power lines at sunset

Unplugging the Baltic States: Why Russia’s Economic Approach May Be Shifting

July 01, 2020
Emily Ferris

Russia’s approach to the Baltic states is occasionally framed as an imminent territorial takeover. This view has become salient since Russia’s annexation of Crimea in 2014, when other nearby countries became concerned that they may be in Russia’s sights. In fact, Russia is unlikely to be interested in a territorial incursion in the Baltics, not least because this would trigger NATO’s Article 5, its collective defense principle, and because Russia would be unlikely to win in a conflict against NATO allies. Additionally, as some polls indicate, a conflict close to Russia’s own borders might not have the full support of the Russian population. For instance, a 2017 poll from the independent Levada Center polling agency, the latest on the subject, showed declining support for Russia’s involvement in other border conflicts, such as in eastern Ukraine. However, a more recent poll by state pollster All-Russian Public Opinion Research Center (VTsIOM) showed that 71 percent of respondents were in favor of the proposed amendment to the Russian constitution stating that the Russian government is responsible for defending compatriots abroad. But Russia has many other tools—more effective than covert or overt military aggression—at its disposal to influence the Baltic states. Their significant ethnic Russian populations and enduring dependence on Russia for energy enable Moscow to maintain its status as one the most powerful regional stakeholders.  

Are the Russians Coming or Are They Already There?

There is certainly a security dimension to Russia’s approach to the Baltic states. Russia considers them an important site of intelligence gathering to understand NATO capabilities there, and there are frequent spy exchanges on both sides, suggesting ongoing intelligence operations.

The Baltic states have also voiced concerns about the deployment of Russian weapons and troops close to the Baltic states’ borders with Russia, as well as Russia’s nuclear build-up, including renovations of weapons storage facilities in its exclave of Kaliningrad. Russia has built up forces in its Western Military District, which encompasses the Baltic states’ border regions, most recently adding an air defense missile regiment to its capabilities. There is also evidence suggesting that the Western Military District has upgraded some of its tactical capabilities, and has re-established the 1st Guards Tank Army in the district, which includes modernized main battle tanks and represents the first new Russian tank army formed since 1991. In addition, the Russian Navy’s Baltic Sea Fleet is headquartered in Kaliningrad, which borders the Baltics. This fleet conducts training and relatively frequent war-gaming exercises, most recently in June 2020, which coincided with NATO’s own BALTOPS 2020 manoeuvres. Russia also holds large-scale military exercises with Belarus, such as the 2017 Zapad exercises, parts of which took place in Belarus, to the consternation of neighboring Lithuania. Russia in turn has expressed dissatisfaction with NATO’s presence in the Baltics, and its aircraft repeatedly fly close to NATO aircraft and ships to gauge their response times.

In addition to deploying and demonstrating military assets on its own territory adjacent to the Baltic states, Russia also maintains ties to Russian-speaking communities in these states, which the Kremlin undoubtedly also views as assets in its strategy to retain influence in the region. Latvia has the largest contingent of those identifying as ethnic Russians, with around 35 percent, while Estonia has 29 percent and Lithuania has the fewest, at around 6 percent. The issue of grey passport holders—where citizenship was not automatically granted to ethnic Russians in Latvia and Estonia upon the collapse of the Soviet Union—has complicated progress on integrating Russian speaking communities there. Moscow has taken advantage of these complications to position itself as the defender of Russian speakers in the region. Among other things, Russia has criticized Estonia and Latvia for not granting automatic citizenship to their large Russian-speaking minorities, maintaining that all three Baltic states have passed restrictive laws limiting the public use of the Russian language.

It’s the Economy, Stupid

Without doubt, Kremlin strategists also view Russia’s status as an important trading partner for all the Baltic states as another enduring instrument in its toolbox for retaining influence in the region. Although Estonia’s imports to Russia declined by 63 million euros in 2019, in Latvia, Russia remains a major export destination, worth 9.2 percent of its market in 2019. For Lithuania, Russia is also one of its major export partners, taking up 13.4 percent of the market share. Total trade between Russia and the Baltics has fallen between 2013 and 2019. In 2013, Russia’s total trade with Latvia was $11.2 billion, making it Russia’s 19th top trade partner, according to International Monetary Fund data. By 2019, trade fell by more than half to $5.4 billion, dropping Latvia to Russia’s 25th top trade partner. In that time, Lithuania also fell from 25th to 34th among Russia’s trade partners with $4.1 billion in total trade in 2019, while Estonia fell from 30th to 40th with $2.9 billion in trade.

Energy supplies account for much of the Russian-Baltic trade. When it comes to oil, the first half of 2019 saw Estonia and Lithuania import over 75 percent of their oil from Russia, while Latvia imported significantly less, with only up to 25 percent of its oil imports coming from Russia. The Baltics also used to import most of their gas from Russia. For instance, in the first half of 2019, Estonia and Latvia received more than 75 percent of their natural gas imports from Russia’s Gazprom, while Lithuania received 50-75 percent. In addition to selling gas, Gazprom used to own significant stakes in all three of the Baltic states’ main gas companies: 37 percent of Lithuania’s Lietuvos Dujos, 47 percent of Estonia’s Eesti Gaas and 50 percent of Latvia’s Latvijas Gaze as of 2013. This gave Gazprom, and by extension Russia, a significant say in the Baltics’ gas policies.

But in recent years,  Gazprom’s stakes in local gas companies have declined. In 2016, an Estonian company called Trilini Energy bought out Gazprom’s share of Eesti Gaas, Gazprom’s stakes in Latvijas Gaze declined to 34 percent and it sold its shares in Lietuvos Dujos in 2014 following an anti-trust dispute. Additionally, Gazprom is no longer the only Russian player in the regional gas market; Estonia’s Eesti Energia is importing gas from Novatek, a Russian privately-owned gas company, through Lithuania’s Klaipeda port, indicating that engagement with Russia in this sector is still welcomed. 

In addition to reducing Gazprom’s clout in the region, the Baltic states have also been trying to reduce their reliance on Russia for their electricity supplies, a hangover from the USSR when Moscow operated the central grid systems known as the Integrated/Unified Power System (IPS/UPS). The reliance on today’s BRELL (Belarus-Russia-Estonia-Latvia-Lithuania) electrical grid has endured, even though the Baltic states claim that this dependence on Russia’s power supplies poses a national security threat. The Baltic have expressed concerns that Russia could cut off the grid, isolating their power networks, pointing to an episode in May 2019 when Russia briefly disconnected power lines between Kaliningrad and Lithuania as part of a scheduled three day test. But Russia has not cut off the Baltic states from the electrical grid before, and while Russia has in the past temporarily halted gas supplies to client countries in response to political disagreements, it has never used the electrical grid in this way, suggesting that the Baltic states’ concerns here may be somewhat overstated.

In response to this perceived security threat, the Baltic states have begun making progress on decoupling their power systems from Russia. In 2018, the Baltics and Poland brokered an agreement to link these states to the EU’s power supply by 2025. The LitPol link between Lithuania and Poland and the Nordbalt link between Sweden and Lithuania have also offered deeper integration with European grids. Naturally, Russian President Vladimir Putin criticized these developments, which he said can lead to the emergence of “zones between several regions of the Russian Federation, where we will have no power transmission lines.” While he did not state this openly, the decoupling would also reduce Russia’s leverage over the region, particularly as Estonia has announced that it will no longer buy electricity from Russia.

It should be noted that the Baltic states are not unanimous in their approach to Russia overall. Lithuania has a contract with Gazprom until 2025 for gas transit via Kaliningrad, and Latvia, whose budget depends on gas transit fees, is keen for some level of cooperation with Russia, should this move impact local incomes. While Estonia officially takes a hard-line approach to Russia and has fewer trade links with Russia than Latvia and Lithuania, many large Russian businesses operate in Estonia, taking advantage of the easy online registration processes designed to assist with setting up new businesses. There have also been allegations that in 2007-2015, businesses linked with Russia’s Federal Security Services (FSB) laundered money through a branch of Danske Bank, based in Estonia, in part owing to Estonia’s loose governance of the finance industry at the time. 

Russia Reducing Own Reliance on Baltics

Russia’s shifting economic relationship with the Baltic states appears to be reflective of some of its own economic security concerns. Russia is keen to avoid depending on NATO member states for trade and is wary of its reliance on Baltic ports to handle cargo. As oil prices, upon which the ruble largely depends, remain depressed, and projected economic growth in Russia is set to remain at just 1.8 percent in 2021, Russia is increasingly reluctant to pay the Baltics for using the region’s ports for exports of oil.

This shift began after Crimea’s annexation, when Russia began prioritizing cargo flows through its own ports, while also pressuring countries such as Belarus to use Russian ports instead. The reduction in Russian oil exports and coal trans-shipments through almost all Baltic ports has impacted the Baltic states, who have lost out on transit fees. Turnover at ports across the Baltics has declined. In the first half of 2019, Russian traffic through ports in the Baltic states fell by 12.4 percent but increased through Russian ports in the Gulf of Finland and the Baltic basin; in 2020, 110.9 million tons of cargo passed through Russian ports in this region. Rail networks in the Baltics have also been affected, as they typically rely on Russian spending.

Russia seems determined to continue to reroute this trade and is investing significant sums in doing so. Construction of a new port complex is underway at the Primorsk oil port in the Leningrad region, scheduled to be operational by 2022. This port will accept all trans-shipments that would have usually traveled via the Baltic ports, with major Russian exports including coal and grain handled there. Russia can also make use of its existing Ust-Luga port off the Gulf of Finland, one of the deepest ports in the Baltic region. The Ust-Luga port has the capacity to accept a cargo turnover of 180 million tons annually, but in January-November 2019 only accepted 95.3 million tons, suggesting that it has been underutilized.

Port construction, particularly deep-water ports, is an expensive endeavor, and this investment is slated to cost 90 billion rubles, suggesting Russia considers this a long-term project. But pressure on the state budget and a lack of private investment in Russia’s port systems might mean that this project could be delayed.

Russia: Still in the Game

The Baltic states have clearly made significant progress in diversifying their trade, including energy imports, away from Russia. Moscow, too, has taken steps to reduce its own dependence on the Baltics for transit of its energy exports and other trade. In spite of this effort to reduce mutual dependence, Russia continues to maintain significant leverage over the Baltics, and it remains a key energy supplier and major trading partner.

As long as this multi-pronged leverage endures, alongside the Baltic states’ membership in NATO, the probability that Russia would resort to a Crimea-style intervention in the region will remain low. While Russia is keen to retain its influence in the Baltics, it has more to gain by using non-military methods of doing so. It is therefore unlikely that the Baltics would become another flashpoint in the U.S.-Russian relationship like the Ukraine conflict.

Author

Emily Ferris​

Emily Ferris​ is a research fellow in the international security studies department at the Royal United Services Institute (RUSI).

Photo by jplenio shared under a Pixabay license.

The opinions expressed in this article are solely those of the author.