There was a bug where strong units could go into negative values, making them weak. Dense modifier in urban terrain will cause problems for attacking armor, so taking Riga using hasty attacks by panzers is hard. Try to keep the HQ in range, so that attacking units would get better support from HQ and leader. I do agree that the system has problems with numbers vs quality (which are not reflected in CV), though.
I do think you need to bounce that unit in the first turn. Left alone and put onto refit, it'll grow to 4 CV in the next turn and become a major problem (as it will draw supply pretty easily). Best to plan the opening turn for AGN around setting up a decent attack on it (& making sure the HQ is in range when you do attack). Of course the trade off maybe not clearing the Lithuanian coastal regions or the extent that you pocket the NW Front south of the Daugava?
Now that the Riga Sealift is gone, I think it is actually a misallocation of resources to go hard after Riga on T1 (or afterwards, for that matter). My goal with AGN is to encircle NW Front west of the Daugava while routing as few units as possible out of the pocket. I prefer to use the Pz Divs from 41st PzK to convert as many hexes as possible, rather than having them stuck up in that swampy corner where they may or not successfully hit Riga. Plus, in order to get to Riga with enough MPs to attack, you need to attack (and potentially rout) several units which are better left alone.
By maxing out hex conversion, two good things happen. First, you make it impossible for the SU to break the pocket. Second, you can keep all your motorized and Pz units in command radius, ensuring that almost all will have 40+ MPs on T2. That allows them to approach Pskov on T2 (converting a broad front of hexes on the way) and then return back into supply range. This in turn, results in almost all the Mot and Pz units again having 40+ MPs on T3 without any need for an HQBU. I like to use 57th PzK here as well. With 3 gassed up PzKs on T3, you can annihilate any defense south of Pskov, and should be North of Pskov (hopefully isolating it) by the end of the turn. Hopefully you only need 2 PzKs for this, and then you can use the third on T4 to blaze a trail close to Leningrad. If all goes according to Hoyle, you will be across the Luga before the SU can build any decent forts, and it is game over for Leningrad.
As to Riga itself, if the SU doesn't voluntarily abandon it on T1 or T2 (that NKVD division is better used up in Leningrad, if you ask me), I just use one crappy Inf Div or Sec Div to keep an eye on the Riga garrison -- they are not going anywhere. And once Kurresare falls, Riga is easily defeated.