The West already needs to start discussing how to help Ukraine in 2025 and 2026, and should act now to tighten sanctions on Russia, Lithuanian Finance Minister Gintare Skaiste told bne IntelliNews in an interview.

The 42-year-old former economist, who just visited Ukraine, says that recent aid packages from the EU and US had been “a good sign for Ukrainians” and that  “for them the support is vital”.

“At the same time we understand that it might be that the war will last longer than we would like it to, so we must discuss how we will help Ukraine in 2025 and 2026,” she told bne IntelliNews on the sidelines of the EBRD annual meeting in Yerevan last week.

To finance this continuing commitment, the West should not only use the net profit of frozen Russian sovereign assets in the West – as the EU Council approved this week – but the assets themselves.

“In our opinion the wisest decision would be to use Russia’s frozen assets and deliver it to Ukraine,” she argues. She also supports the US-backed proposal at the G7 to use the assets as collateral on an issue of a potential $50bn issue of bonds to finance Ukraine.

To squeeze Russia further, Skaiste says that “the prevention of the circumvention of sanctions is crucial” and that they should be tightened particularly on the energy and the banking sectors.

“We must focus on implementation but we must not forget about broadening the scope of sanctions because there are still sectors that give Russia a lot of revenues,” she points out.

Such measures require an EU decision but traditionally hawkish Lithuania, and the other Baltic states, as well as Poland and Finland are already pressing ahead with their own common sanctions targeting dual use goods that Russia could use in its war industry.

“We made our national list of dual use goods that should not be delivered to Russia and we are not letting those goods through our borders,” she says.

Lithuania, which used to act as a conduit for exports to Russia, has decisively shifted away from that role, she says, a process that has been ongoing since well before the February 2022 invasion.

“The history lesson was much earlier than the full-scale invasion,” Skaiste points out. “Lithuanian business slowly but definitely turned to the West. Now our main partners are not in the east but in the western countries like Germany and the US. We can predict these partners; Russia is not predictable.”

Surviving the shocks

The loss of the re-export business since the invasion has not had a big impact on the Lithuanian economy because there was little value-added in that trade.

“These [Russian trade] numbers have definitely decreased. We do not see a huge impact on the economy,” she says.

As well as losing its Russian exports, Lithuania has also been engaged in a trade war with China over its acceptance of a Taiwanese diplomatic mission under the island’s own name, rather than that of the capital Taipei.

Skaiste insists that “the impact of the Chinese restrictions on our economy was limited” as “we were not dependent on that market”, which represents only 1% of exports. Moreover, exports to China and imports from China have since quietly recovered.

She says Lithuania has benefited from the way China’s trade embargo was made an EU issue, with its partners joining an ongoing case against China at the WTO.

Vilnius has no plans to back down and would recommend other countries follow the same course. “Our suggestion for other countries is they should lessen their dependence on autocratic regimes because you never know what they might do,” Skaiste declares.

The main recent challenges to the Lithuanian economy have therefore been geopolitical, she says. “Our economy performed quite well during these shocks.”

Lithuania’s 0.3% decline in GDP last year was “one of best results in the region”. This year the finance ministry forecasts 1.6%, though  “the latest data shows it might be even better”. At the same time, inflation – which had spiked at 24% in September 2022 – is forecast to fall below 2% on average this year.

Lithuania has been one of the star achievers since it joined the EU in 2004, though it has gained less attention than neighbours such as Poland.  Its GDP per capita on a PPP basis has risen from around 50% of the EU average to around 90%. “We definitely want to reach and overcome 100% of EU average GDP per capita, Skaiste says. “We are an ambitious country.”

Lithuania has also maintained a conservative budget policy, and has rebuilt its fiscal buffers since the pandemic.  Debt has fallen back below 40% of GDP, while the budget deficit is expected to be 3% of GDP this year, figures that many of its neighbours would envy.

Energy security

However, going forward the finance ministry has to budget for costly investments in energy security and defence because of the Russia threat, as well as the long-term challenges of demographic shifts and climate change. The World Bank has also called for Lithuania to make stronger efforts to tackle poverty, where it still has one of the worst problems in Central Europe. 

On energy, well before the war, Lithuania built an LNG terminal at Klapeida that can also help supply gas to other Baltic states.

On electricity, it has invested in the electricity grid so that it can disconnect from the Russian Brell ring early next year with the other Baltic states and synchronise its network with that of Poland and the rest of the EU instead.

It has also overseen a big increase in wind and solar power. Skaiste says Lithuania now wants to be able to cover 100% of its electricity needs by 2030, from around 30% before the war and around 50% currently. This domestic power capacity would be entirely renewable. “It is definitely achievable,” she predicts.

“It is a long journey because it is very costly,” she says. “We did a great job. Now we can be completely independent. It is a big part of the resilience of our economy.”

“Green transformation is something that makes us independent,” she argues, something that many nationalist politicians in Central Europe have yet to grasp.

Lithuania is also looking at nuclear power. “We decided to focus more on renewables but we are preparing a new energy strategy for the next 10-20 years and one of the possibilities is small nuclear units,” she says. “We will explore the possibility to see if they fit in our strategy.”

The main current challenge now is ramping up defence spending, which the government has doubled to €2bn a year but aims to raise further to 3% of GDP next year. In particular, the government needs to pay for a new national army division, universal conscription, and to prepare for the stationing of a German brigade in the country.

“Now the crucial debate in the country is about defence spending,” Skaiste says. “We need to increase defence spending by at least 0.5% of GDP if we want to pay for the things that need to be done. That is a lot.”

“I think it would be wise to decide on tax revenues that could cover these challenges. I think there is a big problem,” she says.

“If you say that the need for defence spending will last, it would be better not to compromise but to take a decision to last a long time,” she adds.

A windfall tax on banks was agreed for 2023 and 2024 and Skaiste hinted that it might be prolonged for 2025 too. “We see that bank profits are still very high and there is a national debate on keeping it for 2025,” she says.

But more systemic tax-raising measures will have to be hammered out during the Seimas’ spring session.

Tax reform challenge

"In addition to the defence debate, over the past year we have been discussing measures aimed at achieving a fairer and more growth-friendly tax system," she points out, which is likely to be Skaiste's biggest challenge since she became finance minister two years ago.

However, discussions with other parties in the centre-right government “were quite difficult”, she admits. “We decided to postpone a final decision and discuss it in parts.”

The parliament has approved a green tax and cut tax exemptions for companies so far.

This has led to criticism from the European Commission, which has suggested an increase in property and green taxes to guarantee future fiscal stability.

The EU has also suspended some payments under its Recovery and Resilience Fund in a row over the government’s tax measures, something that has enraged the finance minister. “From my perspective, I don’t think EU bureaucrats can ask me to do more than I have promised,” she says.

The tax row comes ahead of what is likely to be a difficult election for the ruling coalition this October, with polls showing the opposition Social Democrats in a consistent lead.

Skaiste – who is seen as a potential future party leader – says that her Homeland Union-Lithuanian Christian Democrats usually do better than the polls predict, and that there is still a chance that the government might be able to continue.

Yet even if the government changes, she stresses that there is likely to be little fundamental change in policy, since consensus has largely been maintained since the country regained its independence in 1990 and then achieved Nato and EU membership in 2004.

“The consensus on the reforms to be part of the European family was part of our success,” Skaiste says. “The policies have not changed much in these years of independence. The orientation of our foreign policy, our economy, that is something that we do not fight about inside the country.”