Baltic countries respond to EC calls for strengthened FI defences

Over a year and a half has passed since Russia first invaded Ukraine, and sanctions against Russia are now extensive, with few business sectors untouched. However, questions have been raised about potential evasion through off-shore investments, and the European Commission has voiced concerns about Russian and Belarussian investment in the EU.  

Following the EC’s intervention, Lithuania and Latvia strengthened their existing FI regimes in 2022 (with Latvia expressly curtailing Russian and Belarussian investment) and, in September 2023, Estonia followed suit by introducing a new FI regime. 

This post looks at the larger forces behind these recent changes, and their implications for investors.

Recent FI developments in the Baltics 

Latvia

Latvia’s FI regime came into force in 2017 and requires a mandatory filing for changes of influence over companies significant to national security as well as changes of ownership of critical infrastructure, with filings triggered by shareholdings of 10% (or even lower, in some cases). 

In June 2022, this regime was amended to significantly curtail investment from Russian and Belarussian citizens in companies “of significance to national security” and - where they already owned such companies - to restrict their voting rights. 

The FI rules were then further strengthened in November 2022 when the scope of the screening mechanism was broadened to include foundations and associations as subjects to be reviewed (in addition to commercial companies), and the scope of activities to be treated as important for national security was expanded to include dual-use goods.   

Lithuania

Lithuania’s FI regime came into force in 2018 and requires notification of transactions involving enterprises or infrastructure important to national security (i.e. energy, transport, IT, finance, military, etc) where more than a 25% shareholding is acquired. 

In March 2022, the country’s enforcement mechanism was given more teeth with the introduction of a standstill obligation on parties whose transactions are undergoing screening.

Estonia

Prior to Estonia’s FI regime coming into force on 1 September 2023, foreign individuals were already prohibited from acquiring land located on small islands or listed territories adjacent to the Russian border. However, Russia was still an active investor in Estonia in 2022, with its investment spiking considerably in the first quarter of 2022.

The new FI rules will provide for the assessment of the impact of foreign investment on security and public order in Estonia (or any other EU Member State). They apply to non-EU foreign investment in strategic and sensitive areas that are important to the functioning of the state (energy, transport, communications) or to specific companies (providers of vital services, public undertakings, media companies, transport infrastructure). A shareholding of 10% or more will require approval.

The forces at work

A global trend toward stronger FI regimes…

The recent FI screening developments in the Baltics are part of a global and European trend, with the past three years having seen a “historically unprecedented” proliferation and expansion of investment screening mechanisms alongside increased enforcement. Two recent crises have also contributed to this: the pandemic, and the war in Ukraine. In Europe, this has been further driven by the EU FI screening mechanism encouraging the introduction of FI regimes in Member States. 

…though the war in Ukraine may have particularly influenced developments in the Baltics

While the war has triggered fewer policy changes globally than the pandemic, it has likely had a more significant impact on the recent changes in the Baltics for a number of reasons. 

First, although Russia only plays a marginal role globally as the origin of FI (with outwards FI stocks accounting for around 1-1.5% globally), it has historically been a more significant investor in the Baltics compared to elsewhere. Because of this and pre-existing investment ties with Russia, the Baltic states may be at particular risk of post-sanction Russian investment. 

Additionally, the EC has voiced its concerns about Russian investment in the EU and the intensity of prior business relations between EU and Russian companies, and renewed its call for Member States to set up and enforce fully-fledged FI screening mechanisms in light of the “significantly heightened risk that FI by Russian and Belarussian investors may pose a threat to security and public order.” 

What can be expected from enforcement in the Baltics?

Latvia’s regime has specific restrictions aimed at investment from Russia. While no such specific restrictions are in place in Lithuania and Estonia, investors can expect all of the Baltic states to use their recently bolstered FI regimes to carefully scrutinise investments for Russian links. 

There may also be increased scrutiny by Latvia, Lithuania and Estonia (and other EU Member States with FI regimes) of investments by EU-based companies with Russian or Belarussian ownership. This might be the case, for example, where the transaction structure of the EU company has been used as a means of “circumvention” – in other words, where the EU company is an “artificial arrangement” which attempts to get around the foreign investment screening mechanism.

While arguments for circumvention have previously been applied very narrowly, they may be applied more widely following the recent CJEU Xella judgment – especially where there are concerns about Russian investment. However, it remains to be seen if and how EU Member States and their institutions will react to this ruling, and whether this judgment will in fact lay the groundwork for Member States to take a closer look at the ownership structure of EU companies seeking to invest.