Lithuanian Prime Minister Algirdas Butkevicius said Feb. 1 that Lithuania would not offer Gazprom, Russia's state-owned energy giant, any concessions of its own in exchange for lower natural gas prices. Days before, Gazprom Deputy Chairman Alexander Medvedev met with Lithuanian Energy Minister Jaroslav Neverovich reportedly to convince Vilnius to abandon reforms to its energy sector that would undermine Russia's position on Lithuanian supply and distribution stakes.
Russia is the primary energy supplier to Lithuania, providing 100 percent of the country's natural gas and nearly all of its oil and oil products. Because Lithuania is firmly aligned with the West — it is an active member and proponent of both the European Union and NATO — Russia has sought to use its energy position in the country for political leverage. This approach has included charging Lithuania one of the highest natural gas rates of any European country (currently $540 per thousand cubic meters) and cutting off supplies to the country in 2006 via a branch of the Druzhba oil pipeline, which has remained offline ever since. Given that Lithuania had no viable alternative to Russian energy, for years there was little that the country of just more than 3 million people could do to challenge Moscow's dominant position in its energy sector.
But in the past year, things began to change. In March 2012, Lithuania announced a deal beginning in 2014 to lease a floating regasification terminal from Norway, which would bring in 1 billion cubic meters of natural gas per year, or roughly half of Lithuania's gas consumption, with the possibility of further expansions. Lithuania has also taken legal action against Gazprom in line with the EU Third Energy Package, which seeks to unbundle the sales, production and distribution of energy companies operating in EU member states, since Gazprom is involved in both production and distribution in Lithuania.
These moves have come amid a regional push to diversify away from dependence on Russian energy. European countries have worked to bring online other non-Russian energy sources such as liquefied natural gas and even shale gas. For the countries with the necessary import infrastructure, the possibility of new energy supplies that come with far fewer political conditions and are often cheaper than Russian energy is appealing.
In response, Russia has become more pragmatic and accommodating in its energy policy, eschewing politically-motivated cutoffs and restructuring contracts with energy companies from several European countries for lower prices in exchange for maintaining long-term contracts and preserving its market share in Europe, which is critical to the Russian economy. These adjustments initially occurred with Western European countries such as Germany and Italy that had close working relationships with Russia. But in recent months, Moscow has reached similar deals with smaller Central and Eastern European countries where relations have been more complicated, such as Poland and Bulgaria.
Despite these changes, Lithuania is one of the last countries that Russia would want to accommodate on energy, due to its aggressive rhetoric on energy and political matters and the country's assertive pro-West foreign policy toward states such as Belarus and Ukraine. Lithuanian officials have said that the country is not prepared to offer any concessions for lower natural gas prices, and instead would continue to abide by Third Energy Package regulations and possibly implement transit fees on Russian energy passing through Lithuania to the Russian exclave of Kaliningrad — a sensitive issue for Moscow. Because of Lithuania's moves toward diversification as well as the pending 1.5 billion-euro lawsuit the country has filed against Gazprom in the Stockholm arbitration court, it appears that lowering prices may be the only way for Russia to preserve its market share in Lithuania over the longer term.
Still, this may not be the biggest priority for Moscow. Lithuania is a relatively small market for Gazprom, so losing some or even all exports to the country would not have a significant economic impact on Russia. And for Russia, this issue is not only related to energy. Moscow has gradually lost much of its influence in the Baltic region in recent years, and Russian accommodation there could affect its image and negotiations with other strategic countries such as Ukraine.
Russia may choose to settle the matter in a pragmatic way similar to its deals with other European countries in order to preserve its market share. Or Russia may choose to deal with Lithuania aggressively in order to send a message that Moscow is not always willing to cooperate at any cost. Russia's moves in the coming days and weeks may be telling which option Moscow will pursue.