividends from state-owned companies are simply consumed rather than invested to grow income and act as a kind of seed for the next harvest. What's more, while working on the parliamentary inquiry committee on Rail Baltica, I had to conclude that good corporate governance is promised in words, but in reality the management board and the supervisory council overseeing its work are nothing more than a VIP club with no connection whatsoever to the standard of acting as a decent, careful custodian. Often, talking to these people and hearing their answers to questions, one has to start doubting the knowledge, understanding and competence of the people appointed to these senior positions, which also leads one to wonder about their closeness to certain political forces.
State-owned companies are drained by transferring 80-90% of dividends to the treasury, yet they are not given enough resources to earn more. We can look at Slovenia's experience: it has placed shares in 50 of its state companies into a national wealth fund, so that instead of each company separately signing consultancy contracts and preparing its own portfolio for a stock exchange listing, the fund does it collectively, and considerably more cheaply. As a result, when Slovenia's national wealth fund floated on the exchange, it entered a league where billion- and trillion-euro pension funds and financial investors operate, investors with no interest in a stake smaller than 0.5 billion euros.
Latvia could act in a similar way and arrive at a solution that would allow the state to attract and carry out major economic growth projects suited to our financial capacity. There is also still the option of drawing part of this fund's resources from the nearly 13 billion euros Latvian residents hold in bank accounts. Of course, these funds are concentrated among roughly 13% of bank account holders, while around 85% of residents live from hand to mouth. If attractive terms were offered, wealthier residents in Latvia, as well as pension funds, could buy securities issued by a Latvian growth fund, thereby co-financing the development of new value creators in Latvia. In theory, Latvia has about three years to move to a state budget where revenue matches expenditure, with the only permissible budget deficit being on defence and security spending.