2005-01-03 14:24:00
Embassy Vilnius
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E.O. 12958: N/A





E.O. 12958: N/A


1. To maintain its high rate of growth, Lithuania needs
more foreign investment. The government affords foreign
investors equal protection to domestic investors, and sets
few limitations on their activities. Foreign investors
have the right to repatriate or reinvest profits without
restriction, and can bring disputes to the International
Center for the Settlement of Investment Disputes.
Lithuania automatically extended protections to European
Community trademarks and designs when it acceded to the EU
on May 1, and has stepped up seizures of pirated goods.
However, it remains on the Special 301 Watch List, because
piracy rates remain high. The government harmonized
national company law with EU requirements, offers special
incentives, such as tax concessions, to strategic
investors, and has nearly completed major privatizations.
U.S. executives report burdensome procedures to obtain
licenses and residence permits as well as corruption in the
lower and middle ranks of government. Labor shortages, the
result of increased emigration to the EU, affect a few
sectors. The United States is the sixth largest investor
in Lithuania, with investments totaling USD 481 million
(8.5 percent of total FDI). End Summary.


2. Lithuania has one of the fastest growing economies in
Europe, with GDP growth of nine percent in 2003, and 6.7
percent during the first three quarters of 2004. Domestic
consumption and investment drove Lithuania's rapid growth
in 2003. External factors, such as rising fuel costs,
coupled with a shortage of qualified labor, slowed growth
in 2004. The private sector now produces more than 80
percent of the country's GDP. The Lithuanian Development
Agency's annual survey of foreign investors reports that 94
percent of investors are satisfied with their investment,
up from 80 percent in 1997. Among the attractions of
Lithuania's investment climate are a large and diversified
economy, investment laws that conform to EU standards, a
low corporate tax, a very well educated workforce, the

region's best developed infrastructure, a stable democratic
government and banking system, leading specialists in
biotechnology, lasers, telecommunications and information
technologies, and a strategic location between the EU and

3. Lithuanian income levels still lag well behind the rest
of the EU, with per capita GDP in 2004 at 46 percent of the
EU average. The government needs to attract more
greenfield investments, because Lithuania will likely lose
its current competitive advantages of low interest rates
and an inexpensive labor force in the future. Though there
have been recent investments from Thailand, Austria and
France, the overall investment flow is not impressive.
Substantial inflows of capital from EU structural funds
(over USD one billion over the next three years) should
provide a boost to the economy.

A level playing field for all investors

4. The government welcomes foreign investors and requires
no special permit to invest in Lithuania. The law grants
equal protection to foreign and domestic investors.
Foreign investors have free access to all sectors of the
economy, with some limited exceptions:

-- Article 8 of The Law on Investment prohibits the
investment of foreign capital in sectors related to the
security and defense of the State; and

-- The law requires governmental permission and licensing
for commercial activities that may pose a risk to human
life, health, or the environment, including the manufacture
of, or trade in, weapons.

The government has recently expanded the number of areas in
which investment is permissible:

-- Legal amendments in 2000 eliminated the provisions of
Article 13 that established a list of commercial activities
exclusively permitted to either State or municipal

-- The same amendments opened mass media enterprises to
foreign investment; and

-- The parliament passed amendments to Article 47 of the
Constitution in 2001 permitting the sale of agricultural
land to foreigners. Previously, the Constitution had
permitted foreigners to buy agricultural land only when
they owned buildings on agricultural land. As part of its
EU accession agreement, however, Lithuania established a
seven-year transitional period wherein EU citizens and
companies are restricted from purchasing agricultural and
forestry land. This agreement, however, granted exceptions
to foreign nationals who are permanent residents of
Lithuania and who have been engaged in the agricultural
business for at least three years and to foreign
organizations that have established representative or
branch offices in Lithuania. These entities may acquire
agricultural and forestry land on equal footing with
Lithuanian citizens.


5. The law defines investments as funds or other financial
assets used to generate profit or achieve charitable or
public (governmental) goals. It permits several forms of

-- Establishment of an enterprise, or acquisition of a part
or whole of the authorized capital of an operating
enterprise registered in Lithuania;

-- Acquisition of securities of any type;

-- Creation, acquisition, and increase in the value of
long-term assets;

-- Lending of funds or other assets to business entities in
which the investor owns a stake, which in turn makes
control or considerable influence over the company
possible; and

-- Concession or leasing agreements.

6. Foreign investors can contribute capital in the form of
money, movable or immovable assets, intellectual or
industrial property. Foreign entities may also establish
branches or representative offices, neither of which,
however, have the same rights as a legal person. (Branches
may engage in commercial activities; representative offices
may not.)

Privatization nearly complete

7. The law treats foreign investors equitably in
privatization programs. The government has successfully
privatized most state enterprises and property included in
the initial privatization program. Major assets still in
government control include the Lithuanian electric power
company Lietuvos Energija, the national airline Lietuvos
Avialinijos, and the railway company Lietuvos

8. Privatization of state and municipal companies yielded
USD 330 million in 2003, 2.6 times that in 2002. VP
Market's purchase of 77 percent of the Western Power Grid's
stock for USD 196 million represented the largest
privatization transaction. In March 2004, the government
sold 34 percent of Lithuania's main natural gas distributor
Lietuvos Dujos (Lithuanian Gas) to the Russian company
Gazprom. In 2003, the government privatized two large
state companies. Mineraliniai Vandenys purchased the
alcohol company "Stumbras" for $55 million, and the Polish
Company Belvedere Dystrybucja purchased the alcohol company
"Vilniaus Degtine" for USD 7.6 million. In 2003, the
government halted the privatization of the Eastern Power
Grid, rather than sell it to the only bidder, the Estonian
state-owned power company "Eesti Energia," amid concerns
that the prospective buyer had excessive debt liabilities.

9. The government established the State Property Fund to
manage and privatize state assets. It commonly screens
companies according to size and performance criteria when
privatizing state or municipal property and during public
procurement. The privatization of state property is
carried out by the following methods:

-- Public share subscription (for large and medium scale

-- Auctions (for small enterprises or their divisions);
-- Tenders or auctions for convertible currency;

-- Direct negotiations;

-- Leases with the option to purchase; and

-- Combinations of the above methods.


10. Lithuanian law requires that all transactions in the
country be made in the national currency, the Litas. On
February 1, 2002, the government pegged the Litas to the
euro at a rate of 3.45:1, under a currency board
arrangement. The Bank of Lithuania ties the amount of
currency in circulation to the size of reserves. There are
no restrictions on the transfer or conversion of the Litas.
Lithuania is interested in joining the European Monetary
Union and acceded to the Exchange Rate Mechanism II in June
2004 as a step towards joining the euro. Lithuania's
strong macroeconomic performance and stable monetary policy
may enable it to be among the first wave of countries to
join the eurozone.


11. Lithuanian law permits expropriation, on the basis of
public need, but with compensation at market value in
convertible currency. There have been no cases of
expropriation of private property by the government since

1990. Moreover, the government has been denationalizing
and returning private property seized by Soviet authorities
during the occupation.


12. Lithuania provides special incentives to investors
whom the national or municipal governments designate
strategic investors, though the criteria used to determine
a strategic investor varies from project to project. In
general, the national government requires that a strategic
investor invest USD 50 million or more. Municipalities may
tie the designation to different criteria, such as the
number of jobs created and the environmental benefits
involved. Strategic investors may be rewarded with special
business conditions, such as favorable tax incentives, for
up to ten years. Significant tax incentives apply to
foreign investments made before 1997. Municipalities may
grant special incentives to induce investments in municipal
infrastructure, manufacturing, and services.

13. The government applies performance requirements
uniformly to domestic and foreign investors. Government
Resolution No. 918 of July 15, 2003 requires offset
agreements as a condition for awarding contracts to procure
military equipment valued at more than LTL 5 million (USD
1.9 million). Offsets are obligations the government
imposes that require companies to provide services, create
jobs, or purchase local goods as a condition for the
contract's award. The Embassy has not, however, processed
any Letters of Request (LOR) for military equipment or
services exceeding this ceiling since the resolution went
into effect. Foreign investors have the same rights as
local firms to participate in government-financed and -
subsidized research and development (R&D) programs. There
are few such opportunities, however, since most R&D
financing is awarded to state-owned institutes.
Lithuania's external tariffs are aligned with EU
requirements. The requirements that labels must be
translated into Lithuanian may pose a non-tariff barrier to

14. There are no requirements for local content or
purchasing from local sources as a condition for investment
or public purchases. Municipalities have the right to ask
investors to develop roadways or other infrastructure
adjoining their project, though such development is subject
to negotiations. Lithuania's EU membership has given
foreign firms the additional right to appeal adverse
governmental rulings to the European Court of Justice.
Lithuania's modified "Law on Public Procurement," which
came into effect on March 1, 2003, is completely harmonized
with the EU Acquis Communautaire.

Difficulties with residency permits

15. Americans and citizens of the EU can stay in Lithuania
no more than 90 days without a visa (and no more than 180
days per calendar year). Those who stay longer face
criminal sanctions and deportation. The current residence
permit process is not user-friendly. Though Lithuanian law
mandates that permits be available through its embassies
abroad, permits can in practice only be obtained in
Lithuania. Decisions by the Migration Office regarding
the issuance of residency permits may take up to six
months. The Embassy has learned of instances where
American Citizens have either been trapped in Lithuania or
asked to leave solely because their application for a
residency permit was not processed in a timely manner. By
law, there are reports that the Migration Office imposes
varying and sometimes capricious demands regarding the
documentation required for a residency permit. Companies
wishing to hire citizens of former Soviet republics may
face even more restrictive requirements.


16. The law places no limits on foreign ownership or
control over investments. Foreign investors have the right
to repatriate profits, income, or dividends, after payment
of taxes, or to reinvest their income without any
limitation. Lithuania introduced a law restricting
monopolies in 1993, and a law on competition in 1999. An
anti-monopoly committee oversees implementation of these

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17. Lithuanian law protects foreign investments and the
rights of investors in several ways.

-- The Constitution and the law on Foreign Capital
Investment protect all forms of private property against
nationalization or requisition.

-- International agreements offer protections, such as the
1958 New York Convention on the recognition and enforcement
of foreign arbitral awards.

-- Bilateral agreements with the United States and other
western countries on the mutual protection and
encouragement of investments reinforce these protections.

-- The law on capital investment in Lithuania and other
acts regulate customs duties, taxes, and relationships with
financial and inspection authorities. This law also
establishes the order of dispute settlement.

-- In the event of justified expropriation, investors are
entitled to compensation equivalent to the market value of
the expropriated property.

-- Foreign investors may defend their rights under the
Washington Convention of 1965 by applying to either
Lithuanian courts or directly to the International Center
for the Settlement of Investment Disputes. To date,
Lithuania has not been involved in any investment disputes
with American or other foreign investors.

-- State institutions and officials are obliged to keep
commercial secrets confidential and must pay compensation
for any loss or damage caused by illegal disclosure.
The laws did not change significantly, other than the
reform of the enforcement system in 2003, which made it
possible to hire private bailiffs to enforce court

Company law conforms to EU requirements

18. Lithuania has harmonized its company law with EU
standards, including the principles of the free
establishment of companies, protection of shareholders' and
creditors' rights, free access to information, and
registration procedures. The following Lithuanian laws
address company law: the "Company Law" and "Law on
Partnerships" (both modified January 1, 2004),the "Law on
Personal Enterprises" of January 1, 2004, the "Law On
Investments of 1999," the "Law On Bankruptcy of Enterprises
of 2001," and the "Law on Restructuring of Enterprises of

19. The Civil Code of 2000 governs commercial guarantees
and security instruments. It provides for the following
types of guarantee and security instruments to secure
fulfillment of contractual obligations: forfeiture, surety,
guarantee, earnest money, pledge, and mortgage. Bankruptcy
procedures, which are regulated by the "Law on Bankruptcy
of Enterprises," are consistently applied. The law
establishes the following order of creditors' claims:

-- Claims by creditors that are secured by a
mortgage/pledge of debtor;

-- Claims related to employment;

-- Tax, social insurance, and state medical insurance
claims, and claims arising from loans guaranteed or issued
on behalf of the Republic of Lithuania or its Government;

-- Other claims.

Lithuania remains on the Special 301 Watch List
-------------- --

20. Lithuania observes international standards and
subscribes to international conventions on the protection
of intellectual property. Lithuania is a member of the
World Intellectual Property Organization (WIPO) and became
a member of the World Trade Organization (WTO) on May 31,

2001. It is a signatory to the following IPR-related
treaties and conventions:

-- The Paris Convention for the Protection of Industrial
Property in 1990 (effective May 22, 1994);

-- The Berne Convention for the Protection of Literary and
Artistic Works of 1886 (effective December 14, 1994);

-- The Rome Convention for the Protection of Performers,
Producers of Phonograms and Broadcasting Organizations of
1961 (effective July 22, 1999);

-- The Nice Agreement Concerning International
Classification of Goods and Services of 1957 (effective
February 22, 1997);

-- The Madrid Protocol of 1989 (effective November 15,

-- The Patent Cooperation Treaty of 1970 under the auspices
of WIPO (effective July 5, 1994);

-- The WIPO Copyright Treaty of 1996 (effective March 6,

-- The WIPO Performances and Phonograms Treaty of 1996
(effective May 20, 2002); and

-- The Trademark Law Treaty of 1994 (effective April 27,

Lithuania, in 2002, enacted regulations to protect
confidential test data that pharmaceutical firms submit for

patent and trademark registration. Lithuania's parliament
is expected to ratify the 1973 and 2000 Conventions on the
Grant of European Patents.

21. Following EU accession, Lithuania extended protection
to Community trademarks, designs and applications. Though
the issue is under review by the Ministry of Culture,
Lithuania has not yet brought its national law protecting
biological inventions into compliance with EU Directive

22. Lithuania remains on the 2004 Special 301 Watch List.
The country remains a transshipment point for pirated
optical media products from the East, particularly Russia,
to Europe. Although Lithuania amended its Copyright Law in
2003 to bring it in line with the EU copyright directive,
penalties for confiscated pirated software and media worth
less than LTL 12,500 (USD 4,800) remain low. The rate of
CD piracy in 2003, estimated at between 55-85 percent of
all sales, was high. The software piracy rate in 2003 (58
percent) was also high. Law enforcement efforts against
pirates improved in 2004, with the number of seized pirated
CDs increasing fourfold. The Lithuanian Music Industry
Association reported that the Criminal Police closed six
Internet sites in 2004 for illegally distributing films,
computer games, music and software that had not yet reached
retail outlets.


23. Business in Lithuania is still fairly heavily
regulated. More than 50 agencies regulate the business
environment and possess the legal standing to close a
business. Investors and lawyers complain that many laws
and regulations are vague, confusing, and often
contradictory. A U.S. executive noted that government
officials are not held accountable for the untimely or
incorrect implementation of regulations or ministerial
decrees, and that there is no mechanism within ministries
to appeal these decisions. U.S. executives have complained
about a lack of clarity in the government's procurement
rules, bureaucratic incompetence, and a lack of
transparency in licensing rules.

24. U.S. corporate representatives have noted lengthy
bureaucratic procedures to obtain customs clearances and
other certifications. The Executive Director of the local
Investors' Forum noted that it takes approximately 20 days
to start a business in Lithuania.

25. The government gives the business community little
advance notice of new legislation, and still less
opportunity for comment. It usually does not publish new
laws in draft form, nor does it publish an analysis of its
responses to public commentary. A U.S. company executive
noted that the government does not engage in active or
constructive dialogue with industrial and trade
associations to solicit their views before enacting

26. Labor, health, and safety laws may distort investment
because strict labor laws governing working hours do not
afford companies needed flexibility. Companies have also
complained about burdensome health and lighting

Tax Burden

27. The government reduced the corporate profit tax on
January 1, 2004 to 15 percent, and plans to eliminate the
turnover tax, currently at 1 percent, in mid-2005. It is
also considering reducing the personal income tax from the
current 33 percent to 30 percent. Local analysts have
drawn our attention to the fact that while the corporate
tax is low, the total tax burden remains high, since
companies must pay a 31 percent social security tax on
wages. The government is considering a proposal from the
Investors' Forum to limit payment of social security tax to
the first LTL 5,000 (USD 1900) of an employee's salary.
Analysts have noted that a foreign bank extending a loan to
finance a company would need to pay a ten percent
withholding tax, twice the rate a Lithuanian bank would
have to pay.

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28. Government policies do not interfere with the free
flow of financial resources or the allocation of credit.
Commercial credit and short-term, trade-related loans are
readily available. Demand for credit is high due to low
interest rates, and the loan market expanded by 52 percent
in 2003. Interest rates will likely rise in 2005-2006
after Lithuania adopts EU requirements that tax interest
from deposits. A recent IMF delegation on an annual
Article IV consultation mission to Lithuania noted that
inflation, expected to be just under 1.5 percent in 2004,
will likely exceed 2.5 percent in 2005. The mission noted
several signs that point to an increased risk that the
economy will overheat in 2005 including:

-- High capacity utilization;
-- Continued robust growth of credit, driven by low
interest rates;
-- Declining unemployment;
-- Acceleration in wage growth;
-- Increases in property prices;
-- Rapid growth in the current account deficit; and
-- Output exceeding potential.

29. The banking system is stable, well-regulated, and
conforms to EU standards. The privatization of all state-
owned banks was completed in 2002. Foreign banks may
operate in Lithuania through branches, representative
offices, and subsidiaries or through the acquisition of
shares in local banks. Any acquisition involving ten
percent or more of a local bank's share capital requires
approval by the Bank of Lithuania. The total assets of the
country's largest banks on October 31, 2004 amounted to LTL
3.19 billion (USD 1.24 billion). Commercial banks have
dramatically expanded their range of services, including
leasing, insurance, asset management and investment
banking. Credit cards have become increasingly popular in
Lithuania. Lithuania's response to the 1998 Russian
financial crisis included the restructuring of the banking
sector and increased governmental oversight.

30. There are no restrictions on portfolio investment.
Portfolio investment, however, has not attracted many
foreign investors due to the small number of companies
listed on the National Stock Exchange, whose market
capitalization, as of May 2004, amounted to approximately
LTL 20.221 billion (USD 7.84 billion). In May 2004, the
government privatized 44.3 percent of the National Stock
Exchange's shares and 32 percent of the Lithuanian Central
Depository's shares to OMHEX, Northern Europe's largest
stock exchange operator. Three different authorities
supervise the financial market -- the Bank of Lithuania
supervises commercial banks and credit unions, the
Securities Commission supervises the securities market, and
the Insurance Supervisory Commission supervises insurance
companies. The law requires these institutions to
cooperate with the respective EU authorities. The Embassy
is not aware of any cases of local "stable Shareholder"
arrangements that would restrict foreign investment.


31. Lithuania has not witnessed any recent incidents
involving politically motivated damage to projects and/or
installations. There have been no nascent insurrections,
belligerent neighbors, or other politically motivated


32. Most large foreign investors report that senior
officials are often very helpful in solving problems. The
Investors' Forum, which counts large corporations among its
members, reports no outstanding issues with corruption.
The small and medium enterprise (SME) sector holds a
different perspective on the Lithuanian bureaucracy,
however. These businessmen describe lower level
bureaucrats as rigid, unhelpful, corrupt, often abusive,
and sometimes displaying an anti-business attitude. The
Lithuanian press is replete with stories of tax inspectors,
economic police, and customs officials who make
unreasonable demands on small businesses. Many companies
agree that the government appears to be biased in favor of
big business, which are seen as a ready source of capital
and employment, in spite of the existence of several
official programs to promote SMEs.

33. The Special Investigation Service (Specialiuju Tyrimu
Tarnyba or STT) was established in 1997, under the auspices
of the President of the Republic, to fight corruption. The
law treats bribery in any form (giving or receiving) as a
criminal act. Lithuania is a signatory to the OECD
convention on combating bribery and hosts a representative
office of Transparency International. The government
stepped up oversight of the administration of EU transfers
and fought corruption in the State Border Protection
Service and Customs. Efforts to combat corruption,
however, stalled in the second half of 2004 because of
protracted disputes among politicians, prosecutors, and the
STT about how to proceed. In September, the STT Chief
resigned as a result. Parliament also failed to pass a
Code of Ethics for either Civil Servants or Politicians.

34. Transparency International's Global Corruption
Barometer survey, released in December 2004, noted that one
in three Lithuanians admitted paying a bribe during the
past twelve months. Those polled indicated that the
customs service is the most corrupt element of society,
followed by political parties and the parliament, the
courts, the police, and the health care system. The
Embassy has funded ethics training for government officials
in procurement and other areas.


35. Lithuania has commercial relations with more than 160
countries, including free trade agreements with 20 trading
partners. It has concluded "Agreements Concerning the
Promotion of Mutual Investment" with all EU member states
(except Ireland),the United States, Australia, China,
Iceland, Israel, Korea, Russia, Venezuela, Argentina,
Kazakhstan, Turkey, and a number of Central and Eastern
European countries. It has signed Most Favored Nation
agreements with 22 countries, including the United States.
The United States and Lithuania have signed and ratified
the following agreements:

-- Charter of partnership between the USG, Estonia, Latvia
and Lithuania;

-- Agreement on reciprocal investment protection and
encouragement (recently amended to avoid incompatibilities
with obligations arising out of EU membership);

-- Treaty on avoidance of double taxation;

-- Treaty on legal assistance in criminal matters;

-- Treaty on extradition; and

-- Treaty on mutual assistance in Customs matters.


36. Coverage from the Overseas Private Investment
Corporation (OPIC) is available for U.S. investments in
Lithuania. Lithuania is a member of MIGA (the Multilateral
Investment Guarantee Agency). The embassy purchases local
currency at an exchange rate that varies on a daily basis.
On December 28, 2004, it was LTL 2.53 to the dollar.

37. Lithuania has concluded "Agreements on the Avoidance
of Double Taxation of Income and Capital and the Prevention
of Fiscal Evasion" with Armenia, Azerbaijan, Belarus,
Belgium, Canada, China, Croatia, the Czech Republic,
Denmark, Estonia, Finland, France, Georgia, Germany,
Greece, Iceland, Ireland, Italy, Kazakhstan, Latvia, Malta,
Moldova, the Netherlands, Norway, Poland, Portugal,
Romania, Russia, Singapore, Slovakia, Slovenia, Spain,
Sweden, Switzerland, Turkey, Ukraine, the United Kingdom,
the United States, and Uzbekistan.


38. Lithuania is a member of the International Labor
Organization (ILO) and adheres to its conventions.
Lithuanian work requirements are stricter than in other EU
countries. By law, white-collar workers have a 40-hour
workweek and blue-collar workers a 48-hour workweek, with
premium pay for overtime. Minimum workplace health and
safety standards are in place, but they are sometimes
ignored. A U.S. company executive told us that the labor
regulations lack flexibility and preclude him from hiring
seasonal labor. The average monthly wage is USD 470. The
unemployment rate, at 11.3 percent in the second quarter of
2004, is decreasing. Despite a planned increase in the
minimum wage, analysts do not expect unemployment to rise,
since many workers migrate abroad seeking better wages.
Structural unemployment in the health care system, one of
Lithuania's least reformed sectors, may rise if the
government decides to close one or more hospitals.

39. Lithuania's EU accession has led to a migration of its
labor to other EU countries. The Ministry of Labor expects
that as many as 360,000 workers, about one-quarter of the
country's working-age population, will have left Lithuania
by the end of 2004. According to government data,
emigration increased by 64 percent in the first half of
2004 as compared to the same period in 2003. The impact of
emigration varies by sector. In September 2004, the
Lithuanian Trucking Association, for example, reported a
shortage of 3,000-4,000 truck drivers. Large retail stores
have also reported some difficulty in filling positions.
The construction sector anticipates shortages in the
future. Industry analysts expect that foreign workers that
speak Russian (and can therefore operate in the Lithuanian
labor market) will increasingly fill the shortages in
sectors as diverse as textiles and medical services. The
government will likely begin increasing foreign worker
quotas to enable individuals from Belarus and Ukraine to
fill areas of labor shortage.

40. Emigration has led to salary increases in certain
sectors, such as construction and transportation. It is
anticipated that salaries in these two sectors will
increase by 25 percent in 2005. A recent study projected
that Lithuania's salary growth in 2005, projected to be a
9.9 percent nominal increase and 7.7 percent real increase,
will likely be the highest in the world. Government plans
to raise the minimum wage to LTL 600 (USD 230) from the
current 500 (USD 190) are likely to negatively affect the
textile industry and other sectors that rely upon
inexpensive labor.

41. Since unions do not have a very large membership base,
the labor movement is weak. The unpopularity of unions is
a legacy from Soviet times, when they were co-opted by the
Soviet regime. Unions are often reluctant to exert
pressure on management for fear of jeopardizing jobs in a
job market characterized by high unemployment. There have
been no major industrial strikes since independence. There
were no reports of political violence or politically
motivated damage to property from 1991 through 2003. Civil
disturbances are unlikely.


42. Lithuania has Free Economic Zones (FEZ) in the cities
of Klaipeda, Kaunas and Siauliai. Klaipeda is the
country's largest seaport, Kaunas is an air, road, and rail
hub, and Siauliai hosts the largest airport in the Baltics.
Business conditions in the zones favor investment in
manufacturing and exports. Companies operating within the
zones enjoy:

-- 80% corporate tax reduction for the first five years of
operation, and 50% for the next five years;

-- Exemption from customs taxes;

-- Exemption from Value Added Tax; and

-- A 50% discount on land leases.

There are currently four businesses operating in the
Klaipeda FEZ. This largest of Lithuania's zones, with 130
million euros (USD 174 million) in total foreign
investment, has signed contracts with four more enterprises
to begin operations in 2005.

43. Companies operating in the FEZ receive the same legal
guarantees as those operating elsewhere. Parliament
approved a law on the fundamentals of free economic zones
on June 28, 1995 that regulates conditions for the
establishment of free trade zones and the legal status of
firms operating in such zones. Lithuania's EU Accession
agreement permits the indefinite operation of existing
FEZs, but precludes the establishment of new ones.


44. Lithuania is an attractive location for foreign
investors, and a competitive center for product sourcing in
the region. The country has:

-- A highly skilled, low-cost labor force, making it an
attractive production alternative to the West;

-- Strong production potential to serve both the Russian
and EU markets; and

-- Economic growth, a stable currency, and a favorable
business environment.

45. The U.S. is the sixth largest investor in Lithuania.
American companies have invested USD 481 million,
constituting 8.5% of total FDI, as of November 30, 2004.
There are 584 companies with American capital registered in
Lithuania. Total FDI was LTL 14.65 billion (USD 5.68
billion) on July 1, 2004. Per capita FDI is USD 1382.
More than 60 percent of incoming FDI is from the EU-15
countries. FDI from the EU-15 increased by ten percent in
2003, reaching USD 3 billion. Lithuania's FDI stock
constituted 26 percent of GDP on January 1, 2003. FDI
flow, as a proportion of GDP, was 5.3 percent in 2002 and
3.8 percent in 2001. The most attractive sectors for
foreign investment in 2003 were:

-- The processing sector, 31.1 percent of total FDI;

-- The trade sector, 17.9 percent;

-- Transportation and communications, 17.1 percent; and

-- Financial mediation, 15.7 percent.

46. Lithuania's top five foreign investment sites (2002
data) are:

-- Latvia, USD 19 million;

-- Estonia, USD 15 million;

-- Russia, USD 8.6 million;

-- Bosnia, USD 5.3 million; and

-- France, USD 3.6 million.

Total Lithuanian investment abroad amounts to USD 73

47. The top ten foreign countries investing in Lithuania
(2004 data) are:

-- Denmark (FDI: USD 827 million as of January 1, 2004; up
from USD 788 million as of January 1, 2003);

-- Sweden (FDI: USD 700 million as of January 1, 2004; down
from USD 702 million as of January 1, 2003);

-- Germany (FDI: USD 465 million as of January 1, 2004; up
from USD 440 million as of January 1, 2003);

-- United States (FDI: USD 405 million as of January 1,
2004; up from USD 398 million as of January 1, 2003);

-- Estonia (FDI: USD 401 million as of January 1, 2004;
down from USD 539 million as of January 1, 2003);

-- Finland (FDI: USD 408 million as of January 1, 2004; up
from USD 204 million as of January 1, 2003);

-- Russia (FDI: USD 277 million as of January 1, 2004; up
from USD 239 million as of January 1, 2003);

-- U.K. (FDI: USD 236 million as of January 1, 2004; down
from USD 237 million as of January 1, 2003);

-- Netherlands (FDI: USD 163 million as of January 1, 2004;
up from USD 83 million as of January 1, 2003); and

-- Norway (FDI: USD 146 million as of January 1, 2004; up
from USD 135 million as of January 1, 2003).