In 1989 the Latvian Supreme Soviet ended the Communist Party's political monopoly , and there was a rise in independent political parties and the opportunities for free elections, something that had not been possible in Latvia since 1940. Results of the first free election saw only 15 of the 201 pro-Soviet deputies reelected. Approximately two-thirds of the new members belonged to the Popular Front of Latvia (LTF), a pro-independence party that formed in 1987. On 4 May 1990, the Supreme Council, or Parliament, adopted a declaration of independence, declared Soviet annexation illegal, and restored articles of the 1922 constitution. On 21 August 1991, after the Soviet coup in Moscow, Latvia declared full independence but failed to enact components of the 4 May 1990 declaration because of questions about the legitimacy of the new government and whether amendments to the 1922 constitution should be permitted. Much of the opposition was due, the critics asserted, to the fact that election had taken place while Latvia was still occupied and that members of the Soviet army had participated and had been allowed to use rules different from the rest of the voting population. It was contended that only those with Latvian citizenship prior to Soviet occupation should be allowed to decide Latvia's future. In the following election in 1993 approximately 25 percent of the permanent residents in Latvia, mostly ethnic Russians, were not allowed to vote.
In Latvia's electoral system 100 representatives are elected for a 3-year period to serve in the Saeima, which then elects a board whose chairman or deputy serves as speaker for the legislature. The Saeima elects a president who also serves for 3 years and is excluded from serving more than 2 terms. The president appoints a prime minister, who then nominates the other cabinet ministers. In their May 1994 elections—the first since independence—a majority of the representatives elected were members of the Latvian National Independence Movement or other nationalist parties. Segments of the Communist Party of Latvia, which had previously dominated, fared very poorly. A host of contending political parties emerged and their particular prominence waxed and waned as various issues became more urgent for Latvia's citizens. For example, a 1994 dispute about tariffs on agricultural imports prompted the Latvian Farmer's Union to withdraw from the ruling coalition and resulting in a collapse of the government. Lativia faced the critical issue of citizenship. The first bill was very restrictive for Russians and other non-Latvians, allowing only 2,000 people to naturalize per year. International as well as domestic pressure caused the Saeima to reconsider and initiate another, less restrictive policy. The revised policy was that the applicant should have lived in Latvia at least 5 years, have adequate knowledge of the country's language, history, and constitution, and have a legal source of income.
Latvia, as with the other Baltic States, has played an interesting role in the continuing geopolitical, suspicion-laden struggle between Russia and the West. Latvia's initial attempts to join with North Atlantic Treaty Organization (NATO) were unsuccessful, but efforts toward this end, as well as integration into the EU, continue. Continued strengthening of democratic policies and adherence to economic liberalizing policies has made Latvia's access to these groups favorable, even though Russia continues to express disfavor.
A sizable portion of the state income is derived from value-added tax (VAT), and this tax has been increased up to 18 percent in order to meet state expenditures. To attract foreign investment of capital and to stimulate the economy, certain conditions applied for the exemption of VAT toward foreign investment. The government also sells treasury bills and earns interest on loans to domestic, private, and national enterprises.