The European Commission has announced plans to provide financial assistance in 2026 to Baltic countries and Finland that have suffered collateral economic damage from the European Union’s extensive sanctions regime against Russia. The initiative, led by Regional Commissioner Raffaele Fitto, aims to revitalize economies that have been particularly hard hit by the downturn in tourism and investment, as well as the collapse of cross-border trade.
According to diplomats and Commission officials who spoke on condition of anonymity, the measures became necessary after 19 packages of EU sanctions against Moscow slowed down trade and investment in Finland and the Baltic states, exacerbating the effects of the pandemic and rising inflation in the region.
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Economic Impact of Sanctions on Frontline States
Finland, Estonia, Latvia and Lithuania have all taken significant economic hits from the comprehensive sanctions regime implemented by the European Union since Russia’s full-scale invasion of Ukraine in February 2022. The region is being hit particularly hard because of falls in tourism and investment, along with the collapse of cross-border trade.
While the threat of a Kremlin invasion has deterred tourists and investors, the sanctions have choked off cross-border trade with Russia, and everything has been made worse by skyrocketing inflation after the pandemic. Dwindling housing prices have also made it more difficult for businesses to provide collateral to secure loans from banks.
“People who had cross-border connections with some economic consequences have lost them,” Jürgen Ligi, Estonia’s finance minister, told reporters. A native of Tartu on Estonia’s eastern flank, Ligi has witnessed these problems first-hand as he owns a house only four kilometers from the Russian border.
“Estonia’s economy has suffered the most from the war [which caused] problems with investments and jobs,” Ligi added. According to the Commission’s latest forecast, Estonia is expected to grow by only 0.6 percent in 2025 — well below the EU average — even though economic activity is expected to pick up in 2026 and 2027.
Geographic Proximity Amplifies Economic Vulnerability
There are several channels through which geographical proximity to the war can amplify the exposure to its economic consequences. First, countries closer to Russia and Ukraine often have stronger trade links with them, making these economies more vulnerable to disruptions from sanctions, supply bottlenecks, and changes in demand. Second, these economies tend to be more energy-intensive and depend more on Russia for gas and oil, which heightens their exposure to energy-supply disruptions and resulting price spikes.
Third, proximity may also translate into higher financial risk premiums, particularly in non-euro-area economies, reflecting both heightened geopolitical uncertainty and tighter financing conditions. Fourth, neighbouring countries received significant numbers of displaced persons from Ukraine, which can boost GDP through higher consumption and labour supply, while also generating short-term fiscal costs.
The group of ‘closer’ countries includes the thirteen Member States with lower distance than the median and includes the Baltic States (Estonia, Latvia, Lithuania), two of the EU Nordics (Finland, Sweden), the Visegrad group (Czechia, Hungary, Poland, Slovakia), Austria, Bulgaria, Germany and Romania. Visual inspection of the growth paths for these proximity-based groups confirms that the negative impact of the war is more pronounced for those located nearer to the war.
Raffaele Fitto’s Strategic Role
Regions Commissioner Raffaele Fitto is leading the plan, which aims to kickstart the economies of Finland and its Baltic neighbors. Fitto, who previously served as Minister for European Affairs, the South, Cohesion Policy, and the National Recovery and Resilience Plan in Prime Minister Giorgia Meloni’s government, was appointed Executive Vice-President for Cohesion and Reforms in the current European Commission.
A key focus area of his work is to help local economies reorient themselves, especially those which have been directly affected by Russia’s aggression against Ukraine. His mandate includes designing a strengthened, modernized cohesion and growth policy, working in partnership with national, regional and local authorities, and supporting community needs and tackling regional disparities so that all citizens have an effective right to stay in the place they call home.
In June 2025, Executive Vice-President Fitto visited Latvia and Estonia together with Commissioner for Economy and Productivity Valdis Dombrovskis to engage in discussions with national and local authorities on regional security, economic and regional challenges and opportunities, and Cohesion policy developments. The visit focused on the increased challenges Latvia’s Eastern border regions are facing due to the Russian war of aggression against Ukraine, including the deteriorating sense of security, the impact on the region’s economic performance and reduced trade flows, challenges to attract foreign direct investment, and a slowdown in tourism.
Baltic States’ Comprehensive Wish List
The intended recipients are also heading to Brussels with a lengthy wish list, hoping Fitto’s plan will reignite their economies. Their concerns will take center stage during a summit of leaders from Eastern European countries in Helsinki scheduled for December 16, 2025.
“We want to have special attention to our region — the eastern flank, including Lithuania — because we see the negative impact coming from the geopolitical situation,” Lithuania’s Europe minister, Sigitas Mitkus, said in an interview. “Sometimes it’s difficult to convince [investors] that … we have all the facilities in place.”
Mindful of dwindling resources in the EU’s current cash pot, Lithuania’s Mitkus is demanding that Baltic firms get preferential access to the EU’s new funding programs from 2028 — something that is currently lacking in the Commission’s budget proposal from July. Officials from the frontline states are exploring other options including Brussels loosening state aid rules so they can subsidize struggling firms, and getting the European Investment Bank to provide guarantees to companies that want to invest in the region.
Limited Resources Until Next Budget Cycle
However, skeptics warn that any immediate financial support Fitto can provide will be meager, given the scale of the challenge and with the bloc’s seven-year budget running low. Fitto’s options could be limited until the bloc’s new seven-year budget, known as the multi-annual financial framework (MFF), is in place by 2028.
“My sense is that the communication won’t come with fresh money but with ideas that can be pursued in the next MFF,” said an EU diplomat who was granted anonymity to discuss upcoming legislation. While the upcoming strategy will draw attention to these problems, officials privately admit that it’s unlikely to mobilize enough cash to solve them immediately.
“It will build the narrative that in the next MFF you can do something for [pressing issues for Eastern regions such as] drones production,” said the EU diplomat. But until 2028, “I don’t expect any new money.”
Historical Context: Baltic Energy Independence Journey
The current economic challenges faced by the Baltic states come after years of strategic efforts to reduce economic dependence on Russia. The Baltic states’ journey toward economic independence from Russia began well before the 2022 invasion of Ukraine. Recognizing the inherent risks of their Soviet-era economic ties, these three nations embarked on a systematic campaign to reduce their vulnerability to Russian economic coercion.
The historical relationship between the Baltic states and Russia was characterized by deep economic interdependence. Geographic proximity, established trade routes, and legacy infrastructure from the Soviet era had created significant economic ties that Moscow frequently leveraged for political purposes. The Baltic states had experienced Russian economic pressure tactics before, including Lithuania’s total economic and energy blockade in 1990 and the shutdown of an oil pipeline to Lithuania in 2006 when it declined to sell its crude oil refinery to a Russian company.
Lithuania led this transformation by building the “Independence” LNG terminal in Klaipėda in 2014, despite active pressure from Russia. This strategic investment proved transformational, as Lithuania became the first European country to completely ban all Russian gas imports, including LNG, in April 2022 following the invasion of Ukraine. Latvia and Estonia quickly followed suit, making the Baltic region the first in Europe to achieve complete independence from Russian gas.
The final symbolic step occurred in February 2025, when the Baltic states officially severed their electricity connections with Russia and Belarus. This historic moment ended more than three decades of dependence on the Soviet-era BRELL electricity network, with officials switching off transmission lines and joining the rest of Europe’s electricity grid.
Sectoral Impact Analysis
Despite early preparation for economic decoupling, the comprehensive sanctions regime has had significant sectoral impacts across the Baltic economies. The direct impact of sanctions and the loss of Russian market access proved to be less severe than initially feared, with the overall GDP impact estimated at less than 0.5% in each Baltic country — a relatively modest effect considering the scale of the economic restructuring involved.
However, specific sectors experienced substantial disruption. Agriculture and food processing saw dairy and fish sectors experience substantial disruption, with milk prices in Estonia and Lithuania dropping by 30% below profitability levels. Exports of food and agricultural products to Russia fell by over 60% between 2013 and 2015, with farmers experiencing income drops of 30% or more during the worst affected periods.
Transport and logistics sectors saw Baltic ports lose significant cargo volumes as Russia redirected its exports through its own ports. This particularly affected transit and warehousing services in Latvia and Lithuania, forcing the sector to seek alternative revenue sources.
Lithuania emerged as the regional economic leader in 2024, with robust 2.9% growth in the first quarter compared to its neighbors. This superior performance was attributed to several factors including non-price competitiveness in exports, significant workforce growth particularly in the IT sector, substantial government investment, and rising wages that supported household consumption.
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Estonia’s Recovery Challenges
Estonia faces greater economic challenges than its Baltic neighbors. After stagnating in 2024, Estonia’s economy is witnessing a cautious recovery, with real GDP growth projected at 0.6% for 2025, primarily driven by domestic demand.
Public consumption expanded, while private consumption is expected to gradually increase. Investment is benefitting from lower borrowing costs, but high geopolitical uncertainty weighs down growth. In 2026 and 2027, investment will rise due to higher defence spending, while higher real disposable incomes are set to push consumption. Export performance is expected to improve with the recovery of the Nordic economies. Real GDP is projected to increase by 2.1% in 2026 and 2.0% in 2027.
Unemployment has been rising slowly amid prolonged economic challenges, reaching 7.6% in third quarter 2025. Employment growth in 2025 was slower than the previous year. Due to labour hoarding in the past, the unemployment rate is set to decline only modestly, to 7.2% in 2026 and 7.1% in 2027, despite the foreseen recovery.
HICP inflation rose to 5.7% in the third quarter of 2025, primarily driven by mid-year VAT rate increase. Certain product categories, notably food and services, recorded particularly high price increases (with services affected by car registration fees and increased administrative costs such as medical fees). The fall out of the past tax hikes and slower wage growth are set to reduce inflation in 2026 to 2.8%. In 2027, inflation is projected at 2.2%.
Finland’s Fiscal Predicament
In another sign of financial strain, Finland breached the Commission’s spending rules in 2025 due to excessive spending and an economic slowdown caused by the war. The European Commission confirmed that Finland is breaching the bloc’s core economic rules on debt and budget deficits.
Finland already in 2024 exceeded the 3% of gross domestic product threshold set for public deficits and plans to breach it again in 2025, the European Commission said on Tuesday, adding it will propose opening an excessive deficit procedure and making recommendations for corrective measures.
Finland’s deficit reached 4.3 percent in 2024 and is expected to remain above the threshold this year. The country’s debt-to-GDP ratio stood at 88.1 percent and is forecast to climb to 92.3 percent by 2027. The formal procedure is expected to be launched in early 2026, with EU finance ministers set to make the final decision in January.
“We will be acknowledging the difficult economic situation Finland is facing, including the geopolitical and the closure of the Russian border,” EU Economy Commissioner Valdis Dombrovskis said on Tuesday.
Petteri Orpo, Finland’s prime minister, said the development was expected and attributed the country’s deteriorating fiscal position mainly to the economic fallout from Russia’s war in Ukraine. Writing on social media, he said the government’s consolidation programme had helped prevent a deeper debt spiral, but stabilising the economy would take years.
The Commission applies flexibility for military spending when evaluating deficit levels. Germany, which also exceeded the 3 percent limit, avoided the excessive deficit procedure because 0.5 percentage points of its deficit were linked to defence investments. In Finland’s case, only one percentage point of the 4.3 percent deficit was attributed to defence, which was not enough to offset the breach.
Comprehensive Sanctions Regime Impact
The EU has agreed 19 sanction packages against Moscow in a bid to cripple the Russian war economy, which has bankrolled the Kremlin’s invasion of Ukraine since February 2022. The comprehensive sanctions regime has targeted vital sectors of the Russian economy such as energy and banking, further weakening the regime’s ability to wage its illegal, unprovoked and unjustified war of aggression against Ukraine.
Since the beginning of 2025, the UK and the EU have continued to tighten sanctions against Russia, targeting strategic sectors of Russia’s economy including Russia’s defence industry, its banking sector, international finance and procurement networks, Russia’s shadow fleet, those supporting and facilitating Russia’s invasion of Ukraine and the occupation of the annexed territories, and those enabling sanctions evasion, including in third countries.
Measures designed to restrict Russia’s energy revenues have included lowering the Oil Price Cap, and in May 2025 the European Commission presented a roadmap for achieving a total end to the EU’s dependence on Russian energy. By the end of 2027, imports of Russian oil and gas will be stopped and Russian nuclear energy will be phased out.
The EU adopted its 18th sanctions package in July 2025, which contains a number of new and expanded measures to limit Russia’s energy revenues and the shadow fleet. These measures include lowering the oil price cap from USD 60 to USD 47.6 per barrel. The package also introduces a ban on purchasing, importing or transporting petroleum products from Russian crude oil via third countries, and against providing related technical or economic support.
A total of 91 entities, 14 individuals and 105 additional vessels associated with the Russian shadow fleet have been sanctioned in the new package. The EU is also imposing further sanctions across the shadow fleet value chain, bringing the total number of listed vessels to 444. This measure targets non-EU tankers that are part of Vladimir Putin’s shadow fleet circumventing the oil price cap mechanism.
Political Implications and Regional Security
The economic challenges facing the Baltic states and Finland are intrinsically linked to broader questions of regional security and European solidarity. The comprehensive sanctions regime against Russia was implemented not just as a punitive measure, but as a strategic tool to degrade Russia’s ability to sustain its war effort while demonstrating Western unity in support of Ukraine’s sovereignty and territorial integrity.
However, the asymmetric economic impact of these sanctions has created what some analysts describe as a “front-line premium” — the additional economic costs borne by countries in closest proximity to the conflict. While all EU member states have experienced some economic disruption from sanctions and the broader geopolitical uncertainty, the Baltic states and Finland have shouldered a disproportionate burden due to their geographic location, historical trade patterns, and heightened security concerns.
The planned financial assistance from the European Commission represents an acknowledgment of this asymmetric burden and an attempt to ensure that the costs of maintaining European solidarity are distributed more equitably across the bloc. However, the political optics remain challenging. Critics within the region argue that financial compensation after the fact is insufficient and that greater thought should have been given to supporting front-line economies before implementing measures that would inevitably hit them hardest.
Investment and Business Confidence
Beyond the immediate macroeconomic indicators, the sanctions regime and geopolitical uncertainty have had profound effects on investment flows and business confidence in the Baltic region. Foreign direct investment into the Baltic states has declined significantly since 2022, with multinational corporations reassessing their exposure to what is now perceived as a higher-risk region due to proximity to the conflict.
The tourism sector, which had been growing steadily in the years leading up to the pandemic and subsequent war, has been particularly devastated. Major tourism operators have redirected customers away from the Baltic states and Finland, citing security concerns despite the actual risk to tourists being minimal. The perception of danger has proven almost as damaging as any real threat, with booking levels remaining well below pre-war levels even as other European destinations have largely recovered.
Real estate markets in border regions have experienced significant corrections, with property values in eastern Estonia and eastern Latvia declining by double-digit percentages. This has created a negative wealth effect for households in these regions while simultaneously reducing the collateral available to businesses seeking to secure loans for expansion or working capital.
Future Policy Challenges
Looking ahead, policymakers face several interconnected challenges in supporting the economic recovery of the Baltic states and Finland while maintaining the pressure on Russia through sanctions. The December summit in Helsinki will be crucial in determining whether the European Commission’s planned assistance will be sufficient to address the scale of the economic disruption.
One key question is whether the assistance will be structured as grants or loans, and whether it will come with policy conditionality requiring structural reforms. Baltic officials have expressed concerns that excessive conditionality could prove counterproductive, adding administrative burden at a time when quick disbursement of funds is essential to support struggling businesses and maintain employment.
There are also questions about the sustainability of the current sanctions regime and whether it can be maintained indefinitely without creating permanent economic dislocation in front-line states. While all Baltic governments publicly support maintaining maximum pressure on Russia through sanctions, there is private acknowledgment that the economic costs are substantial and that alternative trade and investment relationships will need to be developed to replace those lost with Russia.
Defense Spending Pressures
Compounding the economic challenges is the need for substantially increased defense spending across the Baltic region. All three Baltic states and Finland have committed to spending at least 3-5% of GDP on defense, well above the NATO target of 2%. While this spending provides some economic stimulus through domestic procurement and infrastructure investment, it also crowds out other productive investments and adds to fiscal pressures.
Estonia has announced a revised defense spending target of at least 5 percent of GDP from 2026. While activation of the national escape clause and Estonia’s low debt ratio will allow greater flexibility in the near term, the consequences of increased defense spending on debt sustainability need to be carefully assessed.
The challenge for policymakers is to balance the legitimate security concerns that drive higher defense spending with the need to maintain fiscal sustainability and preserve resources for growth-enhancing investments in education, infrastructure, and research and development. The EU’s fiscal rules provide some flexibility for defense spending, but there are limits to how much can be justified under exemption clauses.
Regional Cooperation and Integration
Despite the economic challenges, there are some positive developments emerging from the crisis. The Baltic states have deepened their economic cooperation and integration, both with each other and with the Nordic countries. New infrastructure connections, particularly in energy and transport, have reduced historical dependencies on Russia while improving connectivity with the rest of Europe.
The Rail Baltica project, which will connect the Baltic states to the European standard-gauge railway network, has taken on renewed strategic importance and is receiving increased EU funding. When completed, it will dramatically reduce travel times between the Baltic capitals and improve freight connectivity with Central Europe, helping to offset some of the losses from disrupted east-west trade routes.
Similarly, energy interconnections are being strengthened, with new electricity cables linking the Baltic states more firmly to the Nordic electricity grid and LNG import capacity being expanded. These investments, while costly in the short term, will enhance long-term economic resilience and reduce vulnerability to future geopolitical shocks.
Lessons for European Solidarity
The Baltic experience offers important lessons for European solidarity and burden-sharing in times of crisis. The EU’s strength lies in its ability to present a united front in response to external aggression, but this unity can only be sustained if the costs are shared equitably and if front-line states receive adequate support to maintain their commitment to collective policies.
The planned financial assistance for the Baltic states and Finland, while modest in scale, represents an important recognition of this principle. However, many observers argue that the response should have been more proactive rather than reactive, with support mechanisms put in place at the same time sanctions were implemented rather than years later after significant economic damage had already occurred.
As the war in Ukraine continues and geopolitical tensions show no sign of abating, the question of how to support front-line European economies will likely remain a central challenge for EU policymakers. The December Helsinki summit and subsequent budget negotiations will be important tests of Europe’s commitment to ensuring that solidarity is more than just rhetoric, but is backed by concrete financial and policy support for those bearing the heaviest burdens in defense of European values and security.
Conclusion
The European Commission’s announcement of financial relief for Baltic states and Finland represents a belated but necessary recognition of the disproportionate economic costs these front-line nations have borne as a result of EU sanctions against Russia. While the scale of immediate assistance may be limited by budgetary constraints, the initiative signals a commitment to greater burden-sharing and solidarity as Europe navigates a prolonged period of geopolitical tension.
For Estonia, Latvia, Lithuania and Finland, the road ahead remains challenging. These nations must balance the imperative of maintaining strong defenses and unwavering support for Ukraine with the need to preserve economic competitiveness and fiscal sustainability. The success of Commissioner Fitto’s initiative will be measured not just in euros disbursed, but in whether it helps these economies adapt to a fundamentally changed geopolitical and economic landscape while maintaining their prosperity and resilience.
As one EU diplomat noted, the real test will come in the next multi-annual financial framework starting in 2028, when Europe will need to decide whether temporary relief measures will evolve into permanent structural support for regions bearing the highest costs of defending European security and values. Until then, the Baltic states and Finland will continue to demonstrate the resilience and determination that has characterized their response to Russian aggression, even as they rightfully call for greater European solidarity in sharing the burden of that response.
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By: Montel Kamau
Serrari Financial Analyst
27th November, 2025
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