Lithuanian President Dalia Grybauskaite made a working visit to China last November, and things started very well for her. She went to China's first International Import Expo and said that her country's companies could do more business in and with China.

Grybauskaite's Chinese hosts, which included President Xi Jinping, agreed. Chinese trade representatives in Vilnius were instructed by Beijing to start boosting ties with Lithuanian businesses interested in the Chinese market — among them companies producing laser technology, furniture, fish and dairy products.

In 2017, bilateral trade grew by more than 20 percent reaching €1 billion ($1.2 billion) — a significant volume for a Baltic country of 2.9 million people. The future looked bright.

Lithuania's port of Klaipeda is the gateway to more trade with China. But attempts by Beijing to buy a stake in the crucial infrastructure have been thwarted several times out of national security concerns

Security chief opens fire at 'Huawei'

However, the mood has since changed drastically. This has come after Lithuania's State Security Department, known by its local acronym VSD, published its annual "National Threat Assessment" recently.

In previous years, the report named Russia as the undisputed No. 1 enemy — especially after Moscow's annexation of the Crimean peninsula and its involvement in the conflict over eastern Ukraine. But in 2019, VSD for the first time also paid close attention to Chinese activities in the Baltic state.

In a chapter titled "Chinese Intelligence Services Expand Their Area of Interest in Lithuania," the report mentions Beijing's State Security Ministry as well as its military intelligence as having increased their activities in Lithuania.

Among other things, they would use business contacts to infiltrate institutions of NATO and the EU to glean valuable information, the report noted. Presenting the report to the media recently, VSD Director Darius Jauniskis pointed out that the activities of Chinese communications giant Huawei were particularly suspicious, claiming that the company was connected to Chinese intelligence services.

The Chinese embassy in Vilnius flatly denied those accusations. State-controlled media in China hinted that the Lithuanian government was taking its cue from the US administration which saw China as its archenemy in the region.

At least some Lithuanian businesses were alarmed and put some of their China plans on hold. A source in the Vilnius government told DW that Lithuania's Ministry of Foreign Affairs had received calls from worried entrepreneurs, asking if it was still fine to do business with the Chinese.

Meanwhile, several companies have made their own risk assessments. "After the report was published, our top management sat down to take stock of the situation," Rimantas Varkulevicius, general manager of a milk factory in the southwestern town of Marijampole, told DW.

"We decided that we can continue doing business with China," he said, adding that selling €2-3 million worth of dairy products to China would hardly impact national security. He may be right as it is primarily Huawei's activities that are causing concerns.

5G networks at stake

Omnitel and Bite — two of Lithuania's three main telecoms companies — use Chinese technology, including Huawei's, as the basis for their mobile networks. Only the third one, Tele2, uses products made by US-based Cisco Systems. LRT, the country's public broadcaster, also extensively uses Huawei technology.

Lithuania's plans to introduce 5G networks could potentially lead to a Huawei-versus-Cisco battle now, with a big prize looming on the horizon. Lietuvos Energija, the country's state-owned energy company, plans a major overhaul of its meter network. It wants to install new devices that will automatically transmit energy consumption data from every home directly to the company's headquarters.

The project is estimated to cost up to €300 million — an unprecedented sum for the small Baltic country. Although the tender has not yet been officially opened, most local observers expect Huawei to actively compete for it.

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Kęstutis Glaveckas, a member of Lithuania's parliament, the Seimas, and co-chairman of a Lithuanian-Chinese joint parliamentary group, pointed out to DW that Chinese technology was very competitive. In his view, Huawei's quality-cost ratio is frequently the best in the market.

"I see Chinese projects here, including the Lietuvos Energija potential deal, as purely business ones," he said, but cautiously added that "politics could always interfere later in these projects."

An influential member of Lithuania's Chambers of Commerce and Trade Association, who asked DW not to be named, said Chinese mobile network products were "very competitive, but to a large extent it's because companies like Huawei get direct government subsidies which European or American companies do not."

However, certain strategic infrastructure in Lithuania "will forever remain out of reach for Beijing, like for example the Klaipeda Baltic Sea port, railways or airports," the Chamber of Commerce official told DW.

In recent years, China has shown a keen interest in investing in the port, including in a much needed deepening of its access channel. Beijing views this project as a potential addition to its Belt and Road Initiative and aims to prove that its "16+1" program of cooperation with countries in Central and Eastern Europe is beneficial to all involved. However, Vilnius made it clear that it will not allow the Chinese to buy a stake in the port.

Security above all

The country has a law stipulating that only companies from NATO countries and those allied with them are allowed to participate in tenders for projects deemed important for national security. The government can always invoke this law if it wants to keep Chinese companies at bay. The upcoming 5G upgrade of mobile networks and Lietuvos Energija's meter replacement program are likely to fall in this category.

Laurynas Kasciunas, a conservative member of the Seimas, voiced his concern about Huawei's activities in Lithuania well before VSD did. Underscoring Lithuania's strong links to NATO and the US, he told DW: "This means we cannot ignore what the Americans say about the Chinese activities. I would like to see a professional expertise of these major projects. And if it shows that our security is really at stake then we should act on this."

With China rapidly expanding its presence in neighboring Belarus, also courting Viktor Orban's Hungary and other Central Europeans countries, there is little doubt that Chinese investments will remain a contentious issue for the Baltic states' business agenda for a long time to come.