Viewing cable 05VILNIUS3

05VILNIUS32005-01-03 14:24:00 2011-08-30 01:44:00 UNCLASSIFIED Embassy Vilnius
This record is a partial extract of the original cable. The full text of the original cable is not available.
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 
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¶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).