Political Risk Analysis - Foreign Policy Status Quo Going Nowhere - AUG 2017

BMI View: Tensions neighbouring Russia will continue to pose the largest threat to investor interests in Lithuania over the coming months. While we do not expect an outright conflict between the two states, the threat of Russian military intervention will keep defence spending a key priority of Lithuania's fiscal policy and encourage closer relations with the rest of the EU.

As expected, relations with neighbouring Russia have continued to rank highly on Lithuania's political agenda under the country's new government. This will likely remain the case over the course of the next two years, when we believe Moscow will look to capitalise on the structural headwinds facing the West's relationship with the Baltic States. The actual risk of military intervention on the part of Russia in any of the Baltic States remains unlikely; this view is reflected in Lithuania's relatively strong performance in our proprietary Short-Term Political Risk Index, scoring 73.1 out of 100. Indeed, in the Security/External Risks component of the index, Lithuania scores even higher, at 73.3 ( see chart below). That being said, the likelihood of continued tensions with Russia means we cannot discount the impact of political risk in areas such as fiscal policy and Lithuania's efforts to integrate with Europe.

Faltering NATO Commitment Will Exacerbate Regional Concerns

Threatening Neighbours Belie Underlying Stability
Lithuania - Short-Term Political Risk Index, Scores Out Of 100
Source: BMI

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