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Sep 26, 2013 | 10:16 GMT

6 mins read

Kaliningrad: Russia's Weak Spot in Talks with Lithuania

Kaliningrad: Russia's Weak Spot in Talks with Lithuania
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Summary

Russia is using Gazprom to try to counter Lithuania's leverage against Russia in energy negotiations and political maneuvers. Currently, all natural gas that the Russian exclave of Kaliningrad uses comes from Russia proper but transits Lithuania — a situation that Lithuania has used as a key bargaining point in negotiations with Moscow over natural gas prices. However, on Sept. 23, Gazprom chief Alexei Miller and Kaliningrad Gov. Nikolai Tsukanov signed an agreement of understanding and cooperation regarding the construction of a liquefied natural gas import terminal in Kaliningrad. This is meant to challenge Lithuania's position, but whether Russia will follow through with the construction of the terminal remains uncertain.

There has been much friction between Russia and Lithuania over the past several years, but relations have been particularly tense in recent months. Vilnius is making great efforts to diversify its natural gas supplies in order to lessen its energy dependence on Russia, and it has been in negotiations over natural gas prices with Gazprom, though those talks are now deadlocked. Lithuania, which currently holds the EU presidency, is also leading efforts to bring other former Soviet states politically and economically closer to the European Union through the EU Eastern Partnership program. Russia views these efforts as a threat to its influence in its periphery, and is therefore putting pressure on Lithuania on several fronts.

Russia's Pressure Tactics

Ahead of the Eastern Partnership summit, which will take place in Vilnius in late November, Russia has used its position as a primary trade partner for countries in its periphery to signal how economically harmful an orientation toward the West — counter to Russia's interest — could be for these countries. For example, Russia has restricted the import of certain goods from Moldova and Ukraine, both of which are expected to initial and sign agreements for closer cooperation with the European Union during November's summit.

Since late August, Russia has also been pressuring Lithuania, which has long been a major supporter of the Eastern Partnership. For example, on Aug. 30, Russian border guards started to more thoroughly inspect cars registered in Lithuania that were trying to enter Kaliningrad, leading to long queues on the border. Since Sept. 11, trucks with cargo loaded in Lithuania have also been under special scrutiny. Russia's actions are meant to dissuade Lithuania from its political and energy plans, but are likely having the opposite effect of strengthening Vilnius' efforts to distance itself from Russia.

Lithuania's Natural Gas Options

Lithuania is engaged in on-again, off-again negotiations with Russian natural gas supplier Gazprom, from which Vilnius gets all its natural gas. An agreement will have to be found within the next year, since the current natural gas supply contract between Gazprom and Lithuanian natural gas company Lietuvos Dujos ends in 2015. Russia wants to commit Lithuania to another long-term contract, but Lithuania wants to avoid this and has instead pursued other options to wean itself from Russian energy. Vilnius hopes to weaken its dependence on Russia and get lower natural gas prices using EU legislation, the prospects of liquefied natural gas imports and shale gas exploration — as well as its status as a transit country for natural gas going to Kaliningrad — as leverage.

Vilnius is pushing aggressively for the implementation of the European Union's Third Energy Package, a set of EU laws requiring the separation of natural gas transmission, distribution and supply operations. In Lithuania, this means Gazprom will have to give up its stake in Lietuvos Dujos. Earlier this year, a new company called Amber Grid took over the natural gas transmission network from Lietuvos Dujos. Gazprom still owns 37 percent of this new company but is required to sell its stake by late 2014.

Lithuania also hopes to get access to non-Russian gas. The prospects for shale gas in Lithuania are still uncertain, but Vilnius is expected to formalize an exploration agreement with the United States' Chevron Corp. by the end of this month. Once Chevron starts actual exploration, it will become clearer whether Lithuania's reserves (estimated by the U.S. Energy Information Agency to be approximately 11 billion cubic meters) are economically viable and how long it would take to get the gas out of the ground. Lithuania also has shorter-term options to reduce its dependence on Russian gas. Vilnius has commissioned a floating liquefied natural gas import terminal, which is supposed to be completed in December 2014 and have a capacity of up to 3 billion cubic meters per year. In 2012, Lithuania consumed close to 3.4 billion cubic meters of natural gas; thus, this facility will offer a supply alternative.

Natural Gas Pipelines

Lithuania Natural Gas Pipelines

Lithuania's position as a transit state for natural gas going to Kaliningrad is another card Vilnius can use in its negotiations with Gazprom. The Russian exclave imports all of the natural gas it uses — around 2 billion cubic meters in 2012 — from Russia through a pipeline that runs through Belarus and Lithuania. The transit fee is a variable that Vilnius can use in its current price negotiations with Russia.

Moscow's Attempts to Counter Vilnius

Russia has sought to deprive Lithuania of this leverage with the announcement of a liquefied natural gas import terminal for Kaliningrad. An investment decision for the facility is expected next year, but Russia can threaten Vilnius with the loss of transit fees it will see once the terminal is completed. Moreover, Russia can offer Lithuania natural gas prices that are low enough to make Vilnius doubt the benefits of its own diversification efforts.

However, considering the pressure Moscow is applying, Vilnius is unlikely to give up its diversification efforts. It is not that Lithuania is uninterested in importing Russian natural gas; fully relying on liquefied natural gas would probably be more costly than its current contract terms with Russia. Vilnius is interested in having a contract with Gazprom, but it wants better terms than it has had in the past.

In 2010, Russia began constructing a nuclear power plant in Kaliningrad with the goal of exporting electricity to neighboring countries, particularly to undermine Lithuania's own nuclear power ambitions by offering cheap electricity from Kaliningrad; however, the plant's size and completion date are still uncertain. Similarly, whether Gazprom will actually follow through with the construction of the liquefied natural gas plant in Kaliningrad remains in question. Before the plant is completed, Lithuania will already have its own liquefied natural gas facility, and there is no Russian liquefied natural gas export facility in the vicinity to supply Kaliningrad. Currently, Russia's only liquefied natural gas export facility is in Sakhalin in Russia's far east, and such facilities reasonably close to Kaliningrad — for example on the Yamal Peninsula or near St. Petersburg — are still in the planning phase. The 2015 deadline for reaching a new natural gas agreement with Lithuania will arrive before any Russian liquefied natural gas could reach Kaliningrad. 

Kaliningrad's isolation from the rest of Russia and long-term concerns over supply security for the exclave will remain among the most controversial points in the Lithuanian-Russian energy negotiations. Dependence on Lithuania for the transit of natural gas to Kaliningrad is a vulnerability Russia wants to handle carefully, particularly in light of the possibility that Gazprom will no longer have an important stake in the Lithuanian natural gas network once the EU Third Energy Package is fully implemented. Disagreements and tensions between Lithuania and Russia over energy and political issues can be expected to continue. 

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