The World This Year

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CWA # 1185, 31 December 2023
The World This Year
The Baltic: Energy, Russia, NATO and China

  Binod Khanal
Binod Khanal is a Doctoral candidate at the Centre for European Studies, School of International Studies, JNU, New Delhi.

The Baltic countries, comprising Estonia, Latvia, and Lithuania, exhibit shared characteristics and a history that mirrors one another. Their economy is largely interlinked, driven by common factors across most areas. However, distinctions exist in their influence, with Estonia being notably sensitive to global developments, Latvia experiencing minimal impact from regional influences, and Lithuania assuming a less prominent role than the other two within the region. In 2023, the narrative of the Baltic States is marked by a combination of unity and division as the region navigated through various issues that have shaped its shared identity.

2023: Major Developments
First, the path to economic recovery. Following the Ukraine War, the surge in natural gas prices due to reduced supply from Russia placed a heavy burden on these three nations. These countries had to bear the brunt more than the other European countries because of their early decisions to limit imports from their heavily sanctioned neighbour and heavy reliance on their eastern neighbour. Consequently, in 2022, the Baltic nations ranked as the poorest-performing economies in the entire EU.

However, in 2023, there has been a more optimistic turn of events. Notably, natural gas prices in the region have significantly declined from their peak in late August 2022. Additionally, a series of fiscal policy support measures and subsidies have been implemented to assist households in coping with excessively high energy costs. As a result, both consumer and business sentiments have seen improvements this year.

Second, the diversification of energy supply. The three governments are actively progressing with their initiatives to reduce reliance on Russian gas imports. Investors are proposing a new floating LNG (liquefied natural gas) import terminal in Latvia, and efforts to enhance renewable energy production capacity, mainly through increased investments in wind and solar farms, are key strategies for achieving Baltic energy independence.

In a recent development, Estonia, Lithuania, and Latvia have agreed to disconnect from an energy grid network shared with Russia and Belarus by early 2025. This is one of the many efforts these countries are taking to break free from their historical energy dependence on Russia, which dates back to the Soviet era; these three countries are set to connect to the EU power grid via Poland. 

Third, the boycott of the OSCE meeting. In November of this year, the foreign ministers of the three Baltic states declared their intention to abstain from an Organization for Security and Cooperation in Europe (OSCE) meeting. This decision was made in response to the invitation extended to Russian Foreign Minister Sergey Lavrov. It sent a clear message to their European counterparts that they oppose any softening stance towards Russia.

Fourth, the 2023 NATO Summit. In July, Lithuania's capital hosted the 2023 NATO Summit. The three Baltic nations are members of both NATO and the EU. For the Baltic countries, this summit served as a platform to express their dissatisfaction with the European countries' efforts to assist Ukraine in this time of crisis. In terms of the outcome of this summit, significant improvements were implemented in NATO's Integrated Air and Missile Defence posture, involving the rotation of advanced air defence systems across the eastern flank and increasing readiness. Additionally, Estonia, Latvia, and Lithuania jointly signed a Declaration of Cooperation on cross-border airspace management to enhance air exercises and activities.

Fifth, distancing with China. The Baltic states, which initially viewed China as a preferable alternative to Russia, have adopted a more pragmatic stance. They are stepping back from the 17+1 cooperation format, reassessing the Three Seas Initiative, and making long-term decisions to restrict involvement in critical and sensitive infrastructure, such as 5G networks, of which China was integral.

The primary challenge for individual Baltic countries is unravelling the fragmented and concealed networks of Chinese investment channels and objectives. This is a daunting task for small nations with limited capacity to monitor Chinese funding and acquisitions.

The Baltic states have strengthened their ties with Taiwan, especially in technological cooperation, despite persistent opposition from the People's Republic of China (PRC).

Sixth, the importance of the Baltic Sea Region. The Baltic Sea region is an integral part of the region that cannot be ignored. Regrettably, the Baltic Sea stands as the most polluted sea in Europe, grappling with challenges like biodiversity loss, climate change, eutrophication, overfishing, and heightened contaminants, including pharmaceuticals and litter.

In response to this pressing issue, the European Commission hosted the second edition of the Our Baltic Conference in Palanga, Lithuania, on September 29, 2023. Acknowledging the severe ecosystem problems facing the Baltic Sea, leaders at the conference reached a consensus to enhance and supplement actions that Member States can undertake to improve the health of the Baltic Sea's ecosystem.

Seventh, the Balticconnector Pipeline. A subsea gas pipeline, the Balticonnector, connecting Finland and Estonia under the Baltic Sea, was damaged in October of this year and is yet to be fixed. This particular pipeline is significant for the entire region because it can transport up to 7.2 million cubic metres of gas per day in either direction. The pipeline gives the Baltic nations of Estonia, Latvia and Lithuania more flexibility of supply. Though the impact on energy has been limited due to this particular issue, it has undoubtedly exposed the vulnerability of the Baltic states when it comes to their energy infrastructure. 

2024: Looking Ahead
First, the inflation in the Baltic states is still high and cannot be controlled. Defence spending is also at a historic high in the wake of the Ukraine War. This and other factors, such as slow industrial recovery, have posed significant economic challenges to the Baltic states.

Second, the equation with Russia. Russia did not bring the result the EU planned, but they hit the Europeans. But the worst doesn't seem to be over yet. The anti-Russian sanctions prompted Russia to withdraw from a grain deal, the drastic impact of which could be seen over time in Africa. The situation could deteriorate further for Europe and the Baltic countries if Africans, facing hunger due to the disruption in grain supplies from Ukraine and Russia, seek refuge in Europe. This influx of immigrants would pose a significant challenge for the Baltic States, particularly during economic uncertainty. The invasion of Ukraine by Russia has reignited discussions about the potential spread of conflict to NATO's frontline states, particularly the Baltic nations. Despite being members of the European Union (EU) and NATO, the Baltic states have historically perceived Russia's threat differently from their Western European counterparts. Baltic leaders are apprehensive that the Kremlin might extend its focus beyond Ukraine and pose a risk to the Baltics. Given their reliance on external entities for territorial defence, security is a significant challenge for the Baltic countries.

Third, the rise of populism. The above challenges have created a conducive environment for Eurosceptic populist parties to expand their already established influence, especially in Baltic countries like Estonia and Latvia. While these populist parties in the Baltics may adopt a softer Eurosceptic stance, their growing prominence does cause discomfort in the EU headquarters in Brussels.

Fourth, challenges in the energy situation. Despite ongoing efforts to diversify energy sources and significant investments in renewable energy, the Baltic states are still grappling with considerable challenges in achieving energy security. While there have been strides in reducing dependence on specific sources, further advancements and robust infrastructure development are essential to attain energy security that can withstand various potential disruptions.

About the authors
Binod Khanal is a Doctoral candidate at the Centre for European Studies, School of International Studies, JNU, New Delhi.

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