BALTIC INDEPENDENCE AND RUSSIAN FOREIGN ENERGY POLICY

Dr Harold Elletson Series Editor: Dr Kevin Rosner

Baltic Independence and Russia

Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2006 by GMB Publishing Ltd. © Harold Elletson Hardcopy ISBN 1-905050-36-4 E-report ISBN 1-905050-89-5

British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library.

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Baltic Independence and Russia

Contents
About the author 1. Introduction 2. An historical and political perspective
Separate nation states Soviet rule Baltic independence Baltic–Russian relations

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3. The economy
Impressive growth World Bank concerns EU integration and structural reforms

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4. The Baltic energy system: structure and dynamics
Electricity Natural gas Oil

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5. Russia’s interest in Baltic energy
The siloviki and the key decision-makers Background to Putin’s energy and foreign policy Russia’s energy-security complex Energy as a foreign policy tool The Kremlin’s motives European energy security

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6. The Baltics: options for the future
Russian dependency The energy security challenge Regional collaboration

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Baltic Independence and Russia

The nuclear option Renewable energy Co-generation schemes Energy efficiency and administrative improvements Encouraging EU–Russian cooperation

7. Conclusion Notes and references About the series

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He was previously Director of the NATO Forum on Business and Security. An international public affairs consultant and a fluent Russian speaker. he has advised many leading companies on aspects of their business in the former Soviet Union. v . A former Member of the UK parliament. including BP in Azerbaijan and Alstom in Siberia.Baltic Independence and Russia About the author Dr Harold Elletson leads The New Security Programme. he served as Parliamentary Private Secretary to the Secretary of State for Northern Ireland and as a member of the Select Committee on Environment. which conducts research into the implications of the new security environment.

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With the lowest per capita wages in the EU. they suspect. such as oil shale in Estonia and Nuclear energy in Lithuania. they say. on environmental grounds. For several years. the long-term security of the Baltic States’ energy supplies were at the top of their agenda. reliable energy supply in appropriate quality and quantity’.Baltic Independence and Russia 1. neither one is a significant energy producer. Russia is flexing her muscles. Lithuania and Estonia. bypassing Poland and the Baltic States. stable and reliable energy sources. met in the Lithuanian town of Trakai to discuss their position on energy issues. Furthermore. Energy. ‘Future growth in the Baltic countries requires an affordable. is being used as a tool of foreign policy in the region. the heads of government of the three Baltic States of Latvia. The Baltic Energy Ministers had recognized the importance of the issue in the context both of national security and of future relations with the European Union (EU) as long ago as 1999. the situation is likely to get even worse as a result of EU pressure to curb existing production. Against this background.’1 The issue was brought into much sharper focus with the so-called ‘Gas War’ between Russia and Ukraine O early in 2006 and the concerns expressed by the Polish government over plans for a pipeline to export Russian gas to Germany through the Baltic Sea. They harbour the suspicion that energy supplies to the Baltic States have a political significance for the Kremlin that is beyond the normal parameters of mere commercial consideration. where the main supplier recently declared its intention to increase gas prices significantly. GMB Publishing 1 . the supply should be secured against disruption shortfalls and unexpected price rises.2 The problem for the three Baltic States is that. Introduction n 27 February 2006. which anticipates utilization of diversified. Energy security and. although they are all comparatively small consumers of energy. when they agreed a joint energy strategy. because the Baltic States have finally left the old Soviet sphere of influence and joined NATO and the EU. ‘Security of supplies should be at the level to ensure that present and future energy needs are met at financially sustainable terms. The proposed pipeline is so controversial in Poland and the Baltic States that some political commentators have even referred to it as the energy version of the Nazi-Soviet Pact of 1939. all three states are highly dependent on cheap gas from the Russian Federation. Since energy is a vital factor of the country’s economy. ever since Russian companies had begun to acquire significant stakes in companies operating in key areas of Baltic energy infrastructure. politicians and the media in all three Baltic countries had expressed concern that an over-dependence on Russian sources of energy supply was bound to compromise Baltic independence. some commentators fear that Russia’s new assertiveness under President Putin presents a threat to Baltic independence. particularly. ahead of the forthcoming EU Summit. which they joined in 2004. they had declared.

the nature of Russian interests and the various options for reducing the region’s dependency on external sources of supply. how can it be guaranteed? What are the Baltic States’ options? These are important questions. in particular. never lost the hope that it would be restored. Vilnius and Tallinn. not only for the Baltic States but also for the rest of the EU. tenaciously clung to it and. as sovereign states. This report seeks to establish the causes of Baltic concern.Baltic Independence and Russia An understanding of the region’s history explains how explosive such suspicions are. is a story of three nations that won their independence against the odds. how realistic are these fears? Is Russia using its control of energy supplies as a means of advancing its foreign policy objectives? If so. Yet. any suggestion that Moscow might be able to use its control of vital energy supplies to re-establish its control is bound to be greeted with alarm in Riga. what are those objectives in the Baltic States and how might they be realized? If security of energy supplies is essential to the future sovereignty of the Baltic States. 2 GMB Publishing . Now that they have realized their ambition. when it was ultimately taken from them. The history of the Baltic States in the last century. as it seeks to establish a stable partnership and a clear strategic understanding with Russia. to join the EU and NATO.

all three indigenous Baltic peoples have lived in their homeland for far longer than any of the peoples who have ruled over them since the middle ages – whether Scandinavians. such as Riga and Tallinn. Foreign involvement in the region. An historical and political perspective t is difficult to escape history in the Baltic States. as the Teutonic knights forcibly converted the Baltic tribes to Catholicism. The Estonians are of Finno-Ugric stock. the indigenous inhabitants of the three modern Baltic States of Estonia. at the mouth of the river Daugava. were centres where furs. This sense of belonging creates a special feeling of both attachment and legitimacy. Its presence is everywhere. Whatever their individual origins. Whilst the Teutonic Order subdued the ‘Old Prussians’ in the west. was punctuated by regular periods of war I and conquest. whereas the Lithuanians and Latvians have Indo-European ancestry (Lithuanian. Tallinn and Tartu. in turn. as its capital.3 Indeed. in the north the Brotherhood of the Sword established a Christian. The German influence in the region GMB Publishing 3 . the eastern shores of the Baltic were emerging as an important staging post for trade between Russia and the Western world. a recurring leitmotif that underscores the present and places it in the context of a turbulent past. Germans or Russians.Baltic Independence and Russia 2. soon became foreign domination – at first Scandinavian and later German. The last peoples in Europe to be Christianized and with viable pagan tribal societies of their own until the twelfth century. the Baltic nations nonetheless found that their geographical location made their homeland a battleground for other states striving for political or economic mastery of the region. military state in Livonia with Riga. one historian has observed. however. The three nations’ historical consciousness. which was founded in 1201. is shaped by a collective sense of identity that comes from the fact that the Baltic peoples have a longer connection with their homeland than almost any other nation in Europe. interestingly. Mercantile interests were combined with missionary zeal. Even in pagan times. ‘The kernel of the historical awareness of the Baltic peoples is the fact that they are directly descended from the original inhabitants of their countries’. Latvia and Lithuania are direct descendants of the original tribes who settled on the shores of the eastern Baltic Sea four thousand years ago. like the Finns and Hungarians. textiles and weapons. Poles. wax and slaves could be exchanged for salt. The last millennium of Baltic history. being the closest living language to Sanskrit). in particular. culminating in the bloody upheavals of the twentieth century.4 Despite the comparative brevity of the period of direct occupation by the Teutonic knights. the German presence in the Baltic remained strong until the beginning of the twentieth century because of the rule of German landowners over the Baltic peasantry and the dominance of German merchants in Hanseatic trading centres on the Baltic.

the Baltic States at last won their independence. perhaps. In the end. which lasted from 1920– 1939. Lithuania and Estonia came into being’. the various attempts to develop a more robust system of regional alliances. whose relations with the Baltic States were poisoned by her capture of the ancient capital of Lithuania. all three signing peace treaties with the Soviets during the course of 1920. it at last became a ‘war for democracy’ and an opportunity for the Allies to use the issue of the rights of national minorities to create what Clemenceau called a ‘cordon sanitaire’ between Germany and Russia.5 Despite the eventual absorption of the Baltic provinces into the Russian empire. even after the armistice in the West. which led to the collapse of the Imperial Russian Army. After Germany had 4 GMB Publishing . and repeated incursions by both ‘White’ Russian and Bolshevik troops. without guarantees of military support from powers outside the region.Baltic Independence and Russia persisted through the ensuing centuries. Ultimately. in an extraordinary combination of circumstances which could hardly have been predicted at the start of the conflict.8 An entente between the three Baltic States. during the Polish-Soviet war in 1920.7 The inter-war period of Baltic independence. that the power of the German ‘Baltic barons’ was finally broken and. failed – largely. was characterized both by the desire to profit from a resurgence of trade with Russia by acting as the West’s commercial ‘springboard’ and by the attempt to maintain international support by acting as a barrier against Soviet interference or a new German–Russian combination. Soviet rule The fate of the Baltic States was finally sealed in 1939. Poland and Soviet Russia that. By signing a separate peace treaty at Brest Litovsk in 1918. however. Ambitious Baltic diplomatic initiatives that might have led to the establishment of a large regional bloc in the ‘cordon sanitaire’ ‘were gradually whittled down. the Baltic nations at last achieved their chance to establish themselves as separate nation states. was not enough to save them. because they centred around Poland. only the so-called Baltic Entente between Latvia. Despite a sustained German attempt to maintain a presence in the region. Peter the Great confirmed the privileged position of the Baltic Germans and the Lutheran Church. which might have guaranteed Baltic independence.6 Separate nation states It was not until the end of the First World War. their fate was dependent on the intentions of their various predatory neighbours within it. PolishLithuanian and Russian interests competed for succession to the legacy of the Teutonic knights. With the entry of the United States into the conflict. the city of Vilnius. in 1934. they still enjoyed a comparatively extensive degree of autonomy under their local German aristocracy. Russia’s new Bolshevik rulers not only betrayed their allies but also freed them from any obligation to defend the territorial integrity of the Russian empire in a post-war settlement. The three Baltic States were of such strategic significance to Germany. and it was the middle of the nineteenth century before any serious programme of Russification began. however. What created the opportunity for the establishment of Baltic independence was the defeat of the German army in the West and a revolution in the East. even as Swedish.

an extraordinary event. it was too late to turn back the clock. through Riga. Yet. delegates agreed: ‘to coordinate joint policies of the biggest popular movements of the Soviet Baltic countries and to make the general public of the Soviet Union and the world at large aware of the democratic aspirations pursued by the Baltic popular movements. Baltic independence Thus. the Baltic States were the only members of the League of Nations not to be restored to full sovereignty. Latvia and Lithuania were formally absorbed by the Soviet Union in 1940 but were under German military occupation from 1941 to 1944 when the Red Army re-imposed Soviet rule. the momentum for independence became unstoppable. formulaic response: the Baltic States had voluntarily chosen to join the Soviet Union in 1940. which was determined that they should never regain their independence. When the peoples of the Baltic States linked hands. At a meeting of all three Baltic popular fronts in Tallinn in May 1989. was consigned to the Soviet sphere. even GMB Publishing 5 . the despatch of OMON troops to the region and several bloody incidents. parliamentary path back to statehood. After Germany had invaded Poland on 1 September and Ribbentrop had revisited Moscow. It was initially agreed that Lithuania’s northern boundary would mark the division between the Soviet and German zones. marked the 50th anniversary of the signing of the Molotov-Ribbentrop Pact. secret protocols to the MolotovRibbentrop non-aggression pact divided the Baltic States into separate spheres of influence. so today it continues to haunt relations between the Baltic States and Russia. Millions of people joined hands and formed a human chain stretching across the Baltic from Tallinn in the north. Estonia.Baltic Independence and Russia reincorporated the Lithuanian port of Klaipeda into the Reich in March. Moscow gave a standard. history played a prominent role in fuelling the independence movement and it continues to play an important role in the political psychology of the Baltic countries today. Moscow’s efforts to contain and manage the drive to Baltic independence were doomed. In 1989.’9 One of the main issues chosen to highlight the Balts’ democratic aspirations was the Nazi-Soviet Pact and its secret protocols. At the end of the Second World War. perhaps the most remarkable public demonstration in European history. The demonstration was largely coordinated by the various popular fronts. giving Germany a free hand to attack Poland. along with half of Poland. with Latvia’s Freedom Monument marking the country’s pre-war independence at the heart of the demonstration. Just as in 1989 the truth about the NaziSoviet Pact was an important part of the case for independence. provoked Gorbachev himself into declaring that ‘the state of the Baltic peoples is in serious danger’. to Vilnius. however. which had sprung up in the Baltic States after Gorbachev’s introduction of ‘perestroika’ and ‘glasnost’ in the Soviet Union. however. despite a Soviet blockade of Lithuania. Lithuania. Even the local communist parties in the three republics turned against the General Secretary and. The sheer scale and organization of the human chain. in contrast to the ‘criminal and unlawful agreement’ of 1939. They spent the next 50 years under the heel of the Soviet regime. the three popular fronts issued a statement emphasizing their peaceful.

and a genuine peace policy in Chechnya’. unrepentant about their supposed wartime collaboration. the policy of the Baltic States has been very similar to that of Poland and. naturally linked to the Russian market – the West’s economic ‘springboard’ but also still Russia’s ‘window on Europe’. one commentator on the region has observed. as such.’10 Baltic–Russian relations Suspicions in the Baltic States have been stirred by the failure of successive Russian leaders to take account of the national interests of their Baltic neighbours. regardless of historical experiences with Russian imperialism. 6 GMB Publishing . too. a vibrant civil society.Baltic Independence and Russia stoking fears about the Kremlin’s true intentions with its energy policies in the region. to dampen popular enthusiasm in Russia for the notion that the indigenous populations of the Baltic countries are. In fact. some of whom appear to believe that an important measure of Russia’s global status is the extent to which it can continue to exert control over its former East European vassals. at best. They see themselves as a bridge between East and West. at worst. friendly relations with the great power on their doorstep. They have failed. ‘Russo-phobic’ and. empirical observation has convinced many in the Baltic States that little is fundamentally different in Russia and they continue to be haunted by the ghosts of history. ‘then its influence may have been welcomed in Eastern Europe. an effective multiethnic system. Baltic States still belong to Russia are built. the Baltic States all want normal. The reason they were so keen to join NATO was fear of Russia’s intentions towards them. a productive capitalist economy. Such public prejudices are the foundations on which the imperial ambitions of those who continue to believe that the However. As independent states. similarly offensive to the hard-liners in the Kremlin. ‘If Russia had a thriving liberal democracy.

despite sluggish growth in the global economy. growth has recently been ‘fuelled largely by domestic demand in the Baltic States’. In its latest ‘EU-8 Quarterly Economic Report’.Baltic Independence and Russia 3. it complicated inflation control.11 Although Lithuania has an impressive portfolio of exports. GMB Publishing 7 . In its review of the economic position in EU-8 countries. slowing the Baltic States’ plans for full economic integration with the EU. the national economy has achieved a remarkable turnaround from the position immediately after independence when real GDP fell by 50 per cent. for example. machinery and textiles. the Baltic States saw an average 6. where the privatization of small and medium-sized enterprises has been completed and many large public companies. In 2004. including refined oil products. and 70 per cent of its trade is now with the EU. a state of affairs that has characterized much of the history of Baltic independence. the World Bank worries that. not least in the Baltic countries.5 per cent and in the same year. it warned that ‘current account deficits remain very high in Estonia and Latvia’. They have thus largely managed to avoid the economic and political crises that have affected other regions in transition from centrally planned systems. Latvia saw real GDP growth of 8. The Bank has also expressed particular concern about exposure to external economic factors beyond their control. it worried that: ‘Although the oil shock has not been fully passed on to domestic consumers. EU integration and structural reforms Such concerns have taken some of the gloss off what has otherwise been an impressive performance. In Latvia. in sectors such as gas. The transformation has been remarkable. World Bank concerns The problem now facing the Baltic States is no longer economic stagnation but the very reverse. shipping and banking. the economic performance of all three Baltic States in the period since independence has been impressive by any standards. The figures confirm the Baltic countries’ position as some of the fastest growing economies in Europe.6 per cent increase. in general. The economy T he three Baltic countries were quick not only to implement democratic political reforms but also to adopt market economies after regaining their independence. Tough decisions have been taken and privatization has been extensive.’ At the same time. the World Bank warned that ‘overheating in the Baltic States is a key concern’. Impressive growth Despite the initial shock of the transition from the Soviet system. have also been transferred from the public sector. for example.

Meeting the very strict fiscal criterion is also complicated by the fixed exchange rate regimes and neutral convergence process. Sustaining their programme of structural reforms will be key to future economic development. the Baltic States must deal with a range of fundamental structural problems. if they are to avoid slipping from rapid economic growth into a new period of stagnation.’12 In the long term. all three Baltic States need to pay particular attention to combating unemployment and reducing poverty. This reflects a combination of higher energy prices. They need to improve public sector administration and performance and to promote regional development. strong wage and credit growth. perhaps.Baltic Independence and Russia ‘Early Euro adoption plans in the Baltic countries have been postponed owing to problems in meeting the inflation criterion. which is competitive in European markets and does not simply rely on low wage rates. They need to develop and maintain an economy. Above all. and inadequate support from fiscal policy. job creation and poverty reduction.13 8 GMB Publishing . particularly in rural areas.

indeed. in a dry year it is estimated to be only 60 per cent selfsufficient in meeting its energy needs and. The majority of Estonia’s electricity is generated by the Narva power plants. approved by the Latvian Cabinet in September 2001.5 billion in foreign aid. Its ability to continue to generate this amount of electricity over the longer term is questionable if it continues to rely on oil shale as fuel and. undersea cable linking the Harku 330kV substation in Estonia with the Espoo 400kV substation in Finland. Latvia is working with Estonia and Finland to develop the ‘Estlink’ project. the EU has begun to exert pressure for oil shale-fired generation to be scaled back. using oil shale as fuel. which contributed to the 19. Until Estlink is completed. as well as to parts of the Russian Federation. identified energy policy in the electricity GMB Publishing 9 . as the Baltic States’ only net importer of electricity. the Baltic States’ first connection to the European network. Lithuania then supplies the Russian oblast of Kaliningrad with electricity by means of this connection. A report on energy policy. however. which brings a 750kV line from Smolensk through Belarus to Ignalina in Lithuania. until recently. In return for its agreement to phase out Ignalina. and will be laid. Although Latvia has some hydroelectric facilities.Baltic Independence and Russia 4. The government has. Estlink. However. Estonia produced 8. however. It has been designed. Ignalina operates an RBMK-type reactor and. direct current. which is scheduled to be completed late in 2006 is a highvoltage.9 billion kilowatts (bkwh) of electricity. been generated by the country’s Ignalina nuclear power plant. The majority of Lithuania’s electricity has. Lithuania has received over $1. however. Estonia and Lithuania are both net electricity exporters and their surplus supply is sold to Latvia. The Baltic Power System Control Centre in Latvia has operational control of the IPS 330kV transmission network in the Baltic States and is responsible for coordinating the link with the Russian system. under pressure from the EU. the Lithuanian government has agreed to shut down the plant by 2009. indicated its interest in developing a new nuclear plant to replace Ignalina. on environmental grounds. it buys from its Baltic neighbours and from Russia. a 43-mile underwater cable linking them to the Scandinavian power grids. The governments of the Baltic States see the electricity industry as vital to the future economic development of their countries. In 2004. The Baltic energy system: structure and dynamics Electricity T he electricity market differs in each of the Baltic States.8 bkwh of electricity that Lithuania produced in 2004. by ABB. although all three share the common characteristic that they are not linked to the European grid. Currently. the Baltic electricity network remains solely linked to the Russian and Belarusian systems.

therefore today the electricity cross-border sales prices are low’. through both short-term immediate activities and regular annual measures that are vital for a stable development of the energy industry. therefore undermining economically justified fulfilment of long-term supply objectives.’15 ‘The supply of primary energy. ‘However. The Latvian Cabinet of ministers complained that past assumptions were based on ‘the import of inexpensive primary resources and electricity. electric energy and heat at optimal prices.’18 The Estonian government sees the country’s new international.’14 The Estonian government has been no less clear: ‘The fuel and energy sector is a strategic infrastructure of the state which must ensure that Estonia has an uninterrupted supply of high-quality fuel. these prices do not reflect the long-term marginal costs of electricity generation and it is hardly possible to forecast with certainty the price level for a period in excess of one year. The current situation does not provide for economic signals to be aimed at the introduction of new generating capacities.16 Two major factors affect the future development of the Baltic electricity market. including electricity (also import) in the Baltic region exceeds the demand. satisfying the short-term demand of consumers’ and that the attainment of their goals in the energy sector was ‘hindered by circumstances related to the situation in the region where the stability of external suppliers can be planned only on a short-term basis’. ‘The visions and needs relating to the future of power engineering have now changed to a significant extent – in connection with accession to the EU. taking into consideration the increasing requirements with respect to environmental protection and security as dictated by the public wellbeing and international commitments of Latvia. The other important factor affecting future development has been the need to ensure that Latvia meets its international environmental commitments and that industry makes the necessary improvements to meet EU standards. the energy technology has developed and implementation of the Kyoto Protocol provides new possibilities…’19 Both governments have identified the ‘promotion of renewable and domestic energy resources’ as critical to 10 GMB Publishing .Baltic Independence and Russia sector as ‘an integral part of (the) strategy of the national economy’. environmental obligations as an opportunity. according to an assessment by the Latvian Cabinet. At the same time the fuel and energy sector must be as efficient as possible and comply with the safety and environmental requirements. a number of requirements and objectives have arisen.’17 The difficulty for the Baltic governments in assessing energy policy in the electricity sector has been the same as that facing them in other energy sectors: the lack of domestic supply and an addiction to subsidized fuel and energy from external sources. Its policy was aimed both at ‘the creation of preconditions for the establishment of a common Baltic electricity market…’ and at ‘ensuring the reliability and quality of electricity supply within the forthcoming 10 years. The first of these is the region’s reliance on unpredictable and potentially volatile external sources of supply. utmost attention shall be paid to problems related to environmental protection. The Latvian government has emphasized that: ‘In the future development of the energy industry.

the development of electricity transmission and distribution systems is no longer sufficient and adequate. the national economy of Latvia has been undergoing modernization and introduction of new advanced technologies and equipment. there is a risk of eventual inadequacy between the consumer demand and the ability to meet it. Simultaneously. according to one manager. Power exchanges appear to be allocated on a ‘first come. and the existing facilities will continue to depreciate. Instead. ‘even at present some of the interconnections are operated close to the reliability limits’. They have specified that.Baltic Independence and Russia the attainment of their objectives. where not only is the transfer system inappropriate in the post-Soviet era but. especially when connecting new users or changing existing loads.’ Furthermore. ‘Along (with) changes in the energy consumption structure and load centres and the location of energy generating facilities. will reduce the scope of generation. The Latvian Cabinet has recognized that ‘there is a need to improve the reliability and quality of electricity supply with no delay. the Belarus IPS and Russia’s UPS ‘with no clear principles of use’. first served’ basis and there is no clearly structured power reserve market. as well as the pace of development of network systems. Hence.22 The problem is compounded by the fact that ‘no transfer capacity allocation methods exist’ and ‘power exchanges are based on bilateral monthly contracts’. is ‘to foster the development of the energy industry in line with balanced and sustainable growth of the national economy’. by 2010. in the case of Latvia.23 GMB Publishing 11 .1 per cent of gross consumption and that by 2020. which. In the conditions of a swift economic development.20 The Estonians have set environmental targets as formal. The problem that all three Baltic countries now face is to ensure that the electricity sector can continue to service the requirements of rapid economic growth. the technical condition of electricity transmission and distribution networks. Moreover. the Latvians have identified serious structural failings. has resulted in the incompatibility of network capacities with the capacity transmission demand to meet the needs of energy users. the combination of new environmental commitments and reduced generating capacity in some areas is bound to create difficulties and increase reliance in the shortterm on imports. compliance of the generating facilities with the environmental protection standards can be expected. requiring extremely high quality of electricity and reliability of supply.’ However. Of late. the main one of which. in turn.’21 The region faces a major infrastructure problem within the BRELL electrical ring. the electricity supply companies have to guarantee stability and quality of electricity supply to the highest standards. renewable energy should account for 5. electricity produced in combined heat and power production stations should form 20 per cent of gross consumption. The Latvian government has admitted that: ‘It is anticipated that several electricity generation facilities in the Baltic Region (Ignalina NPP among them) will be closed down within the forthcoming 5–8 years. strategic objectives for the fuel and energy sector. ‘mutually agreed power reserves’ are kept for the Baltic Interconnected Power Systems (IPS). which will increasingly affect the reliability and quality of supply.

given the scale of the restructuring involved. however. along with the other Baltic governments. claimed that ‘such level of supply will be attained through preservation and modernization of the existing capacities. Most of the Baltic States’ imported gas comes from Russia and is provided by the quasi-state monopoly company Gazprom and its subsidiaries at rates which. for example. given the scale of the restructuring involved. However. as the private sector responds to the challenge of modernizing and developing the electricity infrastructure of the Baltic States. with the development of other strategic routes for supplying gas to Western Europe. Natural gas None of the Baltic countries is a producer of natural gas and all three depend on imports to meet demand from domestic consumers. the Baltics are 12 GMB Publishing . to justify the government’s optimistic prognoses about future domestic generating capacity. until recently. in part because they anticipated extraordinary results from the development of new and environmentally sustainable sources of energy. Equally. etc) and concepts thereof. the potential supplies of electricity from power plants under the Latvian jurisdiction shall reach 80–90 per cent of total consumption’. have proved to be more than a little optimistic. which has traditionally maintained a good relationship with them. transmission lines) promote the development of dispersed generation and combined energy generation technologies (micro turbines. whilst producing no gas themselves. is that all three Baltic governments attach great significance to the development of renewable and environmentally-friendly sources of energy as part of their overall energy security planning. as well as the related risk factors in the electricity trade.’24 It may not be quite enough. Such prognoses. as well as by creating economically sound conditions for the development of facilities operating in a cogeneration cycle and using renewable energy resources’. however. The Baltic States have long-term supply agreements with Gazprom. as is likely.’ The government has even gone so far as to state publicly that: ‘No other restrictions than those relating to environmental protection and stability and public safety will be imposed with respect to the introduction of new electricity generating capacities in Latvia. In 2001. The Latvians even claim that ‘taking into account the technical condition and the market maturity level in the neighbouring states. the same questions will confront political leaders about security of supply if. ‘The international experience shows that the tendency of the energy users to improve the reliability and quality on their own. in part because of their importance hitherto as transit states. fuel cells. as well as the growing number of problems related to eligibility to build large energy facilities (power plants. whether such optimism will be justified. despite these obstacles. What is clear. by (the) year 2008. the Baltic countries consumed a total of 202 billion cubic feet. much of the required investment comes from Russia. small co-generation. as in other energy sectors. such as the North European Gas Pipeline. are looking to the private sector to make the necessary improvements. The Latvians. the Baltic governments remain confident about the future. remains to be seen. In the long term. have been favourable. however. The Latvians.Baltic Independence and Russia Nevertheless.

In a region with the lowest per capita wages in the EU. The company has recently set about making a series of strategic acquisitions of natural gas utilities. ‘Following the accession of the Baltic States to the EU. announced that he was planning to raise the price of gas supplied to the Baltic States. Latvia and Estonia could switch to alternative fuel.26 However.25 Gas prices in all three countries have. been held artificially low. such as fuel oil. Gazprom acquired 40 per cent of the state-owned natural gas company.000 cubic metres. Whilst it has joined other foreign companies.’ he announced. in investing in the Baltic gas sector. we will be raising prices to the corresponding level.5 billion cubic metres and we are ready to satisfy the demand in full. When Aleksandr Ryazanov. at around $80–85 per 1.000 cubic metres.27 He also confirmed Gazprom’s long-term interest in the Baltic market. caused widespread concern. Ryazanov has also stressed that the company would be foolish to encourage the development of other sources of fuel supply by increasing prices to unsustainable levels. towards global and regional development and towards our main aim of improving the quality of life of Europeans. As an example of what the Baltic countries might expect. whose actions are determined primarily by market considerations. Gazprom’s decision to raise prices has. In some Baltic countries. the price rises could soon be very steep. ‘ We must not increase prices too much because then Lithuania. an act of vengeance because the Baltic nations joined the EU and NATO or part of a plan to choke Baltic independence. Gazprom does have a point. in line with growth. telling European leaders at a recent summit meeting on Russia’s Black Sea coast: ‘The launch of construction of the North European Gas Pipeline. however. to date.’ Ryazanov said. Suspicion persists that the decision is politically motivated. With Lithuania’s partial privatization and price deregulation in January 2004. It now holds a 34 per cent stake in the Latvian gas company Latvijas Gaze and 37 per cent of Estonia’s Eesti Gaas. It insists that the plan is simply to increase prices in the Baltic States to the level of the rest of the EU. concern about Gazprom’s intentions has led to GMB Publishing 13 . telling a press conference that ‘The Baltic States’ market is stable and Gazprom is interested in it. has been Gazprom’s corporate acquisition activity in the region.’28 President Putin himself has painted a similarly rosy picture. Ryazanov cited the current Polish price of $120 per 1. he specifically linked his decision to a political development.Baltic Independence and Russia losing their importance as transit states and political concerns seem increasingly to motivate Gazprom’s activity in the region.’29 As Gazprom expects continued economic growth and a corresponding increase in demand for gas. the concern is that Gazprom is not a ‘normal’ investor. and seems wary of the effect that punitive price rises could have on its position. such as Germany’s EON-Ruhrgas and Finland’s Fortum. however.’30 More worrying perhaps than the planned price increases. ‘There are estimates that by 2010 the consumption of gas in the country will reach 5–5. understandably. The Russian gas giant does appear to be concerned about protecting its Baltic market. As growth rates have been more impressive in the Baltic States recently than virtually anywhere else in the EU though. Gazprom’s deputy CEO. measures to strengthen the energy security of the continent – all this is moving towards progress.

A harmonized EU external energy policy should be established towards third countries and organizations. transmission and distribution of gas. Ultimately. There is a small amount of domestic production. The three Baltic governments appear to have recognized the limits to their capacity to deal with the issue of energy dependency. and therefore do not have possibilities to participate in the internal energy market. the fate of the Baltic countries may depend on guarantees of support from outside the region. Kalvitis of Latvia and Brazauskas of Lithuania said: ‘Taking into account the sensitive issue of the security of energy supply in the Baltic States and the fact that the Baltic States do not have any gas and electricity interconnections with other EU Member States. however. to slip from Gazprom’s grip. with a virtual monopoly on the import. with export capacity nearly doubling since 1999. Even before the planned liberalization of the Latvian market in 2007. 2) state that the energy security problem of the Baltic States should be addressed at the EU level and therefore request that the European Commission by the end of 2006 assesses energy vulnerability of individual Member States and EU regions in order to propose specific actions at the EU level for the reduction of such vulnerability… 3) consider that there is a need to integrate the EU energy and foreign and security policies. The amount of oil traded through the Baltic region has increased significantly in recent years. As so often in history. most of which comes from oil shale.000 barrels per day (bbl/d) and Estonia around 6. their room for manoeuvre is limited. on their own. If Germany pushes ahead with the North European Gas Pipeline and the rest of Europe continues to increase its dependence on Russian gas. considering the necessity to reduce the dependency of the Baltic States on the dominant supplier of the energy resources. However. In a declaration following their meeting on 27 February 2006. Latvia is entirely dependent on imports. many in the Baltic States feel that.Baltic Independence and Russia second thoughts about privatization. The main significance of the Baltic States in the oil sector has been their role as an export terminal for Russian crude transported to ports on the Baltic via Transneft’s pipeline system. Prime Ministers Ansip of Estonia. it has a long-term supply deal with its local partner. bearing in mind that the closure of the Ignalina Nuclear Power Plant will have serious effects on the energy security of the Baltic States. the Prime Ministers of the Baltic States: 1) express their support to the development of a common European energy policy as a guarantee to the security of supply at the Community level. there will be very little that the Baltic countries can do. In Latvia. where Gazprom supplies more than 80 per cent of the country’s gas. Gazprom already has a powerful hold on the economy. as nearly all the exported oil 14 GMB Publishing .000 bbl/d. with Lithuania producing roughly 14. notably with Russia and OPEC… 4) call for the development of an EU mechanism that prepares for and ensures solidarity and assistance to a country facing difficulties following damage to its essential infrastructure or disruptions in energy supply…’31 Oil Russia currently supplies approximately 90 per cent of the Baltic States’ oil. Latvijas Gaze. Some commentators fear that further liberalization may simply help Gazprom to tighten its grip. without European support.

crude oil flows reached an average of 880. Russia’s Baltic Pipeline System now brings oil from western Siberia and the TimanPechora oil fields to the new Russian port. Transneft completed work on its port at Primorsk near St Petersburg and immediately stopped deliveries of crude oil to Ventspils.000 bbl/d. By the end of 2003. By 2004. the port of Butinge. The new facilities have also allowed Tallinn to increase its exports of other Russian products. In 2002. exports of which rose to 2. This was. priority will automatically be given to it. Faced with the overnight eradication of its main source of business. In 2004. In Lithuania.000 bbl/d of oil. Further expansion. would dwarf the capacity of Ventspils. which comprises a complex of four large ports (Muuga. which is located between the Latvian border and the Russian enclave of Kaliningrad Oblast (the former German province of East Prussia). which would be capable of handling up to 120. transporting petroleum products and crude oil by rail rather than via the pipeline system has brought significant extra costs for Ventspils. This is not a question of normal commercial considerations or even anxiety about the presumed patriotic prejudices of Russian companies. Until recently. handling 600.338 million tonnes in 2004. Estonian Oil Services. Although far from ideal and very much a short-term solution. Ventspils in Latvia was the largest port in the region and the second largest terminal for the export of Russian crude oil after Novorossisk. seaports in which Russia has a stake will be given precedence over foreignowned ones. Pakterminal and Eurodek. Moreover. Tallinn in Estonia. it has seen the largest annual increases in fuel oil export levels of all the Baltic Sea ports. currently being planned by Transneft. The problem is that. an embargo. however. The future of Ventspils thus remains uncertain. In addition. simply in order to be able to maintain its position as an oil-exporting port. Transneft plans to develop a petroleum product export terminal. Palyasaare and Paldiski) has recently undergone a period of some expansion. has apparently been more fortunate than GMB Publishing 15 . Transneft is a stateowned monopoly and the Russian authorities have stated explicitly that. Ventspils was able to export 215.276 million tonnes in 2004 from 1. only one third of the average amount exported before Transneft’s completion of Primorsk and the beginning of what is. when allocating resources for export.2 million bbl/d. as profit margins are much slimmer.000 bbl/d.32 The primary competitive threat to Ventspils is now Primorsk. this policy had some success in plugging the gap created by the absence of piped Russian crude. Despite the fact that it depends on the railways for its crude oil and petroleum products. with the construction of a new rail terminal. new rail links and jetties have been added at the main export terminals. Primorsk had already become the Baltic region’s busiest port.Baltic Independence and Russia arrives at the Baltic via the Russian pipeline system. however. Ventspils tried to increase deliveries of crude oil and petroleum products by rail.000 bbl/d. As a consequence. effectively.33 The Baltic States’ other main oilexporting ports are less exposed than Ventspils but for different reasons. as Primorsk is wholly owned and operated by Transneft. Old City Harbour.825 million tonnes in 2003. giving Primorsk a crude oil export capacity of 1. with exports rising to 16. increasing exposure to risk. most notably coal. competition has been fierce and there have been dramatic changes in the distribution of market share.

allowing Moscow not only to gain a stranglehold on the country’s energy infrastructure but also to influence its foreign and security policies. Lukoil. Dragged from his seat on an aeroplane at a Siberian airport by special forces. as a consequence. headed by a so-called ‘oligarch’. Khodorkovsky’s arrest was soon frontpage news and a powerful warning to Russia’s emerging business class. one of Russia’s leading oil companies. was arrested on charges of tax evasion and other ‘economic crimes’. If successful.34 On the face of it. who was openly critical of President Putin. reputedly. Butinge exported more oil in 2003 than Ventspils and. undertook a limited expansion of its facilities. with close connections to the Kremlin. Khodorkovsky had refused to abide by the Kremlin’s direction that Russian energy entrepreneurs advance the government’s security priorities first and only later think about profit margins. In October 2003. however. that it launched a determined campaign to undermine the deal. perhaps the most progressive of Russia’s leading oligarchs. Mazeikiu was sold to a Russian company. he also contemplated a partnership with China in the construction of an oil pipeline.’37 16 GMB Publishing .36 It is fair to speculate that the reason for the harsh treatment meted out to Khodorkovsky was not simply his political opposition to Putin but also the fact that his activities were increasingly running counter to the Kremlin’s foreign and security policies. Butinge is part of the Mazeikiu Nafta complex. Khodorkovsky. a US company. Despite being smaller than the Latvian port. worth £8 billion. One commentator recently specifically identified Khodorkovsky’s purchase of Mazeikiu Nafta as a reason for the oligarch’s downfall: ‘As the head of Yukos and bent upon operating the company in a manner in keeping with Western and not Russian enterprises. Lithuania’s Mazeikiu Nafta – thereby denying that prize to Lukoil. tried to gain control of the complex but was firmly snubbed by the Conservative/Christian Democrat coalition government. After a lengthy trial. which also includes the oil refinery at Mazeikiai and a pipeline at Birzai. a Kremlin favourite. In 1999. an oil and gas giant. the reason for Butinge’s comparative success has been the fact that it has enjoyed better relations with its Russian suppliers than Ventspils. who was once Russia’s richest man and. to say the least.35 In 2002. although not to the proKremlin Lukoil but to Yukos. been something of a double-edged sword. was sentenced to eight years in a Siberian prison camp. and indicated that he sought a close commercial relationship with one of the major American oil companies.Baltic Independence and Russia Ventspils. Some reports suggest that Moscow was so unhappy about the sale of Mazeikiu Nafta to Williams. the largest energy enterprise in Lithuania. He not only purchased the largest oil refinery in the Baltics. the Yukos boss. however. Mikhail Khodorkovsky. which instead sold a controlling share to Williams International. where he continues to languish to this day. This has. Khodorkovsky would have compromised Putin’s drive to play the energy card on the global chessboard. The government apparently feared that a takeover by Lukoil would represent a serious threat to Lithuania’s strategic interests.

the Defence Minister. It must also appreciate the extent to which energy and security concerns inform their common Weltanschauung. Today’s governing elite in Russia is substantially composed of the socalled ‘men of power’. Sergei Ivanov. The mission of the siloviki. In its most basic form. Ivanov. the Minister of the Interior. Viktor Ivanov and Igor Sechin. who said that Russia would in no way assist the United States in its military action against the Taliban and al-Qaeda in Afghanistan. is to reestablish. first of all. deputy chiefs of staff in the Kremlin. preserve and extend the authority and influence of the state. some reports suggest that as many as one quarter of Russian government officials could be classed as siloviki. Putin’s advisers and intimates come almost exclusively from the same security service milieu as the president himself. Two of the President’s closest advisers. whilst political systems come and go. However. It was Sergei Ivanov. his close friend. Yeltsin tended to surround himself with liberal reformers. They included Viktor Cherkessov. Whilst it is certainly possible to overestimate their importance. therefore.Baltic Independence and Russia 5. buccaneering businessmen and even former anti-Soviet dissidents. who was The siloviki and the key decision-makers President Putin and his advisers are very different to the men who ran Russia in the 1990s under Boris Yeltsin.38 Of these. five of the seven people selected to serve as regional ‘super-governors’ were siloviki. is now a deputy head of the president’s administration. an epithet that only hints at what often tends to be their collective view that they represent the ‘eternal state’. in the wake of 9/11. Although the more diplomatically adept President Putin quickly slapped down his defence minister. as is Rashid Nurgaliyev. the postoyannoye gosudarstvo. Ivanov’s comments were indicative of a typical silovik attitude to foreign policy. the best known. who worked as an engineer before joining the KGB in 1977 and fighting in Afghanistan. clearly. the interests GMB Publishing 17 . at least in the early part of his rule. of the state remain the same. seeing the United States as head of a Western alliance determined to humiliate Russia and prevent its re-emergence as a world power. a graduate of the Leningrad BonchBruyevich Electrical-Technical University. worked for the KGB in Putin’s home town of St Petersburg. the siloviki. pay attention to the composition and antecedents of the key decision-makers in Moscow. is also a former KGB officer. In addition. it is a view that. Putin himself is. Whereas. Russia’s interest in Baltic energy The key question in any assessment of Russia’s objectives and interests in the Baltic States’ energy systems is: does the Russian state want to encourage Russian companies to secure a predominant position for legitimate commercial reasons or are their actions a symptom of a wider attempt to promote Russian foreign and security policies? Any attempt to answer this question must.

which was created to act as a bridge between Ukraine’s state-run Naftohaz Ukrainy and the Swissregistered RosUkrEnergo. Putin argued that hydrocarbons were crucial both to Russia’s future development and the restoration of its former power. They included Alexey Miller. What is more interesting. Sibneft. a position he has managed to combine with the office of deputy head of Putin’s administration. is now a compulsory stop for Russian and German energy leaders 18 GMB Publishing . who is now the Chief Executive of Gazprom. vertically integrated companies. He had already served 15 years there as an officer in the KGB and its successor organization. deputy Prime Minister and chairman of the board of Gazprom. the Federal Security Service (FSB). after it was bought by Gazprom. political importance that the president himself has long attached to issues concerning the development of Russia’s energy resources. During his time at the St Petersburg Mayor’s office. however. Both the Mayor’s office and the Mining Institute were to play an important role in the development of Putin’s approach to energy and foreign policy. who would go on to occupy important positions in Russia’s energy-security complex. the Mining Institute appointed a new rector. it is necessary to return to the period in the 1990s when the future president spent most of his time in St Petersburg. Putin considered him a suitable choice for ‘super-governor’ of north-west Russia. The Institute. His central thesis was that the most effective way to harness Russia’s natural wealth was by state regulation of the fuel sector and the parallel creation of large. In 1994. as director of the FSB. who is now the chairman of the board of Rosneft. He also enrolled as a ‘mature student’ in the St Petersburg Mining Institute. He was also recently appointed to head UkrGazEnergo. Putin met several key figures. and Igor Sechin. He became Chief Executive of the Siberian oil company. a Russian–Ukrainian joint venture company. and Putin followed his lead when he came to defend his doctoral thesis in 1997 with an examination of the contribution of natural resources to regional economies and strategic planning. Dmitri Medvedev. who is believed to have exerted a significant influence on the development of Putin’s thinking. Vladimir Litvinenko. The influence of Litvinenko and his Mining Institute has endured too. is the involvement of the siloviki and the security establishment in Russia’s energy complex.Baltic Independence and Russia responsible for the KGB’s campaigns against anti-Soviet dissidents until the dissolution of the USSR in 1991. Two years later. when he joined the St Petersburg Mayor’s office. An example of a prominent silovik with an important position in Russia’s energy structure is the deputy Chairman of Gazprom. Aleksandr Ryazanov. Litvinenko believed in the importance of energy as a tool of state policy. he wrote an article for the Mining Institute’s in-house journal entitled ‘Mineral Natural Resources in the Development Strategy for the Russian Economy’. however. according to one report. in 2005. Equally significant is the geo-strategic. which would work in close partnership with the state. Background to Putin’s energy and foreign policy In order fully to understand the importance of Russia’s energy resources in Vladimir Putin’s world view. who became the head of the Presidential administration.

has emphasized the geo-political potential of Russia’s energy asset. Russia has vast resources that enable it to play the energy card on a global basis… Moscow has used the pipeline system as a foreign policy weapon. seemingly. refineries. one capable of promoting Russia’s foreign policy objectives in the space of the former Soviet Union’. recently noted that it had received a delegation from Gazprom’s close ally. Keith Smith. The Institute’s website. is building its Baltic Pipeline System to carry oil to the Russian port of Primorsk. At the same time. Russia. the Soviet Union had become the largest oil producer in the world and. He believes that.39 were rising and there was growing unease about the West’s ability to continue to rely on the Middle East. A decade later. Indeed. it was sending more than 4.’41 By the middle of the 1980s. the importance of energy as a tool of foreign and security policy now overrides the usual economic considerations. the West so covets Russia’s vast pool of oil and gas that it is. The Baltic specialist.’ ‘…Kremlin planners realized at some point in the 1990s that they possessed an economic weapon of significant potential. for example. the German gas giant. has identified the GMB Publishing 19 . although fluctuating prices masked the true extent of its wealth.09 million barrels per day for export. as Putin and his team prepared to take over the reins of power from President Boris Yeltsin. particularly in the ‘near abroad. it could find cheaper outlets were it to use the underutilized oil transit routes through the three Baltic countries.Baltic Independence and Russia visiting St Petersburg. sceptical about Warsaw’s good will or merely wishing to punish Poland. At the same time. particularly in the Eastern Baltic Sea Region (ESBR). Richard Krickus. Trusted figures from the security apparatus have managed to occupy key positions in both the government and the energy sector. particularly at a time when oil prices The former US Ambassador to Latvia. there is little doubt that energy has acquired a new geo-political significance for the Kremlin and that Putin is determined to use Russia’s energy resources to secure his foreign policy objectives. the Kremlin is prepared to make economic sacrifices to promote its foreign policy agenda. ‘The weapon was a massive supply of natural gas and petroleum along with strategic pipelines from East to West. they realized the significance of Russia’s energy resources. for example.’42 Russia’s energy-security complex The energy-security complex is now at the centre of power and policymaking in Russia. Russia is building an undersea gas pipeline at a cost three to four times as much as running a parallel pipe along the Yamal route through Poland. Energy as a foreign policy tool In the Baltic States and Poland.40 The president and his closest advisers believe that the use of Russia’s energy resources is an essential element in their plan to re-establish Russia’s power and influence. by 1998. Wintershall. ‘Through its energy industry. prepared to ignore Putin’s willingness to use energy to secure deeper foreign policy goals with the new NATO and EU Member States in the ‘near abroad’. pumping stations and other installations associated with Russia’s energy wealth. according to one commentator.

they were told to ‘shut up’ by the French President Jacques Chirac. it has achieved several important objectives. who have continued to enrage the siloviki ever since they achieved independence with a series of irritating political challenges. a measure of the frustration of the siloviki at NATO expansion in the region but also a warning that Russia is determined to maintain its interest there. NATO’s recent decision to host its next summit for heads of government in Riga in November 2006 was. ‘Putin appears to share the widespread view in Russia that energy is too important a national asset to allow the market or any private individual free rein in deciding on issues such as links to foreign partners. and perhaps most worryingly. However. It has encouraged the European nation states to re-examine the need for a common energy policy and it has helped to fuel demand for alternative technologies and sources of supply. what exactly is the Kremlin’s objective? The row over Russia’s decision temporarily to curtail gas supplies to Ukraine and concern in Poland and the Baltic countries over the North European Gas Pipeline have drawn the attention of some of the world’s richest energy consumers in Western Europe to the question of the reliability of Russia as a long-term energy supplier. the Kremlin’s motive may have been its unease about what it per- ceives as Poland’s increasing attempts to influence events in the region and to return to the pre-war idea of a cordon sanitaire around Russia.’43 The Kremlin’s motives If energy is. such as encouraging the EU to deny Russian citizens visafree access through Lithuania to Kaliningrad and providing a platform for Chechen exiles to criticise Russian policy in the Caucasus. In purely commercial terms.Baltic Independence and Russia extent to which Putin has been prepared to interfere in the energy sector in order to establish control as a real cause of concern. which were boycotted by two out the three Baltic leaders. More significant. In part. was Baltic support for Polish initiatives to resolve the political crisis in Ukraine. however. perhaps. as an instrument of foreign policy. Baltic support for the American-led coalition in Iraq was crucial in undermining European opposition to US policy and caused irritation not only in Moscow – when the Balts signed a letter supporting the US invasion. it has sent a clear signal about what it continues to regard as its legitimate sphere of interest. This is. paving the way for the ‘orange revolution’ and the loss of political control. Worse still. the final humiliation for the siloviki. The fact that President Bush visited Latvia on his way to Moscow for the celebrations commemorating the 60th anniversary of the end of the Second World War. indeed. pipeline construction or competition for the right to explore new oil and gas fields. is the role Moscow believes them to have played in frustrating the Kremlin’s attempts to establish a relationship with major EU countries in a bid to counterbalance US power. an indication that Russia’s former Baltic provinces were now not only members of a different military bloc but also capable of exerting 20 GMB Publishing . in Moscow’s eyes. Moscow may also have been influenced by a desire to slap down the Balts. perhaps. First. was an indication to Moscow of Washington’s desire to use the Balts to counterbalance Russian pressure on the EU. being used as a tool of foreign policy in the Eastern Baltic Sea. the Kremlin does not appear to have played its hand very cleverly.

Russia has shown that its threat to energy supplies is not empty. is GMB Publishing 21 .’45 The Kremlin’s use of energy as a tool of foreign policy is about buying influence. another fact that increasingly links energy to Russia’s security interests. What the precise implications of this fact are is still unclear. Putin’s sabre-rattling was. The Kremlin’s determination to gain control over Russia’s hydrocarbons has not simply been about access to revenue flows but also to gain power that they are not afraid to use. but to ‘preserve the strategic balance of forces’. on the other hand. designed to impress his colleagues in the G8. He added that Russia needed to rebuild its military not just to deal with new and unpredictable threats. rather than winning friends. Putin has illustrated why its position is at least as powerful as any other around the table’. the Kremlin will not hesitate to pursue a policy that it considers to be in Russia’s best interest. although Putin has tried to appear closely aligned with Europe. ‘…Just as Russia focuses the G8 on energy security. The growth in Russia’s energy sector and the steady rise in prices underpinning it have also fuelled the reconstruction of Russia’s defence industry and allowed President Putin to begin to rebuild the Russian armed forces. too. such as terrorism. As the G8 focus on energy security. effectively. It is important to remember. Russia has shown that it is willing to use energy to advance its foreign policy agenda and not simply as a means of securing increased revenue. Because we can see what is happening in the world’. Russia’s economic performance during the past decade has meant that it is now able to make its presence felt once again on the world stage. Equally. it is now the only European country with both the resource base and the political will to pursue a genuinely independent foreign policy.’46 A reinvigorated Russian military. an announcement that Russia could no longer be ignored or taken for granted. But this seems to be somewhat unimaginative rhetoric. In his seventh state of the nation address recently.’44 Thirdly. it is clear that. ‘We should be able to respond to attempts to put foreign pressure on Russia… and it should be said frankly: the stronger our armed forces are. Secondly. despite the reservations of its partners in the West. President Putin said that ‘…we must make our own house strong and firm. It is difficult to imagine a scenario when Europe will unilaterally stop buying gas from Russia. It was. perhaps. the less temptation there will be to put pressure on us. Russia.Baltic Independence and Russia influence within it against Moscow’s interests. Russia has shown where the balance of power lies. it would hardly be surprising if the Kremlin decided that Russia’s state monopoly energy companies were an appropriate instrument with which to issue an admonitory slap to the Baltic States. one investment analyst has observed. financed by the silovik-led energy sector and controlled by a Kremlin leadership determined to maintain Russia’s strategic interest in the Baltics. ‘By throwing the switch for a couple of days when most of the world was focused elsewhere. However. ‘The argument has been made that there is a symbiotic relationship between energy producer and energy supplier – Russia needs the consumer just as much as Europe needs the producer. In such circumstances. has shown it can turn off gas supplies simply because of an unpaid gas bill.

the Polish President. Tallinn or Vilnius. which must be taken into account in any consideration of the Kremlin’s motive for using energy as a tool of its policy in the Baltics. the proposed energy security alliance would be ‘open to all Member States of the European Union or NATO’ and would thus automatically exclude Russia. whilst it is easy to understand the legitimate concerns of Poland and the Baltic States. the proposed energy security alliance could end up being highly damaging to Europe’s wider security interests. said Katinka Barysch.48 Furthermore. that the Baltic States are likely to continue to be confronted with the Kremlin’s conviction that it has a legitimate strategic interest in the Eastern Baltic Sea Region and. it must be emphasized that it is hardly possible now to exclude Moscow from the discussion about Europe’s security of supply. supported by the Baltic States. a greater focus at European level on the diversification of energy sources and the imposition of a ‘ceiling’ to limit dependency on particular sources of energy. had four main elements: a mutual energy-security guarantee clause. which would make it eligible to join an energy security alliance. to allow cooperation if supplies to Member States were restricted. however. The plan.47 It is difficult to avoid the conclusion that. All this means first. was surely right to emphasize that Europe should refuse ‘any kind of nationalism’ in the energy sector. presented a draft energy security pact for EU and NATO Member States. Poland has recently been lobbying extensively for Ukraine to be granted an ‘action plan’ for future membership of NATO. has been seeking recently to do just that. such as Ukraine. As Moscow’s Baltic outpost is linked to the Russian grid through the Lithuanian network. energy specialists in both Russia and Western Europe have pointed out the impracticability of excluding Russia from any dialogue about European energy security. ‘All you have to look at is how much energy Russia supplies to Europe’. that Europe needs to develop a clear Eastern policy (see below). Poland’s conservative Prime Minster. is its anxiety over the future viability of Kaliningrad. European energy security In any assessment of Russia’s interests in supplying energy to European markets. modelled on NATO’s article 5. however. which was drawn up by the office of Kazimierz Marcinkiewicz. transmission and storage of energy. which takes full account of the importance of energy security. it is only fair to acknowledge that Russia is bound to continue to have an interest in the region’s energy system. one major factor. under which signatories would agree to support each other ‘in the event of a threat to their energy security from natural or political causes’. to join at a later stage. However. Lech Kaczynski. or even sensible. Finally. In March 2006. Jose Manuel Barroso. secondly. whether it has so far employed legitimate.Baltic Independence and Russia unlikely to be a prospect greeted with universal enthusiasm in Riga. Poland. The President of the European Commission. although it might be possible for countries. means to advance that interest is another question. the development of new technical infrastructure for the transport. an energy 22 GMB Publishing .

long-term energy partner.49 Russian energy specialists have also been quick to emphasize Russia’s credentials as a reliable. She insists that there is now an opportunity for ‘enlargement of the largescale cooperation. reliable and important exporter of energy… to the European Union. The Director of the Russian Institute of Energy and Geopolitics. Europe. Ms E A Telegina. Moscow has done little to reassure consumers in Poland. in the development of advanced countries (North America. which can be characterized as a mutually beneficial strategic partnership built upon the principles of equality and parity of interests’. ‘This shows you cannot exclude Russia… The Polish view seems to be a contingency view. If the EU cannot reach a deal with Russia. especially in the European Union (EU). But it is clear several Member States will not want to exclude Russia.’ Indeed. a board director of the Union of Russian Oil Exporters.Baltic Independence and Russia expert at the Centre for European Reform. in particular. so far. the Baltic States and the rest of Europe about its intentions.’50 Ms Telegina argues that Moscow’s interest in securing European inward investment in infrastructure projects. said recently: ‘Russia has been a traditional. combined with the strategic objective of maintaining competitiveness in increasingly liberalized European energy markets. An important trend in world development and. GMB Publishing 23 . The EU has a serious interest in preserving and increasing the role of Russia as an oil and gas supplier. means that the EU and Russia have a strong mutual interest. Japan) is an increase in natural gas consumption. German officials have made clear their view that Russia should not be marginalized over an issue as crucial as energy security. Germany has already made that clear to Poland. The basic consequences would be the development of competition among producers. then the Poles seem to be saying Europe needs alternative plans. a possibility to choose a supplier and reduction of prices for end users. which requires material investments in world energy… ‘An important factor of world energy development is the gas and electric power sectors’ liberalization process. which is going on today.51 She may be right but the problem is that. One of the key strategic tasks of the Russian Fuel and Energy Complex is to preserve and to maintain the competitiveness of Russian fuel and energy resources in world energy markets.

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which makes them difficult to accept as partners in the liberalized. such as Gazprom or Transneft. which fear the consequences of Russian dependency In many ways. In considering their options. is that Russian companies are only too willing to invest but are often either secretive or state-owned. the lack of transparency and the business practices of some Russian companies operating in the region have contributed to the suspicion that they are not normal private sector entities seeking to operate in a free market. it is hardly surprising that there should be anxiety about allowing Russian companies to enjoy a virtual monopoly of the supply and distribution of energy in various sectors. Although antiquated. such as harmful emissions and nuclear risk. In this respect. Given the region’s painful history in the last century. a failure so far to develop significant renewable energy solutions. key Russian companies. therefore. but that energy from Russian sources accounts for such an overwhelming. the Baltic States are no different from those countries in Europe. The problem the Baltic States face is not the fact that Russia supplies them with energy.Baltic Independence and Russia 6. and increasing. GMB Publishing 25 . the Baltic States need to bear in mind that it is not Russian energy per se that is the problem but the fact that an over-dependence on it has potentially uncomfortable political implications. as they seek to reduce their dependency on Russian sources of energy. The Baltics: options for the future The Baltic States’ concern about energy security is not unique. their activities in the recent past have seemed to reflect the Kremlin’s broader foreign and security policy agenda. This situation is aggravated by the nature of Russian corporate activity in the Baltic for two main reasons. Secondly. therefore. and volatility in the market system and prices. It is shared by several European countries. North America or parts of Asia. and perhaps more significantly. as they look to entice the private sector into investing in the region’s energy infrastructure. a reliance on hydrocarbons from areas of political instability. including: the continuing rapid growth of demand. proportion of the Baltic market. First. which are anxious about many different features of the current world energy market. the system that links them into the Russian grid and pipeline system is an enormous advantage that could help to drive future economic development in both the Baltic States and Russia. environmental issues. The dilemma for Baltic governments. in the past. at hitherto heavily discounted prices. are either wholly or partly owned by the Russian state and. the Baltic States have been fortunate in being able to draw on the vast energy resources of the Russian hinterland. competitive environment that the Baltic States want to create in the energy sector.

particularly at the European level. strengthen indigenous sources. They all recognize that the best guarantee of security is diversity of supply. a fact that means that the Baltic States can draw on international experience and support in developing policy. particularly unwise when the source of supply is liable to disruption. Arnis Staltmanis of the Baltic Power System Control Centre. In a world of increasingly complex and interlinked energy markets. as easy as might be expected to define these terms. In broader political or economic terms. including: The energy security challenge So.53 In terms purely of security of power supply. has identified four key measures that the Baltic States must adopt quickly to ensure security of supply: diversify import supplies. control demand more effectively. Andrijs Piebalgs. a balance between generation and demand. as for many modern industrialized societies. However. with much greater economic and even political exposure than the Baltic States. therefore.52 In analysing what needs to be done. terrorist activity or political sabre-rattling. One senior energy executive in the region. is to diversify supply and.Baltic Independence and Russia their continuing dependence on energy from the Middle East. increase renewable energy components. 26 GMB Publishing . economic adviser to the President of Latvia and a former European Commission energy policy specialist. Janis Folkmanis. however. the Baltic States also have to consider carefully what exactly is meant by energy security or security of supply. the ability of power systems to withstand normal and abnormal circumstances. Equally. such as the Baltic countries. diversity of supply is best achieved by a package of measures. energy security is an international issue. However. has suggested that security of power supply means: a secure fuel supply for power plants. perhaps. curb demand. whether through technical difficulty. Many countries. Internationally. might mean by ‘security of supply’ or ‘energy security’. that may be an adequate definition. share the dilemma of the Baltic States. It is. whatever else it is. it is not. it is not enough to define what sovereign nation states. Concerns about energy security are no more unique to the Baltic States than the various other pressures and constraints affecting energy policy. which are shared by many European countries. The energy policies of all European countries have to be set within the context of developments in the global energy market. perhaps. but there is a general consensus that overdependence on any single source of energy supply is very unwise. the United States being the most obvious example. where the energy portfolio at the European Commission is now held by a Latvian. however. it is not the fact that Russian companies are keen to invest in the energy infrastructure of the Baltic States that is a problem but rather that they often seem to do so without operating to the same standards as Western European companies. at the same time. the fundamental energy security challenge for the Baltic countries. this is a major concern for many countries.

The relatively small investment needed to extend the existing storage facilities would mean that all three Baltic States’ gas needs could be supplied for the duration of a whole winter. for example. in the near future. regional collaboration – for example.Baltic Independence and Russia different means of energy generation (hydrocarbons. Equally. regional basis. which will find that the key to diversifying their supply lies partly in working closely with their regional and international partners. Energy security and lower supply costs can be achieved through regional collaboration. the Baltic States will have to make major investments in infrastructure in order to improve their energy security. ‘However. One obvious case in point is Latvia’s massive geological gas storage capacity. renewables). Lithuania can become a regional energy hub. Regional collaboration Inevitably. alternative sources of fuel supply. which was held jointly by the Lithuanian Academy of Sciences and the Defence Academy of the United Kingdom. Similarly. it would clearly be most cost-effective if it were done on a collaborative. A new nuclear plant of 750–1000MW at Ignalina. a flexible energy transmission infrastructure. however. will find it much easier to develop appropriate solutions to reduce their dependency on particular external sources. a thorough energy conservation programme. than individual countries trying to ‘go it alone’. and linking Russia with Western Europe. a 275– 400MW coal-fired plant in Latvia could compete with gas as an element in a regional policy. The old Soviet infrastructure was deliberately designed without a national basis and has left most of the former ‘captive nations’ with unbalanced national energy infrastructures. nuclear. on storage capacity. The exercise. The latter point is of particular importance to the Baltic States. and pursues solutions GMB Publishing 27 . All three Baltic countries. rather than a purely national. working together. which could be made available to the other Baltic States. this can only happen if Lithuania first develops a regional solution to energy problems. reserves and sharing of facilities. thus providing an important buffer against disruption of supply.54 The importance of regional collaboration to achieve energy security was emphasized at a recent Policy Development Exercise in Lithuania. it will be impossible to achieve energy security at an affordable cost. considered various options for Lithuania to improve its energy security and concluded that any attempt to reach a purely national solution to the problem was doomed to fail. would make economic sense as part of a regional energy strategy. If that collaboration is developed proactively. and any energy policy will be expensive. If the Baltic countries are to make the investments necessary in infrastructure. basis. other large-scale energy generation projects could be both economically viable and reduce dependency on external sources of supply if they were applied on a regional. This offers a tremendous opportunity for the future and would be the ultimate guarantee of energy security for a very model investment over the next decade. ‘If Lithuania continues to pursue its energy policy on a purely national basis. linking firstly to Sweden and Poland (by 2012). Many European companies should have a strong interest in seeing this develop.

Improvements in the security of power stations.56 In the Baltic context. in any case. largely influenced by concerns over environmental issues and financial costs. Lithuania has agreed to phase out nuclear power generation at Ignalina’s RBMK reactor by 2009 and. now seems to be reversing. especially in construction and design. In time. Nuclear power is not the solution to the Baltic States’ problems with energy supply but. will receive European compensation funds. and (b) a smaller capacity nuclear reactor is built. ‘the nuclear option becomes more viable if (a) Lithuania can develop an energy policy based on regional agreements and shared supply. which would. if European public confidence in nuclear safety continues to grow. as a consequence. In the context of the global energy market. solution would be most appropriate. Some form of new nuclear plant to replace the existing RBMK reactor at Ignalina now looks increasingly likely and would enjoy a much higher level of public support in the Baltic States than might have been the case a decade ago.’55 The nuclear option The question of the future of nuclear power in the Baltic States. political leaders in the region will be aware of the increasingly widespread view that nuclear power generation is less damaging to the environment than burning hydrocarbons. in which oil and gas prices are rising steadily and Russia’s inability to ‘surge’ effectively to meet demand means that it will inevitably be forced to increase gas prices to the Baltics – whether it wants to or not – nuclear power begins to look a particularly attractive option. and the security of fuel supplies. In assessing whether to proceed with a new nuclear plant at Ignalina. Patching up Ignalina and struggling on with it in its present form is not. in part because of a widespread recognition of its importance in achieving a mixed energy portfolio and thus contributing to security of supply. whether ultimately for or against. coming mostly from stable democracies. Equally. In such circumstances. the clear advantage of retaining some form of nuclear capacity is that it would maintain diversity of supply and thus improve regional energy security. rather than a purely national. it might also contribute to a better energy relationship with Russia. is clearly one area where a regional. Whilst there is no fundamental contradiction between environmental concern and energy security. the EU would be unlikely to react kindly to proposals to replace the existing reactor with one of a similar size and capacity. tackling the issues by the necessary deadlines. a viable option. making them less vulnerable to terrorist attacks and accidents. a reassessment of the likely reduced impact of a major incident. be left with a significant overcapacity. instead of the current large options on offer’. EU policy has been to press for the closure of all the RBMK reactors in central Europe. The nuclear option is being increasingly canvassed inside the Baltic States as a partial answer to the region’s problems over security of supply. the international trend of the last decade away from nuclear power. all increase the attractiveness of the nuclear option.Baltic Independence and Russia proactively. it may be part of one. However. and not waiting until a crisis occurs. as participants at the recent policy development exercise in Riga recognized. therefore. the cost of such a large-scale project would be prohibitive for Lithuania alone. 28 GMB Publishing .

it will also promote wider consumption of renewable energy resources to improve the foreign payment balance of the country. peat) will be ensured by imposing the public service obligation on the system operators. will enable Latvia to join the ‘green certificate’ market supported by the European Union. However. immediate gains in the ‘renewables’ sector.Baltic Independence and Russia Renewable energy All three Baltic States clearly believe that renewable sources of supply can play a major part in helping to improve their overall energy security. if the annual average Despite the lack of significant.’57 promising. the generation of electricity and heat and energy at power plants operating on renewable energy resources would be promoted in a predictable and planned manner and. as well as the fact that they in their development are in the transition to operation in a competitive conventional or traditional energy market. for example. minimize dependence of the country on energy import and promote creation of new jobs. for example. the total energy resources balance of all Latvian electricity consumers will include a renewable (‘green’) energy component. They have been actively reviewing the public sector framework within which the ‘renewables’ sector might be encouraged and promoted.’59 However. ‘Taking into consideration the prospects for renewable energy sources and technologies of their consumption. biomass – wood waste. The Baltic governments are determined to pursue development of ‘renewables’ for both environmental and security reasons. noted in 2001 that ‘Co-generation plants will obtain support on the competitive market. as well as the imported electricity in the energy balance of Latvia. has made clear its view that significant investment in renewable technologies will have to be made in order to secure future benefits. wind. ‘Taking into account the prevailing share of hydro resources. The Latvians. the Latvian cabinet. independent future. in their enthusiasm for an environmentally-friendly. economic and technical balancing and promotion of consumption of renewable resources and minimization of energy import in the country… ‘Purchase of energy from generators using renewable resources (water. which encourages to expect that the efficiency of some types and equipment of energy generation will improve and reach the level attained by conventional types. which would be aimed at social. the Latvians and their fellow Balts may have overestimated the short-term potential of the ‘renewables’ sector as an answer to their prayers. upon reaching a certain level of development. the longer term looks much more GMB Publishing 29 .’58 Co-generation schemes Co-generation schemes also offer significant potential energy savings and the Baltic governments have made clear their intention to support them. the need for radical and expensive activities in support of (the) use of renewable resources in energy generation cannot be substantiated only from the perspective of (a) reduction of gas emissions having hothouse effect and elimination of global climatic changes. technologies for the use of renewable energy resources have been developing particularly swiftly. A report to the Latvian cabinet in 2001 claimed that: ‘In the recent decade. As a result.

have pointed out the enormous potential for energy efficiency savings and administrative improvements. It is from this standpoint that the Energy Council of June 8th 2006 approved the proposal set out in the paper prepared with a view to the next June European summit on energy security and external policy of the Union. should the market signals be favourable for the promotion of co-generation projects. which encourages us to seek a balanced partnership. whilst the Baltic States can do much in cooperation with one another to reduce their collective dependency on external sources of supply. the electricity prices will be deregulated. such as the participants in the Riga policy development exercise. improving the administrative competence of civil servants and limiting the political lobbying of policy-makers and decisionmakers. As Andre Merlin.’61 Encouraging EU–Russian cooperation Finally and perhaps most importantly. for example. The European Commission has recognized both the importance of a proper assessment of the EU’s energy security interests and the central role of Russia as a source of supply to meet Europe’s long-term energy needs.’60 efficiency of consumption (currently these are far below European norms).Baltic Independence and Russia efficiency of primary energy utilization reaches 80 per cent and heat energy is supplied mainly to the district’s heat supply system of the respective licence validity area… With due consideration given to the development of the electricity market in Latvia and the common Baltic commercial territory. that ‘Lithuania can improve its energy security by: ensuring that there is a clear. They suggested. improving the culture of risk management in the public and private sector. making a much greater effort to introduce energy saving measures to reduce waste and to increase the 30 GMB Publishing . President of the European Energy and Transport Forum and Chairman of the Executive Board of RTE has observed: ‘The European Union’s energy dependence is a strategic issue. setting up a sound energy taxation system with reasonable price regulation. a proposal which considers making the Energy Charter operational… ‘…That’s why I’m convinced. comprehensible and enforceable legal framework. developing the role of NGOs to cope with the social impact of energy-related problems and to help improve mechanisms and education to counter corruption. in the light of these great challenges that this is no longer a time when each nation drew up its own energy guidelines without taking into account its neighbouring countries. That era is behind us! The latest energy crises remind us that energy must be resolutely placed within a European perspective for the sake of Energy efficiency and administrative improvements Outside advisers. notably with Russia. it is clear that Baltic energy security can only ultimately be guaranteed within the context of future European energy strategy and a long-term agreement between Russia and the EU.

We must set up a genuine European energy policy… This European energy policy only has meaning if there is true commitment in favour of a European energy market. in any case.64 GMB Publishing 31 . in my opinion. perhaps. Participants at the Policy Development Exercise in Vilnius in 2005 came to just such a conclusion and advised the Lithuanian government that: ‘Lithuania can improve her energy relationship with Russia by: ensuring that her energy security considerations are raised effectively in appropriate EU fora and bilaterally with large European countries undertaking energy deals with Russia. In this way. the Baltic countries may find that they are pushing at an open door. be in the overall strategic interest of the EU. do so in accordance with internationally recognized standards of good governance and transparency. wherever possible. the most important contribution that Baltic leaders can make towards ensuring their countries’ future energy security is to internationalize the issue. operating in the region. by encouraging other countries to help Russia realize that it is in her own long-term interests to improve transparency and governance of Russian energy companies and by ensuring complete transparency and adherence to international norms for any naturally important energy agreements and deals. including assistance of the EU countries’. the cornerstone of European energy policy. The integration of the electricity and gas markets.’63 In concentrating on such an approach. it should be possible for the Baltic States both to reassure themselves about the longterm security of their energy supplies and to develop an improved energy relationship with Russia. Thus.Baltic Independence and Russia our security of supply. which would. Russia will gradually have to harmonize national regulation of energy in accordance with the global practice. of their operation and regulation is. One leading Russian energy specialist commented recently that ‘…the objective analysis indicates that for the creation of an effective market. it will need certain time and comprehensive preparation performed by means of in-depth analysis. and to press the EU to ensure that Russian companies.’62 That is why.

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in a region haunted by the ghosts of history. however. GMB Publishing 33 . indeed. the issue of Baltic energy security should be seen within a broader European context and form part of the agenda for a wider discussion between the EU and Russia about a long-term energy partnership. there are a number of measures.Baltic Independence and Russia 7. perhaps. However. sought to use its control of energy resources as a means to further certain of its foreign policy objectives in the Eastern Baltic Sea region. this has. the Baltic peoples are in a better position than at any time in their history both to entrench their independence and to secure their position as a bridge between Western Europe and Russia. particularly since the row over supplies with Ukraine and the announcement by the German and Russian governments of a North European Gas Pipeline. with long memories and a painful experience of recent history. In the meantime. as part of a plan to integrate the Baltic States fully into the European energy system and reduce the risk that the Baltic countries might be seen as somehow divorced from the rest of Europe. With the support of the EU and a new understanding of the importance to the whole of Europe of securing sources of energy supply and reducing dependency. In countries. It is certainly true that both the EU and Russia have a significant interest in the development of a stable and reliable partnership in the energy sector. Conclusion There is substantial evidence that Russia has. Equally. understandably. the Balts themselves would be well advised to avoid seeing every commercial development in the energy sector in their region as part of an apocalyptic political conspiracy against them. such as Poland and the Baltic States. which could help to reduce the Baltic countries’ dependence on external sources of supply. including possibly the development of a new regional nuclear capacity at Ignalina. Finally. been a cause of real concern. as they continue to press for a broader European agreement with Russia on energy security. whilst understandably remaining wary of the intentions of their neighbours. These should be pursued actively with the full support of the EU. outsiders should tread with particular care and seek to reassure their partners about their intentions.

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8. The Lithuanians were the last pagans in Europe. It was not until 1386 that Lithuania’s ruler Jogaila (Jagiello) ordered the mass baptism of his subjects when he married a Polish queen. national statistics estimate that 16% of the population live in poverty. EU-8 Quarterly Economic Report. 12. after the fall of the Kaiser and the signing of the armistice. 16. Cologne 1990. cit. perhaps because the local aristocracy tended to be more ‘polonized’ than elsewhere in the Baltic. for example. Longman. by John Hiden and Patrick Salmon. 4. May 2006. 11.cit. GMB Publishing 35 . 2001. The Russian educational system was imposed on schools. Independent. 2004. Quoted in The Baltic Nations and Europe: Estonia. op. English translation by Estonian Legal Language Centre 2005. op. 15 May 1989. particularly in rural areas. Report on ‘Energy Policy in the Electricity Sector’. Poverty. An article on Baltic Energy in The Economist of 5 January 2006 even quotes one Polish official describing the planned pipeline as ‘a pact between the KGB and the Stasi’. Ibid. Ibid. In B Meissner (ed). Lithuania’s fate was closely linked to that of Poland. as much as its geographical location. Lithuania was absorbed into the Russian empire. J-T Dahlburg. is also a major threat to social cohesion. The German military leadership hoped that. is a fascinating but little known chapter in the history of the period. After landing his ‘Iron Division’ at Liepaja in February 1919. World Bank.6%. ‘Cold Peace’. Riga. approved by the Latvian Cabinet of Ministers on 11 November. the study of the Lithuanian language was 7. April 1999. Confusion about allied policy towards Russia gave the Germans an opportunity to re-establish control of the region. op. Thereafter. 20. which reflects that country’s separate historical development. Lettland. Ultimately. J Hiden and P Salmon. under the terms of the Treaty of Nystad of 1721. repressed and the use of the Roman alphabet was outlawed in favour of Cyrillic. ‘Energy Policy in the Electricity Sector’. 2. Die historischen Voraussetzungen fuer die Enstehung der drei baltischen Staaten. 17. 9. 3. by appearing to act as a bulwark against Bolshevism in the region. who worked with President Putin in St Petersburg in the 1990s. G von Pistohlkors. 11. attempting to install the more malleable Andrievs Niedra as a German puppet.Baltic Independence and Russia Notes and references 1. when Poland was partitioned for the third time by her neighbours in 1795. effectively turning the region into another East Prussia and establishing a new ‘land bridge’ to a restored and realigned ‘White’ Russia. the government began confiscating estates from the suspect Lithuanian nobility and encouraging the Orthodox Church to convert the Catholic peasantry. ‘Baltic Nationalists Press Demands for Freedom’. a former East German intelligence officer. Although Grand Duke Mindaugas converted to Christianity in the thirteenth century. Matthias Warnig. General Count Ruediger von der Goltz launched a putsch against the new Latvian nationalist government of Karlis Ulmanis. cit. ‘Long-term Public Fuel and Energy Sector Development Plan until 2015’. 19. Most of the rest of the eastern Baltic had been formally annexed by Russia almost three quarters of a century earlier. they could not only gain better peace terms but also create a German outpost in the Baltic. In Latvia. Die baltischen Nationen: Estland. Unemployment is a serious problem in all three Baltic countries. Latvia and Lithuania in the Twentieth Century. the two nations together defeating the Teutonic knights at Tannenberg in 1410 and formally uniting in 1569. Lithuania’s history is different. op. CSIS. Janusz Bugajski. 21. 5. Russification was much more extreme in Lithuania than in the other Baltic provinces. p. 13. ‘Energy Policy in the Electricity Sector’. ‘Long-term Fuel and Energy Sector Development Plan’. Ibid. cit. 18. Washington. 15. 6. Vilnius. J Hiden and P Salmon. 14. Ibid. cit. a feature both of her close connection to Poland and her Catholic faith. Baltic Energy Strategy of Baltic Council of Ministers’ Energy Committee. 1991. After the abortive Polish uprisings against Tsarism in 1830 and 1863. Litauen. The story of German involvement in the region. it is 10% and in Estonia 9. possibly a reference to the curriculum vitae of the German boss of the pipeline. op. 10. Again. his people did not. Tallinn. German influence has always been much less strong in Lithuania. In Latvia.

16 April 2006. ‘Putin stresses need to ‘make our own house strong’. Renaissance Capital. Export Information Administration. April 2005. 44. ‘The average worker in the region earns between $400 and $600 a month. ‘Mazeikiu Nafta: Controversy and Corruption’. op. several occasions to halt the flow of oil to Lithuania’. 29. The article is quoted in Iron Troikas: The New Threat From The East. it should be noted that the West has been happy to do business with many countries that have a similar ‘overlap’ between government and key ‘strategic’ parts of the private sector. Report on Baltic Sea Region. suggesting that it was unwise to snub Russia and that the Williams deal compromised Lithuania’s sovereignty. 36 GMB Publishing .cit. emphasize that Russia would not repeat the mistakes of the Cold War when the Soviet Union spent so much on weapons that it undermined its economy. where several human rights groups have complained about his treatment. Keith Smith. Riga. Aleksandr Ryazanov. 33. Ibid. 40. Keith Smith. by Richard Krickus. Arnis Staltmanis. 11 May 2006. He reportedly sleeps in a single dormitory with 100 other prisoners in the penal camp at Krasnokamensk in Siberia and has been the subject of punishments for minor infringements (said to include drinking tea in the wrong part of the prison) to ensure that he does not receive parole. published in Czech Business Weekly. 49. 37. US Department of Energy. 15 June 2004. Khodorkovsky’s treatment has caused widespread concern outside Russia. 28. in support of this opinion. Keith Smith. 47.) With such low wages and the region’s notoriously cold winters. op. who also alleges that ‘Lukoil persuaded Transneft and the Russian Ministry of Fuel and Energy on 36.’ a Radio Free Europe/Radio Liberty story. Energy Information Administration.cit. 15 June 2004. Alexander’s Oil and Gas Connections. cit. 38. Butinge exported some 230. The author again also cites the former US Ambassador to Lithuania. op. Financial Times. Kevin Kerr. 10–13. Prime-Tass. The Baltic States may truly discover the price of independence’. ‘Security and Independence of the Baltic Interconnected Power Systems’. Putin did. ITAR-TASS. ‘Red Storm Rising’. ‘EU Urges An Energy Pact With Russia. In addition. cit. In 2003.cit. thus ensuring a stable supply of crude oil during bad weather. 46. The Daily Reckoning. admitted that. even by Russian standards. they were likely to cause real hardship. unfavourable reports about Williams began to appear in the Lithuanian media.’ article by Judy Dempsey. quoted by Richard Krickus in Iron Troikas. Sunday Times.Baltic Independence and Russia 22. quoted in Alexander’s Gas and Oil Connections. the next several months are going to be tough for the people. Butinge planned a major increase in storage capacity. Iron Troikas. News and Trends: CIS/Russia. December 2005. 35. 48. In fairness. who was US Ambassador to Lithuania at the time. 23. 32. 27. 20–26 February 2006. by a fellow prisoner who slashed his face repeatedly with a razor. Declaration of the three Baltic Prime Ministers.000 bbl/d to export figures the following year. Krickus. He also made some reassuring noises on energy security. ITAR-TASS. He celebrated Gazprom’s position as the world’s third largest company by market value and said that it would ‘fully meet the demand’ of traditional partners. Ibid. 43. saying that Russia could play a positive role in forming a ‘uniform energy strategy’ for Europe. 2005. RIAN News Agency. Ibid. 31. op. A study by the Russian Academy of Sciences. an American commodities trader and market analyst with strong local connections. (My own mother-in-law is a doctor in Estonia and earns around $700 a month. Kevin Kerr. 39. as he slept. March 2005. Krickus. op. 41. 9 March 2006. quoted in Krickus. reported that. op. Iron Troikas. 8. 30 July 2005. Head of Research. which is certainly harsh. ‘Russia pledges energy security for Europe. cit. however. 25 May 2006. the hurricanes that hit the Baltic coast early in 2005 meant that Butinge was unable to handle any oil shipments in January that year. 45. 42. 34.’ AFP. Paper presented at the Latvian Government Conference on Future Energy Options. Krickus. quoted by RIAN News Agency. op cit. 27 February 2007. whilst the planned price increases made some strict commercial sense for Gazprom.000 bbl/d of crude oil and counted on adding a further 30. pp. Energy Information Administration. Khodorkovsky was attacked. 25. Recently. 24. In an article in Vilnius Monthly. 15 June 2004. Manager of the Power System Reliability Department of the Baltic Power System Control Centre. 26. 15 June 2004. as well as developing new markets. Ibid. 30. Krasnokamensk is heavily contaminated with radioactive waste and in winter the temperatures drop to –40C. text issued by the government of Lithuania. However. Issue No. Article by Roland Nash. Ibid. ‘ Energy Key to Russian Foreign Policy. after the appointment of the former KGB officer Yuri Zubakov as Russian Ambassador in Vilnius.

Arnis Staltmanis. 21 April 2005. op. speech by Andre Merlin. Energy security and lower supply costs can be achieved through regional cooperation’. 54. the Lithuanian Institute of Energy. and any energy policy will be expensive. BASREC (Baltic Sea Region Energy Cooperation). speech by E A Telegina at Second International Conference on Energy Security: Role of Russian Gas Companies. 60. op. Kaunas Business College and the Defence Academy of the United Kingdom’s Advanced Research and Assessment Group in July 2005. UK Defence Academy. Ibid. op. Ibid. 56. PDX. 63. 59. however. 58. 57. Janis Folkmanis.cit. 62. GMB Publishing 37 . It was keen to stress the dangers of a purely national approach. Riga. Ibid. neighbours. Telegina. 2005. Ibid. Riga. These were two of the conclusions of an interesting Policy Development Exercise (PDx) and workshop on the security of Lithuanian energy supplies. 52. president of the European Energy and Transport Forum at the European Energy Forum.cit. April 2005. ‘Energy Cooperation Around The Baltic Sea’. organized jointly by the Lithuanian Academy of Sciences. 61. if Lithuania pursued active cooperation with its 55. 53. it could become a ‘European energy hub’. 51. Ibid. UK Defence Academy. ARAG. ARAG. Ibid.cit. Vilnius. The exercise emphasized the importance of regional collaboration and even suggested that. Energy in Europe and in the Baltic Sea Region. PDx. it will be impossible to achieve energy security at an affordable cost. June 2006. a paper presented to the Latvian Government Conference on Energy Options.Baltic Independence and Russia 50. PDX. 22 July 2005. Latvian Government Conference on Energy Options. ‘Security and Independence of Baltic Interconnected Power Systems’. Energy Policy in the Electricity Sector. 64. ARAG. UK Defence Academy. 2005. ‘International Gas Investment: New Dimensions of European Energy Security’. ‘If Lithuania continues to pursue its energy policy on a purely national basis. Op.cit.

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dissertation on Russia’s energy sector at the Paul Nitze School of Advanced International Studies. gas. electricity and nuclear power industries. Series Editor Kevin Rosner Ph. Posts held include Senior Security Advisor to the Baku-TbilisiCeyhan pipeline company. security of critical energy infrastructure. Dr. Petroleum Industry: The Case of Bulgaria’ T Adnan Vatansever his report answers questions such as: as one of the largest foreign acquisitions by a Russian company occurred in Bulgaria.A. explains how Russian foreign energy downstream mergers and acquisitions are transpiring to consolidate the new Russian empire. investors.Baltic Independence and Russia About the series: Russian foreign energy policy reports his series of reports establishes for the first time the confluence of Russian foreign policy with the acquisition of foreign energy assets by Russian entities.D. These unique studies address many questions of substance for energy industry professionals. and international energy-security policy. in International Relations from the Middle East Technical University in GMB Publishing 39 . and Project Manager with the UNESCO Science Division in Paris. He served as the 2006 CoDirector of the NATO Forum on Energy Security. T ‘Russian Involvement in Eastern Europe’s oil. Ten specific country profiles focus on the oil.D. Project Director with the Program on Cooperation with the Russian Federation at the OECD. Rosner is the founder of The Rosner Group serving leading members of the global oil and gas community with energy and security analytical products. Each report. DC. He is currently in the process of completing his Ph.. and decision makers who seek to make sense of the dynamic changes that have overcome the Russian energy complex and altered the balance of global energy geopolitics. what lessons are applicable to charting future Russian downstream takeovers? Why have Eastern Europe and Western FSU countries been the primary focus of Russian acquisitions? What drives LUKoil (and other Russian oil companies) to pursue acquisition of assets in these regions? Finally. is a specialist in Russian oil and gas. Johns Hopkins University. what is the stance of the Russian government in terms of promoting such acquisitions abroad? Adnan Vatansever is a freelance energy consultant and the author of a number of reports for Cambridge Energy Research Associates. written by an author of international standing. He holds a B. He is a Senior Fellow both at the UK Defence Academy and at the Institute for the Analysis of Global Security (IAGS) in Washington. policy experts.

Cohen has conducted conferences and briefings for the US Government departments and agencies. Gas and Beyond’ Dr Ariel Cohen his important study explains how Russia. He appears on major US and foreign TV networks. Eurasian. Dr. particularly through the expansion of Gazprom. It looks at the way Russia and Kazakhstan agreed to divide the Caspian Sea shelf and how Kazakhstan has managed to maintain good relations with Moscow overall. is an international expert in international security/ terrorism.B. Turkey and Iran. European and Middle Eastern foreign. Hardcopy ISBN 1-905050-41-0 E-report ISBN 1-905050-81-X T ‘Georgia: Russian Foreign Energy Policy and Implications for Georgia’s Energy Security’ Liana Jervalidze his report shows that as Georgia has restructured its energy sector... Dr. M.Baltic Independence and Russia Ankara.D. L.L. economic and business policy. over the past few years. despite its insistence on exporting energy resources to China and Europe directly and its hopes to export through Iran. and technical assistance projects in the Central and Eastern Europe and CIS regions. Ariel Cohen. Gazprom failed to take control of Georgia’s pipeline infrastructure and Georgia is insistent on developing its pipeline potential in order to boost its role as a transit route to Europe. international organizations. She has advised private T 40 GMB Publishing .A. particularly through the participation of Russian gas company Itera in privatizations of Georgian gas enterprises. has exerted a significant amount of control over Kazakhstan’s vast natural resources and its economic freedom. Ph. Russian-Georgian business groups with their offshore capital have been working to monopolise the Georgian economy and Russia’s gas industry has been consolidating its hold over the CIS pipeline infrastructure. And how. in Russian and East European Studies from Georgetown University’s School of Foreign Service. Liana Jervalidze has worked with several government and research institutions working on Caspian region energy policy and development. Hardcopy ISBN 1-905050-40-2 E-report ISBN 1-90505080-1 ‘Kazakhstan: Energy Cooperation with Russia – Oil. the new Russian and Georgian political elites exerted their influence. He is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Davis International Studies Institute at the Heritage Foundation. with its private sector and policy makers working in tandem. security. However. Cohen also has extensive experience consulting for the private sector. Russian.

Hardcopy ISBN 1-905050-35-6 E-report ISBN 1-905050-84-4 ‘Russia’s Energy Interests in Azerbaijan’ n 2003-2004.Jervalidze has been working on the development of Georgia’s gas market. an increased number of senior Russian officials and major energy companies. Fariz Ismailzade works with the International Republican Institute in Baku and is a part-time lecturer at the department of political science at the Western University in Baku. such as Itera. the reform of the domestic market.Baltic Independence and Russia sector companies in on the development of east-west energy corridor and Georgia’s potential role in regional integration. Since 2003. Ms. While maintaining diplomatic relations with Moscow. She has spoken on regional energy policy at international conferences in the CIS. This unique study looks at the confluence of Russian private and public sector interest Azerbaijan’s energy sector. National University of Kyiv-Mohyla Academy. Europe and the US. Hardcopy ISBN 1-905050-42-9 E-report ISBN 1-905050-87-9 I Fariz Ismailzade ‘Ukraine: Post-revolution Energy Policy and Relations with Russia’ his report looks at how the new Ukrainian government plans to decrease Russian influence over Ukraine’s energy sector. she was an T Olena Viter GMB Publishing 41 . from a “brotherly” relationship to one of pragmatic interest. President Viktor Yushchenko has declared goals which include the diversification of oil and gas supply sources. Azerbaijan is more hesitant when it comes to close cooperation with Russian energy companies. and the creation of a strategic oil stock. Baku. control of these assets will be used for political purposes. Her analyses have been published in both Georgian and English. He holds an MA in Social and Economic Development from Washington University. In 2002. Ukraine’s search for more partners in the energy sphere has affected the relationship between Ukraine and Russia. Baku fears that if Russia gains more assets in Azerbaijan. and a BA in Political Science from Western University. Gazprom and RAO UES visited Baku in the hopes of participating in energy projects in Azerbaijan. Louis. St. and a member of the non-governmental Expert Council on Energy Security. Olena Viter is a Senior Adviser to the Operational Department of the Secretariat of the President of Ukraine. She is Coordinator of Energy Programs at the School of Policy Analysis.

Hardcopy ISBN 1-905050-31-3 E-report ISBN 1-90505077-1 ‘Turkmenistan-Russian Energy Relations’ Gregory Gleason urkmenistan has large gas reserves. as well as the possibilities this transit opens to Western investors. Hardcopy ISBN 1-905050-33-X E-report ISBN 1-905050-82-8 T ‘Belarus: Oil. Whitehead School of Diplomacy and International Relations. Balmaceda is Associate Professor at the John C. New Jersey. but as its immediate neighbours have little import demand. and the US Agency for International Development. Margarita M. How will energy exports from Russia and Belarus’ transit capabilities impact Western Europe if this interdependent relationship ends. Gleason has extensive field experience in Turkmenistan and the other countries of Eurasia and Central Asia.D. is an internationally recognized expert in energy policy and international relations. and in 2003 she participated in drafting Ukraine’s Energy Strategy. infrastructure and investment issues and analyzes both the state of the current infrastructure.Baltic Independence and Russia intern at the Hudson Institute. Sandia National Laboratories. while Russia needs Belarus’ oil and gas pipelines to export its supplies to Western Europe. Ph. Dr.000 million cm per year in 2007. either through political changes in Belarus or if Russia ends its energy subsidies to Belarus? This report looks at transit. Gregory Gleason. it looks at the current conflict between Belarus and Russian investors for control of the country’s gas transit system and oil refineries. This unique study details the background and looks at the prospects for Turkmenistan’s gas production and export in the context of Russian strategy. Gas. Russia holds the key to its gas transport. the Asian Development Bank. and an Associate of Harvard University’s Davis Center for Russian and Eurasian Studies B 42 GMB Publishing . A professor of political science and public administration at the University of New Mexico. In addition.. Seton Hall University. The new arrangements permit Turkmenistan’s gas production to reach 100. His research has been sponsored by the National Science Foundation and the National Academy of Sciences as well as other public and private foundations. Transit Pipelines and Russian Foreign Energy Policy’ Dr Margarita M Balmaceda elarus relies on Russia for about 85% of its total energy needs. particularly as the Yamal Pipeline nears completion. and at Turkmenistan’s role in the new energy strategies throughout Eurasia and the Middle East. In April 2003 Turkmenistan and Russia concluded a 25 year transport and marketing agreement for Turkmen natural gas. He has served as a consultant to Lawrence Livermore National Laboratory.

whilst also continuing its own push to gain control over an increasing share of Russia’s energy complex overall. Now. distribution and the ultimate export of Russian gas to downstream consumers? And what will these changes mean to world? Hardcopy ISBN 1-905050-30-5 E-report ISBN 1-905050-85-2 G Dr Kevin Rosner ‘Baltic Independence and Russian Foreign Energy Policy’ E Dr Harold Elletson stonia. which are now part of the EU. in Politics from Princeton University (1996). post-Soviet and East European energy and foreign policies. She has published widely on Russian. In 2005 it reached a turning point in its history when the Russian government reasserted its majority stakeholder position. He was previously Director of the NATO Forum on Business and Security.Baltic Independence and Russia and the Harvard Ukrainian Research Institute. A former Member of the UK Parliament. long acknowledged as a state-within-a-state. Increasingly dependent on Russian gas imports and with negligible sources of domestic energy supply. Lithuania and Latvia are uniquely dependent on the Russian Federation for energy supplies. This important report will be essential reading for anyone with an interest in the future energy supplies of both the Baltic States and eastern Europe. as Baltic political leaders. She received a Ph.D. The security of energy supplies are national security issues in the three ex-Soviet republics. Dr Harold Elletson leads The New Security Programme. the implications for the security and independence of the three Baltic States are a matter of concern well beyond the Baltic. production. energy specialists and intelligence analysts consider their options. This timely report provides answers to questions such as: what do these movements mean for the future of the Russian energy sector? What will be the impact of state control over Gazprom on domestic and foreign shareholders? And what do these changes portend for the future of natural gas exploitation. Hardcopy ISBN 1-905050-34-8 E-report ISBN 1-905050-83-6 ‘Gazprom and the Russian State’ azprom is the world’s single largest producer of natural gas. he served as Parliamentary Private Secretary to the Secretary of State for Northern Ireland and as a member of the Select Committee on Environment. which conducts research into the implications of the new security environment. and Post-Doctoral training at Harvard University. An international public affairs consultant and a fluent Russian GMB Publishing 43 . the Baltic countries have been the target of aggressive Russian commercial activity and a sustained attempt to lock them into a long-term reliance on Russia.

S.Baltic Independence and Russia speaker. In 1998-2001 he was Douglas MacArthur Professor of Research at the War College. he has advised many leading companies on aspects of their business in the former Soviet Union. including BP in Azerbaijan and Alstom in Siberia. For both countries. Given the political dimension in both countries. and Ph. Prior to this appointment Dr. Therefore cooperation between Russia and China will be difficult even though Russia wants to sell and China wants to buy. are in Russian History from the University of Chicago. Army War College. Moreover. Hardcopy ISBN 1-905050-36-4 E-report ISBN 1-905050-89-5 Russo-Chinese Energy Relations: Politics in Command Dr. 44 GMB Publishing . Blank has been an Associate Professor of National Security Affairs at the Strategic Studies Institute since 1989. Research. Dr. yet it has not been able to come up either with the resources or means for a coherent policy of supplying China with reliable quantities of energy that would lead China away from Middle Eastern and other producers.A. Dr. the under-fulfilment of the potential for Russia to supply energy to China will continue and remain a source of strain in their relationship. and Education of Air University at Maxwell AFB. Blank’s M. both countries are taking a statist approach to energy issues.D. Stephen Blank T his report makes the point that in both Russia and China it is politics – and not market or commercial considerations – that largely drive energy relationships with each other and the outside world. energy and energy security are regarded as strategic assets and/or objectives that are at risk from outside forces. Blank was Associate Professor for Soviet Studies at the Center for Aerospace Doctrine. Stephen Blank is Professor of Russian National Security Studies at the Strategic Studies Institute of the U. Russia has blocked Chinese efforts to realize its version of energy security.

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