Publication: Eurasia Daily Monitor Volume: 5 Issue: 108

Russian First Deputy Prime Minister Igor Shuvalov (L) and Lithuanian Prime Minister Gediminas Kirkilas (R) at the summit

The Council of Baltic Sea Countries, the main cooperation forum of the Baltic’s nine riparian countries plus Norway, Iceland and the European Commission, held a summit at the prime-ministerial level on June 3 and 4 in Riga.

Despite the ample advance notice for this event, which is held every two years, Russian Prime Minister Vladimir Putin and German Chancellor Angela Merkel did not attend, sending their deputies instead. The downgraded Russian and German participation reflects those two governments’ emphasis on bilateral relations, bypassing regional and multilateral frameworks, in some cases over the heads of countries situated between them. The Russo-German gas pipeline project on the Baltic seabed, Nord Stream, is a prime example of this tendency.

Energy supply and transit was a central topic at this summit. Russia’s First Deputy Prime Minister Igor Shuvalov, who supervises the energy sector, insisted that Russia was “the world’s most reliable energy supplier” to Europe and regretted the “mistrust” of some European countries on that account.

The claim to reliability, however, contrasts with the track record, particularly as experienced by some of the countries around the Baltic Sea. The Russian government interrupted oil and gas supplies to Estonia, Latvia and Lithuania several times for political reasons during the 1990s. It terminated oil deliveries by pipeline to Latvia’s Ventspils terminal in 2003 and cut them off to Lithuania’s Mazeikiai refinery repeatedly from 2000 to 2006, attempting to bankrupt the terminal and refinery and take them over on the cheap. It reduced mid-winter gas supplies to Poland in January 2004 and January 2007 (as a predictable effect of interrupting Russian gas to Belarus during price disputes), and it reduced crude oil supplies to German refineries in August 2006 in the context of a dispute with Belarus over transit terms. Supplies to Germany were reduced again in August 2007 in a dispute involving Russian oil traders in Germany, prompting Merkel in 2006 to say the oil supply cuts were “destroying confidence” in Russia’s reliability.

Shuvalov and other Russian officials declared that Russian construction of new pipelines and other energy transit systems would not reduce the volume moving through the existing systems. Such assurances might be correct in the short-to-medium term regarding pipeline-delivered gas to Estonia, Latvia, Lithuania or Poland. The Russian gas currently moving via Poland to points West would, however, undoubtedly be redirected in part through the Nord Stream pipeline, if it is built. Furthermore, the Russian government has recently reaffirmed its intention to redirect large volumes of crude oil from the Druzhba pipelines to the Baltic Pipeline System and a tanker line operating out of the Russian ports of Primorsk and Ust-Luga. The Russian government closed the Druzhba pipeline’s spur to Lithuania in 2006, and it has stonewalled Lithuanian and EU queries since then about that line’s status.

Summit participants took stock of developments on the Nord Stream project in the business forum, parallel to the summit. Nord Stream consortium representatives raised the project’s estimated cost to Euro 7.5 billion, up by 50 percent from the 2006 estimate of Euro 5 billion. The revised target dates for commissioning the pipeline’s first and second loops are 2011 and 2012, respectively, which is two years behind the schedule announced two years ago.

Meanwhile, the Nord Stream consortium has failed to resolve issues with Finland, Estonia and Sweden regarding permits for preliminary work and pipeline routes in those countries’ exclusive economic zones and/or sovereign sectors. Sweden has simply returned the consortium’s application to the sender, on the grounds that the information in it was inadequate. Similar problems seem likely to arise when the consortium submits requests to Poland and Lithuania.

The project’s impact on the maritime environment and navigational safety is of concern to all these countries. Estonia, Lithuania and Poland are additionally concerned about the project’s political risks. By circumventing these countries through Nord Stream, Moscow could hypothetically reduce or interrupt gas supplies to them while continuing to supply Germany directly, thus playing off European Union member countries against each other economically and politically. By the same token, any bypass pipeline would deepen the isolation of Estonia, Latvia, and Lithuania from EU energy markets. It would perpetuate the lack of pipeline connections, instead of closing that gap by building pipeline links.

Latvia’s position is more nuanced, because it has natural storage capacities of significant size for gas. If the Nord Stream pipeline is eventually built, Latvia hopes to construct a link on the seabed from Nord Stream to the Latvian shore and build a gas-fired plant for electricity generation. For its part, Poland would regard a gas pipeline overland from Russia to EU territory as far preferable to a seabed project that bypasses Poland altogether. Polish Prime Minister Donald Tusk confirmed that position at this Baltic summit. For similar reasons Lithuania and Latvia have at various times also considered the possibility of an overland pipeline from Russia to Europe via their territories and Poland. Meanwhile, the German government holds out the possibility of supplying Poland with modest volumes of Nord Stream gas through an overland link from Germany, once Nord Stream reaches German territory.

It seems increasingly uncertain, however, whether Russian gas would suffice to fill Nord Stream with 55 billion cubic meters annually (27.5 billion cubic meters planned for each loop) or some overland alternative (none planned). Chronic underinvestment and delays in commissioning new gas fields, as well as fast-growing internal consumption, cast doubts in the Baltic region and elsewhere on Russia’s capacity to increase overall gas exports to Europe before the middle of the next decade.

In the interim Lithuania, Latvia and Estonia face the prospect of electricity shortfalls resulting from the closure of Lithuania’s Ignalina nuclear power plant, which used to supply those countries with energy. Citing possible safety risks at that Soviet-era plant, the EU dictated the closure of Ignalina’s first reactor in 2004 and of the second reactor in 2009. Thus the three countries’ situation as an “energy island,” without pipeline connections to the rest of the EU, would be compounded by an “electricity hole” when Ignalina is fully decommissioned, forcing them to import electricity from Russia. At present, only Estonia is linked with European electricity systems, thanks to a cable running to Finland on the seabed. An undersea cable from Lithuania to Sweden and an interconnection of Lithuania’s electricity transmission system with Poland’s are planned but will not substitute for the loss of electricity from Ignalina (BNS, June 3, 4; Interfax, June 4; Handelsblatt, Financial Times Deutschland, June 4, 5).