Kaliningrad Oblast and the ‘Sanctions War’: Genuine Progress or Avoidable Stagnation? (Part Two)

*To read Part One, please click here.

In response to Russia’s aggressive behavior and violation of Ukraine’s territorial sovereignty starting in 2014, Western countries imposed several packages of sanctions targeting the Russian economy. These sanctions had a particularly strong impact on Russia’s most western-exposed oblast, Kaliningrad, hitting the region hard in the socio-economic sectors of food and agriculture, tourism, as well as tax “offshorization.” In the ensuing years, the central government dedicated substantial resources to buttress Kaliningrad Oblast, though with mixed results (see Part One in EDM, October 7). Crucially, Moscow’s intensive efforts have also sought to bolster the vulnerable region’s energy security. As a physically detached exclave of the Russian Federation, Kaliningrad Oblast—sandwiched as it is between Poland and Lithuania—remains “a key region in terms of army and navy infrastructure.” In other words, in Russia’s view, Kaliningrad “has to maintain a high level of geopolitical, economic and energy security” (Klops.ru, June 23, 2017). This point is explicitly underscored in the Russia Doctrine of Energy Security, adopted in 2019. Specifically, Article 27 (point A) states that the “development of energy infrastructure in Eastern Siberia, the Arctic region, the Far East, the North Caucasus, Crimea and Kaliningrad Oblast” is an indispensable precondition for bolstering the Russian economy at large (Garant.ru, May 14, 2019).

In terms of energy security, Kaliningrad Oblast is primarily dependent on two strategic (and in many ways interdependent) resources—electricity and natural gas. Throughout the 1990s and into the late 2000s, the region was nearly fully dependent (up to 93 percent) on external sources of energy. While electricity was primarily imported from Lithuania, natural gas was transported to the oblast from Russia proper, via Belarus and Lithuania. The situation began to rapidly change from the mid-2000s onward—long before the outbreak of the Ukrainian crisis and the West’s passage of its economic sanctions against Russia. Even at that point, the ups and downs in political relations between Moscow and Western capitals began to expose the first fissures in Kaliningrad’s energy security. To deal with the oblast’s vulnerability in this domain, Russia initiated a number of key steps.

Between 2005 and 2010, the authorities built and launched the Kaliningradskaya TPP-2 thermal power plant. And though this facility did not make Kaliningrad Oblast fully self-sufficient in terms of electrical energy output, the plant nonetheless allowed it start exporting large quantities of electricity to Lithuania. The TTP-2’s biggest disadvantage is that it operates on natural gas, which for years had to be delivered to the oblast through Lithuania. Moreover, technical problems at the plant caused two major blackouts, in 2011 and 2013, leaving 650,000 locals without electricity and highlighting the oblast’s continued shortcomings regarding autonomous electricity generation (Proatom.ru, June 5, 2018).

The Russian authorities realized further steps were required. And between 2017 and 2019, Kaliningrad received three additional thermal power stations: Talakhovskaya, with an annual production capacity of 159 megawatts (MW), Mayakovskaya (157.3 MW), and Pregolskaya (455.2 MW) (Infrastruktura.gov39.ru, accessed September 23, 2020). Furthermore, the region, as a whole, became a “special project” of the ROSSETI public joint stock company. According to the energy firm’s head, Pavel Livinsky, ROSSETI directed 22.17 billion rubles ($285.12 million), in 2015–2020, for the development of the local power grid. He noted, “[T]his is the largest complex of regional activities that ROSSETI has ever done in Russia,” with the strategic goal to carry out a full-fledged “digital transformation” of the oblast: turning Kaliningrad’s power grid system into the most up to date in the entire Russian Federation (TASS, September 21).

The second set of initiatives designed to improve the energy security situation of Kaliningrad pertained to assuring the oblast’s uninterrupted access to natural gas. Until 2019, the main lifeline for the region was the Minsk–Vilnius–Kaunas–Kaliningrad gas pipeline, built during Soviet times. But on January 8 of that year, Russian state-owned gas major Gazprom announced it was launching operations of a Floating Storage Regasification Unit (FSRU) vessel, the Marshal Vasilevskiy, off the oblast’s Baltic coast. Russia had procured the Vasilevskiy FSRU from South Korea’s Hyundai Heavy Industries for $295 million. The Vasilevskiy can re-gasify up to 2.7 million tons of liquefied natural gas (LNG) per year (equivalent to 3.7 billion cubic meters)—enough to fully cover the region’s annual demand. According to Gazprom CEO Alexei Miller, “[T]he system of supplies [of the oblast] via the Minsk–Vilnius–Kaunas–Kaliningrad pipeline has been fully stopped… [and] the autonomous supply of Kaliningrad through the sea route has been completed.” To complement the FSRU, Gazprom additionally completed construction of an underground gas storage facility in the region (TASS, January 8, 2019).

At that time, President Vladimir Putin argued that, although supplying Kaliningrad with gas via overland pipelines remained the most economical and efficient method, LNG shipment nonetheless “guarantees a secure, alternative option for gas supplies and decreases dependency on transit supplies to zero” (TASS, January 8, 2019). As Putin tacitly acknowledged, the FSRU project poses some serious questions regarding its economic sustainability. Indeed, to implement LNG shipments to Kaliningrad, the federal center had, by January 2019, already spent $1 billion. Moreover, given the Kremlin’s explicit order that local residents not pay higher prices for gas than Russians in the rest of the country, the federal center will have to provide large subsidies to Kaliningrad’s customers.

In effect, Russia views the Kaliningrad FSRU project as a form of insurance—in case overland gas deliveries to the oblast are blocked by Lithuania. Yet for the foreseeable future, Russia’s Baltic exclave will continue to rely on the old pipeline that crosses Lithuanian territory. As noted by Dmitry Marinchenko, a senior director for corporate oil and gas analysis at Fitch Ratings, the FSRU project is a purely political initiative. In a way, he posited, “it is Russia’s fee for its narrowminded foreign policy, which resulted in Russia confronting the rest of the world” and spoiling relations with its neighbors. Similarly, Alexei Grivach, the deputy head of the Moscow-based National Energy Security Fund, asserted that the project “is a matter of national security—not economic effectiveness… Now, risks associated with [Kaliningrad’s] dependency on supplies through Lithuania have decreased to zero” (Vedomosti, January 8, 2019).

It is possible to conclude that Moscow’s post-2014 energy security policies targeting Kaliningrad Oblast strongly resemble Russian objectives there in the socio-economic domain. Namely, Russia has pursued costly projects guided not by economic or business considerations but by geopolitical and military-strategic calculations. So despite having achieved autarky in energy at immense economic cost, Russia is likely to continue supplying Kaliningrad through the already-existing pipeline as long as its European neighbors allow.