The Ukrainian vacuum
Lithuania’s presidency of the European Union’s Council of Ministers will reach its symbolic peak in late November, when it brings the EU’s member states and its post-Soviet neighbours together in Vilnius. There are six neighbours in the Eastern Partnership, but one will dominate the summit: Ukraine.
Ukraine’s hope is that it can persuade the EU to accept an association agreement and a free-trade deal. In Linas Linkevicius, Lithuania’s foreign minister, it finds a strong advocate for a closer relationship with the EU. “I cannot imagine a Europe whole and free without Ukraine,” he said last Wednesday (3 July).
He also believes that action is needed quickly if Ukraine is to move towards Europe. “In physics, there cannot be a vacuum,” he said. “This vacuum will be filled by eastern [Russian] connections.”
His specific concern is that Russia’s creation last year of a trading rival to the EU – the Eurasian Customs Union – could pull Ukraine and other members of the eastern neighbourhood out of the EU’s orbit.
“We have the chance to stop the drift towards the Customs Union,” Lithuania’s President Dalia Grybauskaitee said on Thursday (4 July). “We have a strategic opportunity to stop that process and put them on the path to integration” with the European Union.
Such talk worries Vytis Jurkonis of the Vilnius-based Institute of International Relations and Political Science. “Lithuania is putting a bit too much pressure on itself…as if there is no tomorrow for Ukraine after the presidency,” he said.
But as decision-time approaches, Linkevicius and Grybauskaite are primarily directing the pressure toward Ukraine itself. “They know exactly what they have to do,” Linkevicius said: to change the country’s electoral code, address the problem of ‘selective justice’ applied to political opponents, and complete judicial reforms.
“Three groups of problems, easy to understand, and we would like to see results,” Grybauskaite said.
It has not been so easy to understand quite how important it would be for the EU, come November, if the jailed former prime minister of Ukraine, Yulia Tymoshenko, were still in prison. The European Commission has repeatedly said that its concern is not Tymoshenko, but to ensure no repeat of the cases against Tymoshenko and three members of her former cabinet. Grybauskaite was blunter. “Ukraine knows that they will have to move on the case of Tymoshenko; most countries would not be ready otherwise” to sign the association agreement.
And if the EU and Ukraine do not reach agreement? “I don’t think that would be catastrophic, but it would cause very serious damage,” Grybauskaite said.
Laurynas Kasciunas of the Eastern Europe Studies Centre in Vilnius argues that a Plan B exists, while dismissing it as “theoretical”: the EU could separate the free-trade agreement from the association agreement. Since the EU and the Eurasian Customs Union are “incompatible regimes”, a free-trade agreement would turn Ukraine towards the EU economically.
With November approaching, Linkevicius is arguing for a fundamental, rather than pragmatic, sales pitch to Ukraine. “Let’s speak for our values,” he said, adding that in the EU “interests are becoming more important than values”.
He could have added that in few countries will the contest between geopolitical interests and values be greater than in Lithuania.
Against the currency current
Latvia will on 1 January 2014 become the 18th member of the eurozone. For some time now, Lithuania has been expected to follow it and become the 19th member. But when? In the run-up to parliamentary elections last October, the question remained unanswered. In Vilnius now, though, there is no hint of hesitation: Lithuania will join in 2015.
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Lithuania’s politicians have reasons to hesitate though, and not just because of southern Europe’s difficulties. Most Lithuanians remain sceptical or opposed, and neither Sweden, a big player in Lithuania’s banking system, nor neighbouring Poland have adopted the euro. But Lithuania’s finance minister, Rimantas Šadžius, sees membership as the natural step. Lithuania is close to meeting the requirements for membership; a push this year should bring the government deficit below 3% of gross domestic product. Lithuania’s aim is long-term financial health, he argues, and the restrictions of the stability and growth pact would help ensure that.
Gitanas Nauseda, a banker, adds that Lithuania would gain some influence. Lithuania has been an “importer of monetary policy” since at least 2002, when the litas was pegged to the euro. As a member of the eurozone, it would at least have a seat at the European Central Bank’s table.
An argument against adopting the euro – that Lithuania would suffer the loss of its ability to devalue in times of crisis – is relegated to a background issue. That might seen odd, given that Lithuania’s economy shrank by 14.8% in 2009. That crisis, however, is not seen as structural in nature – in contrast to some troubled eurozone economies now unable to devalue to help their recovery. Rather, says Ingrida Šimonyte, a civil servant drafted in to wield the knife as finance minister in 2009-12, Lithuania’s crisis was a case of spending more than it earned.
The perception that Lithuania’s problems were fiscal rather than fundamental reinforces the message that Šadžius is seeking to convey, that Lithuania wants a culture of long-term fiscal probity. Šadžius’s case for the euro has been eased substantially by Latvia’s experience. “The yield [on government bonds] in Latvia was 30-40 basis points higher than in Lithuania; after it was clear that Latvia would join in 2014, the yield became 50 basis points lower than in Lithuania,” says Nauseda.
Given that differential, which country, Šadžius asks rhetorically, would investors choose. In much of Europe, the current of opinion may lead away from the euro, but for Lithuania it seems to matter more what the current is among its small Baltic neighbours.
An energy island no more?
Adoption of the euro in 2015 will bind Lithuania closer to the European economy. Lithuania hopes that 2015 will also bring another major shift in its economic relationships: a significant reduction in its energy dependence on Russia.
At the moment, almost 100% of the country’s gas comes from Russia, says the energy minister, Jaroslav Neverovic. In 2015, a new liquefied natural gas (LNG) terminal should become operational at Klaipeda, enabling Lithuania to source about 25% of its gas from other suppliers.
Neverovic says the construction contracts are signed, the plans are on track, and the first tanker is likely to arrive in November 2014, to test the facilities ahead of the start of commercial operation in early 2015.
That prospect should also strengthen Lithuania’s otherwise weak hand in negotiations with the Russian giant Gazprom, whose long-term contract with Lithuania expires at the end of 2015. The difference in the price that Germany pays for Russian gas (around $400 per thousand cubic metres) and what Lithuania pays (around $500) provides a crude gauge of how weak Lithuania’s hand has been.
In addition, Lithuania says that it should next year complete the ‘unbundling’ of the ownership of supply and distribution companies – a fundamental aspect of liberalising the gas, oil and electricity markets.
There are also projects to link Lithuania’s energy systems to the Nordic states and to Poland, and countries around the Baltic are working on creating a separate LNG terminal to serve the entire region.
But the scale of the ambitions and activity also shows how much work Lithuania has to do to secure a half-way respectable level of diversification. Lithuania is an ‘energy island’, a situation to which the EU contributed by forcing the closure of the Soviet-era Ignalina nuclear power plant during Lithuania’s accession process.
As a result, over 60% of Lithuania’s electricity comes from Russia. The Lithuanian government has yet to decide whether to press ahead with a replacement for Ignalina.