Lithuania’s investment climate might be about to worsen, just as the eastern European country expected to enjoy greater global market inclusivity and capitalization after it joins the EU on May 1.
This view was put forth this week in an essay written by Snoras, Lithuania’s fourth-largest bank, which is indirectly owned by Russia’s Conversabank.
Last month the Lithuanian Seym passed a new law on banking activity, including some amendments which break key principles of the immunity of private property, potentially leading to corruption and resulting an investment climate in the Lithuanian Republic worse than in other European Union countries, according to critics of the new law.
“Enlightened European” investors would not likely be drawn to making new investments in a country on the brink of EU membership that allows banks to be nationalized, and in so doing, infringes on the “sacred principles of European democracy – the right to property,” the essay points out.
Lithuania needs a law on “endowment insurance”, they say. Every country with a developed market economy has such a law, but it is never accompanied by factors that would allow for the nationalization of businesses, as the Seym law will. Moreover, the Lithuanian version of the law contains items breaking standards of protection of property rights and which possibly lead to corruption, they caution.
The concept of an “insurance event that may happen with the bank” is introduced into this new law without specifying what terms and details may be considered as an “insurance event” – at which point the insurance company would think the event occurred. In insurance, the terminology base has to be worded with extreme accuracy because it is a basis for the business and all possible conditions when an insurance event may become such are stipulated. But none of this is mentioned in the new law, insiders point out.
In effect, under the new law it would be sufficient for a regulator merely to consider banking activity as being insecure and unsafe. At that point, the entity would have a right to make a decision to withdraw the bank’s shares from its shareholders ‘with fair compensation’ without there even being any definition of what defines ‘fair compensation’ in the law.
While any bank considers ‘fair compensation’ as market capitalization, the supervisory body can determine shares’ value on its own, as well as decide what shares cost zero, they say. The same body has a right to oblige the bank to sell its shares to any investor indicated by the body itself, they say.
It is obvious that these standards are in conflict with the principle of property immunity vested by the Constitution of the Lithuanian Republic. Under the Constitution property can be confiscated from the owner against its will only under conditions as follows: with observance of legal order, for the public benefit, and on condition of adequate compensation, critics say.
Meanwhile based on the new law’s provisions the assumption is that the only reason for that is the insurance event, that can happen and is determined in the law on endowment insurance. According to the articles of the new law, an insurance event should be considered as filing a petition in bankruptcy or recall of the license for granting financial services.
Also being questioned is that according to the law the forfeiture of property is bound not with insurance events that already happened but with further ones, critics claim. This raises doubts whether it is possible to likewise assess interpreted public interest as good cause for breach of the property right immunity that is vested by the Constitution and the appropriation of shares.
In the framework of the existing Civil Code the supervisory body has no right to initiate the compulsory sale of the bank’s shares; it has no right to go to the law to demand the forceful sale of shares. In the Code there is a fixed list of subjects who have the right to initiate the sale of bank shares and bank supervisory bodies are not mentioned among them. The Civil Code describes the order of shares sale and specifies the persons who can be initiators of such a sale. The adoption of any law, that broadly uses the norms of the Civil Code and contradicts it, is an obvious infringement of rights and freedoms including the fundamental right for private property, they say.
The bottom line is that these alterations of existing laws are likely to cast doubts for foreign and domestic institutional investors on the attractiveness of making investments in Lithuania as a new EU market, they point out.
Critics ask whether Lithuania needs its own criteria of bank evaluation clouded under the new law. As a rule new EU members bring their laws to conformity with European norms when joining the European Union.
In 1950 the European Counsel adopted its Protocol, “On Protection of Human Rights and Fundamental Freedoms”, where human rights with respect of their own property were clearly stated. These rights assure that nobody could be deprived of his own property unless it is in the interests of society and on conditions foreseen by the legislation and general principles of international law.
It is the essential feature of the general declaration of human rights adopted in 1948 at the session of the UN General Assembly as well, they point out.