Harbinger of Things to Come? Russian Energy Sector Imposes Boycott on Estonia after Getting U.S. Aid

(Washington, D.C.): With the world’s attention squarely focussed over the week-end on the U.S. strike against Saddam Hussein’s intelligence facilities, President Boris Yeltsin conducted a strike of his own: He abruptly halted natural gas supplies to Estonia — a move eerily reminiscent of the 1990 energy blockade imposed on the Baltic states by then-Soviet President Mikhail Gorbachev.

This declaration of economic war followed a 24 June threat by Yeltsin that Russia "has possibilities to remind" Estonians of "some geopolitical and demographic realities." The reason: Russian nationalists’ agitation over alleged mistreatment of fellow Russians at the hands of majority populations in Estonia (and other former Soviet republics). In a statement issued by his press office, Yeltsin said "It must be understood that Russia cannot remain a disinterested observer if the ethnic Russian population were to show a natural desire to defend itself against crude discrimination."

Hardly ‘Apartheid’

On 21 June, Estonia’s parliament enacted legislation which prohibits residence permits to persons who have previously worked for the Soviet Union’s secret police or to current and retired Soviet military officers. The law requires non-citizens to apply for a residence permit within one year. All permanent residents, however, will be permitted to vote — regardless of ethnic background.

Moscow hysterically condemned the new citizenship law stating that "it can be regarded as the practice of ethnic cleansing and the introduction of an Estonian version of apartheid." This stance derives from Russia’s claim that all Soviet citizens who have settled in Estonia during its occupation by the USSR must be accorded full citizenship rights.

Under international law, formerly occupied states are not obliged to make such a concession. Such a practice would, after all, equate the rights of those who have wrongly suffered occupation with their oppressors. It could even encourage such occupations and forced resettlement of populations in the affected territory for the express purpose of assuring the occupying power of its continued domination even after physical control is relinquished.

Importantly, investigations into allegations of Estonian mistreatment of Russian nationals have been conducted by both the United Nations and the Conference on Security and Cooperation in Europe (CSCE) this spring. They found no evidence of intentional discrimination against the Russian-speaking minority. Indeed, some 14 inquiries by various international organizations have been received by Estonia and all have concluded that human rights are fully guaranteed in Estonia.

Ominous Pattern of Russian Coercion

Regrettably, Russia’s energy boycott is but the latest in a series of steps taken in recent months against its Baltic neighbor. These include the following:

• Last year, Russia froze and confiscated $80 million of Estonia’s assets when the Estonian government discarded the ruble and introduced its own currency.

 

• Russia has been dragging its feet on its commitment to withdraw the remaining 8,000 troops from the tiny Baltic republic, and is unlikely to meet its promised target date of 1 August for the withdrawal of all forces. Indeed, Russian negotiators have lately begun talking instead in terms of 1999 for a complete withdrawal.

 

• On 29 May, Russia began construction of what is planned to be the largest commercial port on the Baltic Sea at Ust-Luga, adjacent to the Russian-Estonian border. Estonians are fearful that the facility, scheduled to be completed by 1995, will take traffic away from ports located in the Baltic states. The Russians are seeking funds from the U.S.-supported European Bank for Reconstruction and Development for the project.

 

• Russia attempted to thwart Estonia’s entry into the Council of Europe and, when it was nonetheless admitted nearly unanimously on 13 May, Russian Foreign Minister Andrei Kozyrev sent an angry letter, decrying Estonia’s membership as "premature."

 

• In April, Russia’s Northwestern Group of Forces engaged in a four-day exercise on how to capture strategic facilities in the Baltic states.

The Real Reason for Russia’s Fury — Envy?

In contrast with Russia and most of the other former Soviet republics that are coping poorly with deteriorating economic conditions, Estonia’s economy is thriving. As the Washington Post reported on 21 June 1993:

"[Estonia has become] a model of stability and serenity….Estonia has taken drastic steps that no other former Soviet republic has yet been willing to risk. It cut off subsidies to industry, allowed prices to rise freely while keeping wages down, prohibited its central bank from printing new money and forced itself to live under a balanced budget."

 

Where Russia’s deficit is burgeoning and the value of its currency is plunging, Estonia’s leaders have taken practical steps to control both. The Estonian government is operating under laws requiring a balanced state budget and tying the issuing of additional currency to the increases in gold and foreign currency reserves. Inflation, once at a monthly rate of 100 percent, is down to 3 percent. U.S. Ambassador Strobe Talbott, who visited Estonia on 14-15 May, praised the country’s radical reforms and urged other former Soviet republics to adopt their model. He enthused, "Estonia is a success story, a political and economic miracle."

‘Message to Michel’: Gazprom’s Way of Saying Thank-You for U.S. Credits

The mechanism for implementing President Yeltsin’s energy blockade of Estonia is the Russian state-owned enterprise, Gazprom. Gazprom’s vice president, Bogdan Budzulyak, however, claimed that the cut-off of gas supplies to the Estonians which occurred last Friday was undertaken over Estonia’s failure to pay $8 million for previously delivered supplies — even though this amount represents just 10 percent of the $80 million in Estonian funds expropriated by Russia last year. In February, Gazprom threatened to stop its gas shipments to Ukraine. Just over one month ago, Gazprom employed similar tactics against Lithuania, halving its natural gas supplies and threatening to cut off supplies altogether. On Monday, Russia made good on its promise and suspended deliveries of natural gas to its Lithuanian commercial customers.

Interestingly, Gazprom is the beneficiary of an $86.2 million direct loan approved by the U.S. Export-Import Bank in February 1993 in order to finance the sale of close to 300 Caterpillar earth-movers to Russia. These machines are to be used for the development of a large pipeline system connecting the Yamal peninsula to Gazprom’s existing gas pipeline network west of Torzhok.

At the time, Russia was non-creditworthy and would ordinarily have been denied such an Eximbank loan. When House Minority Leader Bob Michel (R-IL) and Senator Paul Simon (D-IL) applied political pressure in favor of the transaction, the normal taxpayer protections were set aside and Eximbank financing for their constituent’s sale was approved by the Clinton Administration. In a letter to House Banking Chairman Henry Gonzalez on 16 March 1993, however, Eximbank’s Director Rita Rodriguez conceded that "All transactions in Russia carry a substantial risk. Because of Russia’s arrearages…we assumed that 27% of the loan would not be recovered."

Don’t Just Stand There, Do Something

The Clinton Administration should strongly condemn Russia’s heavy-handed pressure tactics against Estonia and other former Soviet republics. At the very least, cooperation between the United States and Russia in the energy area — notably the massive financial assistance Moscow is slated to obtain under Eximbank’s Oil and Gas Framework Agreement — should be made contingent upon the Kremlin refraining from the use of its energy resources as a weapon of economic warfare.

There are a number of vehicles for implementing such conditionality. For example, on 15 April, Eximbank issued a preliminary commitment of $500 million to Russia’s Ministry of Fuel and Energy pending the finalization of the Agreement. The World Bank is now considering an application Russia submitted last month for a waiver of the Bank’s negative pledge clause — a precondition for Eximbank funding. Implementation of the former and approval of the latter should be put on hold.

Another Western leverage point could be the EBRD’s underwriting of the Ust-Luga port project. In any event, the United States and its Western allies should take steps to reduce the Baltic states’ dependence on Russian gas supplies.

The Bottom Line

Previous experience with the Kremlin’s coercive use of energy supplies as a precursor to more violent action against the Baltic states and other victims of Soviet imperialism requires that the United States and its G-7 partners make clear where they stand: Energy embargoes — or the threat of such embargoes — will preclude Western energy-related assistance to Russia.

The Center for Security Policy believes that it is vastly more important for the G-7 to support properly structured, conditioned and transparent privatization efforts in the former Soviet Union than for the West to augment Russia’s capability to threaten its neighbors by withholding energy resources. Although Russia reportedly resumed its gas supplies to Estonia today, it must be disabused of the notion that the West will ignore such actions and proceed with loans and technical support for the purpose of revitalizing Russia’s energy sector even as Moscow once again seeks to use the power of that sector for unacceptable purposes.