Russia, Estonia: New Energy Law Strains Relations

4 MINS READJun 8, 2012 | 10:00 GMT
Russia, Estonia: New Energy Law Strains Relations
Estonian President Toomas Hendrik Ilves in Tallinn

Estonia's parliament passed a law June 6 requiring the country's main natural gas company, Eesti Gaas, to sell its natural gas transportation infrastructure. The decision is in line with the European Union's Third Energy Package as well as with other countries' attempts to decrease their dependence on Russian energy supplies. The new law will challenge Russia's position in Estonia's energy sector and limit Russian ownership of strategic natural gas assets within the country.

However, Russia's leverage in Estonian energy has always been weaker than its influence over energy sectors in other Baltic states. In Tallinn, Moscow relies on other methods of persuasion — methods that will not be affected by the new law. Thus, while Estonia's new law might strain relations with Russia, it is unlikely to lead to a greater dispute.

Estonia's energy unbundling law comes shortly after Lithuania called for its major natural gas company, Lietuvos Dujos, to separate its sales, distribution and transport operations. According to the new law, Eesti Gaas must sell its natural gas transportation network before the end of 2014. The government is required to approve the sale, since the new owner cannot pose a national security threat. 

The new regulations are part of Estonia's implementation of the Third Energy Package, which is intended to dismantle natural gas monopolies in EU countries. Eesti Gaas is the only natural gas firm in Estonia. It receives its entire natural gas supply from Russian state-owned energy giant Gazprom, which owns 37.03 percent of the Estonian firm (Germany's E.On Rurhgas owns 33.66 percent, Finland's Fortum holds 17.72 percent, Latvia's Itera — part of Russian energy firm Itera — owns 9.99 percent and other small shareholders hold 1.6 percent).

By liberalizing its natural gas market, Estonia hopes to attract alternative natural gas suppliers, which could encourage competition and drive down natural gas prices. Tallinn's new legislation is also designed to help decrease Estonia's energy dependence on Moscow by requiring Eesti Gaas — and, by extension, Gazprom — to relinquish its transport network.

The unbundling measures in Lithuania and Estonia will cost Russia strategic energy infrastructure stakes in the Baltics. However, Moscow's position as the region's sole natural gas supplier is not threatened in the short term. Of all the Baltic countries, Lithuania has decreased its dependence on Russian natural gas the most due to its plan to lease a mobile liquefied natural gas (LNG) import facility in 2014. For the entire region to lessen its dependence on Russian energy, the Baltics still must improve cross-border infrastructure and build onshore LNG facilities.

All three Baltic states intend to build onshore LNG facilities, but the states have not been able to agree to terms for a joint project. In the absence of a consensus, the European Union — expected to provide a large portion of the financing — is supposed to decide on a project to end the gridlock, presumably in late 2012. The disagreement and need for EU support has slowed Baltic regional energy projects in the past, and similar delays will likely plague projects intended to help the Baltics diversify their energy sources.

Russian Leverage

For Estonia, the issue of dependence on Russian natural gas is currently less relevant than for Latvia and Lithuania. Estonian oil shale production accounts for more than half of the country's primary energy supply, and the state has increased its use of renewable energy sources. However, as oil shale production costs increase due to higher fees on carbon emissions, natural gas diversification likely will become more relevant for Tallinn.

Russia has not leveraged its role as sole natural gas supplier to pressure Estonia during bilateral disputes as Moscow has done with Lithuania, Belarus or Ukraine. Russia uses other means to retain influence in Estonia. Moscow can mobilize certain segments of the Russian minority in Estonia, which accounts for 25 percent of the Baltic state's population. In 2007, the relocation of a statue in Tallinn erected in remembrance of Soviet soldiers killed in World War II sparked vocal protests from Russians in Estonia. Moscow was eventually accused of launching a cyber attack against Estonian government services as retaliation for the statue's removal.

The strongest retaliatory measure Russia used in 2007 was the halting of Estonian rail transit. By limiting the transportation of goods, Moscow demonstrated how easily it could leverage the countries' trade relationship to hurt the Estonian economy. Russia is Estonia's third-largest export market (after Sweden and Finland), accounting for approximately 11 percent of Estonia's exports. Similarly, Russia accounts for 8 percent of Estonian imports, based on figures from 2011. However, Estonia is only a small market for Russia, which means that Moscow can limit trade with the Baltic state at relatively small cost to itself. Such alternative levers of influence for Moscow will not be weakened by Tallinn's new regulation.

Eesti Gaas likely will challenge Tallinn's new law in court. Regardless, the new measure alone is unlikely to spark a greater dispute between Estonia and Russia. Indeed, the relationship between the two countries has been relatively calm since the 2007 dispute. However, as Baltic states attempt to overcome the disadvantages of their location on Europe's periphery by improving infrastructure links to the Continent, Moscow will remain sensitive about policies — such as the Baltic unbundling measures — that affect its influence in the region.

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