Lithuania’s fear of war with Russia

Lithuania's concern over war with Russia [View in browser]( [Bloomberg]( Welcome to the [Year of the Elections](, Bloomberg’s newsletter on the votes that matter to markets, business, and policy amid the most fragmented geo-economic landscape in decades. Into the third year of Russia’s war in Ukraine, Lithuanian President Gitanas Nauseda is still working to convince voters he’s doing all it takes to ensure they never have to use the survival kits they now keep at home. Lithuania and its fellow Baltic nations of Estonia and Latvia have been wary of the Kremlin ever since they regained independence in 1990s, but Vladimir Putin’s invasion of Ukraine [has heightened that concern](. Vilnius responded by ramping up military spending and seeking alternative energy sources for its 2.8 million people after halting gas and oil imports from Russia. The 59-year-old Nauseda has become one of the most outspoken backers of Ukraine, repeatedly telling allies in Europe and the North Atlantic Treaty Organization that Moscow’s threat will persist and preparations need to be put in place to prevent it from challenging the alliance’s borders. At home, Nauseda scored a big win in 2022 when he secured an agreement to station a permanent brigade of as many as 5,000 German soldiers in Lithuania, the biggest foreign deployment in the nation, which joined NATO in 2004. Germany dispatched its first team last month and is set to expand on that over the next three years.  Addressing his citizens’ fears is helping to make him the leading candidate ahead of the May 12 presidential vote. Lithuanians seem to have glanced over last year’s revelation that he was for a short time a Communist Party member. He drew fire mainly for not disclosing the fact himself for decades. But his full embrace of traditional Christian family values puts him at odds with his main contender, Prime Minister Ingrida Simonyte, who supports a more inclusive approach to LGBTQ rights. That seems to be the only major source of disagreement between the two top contenders. A lot more is at stake in the Oct. 13 parliamentary elections, when the nation’s bold foreign policy against China may face a test. Simonyte’s administration won recognition on the global stage by labeling China as a “threat” and allowing a new Taiwanese trade office in the country to use the word “Taiwan” in its name, rather than the Beijing-approved “Taipei.” That sparked a [backlash from China](, which blocked trade with Lithuania, scrapped it from its customs system and even canceled the official identity cards of Lithuanian diplomats in Beijing. While Lithuania’s position against Beijing won praise from officials in the US and the European Union, opposition parties now say the harsh anti-China stance has brought little reward to the country. And as President Xi Jinping this week visited Serbia and Hungary, two Russia-friendly countries that have tightened their embrace of Beijing, Nauseda made [an apparent overture]( to China, calling for improved relations. — [Milda Seputyte]( and [Andrea Dudik]( Nauseda during NATO exercise in Pabrade on June 26, 2023. Photographer: Andrey Rudakov/Bloomberg Lithuanian Economy Q&A We spoke with [Patrick Donahue](, economy and government editor at Bloomberg, for his perspective.  How has this euro zone member state dealt with the inflation spike? Lithuania’s $70 billion economy is fully integrated into the euro area — with the Baltic nation [on course to draw level with Italy]( in terms of per capita income by the end of the decade. Yet it’s seen the extremes of the global inflation spike since the pandemic. Prices jumped more than 24% on an annual basis as of late 2022, but have collapsed to zero this year — presenting a boost to consumer spending while risking tax revenue. Is spending on the war next door a political issue? Spending, long an economic hot potato in a country that eschews debt and deficits, has moved to the center of the political debate, particularly with Russia’s war. One of the most vocal critics of Kremlin aggression, Vilnius has doubled defense spending since 2020 – an ambition that’s quickly running up against hard fiscal choices. In an election year, political parties are hard pressed to sell new tax policies, even with a looming goal of outstripping NATO peers to spend 3% of gross domestic product on defense. A windfall tax on banks, introduced last year to fill the widening gap, expires this year. But a public initiative spearheaded by Lithuania’s top businesses and backed by more than 50,000 citizens has called for more: 4% of GDP for security. How have investors reacted? The wartime jitters have if anything attracted investment. Alongside a German plan to [expand its military presence](, arms giant Rheinmetall AG is moving forward with plans to build [an ammunition plant]( in the country. Although the scope of the commitment hasn’t been disclosed, Lithuanian authorities are calling it among the largest single investments in the nation. The Markets Take [Andras Gergely](, Bloomberg’s emerging-markets editor, writes about how investors are watching Lithuania. Lithuania is seen among the riskiest credits in the euro-zone, with 10-year bond yields around 3.7%, only exceeded by Italy in the currency area. Lithuania’s credit-default swaps rose sharply in 2022 after Russia's full-scale invasion of Ukraine, though they receded in 2023. The extra yield investors demand to hold Lithuania’s bonds rather than German bunds has been widening slightly in recent weeks, trading at 125 basis points as of today. Corporate Stakes [Ruth Liao](, Bloomberg’s LNG reporter, writes about how energy dependence on Russia has developed with the start of the war in Ukraine. Lithuania has emerged as a key importer of liquefied natural gas for the Baltics region, supplying Latvia, Estonia and Poland. Its floating terminal, named the Independence, was commissioned in 2014 to wean the country from [Russian gas supply]( and was seen as a bellwether compared its European counterparts in the wake of the Russian invasion of Ukraine. Lithuania’s Klaipeda terminal imported 2.2 million metric tons of LNG in 2023, according to ship-tracking data compiled by Bloomberg. This was 3% less than the 2.3 million tons of LNG imported the previous year, when volumes nearly doubled in the aftermath of Russia’s invasion of Ukraine. The US, the largest LNG exporter last year, supplied half of that volume that year to Lithuania, according to AHOY data. The Lithuanian-based terminal operator will also manage four more German LNG import terminals, following a tender held earlier this year. More from Bloomberg - Check out our [Bloomberg Investigates]( film series about untold stories and unraveled mysteries - [Bloomberg Opinion]( for a roundup of our most vital opinions on business, politics, economics, tech and more - [Balance of Power]( for the latest political news and analysis from around the globe - [Washington Edition]( for exclusive coverage on how the worlds of money and politics intersect in the US capital - Explore all Bloomberg newsletters at [Bloomberg.com](. Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Want to sponsor this newsletter? [Get in touch here](. 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