As defense concerns accelerate, partners across various Baltic law firms describe a rapidly changing landscape defined by rising investments, expanding industrial capacity, and evolving legal frameworks.
Defense Spending Reaches New Heights
Across the region, governments are making long-term commitments to higher defense spending. As Gatis Flinters puts it, “Latvia is stepping up its security and defense efforts by allocating almost 5% of GDP to defense in the state budget for 2026.” He highlights that one key objective is “industry development,” achieved through “offset obligations in major defense procurement projects, ensuring further expansion of local defense manufacturing.” He adds that Latvia is also channeling funds toward “investments in innovations, as well as in further development of Drone Coalition incentives,” while the Ministry of Defense is working to “facilitate foreign direct investments into Latvia’s defense sector by ensuring ‘green corridor’ for investors.” Looking ahead, Flinters notes that “it is expected that on January 1, 2026 Defense Investment Fund, a venture capital fund for military tech, will be created.”
Latvia’s direction is echoed by Raivis Leimanis, who describes a structural change. “Security has become an organizing principle for policy and capital,” he says, pointing to Latvia’s new Defense Industry Law, which “moved the sector from a patchwork of rules to a coherent framework for security requirements, industry support, and investment attraction.” He highlights the government’s recently approved Defense Industry and Innovation Strategy for 2025-2036, noting that it “signals durability: this isn’t a one-year spike but a multi-cycle build-out across supply chains, R&D and specialized capabilities.” For him, the implementation plan focuses on “four pillars: strengthening defense capabilities, accelerating high-value-added innovation, deepening cooperation between government, industry, and research institutions, and ensuring resilient defense supply chains that support the National Armed Forces.”
In Lithuania, a similar transformation is underway, albeit on an even larger scale. Evaldas Dudonis notes that Lithuania is allocating “approximately EUR 2.5 billion to defense in 2025” and plans to allocate “a record 5.38% of its GDP to defense in 2026, which will be approximately EUR 4.8 billion.” These levels of spending have drawn dramatic new interest: “Lithuania (and all the Baltic States) have become a place of interest even for big names in defense, e.g., Rheinmetall and Patria building their factories in Lithuania and Latvia.”
According to Matas Balenas, this surge is transforming Lithuania’s legal and business environment. “The heightened focus on security and defense has indeed reshaped (or more likely still is reshaping) Lithuania’s business and legal environment,” he explains. Regulatory frameworks are being streamlined to accelerate strategic projects, with construction permits, land-use approvals, and environmental assessments shifting to “somewhat faster procedures.” He notes that only recently, “there was almost no visible defense industry in Lithuania with a few exceptions,” but today, “there is more interest and consequently more companies emerging. Especially related to drones.”
Estonia’s transformation has, among others, focused on technology. Liisi Jurgen observes that “technology law has always evolved in cycles of innovation,” ranging from 3D printing to cloud services, crypto assets, and AI. Now, she says, “we see the defense sector becoming the new driver of technological and legal transformation.” Defense-related developments are influencing “procurement models, cybersecurity standards, data governance, and dual-use technologies.”
A Wave of New Projects
This has led to a rapidly expanding pipeline of defense-related industrial and infrastructure projects. In Latvia, G. Flinters highlights one of the largest new initiatives: “the State Defense Corporation is developing a modular powder charge production project, with expected commencement of operations in the third quarter of 2026.” He adds that “it has been announced recently that Rheinmetall is going to open an artillery shells production plant in Latvia,” developed jointly with the State Defense Corporation. At the same time, domestic companies are expanding. “Local producers are looking to expand their production capabilities by trying to attract necessary investments through various means,” G. Flinters says, noting that “we have seen several M&A transactions recently with defense industry companies as targets.” And beyond manufacturing, financing tools are emerging: “defense bonds have become a topic in Latvia.”
Leimanis observes a similar tendency toward diversification. “We’re seeing three lanes: financing instruments, innovation vehicles, and capability projects,” he says. On financing, he notes that “the market is positioning for defense-label bond issuances, a format only just emerging in Europe.” He describes the European Investment Bank’s opening of its Riga office as a sign that “large-scale development projects” are likely to enter Latvia’s pipeline. Meanwhile, he sees efforts to mobilize private capital through new structures: “the Defense Innovation Fund initiative seeks to set up an alternative investment structure that channels private capital into early-stage companies developing technologies relevant to defense needs.”
Lithuania’s project landscape is even broader. Balenas highlights that the biggest ongoing efforts relate to the national strategy of creating a National Division integrated with the German Brigade, with investments directed toward “building of various housing, training, maintenance facilities.” He also reports “large-scale ammunition (155-millimeter howitzer as well as 30-35-millimeter autocannon) production facilities,” alongside partnerships in small arms and ammunition manufacturing. Additionally, he points to “a push toward drone technology, cybersecurity solutions, and dual-use innovations,” and notes that “explosives manufacturing initiatives are being developed.”
Dudonis describes the three cornerstone projects reshaping Lithuania’s defense environment. The first is upgrading the Armed Forces with “modern combat systems (tanks, infantry fighting vehicles, air-defense systems).” Second is hosting the German Brigade: “for the purpose of hosting the brigade, a whole town near Rudninkai is being built,” he explains, describing it as “the most ambitious military infrastructure project ever developed in the history of independent Lithuania with the overall budget of approximately EUR 1 billion.” His third example is the “Rheinmetall factory for 155-milimeter production,” a EUR 300 million investment expected to run full speed by the end of 2026.
In Estonia, the expansion is focused on high-tech capability development. Jurgen notes that new defense needs are “pushing legal advisors into cutting-edge innovation, including AI-based situational awareness, automated decision-making, and defense-grade cloud architectures.” She emphasizes that both private actors and contracting authorities are adjusting to new expectations: “at this stage, both contractors and contracting authorities are still experimenting and adapting to new frameworks.”
Streamlining Rules and Practices
Rapid sectoral growth is also reflected in changing regulatory and procurement frameworks. In Latvia, Gatis Flinters highlights that “the Ministry of Defense has been constant in implementing offset requirements in procurement processes.” The aim is “to create a resilient local industry” and to ensure security of supply. He points to the “production of Patria 6×6 IFVs in Valmiera,” and expects similar requirements for “ASCOD IFVs to be delivered to the National Armed Forces in the coming years.” Leimanis adds that authorities are shifting “away from price-only criteria toward a resilience-first model,” and that “local industry participation – typically at a 30% subcontractor rate,” is now a standard expectation in large capability projects.
Lithuania seems to strive for more extensive reforms. Kristina Sabaliauskiene explains that, in response to geopolitical pressures, “significant amendments have been enacted to legislation governing construction activities,” with the objective of “substantially shortening the building permit procedures for projects connected to national security and defense.” She notes that previously “the construction of industrial or other special-purpose buildings” required environmental assessments, spatial planning documents, and other preparatory steps that extended over “one to five years.” Under the new approach, “the initiation and execution of construction works without a building permit” is permitted when necessary for urgent defense needs, and “public disclosure of such projects will no longer be mandatory.”
Dudonis emphasizes the importance of the 2024 Law on Defense and Security Industry, describing it as “the biggest single legal change in the defense-related sector of the last decade (or even two).” He explains that it introduced “a concept of industrial cooperation,” allowing authorities to require that major purchases include “up to 30% of the purchase value being reinvested in Lithuania” through technology transfer, R&D, goods, services, or other mechanisms.
Estonia is experiencing a more gradual shift. Jurgen observes that new defense priorities are steadily influencing expectations around transparency, cybersecurity, and responsible technology standards. She predicts that “in a year or two, we are likely to see clearer patterns emerging – with defense-driven technologies setting trends well beyond the defense industry itself.”
Ripple Effects Across the Economy
Defense investments are generating strong spillover effects. Flinters expects Latvia’s construction sector to “be rather busy in the coming years,” with major projects such as the “Selija Military Training Poligon” and the expansion and modernization of existing bases. He notes that R&D investment “might have positive effects for the local science community,” especially in dual-use technologies. He also points to broader economic expectations: “offset requirement is targeted at 30% and more of defense production to be local,” and the Ministry of Defense estimates “a long-term economic inflow from defense projects at EUR 200 million.”
Leimanis points to similar spillovers: “construction, manufacturing, and logistics are clear beneficiaries,” he says, while technology fields such as “secure communications, cyber defense, sensors, and unmanned systems” align with existing strengths in the region.
Lithuania is seeing similar effects. Balenas notes that “investment into infrastructure alone for the upcoming four years is calculated at EUR 4 billion,” leading local construction companies to compete intensely. He also observes the state’s preference “to acquire services/goods from local suppliers, if possible or feasible.” Sabaliauskiene highlights that increased deployment of personnel “has driven increased demand for rental housing in both urban and regional areas,” though so far “no additional legal measures have been introduced to address housing needs.” From an investment standpoint, Dudonis sees growth in manufacturing, logistics, and capital markets, pointing to the rise of “defense-specific and oriented investment funds, e.g., ScaleWolf, the Vytis initiative, and Defense Investment Fund.”
A Changing Landscape for Legal Work
The expansion of defense activity is reshaping legal practice. G. Flinters reports “significant increase in assignments related to defense sector,” especially in licensing, export control, and project development. Leimanis highlights expanding demand in capital markets, where “defense-labeled bonds will require counsel to balance investor transparency with operational secrecy.” He emphasizes that many transactions now involve parallel processes: “foreign-investment screening, export-control licensing, sanctions due diligence and local-industry participation obligations, often combined with mitigation undertakings to secure approvals.”
Balenas expects legal work to increasingly focus on “compliance with defense-related regulations, export controls,” and structuring “joint ventures, securing government incentives, and navigating intellectual property issues for dual-use technologies.” Dudonis anticipates more activity around defense-oriented startups and investment vehicles, though he also predicts corrections in crowded segments, particularly “drone start-ups and companies producing and developing them.”
Jurgen notes that Estonian advisors are becoming central to defense-linked innovation projects, assisting with “public procurement and compliance assessments, data-protection structures, and cross-border cooperation” required for advanced technologies.
Article by ceelegalmatters.com.
