The Russian tycoon Leonid Rozhetskin was last seen alive in the pretty seaside town of Jurmala, on the Baltic coast of Latvia. That was five years ago. Detectives found ominous clues inside his villa, including blood on the floor, but no body.

Then last summer police discovered human remains 25 miles away in a forest. Inside a pocket was Rozhetskin's credit card. So far officials have been unable to say for sure that the corpse is that of the missing multi-millionaire.

The presumed murder is a vivid example of how Latvia – a small Baltic nation of 2 million people on the doorstep of Russia – has become a playground for Russian interests: business, political and, above all, criminal. Or often, as in the Rozhetskin case, all three. Like many rich Russians he had numerous enemies. The Guardian has even been told the name of the hitman who allegedly killed him.

Two decades after Latvia declared independence from the Soviet Union, joining the EU and Nato in 2004, Russian influence is growing again.

It is most visible in Jurmala, the picturesque resort of pine forests and wooden dachas from where Rozhetskin is thought to have disappeared. Every summer Russia's fashionable super-rich gather here for the New Wave pop festival. They meet, socialise and party. A table in the VIP lounge of the town's concert hall costs £25,000. It is joked that their combined wealth exceeds Latvia's budget.

The guests are a who's who of Vladimir Putin's Russia – oligarchs, Duma MPs, crooners and spies. Two years ago Roman Abramovich dropped by and went for a walk in the sand dunes. Other summer visitors include Rinat Akhmetov, Ukraine's richest man, and Russian billionaire Mikhail Fridman. Also there last year was Vladimir Pronichev, deputy director of Russia's powerful FSB spy agency, and the man responsible for guarding the country's borders.

According to Leonid Jakobson, an investigative journalist based in the capital, Riga, Jurmala also attracts another clientele: the Russian mafia.

Last year a Russian businessman, Nikolai Kirillov, was shot dead while returning from the beach with a 24-year-old female companion. There was a theory he was involved in smuggling. As is often the case, nobody was caught.

In 2010 Vyaschaslav Shestakov, a Russian alleged to be a gangster, moved to Jurmala. He was said to be an emissary of the mobster Aslan Usoyan, also known as Grandpa Hasan, who was gunned down last week while leaving his favourite Moscow restaurant. Last month the Latvian authorities banned Shestakov from the country, and from the rest of the EU.

"Jurmala isn't really a music festival. You don't need to go to Latvia to listen to Russian pop stars. You can do that in Russia," Jakobson said. "In reality Jurmala is an important moment. The Russian mafia and Russian government are together in one place. They discuss common problems, global problems and how to move money through the Baltics."

Some including Jakobson believe the Kremlin's agenda in Latvia is to slowly reverse the country's strategic direction from pro-west to pro-Moscow. This is not as far-fetched as it may seem. Ukraine, Kyrgyzstan and, arguably, Georgia have all recently returned to Russia's geo-political fold following unsuccessful revolutions.

Latvia has the biggest proportion of ethnic Russians of the three post-Soviet Baltic states, accounting for about 25% of Latvia's population. Some 37% speak Russian as a first language, the highest figure for any EU country. The charming capital Riga is effectively bilingual, with Russian and Latvian spoken on its art nouveau streets.

There is also growing evidence the country has become a haven for dubious Russian money.

In a report last week the European commission praised Latvia's post-2008 economic recovery. But it said the authorities had not done enough to stop Latvia's banking system being used for "complex economic, financial, money laundering, and tax evasion crimes".

In recent months wealthy Russians have abandoned Cyprus, which is seeking an EU bailout, and moved their company registrations to Latvia.

Half of all money now invested in Latvia – $10bn – comes from non-resident depositors. Most live in Russia and former Soviet republics such as Ukraine, Kazakhstan and Turkmenistan. The US state department has expressed concern that this reliance on outside money creates a "systemic money-laundering risk".

"Latvia seems to be the first point of call for money launderers to get their cash into the EU," said Tom Mayne, of the campaign group Global Witness. "Once you get money into the EU there are close relations between EU banks, and you can move it around easily. Latvia is one of the main hubs. It's a point of weakness."

Latvian financial regulators say they have introduced tough measures to clamp down on money-laundering and suspicious transactions. They say Latvia, with its large financial services industry, is not the only European country that does business with Russia. "The EU is still buying gas from Russia. We are part of the west," said Kristaps Zakulis, the head of Latvia's bank regulator, FKTK.

But many see evidence of Russian soft power at work. Jakobson's investigative website has made him plenty of enemies. Last year unknown assailants attacked him in the stairwell of his home, slashing his face with a knife.

He had also published emails that allegedly showed Russia's foreign intelligence agency, the SVR, had secretly financed the 2009 municipal election campaign of Nils Ušakovs, now Riga's mayor. Ušakovs does not dispute the authenticity of the emails but police interrogated the journalist for two days over their possible theft.

Ušakovs, a young and energetic former journalist, is ethnic Russian. He leads the Harmony Centre, a five-party coalition that predominantly enjoys support from Latvia's ethnic Russian voter base. Latvia's harsh post-2008 austerity programme may have delighted the IMF, but it has alienated many. The populist Harmony Centre could well play a role in a future national coalition government.

Ethnic Latvians view the party's rise with concern, seeing it as a proxy for Moscow's business and political interests. The party has fuelled suspicion by signing a co-operation agreement with Putin's United Russia party.

Moscow, meanwhile, has staged military exercises on Latvia's border, while the ultra-nationalist Duma MP Vladimir Zhirinovsky has called on Russia to annex the parts of eastern Latvia dominated by ethnic Russians.

EU diplomats in Riga confirm that Russian intelligence agencies in Latvia are highly active. "They have successfully penetrated Russian elites in this country," one said.

Boris Karpichkov, a Latvian former KGB agent now based in Britain, said Latvia's geographical position, bridging Russia and the west, made it an ideal entry point for Russian espionage, smuggling and laundering of criminal proceeds. He said: "Latvia is in the centre of the three Baltic states. Russia's security services use Latvia like a trampoline, to send their people to Europe and the US." Russian spies with Latvian passports can travel undetected across the EU, he said.

The Kremlin has also sought to bolster its influence via Latvia's Russian language press. An anonymous offshore company owns many newspaper titles; their real owner is suspected to be a pro-Kremlin businessman. All portray Putin favourably. Pro-Putin Russian state television is widely viewed; Russia has also distributed history textbooks to schools that portray Latvia's post-1944 Soviet occupation as "liberation".

Valeri Belokon, a Latvian banking tycoon, former owner of a Russian-language newspaper, and president of Blackpool FC, said Moscow was undoubtedly trying to return Latvia to its sphere of influence. "Unfortunately it's true. I'm afraid of all this Russian capital. Capital is influence. Latvia is an open country. And I'm not against tourism or business. But the danger for a small country is that we become dependent on Russia. We definitely have to defend ourselves."

Many of the apartments in Jurmala are Russian-owned. Buying property in Latvia entitles the owner to residency. This allows visa free travel across the EU. Even the Russian ambassador to Latvia lives here, in an imposing yellow and white mansion next to the sea.

Many ethnic Latvians despise the Jurmala festival. Local businesses, by contrast, welcome it.

From her home in the US, Rozhetskin's mother has accused Russian agents of murdering her son. The tycoon had fallen out with the Kremlin before his death, and was embroiled in business disputes with Russia's then communications minister and other well-connected oligarchs.

One tantalising version suggests Rozhetskin faked his own death, and is alive and well in the US living under a false name. Either way his house, next to Jurmala's cemetery, was eerily empty last week. There was no sign its owner will return any time soon.