VILNIUS/BRUSSELS (Reuters) – Trade through Lithuania to Russia’s Kaliningrad region could return to normal within days, two sources familiar with the matter said, as European officials move toward a compromise deal with the Baltic state to defuse the row. with Moscow.

The city of Kaliningrad, which borders European Union countries and relies on railways and roads through Lithuania for most goods, has been cut off from some freight transports from mainland Russia since June 17 under sanctions imposed by Brussels.

The people, who declined to be named because European officials are in talks about exempting the territory from sanctions, which have hit industrial goods such as steel so far, clear the way for a deal in early July if EU member Lithuania drops its reservations. Discussions are private.

The row over Russia’s isolation is testing Europe’s resolve to impose sanctions imposed in the wake of Russia’s invasion of Ukraine, fueling fears of an escalation after other restrictions pushed Russia into default.

While Western powers have vowed to stand by Ukraine, affirming their resolve at both the G7 and NATO summits this week, it is proving difficult for Europe to stand up to tough sanctions and avoid further escalation with Russia.

This is why European officials, backed by Germany, are seeking a compromise to resolve one of their many disputes with Moscow, one person said.

The source said that if the traditional route of Russian goods to Kaliningrad, via its ally Belarus and then Lithuania, is not restored, the Baltic state fears that Moscow will use military force to plow a land corridor through its territory.

Meanwhile, soldiers for Germany are stationed in Lithuania and could be drawn into a confrontation on the side of its NATO allies if that happens.

Europe’s largest economy is also highly dependent on Russian gas imports and will be vulnerable to any reduction in flows if the Kaliningrad conflict escalates.

“We have to face reality,” said a person familiar with the EU discussions, describing Kaliningrad as “holy” for Moscow.

“(Putin) has much more influence than we have. It is in our interest to find a middle ground,” he said, acknowledging that the end result may seem unfair.

waiver deal

A spokesman for the Lithuanian Foreign Ministry said it would continue to consult with the European Commission on the implementation of sanctions and that any change by the bloc should not be limited to the Baltic state.

“Sanctions must be imposed, and any decisions taken must not undermine the credibility and effectiveness of the EU’s sanctions policy,” the spokesman said.

“Because transit of Kaliningrad is possible through many EU member states, the European Commission’s interpretation of how EU sanctions are to be implemented … cannot be limited to Lithuania.”

A spokesperson for the European Commission referred to its June 22 statement that Lithuania was implementing EU restrictions and that the supply of essential goods to Kaliningrad remained unimpeded.

One person with direct knowledge of the matter said they expected a deal to be reached by July 10, and another person said it could be announced next week.

One of those people said that one of the settlements could result in shipping traffic between Russia and Kaliningrad being exempted from EU sanctions on the grounds that it is not considered normal international trade because the outpost is part of Russia.

This concession can only be provided on condition that freight certified in Kaliningrad is used and not exported through its port, where the headquarters of the Russian Baltic Fleet is located.

That could be hard to guarantee, the person said, and could put Lithuania, tasked with determining the final destination for goods, on a collision course with Russia.

Another person said humanitarian grounds could be used to obtain an exemption for Kaliningrad, which lies between Lithuania, Poland and the Baltic Sea.

But he said Lithuania had serious reservations about offering what could be considered a concession to Moscow.

alcohol and cement

Lithuania, formerly ruled from Moscow, is now one of Russia’s fiercest critics in the European Union and has been at odds with officials in Germany and Brussels who want to defuse the row.

Until now, EU sanctions against Russia prevent the transport of iron, steel and minerals to Kaliningrad through EU countries.

The list of sanctioned goods will be extended to include cement and alcohol from July 10, coal in August and petroleum products such as fuel in December. When the final phase begins, almost half of the shipments sent to Kaliningrad from Russia will be penalized.

Neither passengers nor food products are prohibited and Kaliningrad can still be reached by plane or sea.

And while the United States and the European Union quickly imposed sanctions to limit Russia’s access to international finance and its sales of coal and oil, the punitive measures have done little to mitigate Russian military aggression.

In recent weeks, Moscow has also turned the tables on Europe by cutting back on critical gas supplies, prompting Germany to prepare for legalization and monitor the escalating row over Kaliningrad with growing concerns.

Kaliningrad, with a population of nearly a million, was cut off from Moscow when Lithuania became independent during the dissolution of the Soviet Union, and residents have to cross EU territory to reach the rest of Russia overland.

Dmitry Medvedev, deputy head of Russia’s Security Council, said this week that restrictions on shipping goods to Kaliningrad are part of a proxy war with the West and that Russia has many ways to respond.

“There are many opportunities and a large part of them are of an economic nature and are capable of cutting off oxygen to our Baltic neighbors who have taken aggressive measures,” he told a Russian newspaper.

“There is also the possibility of using disproportionate measures … that would cause a dangerous escalation of the conflict,” he added.

writing by John O’Donnell; Editing by David Clark

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