As Russia's war in Ukraine continues, various industries and the economy as a whole have been affected. The grain industry, energy, and yes, even startups. In this piece, we'll go over the different sanctions that have been put in place against Russia and Belarus, how they're affecting startups' day-to-day operations, and what can be done to mitigate any adverse effects.
Less freedom to travel
One of the first restrictions due to Russia's war in Ukraine was a limitation on international travel.
Latvia is among the countries that have stopped issuing first-time residence permits to Russian and Belorussian nationals under Chapter X paragraph 54 of the immigration law. This is in force until June 20, 2023.
Latvia has become a popular destination for foreign startup founders, including from these sanctioned countries. This could cause difficulties for Russian or Belorussian nationals based in Latvia, as they could be limited in their ability to retain residence in the country. LIAA data, there are 30 foreign founders from these sanctioned countries that these restrictions may apply to.
There is a list of exemptions, such as being married to a Latvian citizen, if the residence permit request is based on scientific or academic research, or if the residence is tied to seeking asylum. But for the most part, regular requests will not be issued.
Limited business dealings with Russian market
EU-wide sanctions also affect who and which countries Latvia-based businesses can do business with. This means that the export market has significantly changed, and some startups will have to reconsider their partnerships, business models, and target markets. In fact, this reconsideration is already underway. More than 300 Latvian businesses have already sought consultations from LIAA on leaving the Russian market.
Restrictions on business industries that are now prohibited with Russia include:
-Weapons and military trade – this includes any tech, hardware, and services that could be used in a military capacity;
-Anything to do with the aviation industry;
-Anything considered “sensitive technology”;
-Anything related to the research, extraction, or refinement of fossil fuels;
-Collaboration with various sanctioned banks.
Investors are also limited in their activities, with investors now prohibited from making investments in Russia, including in bonds, securities, capital investment, and other financial instruments. This also extends to VC investors, as well as accelerators, who will now have to be much more scrupulous in who they're able to invest in.
Larger businesses and startups alike face the inevitability of having their businesses disrupted by sanctions in these related industries. As a result, they will have to adjust their strategies in order to maintain their performance indicators. This could mean adapting to serve different markets, adjusting their products to remove them from the sanctioned industries list, or to rethink their partners.
Hiccups in logistics chains
Startups that don't deal with sanctioned industries could still be impacted due to disruptions in logistics and delivery chains. Russia being a significant exporter of primary resources, it's likely that manufacturing or hardware startups could experience delays and disruptions in receiving ordered components.
As a result, startups will be interested in finding a different producer and provider of these products. But even if sourced from outside of sanctioned countries, logistical hiccups could persist – in part of Russia's war in Ukraine and the global domino effect of disruptions they've caused.
Fortunately, there's help for that. Startups (and businesses as a whole) that have experienced financial losses due to the effects of military aggression in Ukraine will be able to apply for compensation and support.
Losses due to the following reasons can be eligible for support:
-A fall in product/service demand, and a resulting fall in revenue;
-Issues with logistics chains;
-A rise in product costs;
-Future investment limitations;
Support is provided in the following ways:
-Loans for liquid assets and investments – 39 million euro available;
-Financial guarantees – 22.5 million euro available;
-Export credit guarantees – up to 1.3 million euro;
-Any left over funding from the national budget, up to 32.1 million euro, will be used to invest in companies for adjusting business models, improving export capabilities, entering new markets, and for the optimization and implementation of new technologies.
While the paperwork is still being processed, it's expected that by the end of August this support strategy will be accepted and implemented. The support is expected to be provided by an alternative investment fund managed by Altum.
More support for export from LIAA
To mitigate the effects of the sanctions, and how they are expected to affect businesses locally, LIAA has increased its support to help businesses increase their export capabilities to non-sanctioned countries.
This takes the form of the International Competitiveness Programme (“Starptautiskās konkurētspējas veicināšanas programma” - SKV), which has increased its rate of support up to 80% of covered expenses, and up to 75,000 euro per year.
Supported activities include:
-Participation in international exhibits, conferences, forums, networking events;
-Preparing a product for international markets, including trademarks, copyrights, design prototype development and registration;
-International publicity and marketing activities;
-Website, ecommerce store, app, platform development;
-Hiring an expert in the related export market;
This is a huge form of support that not only startups, but businesses alike can make use of to develop their international competitiveness at every stage of development.
What about the Belarussian fast-tracked visa?
Two years ago when the vote in Belarus was forged and stemmed country-wide protests, LIAA launched an initiative to support those Belarussians who wanted to relocate their businesses, families, and employees to Latvia.
While new applications are not being accepted, various governmental institutions are continuing to work with those that had applied two years ago to make use of this initiative. Currently, there are 17 companies that have successfully relocated. They are all companies with added economic value, and 90% of those are in the ICT industry.
Refocusing on export and trusted partners
The result of the various national and international sanctions that are applicable to Latvian businesses, startups, and investors means in some cases a refocus of priorities, target markets, and strategies.
While they are expected to have short-term negative financial consequences, the various support programmes in place ensure that every business has the best possible tools to improve their export ability to allied markets with trusted partners.