Soviet Economic Leverage: Moscow’s Tool For Denying Baltic Independence Without Force

Introduction

In 1982, the Western alliance was racked by a rancorous dispute between the United States and several of its European allies. The issue was not that of the long-range nuclear missiles then planned for deployment in five West European countries. Nor was it an acute flareup of the longstanding dispute over the equity of defense burden sharing among the NATO nations.

Rather, the near-crisis was over the wisdom of Western nations subsidizing construction of a huge, two-strand Soviet gas pipeline that would, when completed, greatly increase the dependency of a number of NATO countries on Moscow’s natural gas supplies in the late 1990s and 21st century. The Reagan Administration argued that such inordinate energy dependence could expose the West to economic extortion by the USSR, with profound implications for allied foreign and security policies.

In the end, this U.S. argument prevailed. In May 1983, an important multilateral agreement was reached in the International Energy Agency whereby the OECD signatories agreed not to create undue dependencies on Soviet gas supplies (i.e., beyond a 30 percent share of total West European gas requirements). It was agreed that they would, instead, accelerate development of secure OECD supplies, notably Norway’s Troll gas field. To date, this accord has served as a crucial check on Moscow’s ability to influence West European policies through energy-related leverage.

Moscow’s Leverage over Eastern Europe and the Baltics

Were there any lingering doubt about the dangers of granting the Soviet Union such leverage — or the Kremlin’s willingness to exploit it when the need arose — that doubt should vanish in light of recent Soviet policy toward reformers in Eastern Europe.

Mikhail Gorbachev clearly understands that the Soviet Union would jeopardize the current detente and attendant infusions of economic, financial and technological assistance from the West were Moscow to try through force of arms to curb reforms now sweeping its erstwhile satellites. Indeed, Gorbachev has been at pains to convey his support for those reforms and his commitment not to interfere militarily. Soviet spokesman Gennadi Gerasimov has dubbed this policy the "Sinatra Doctrine" to show Western audiences how sympathetic Moscow is with those who wish to pursue independent paths.

And yet, while the Soviet Union eschews the self-defeating use of military force as a means of constraining reform elements throughout its empire, it is becoming increasingly clear that the Kremlin will use other means at its disposal to influence or control these movements. Consider the following:

• Moscow has signalled to at least one Eastern European country that a steady energy supply from the Soviet Union could be jeopardized if cooperation on other fronts was less than satisfactory. Reports reaching the Center indicate that, at a minimum, one Hungarian opposition party has felt intimidated by this threat.

 

• Just this weekend, the Soviet Union offered Romania additional energy resources (390,000 tons of oil for January and 22 million cubic meters of natural gas daily) to help cushion the latter against the winter’s expected hardships, hardships likely to be exacerbated by severe shortages and dislocations following the recent revolution. The terms for this assistance have not been made public at this writing.

 

• As the USSR is itself facing serious oil production shortfalls — which are jeopardizing its ability to meet urgent domestic needs and the maintenance of high levels of oil exports to the West for hard currency — it seems reasonable to expect that some quid pro quoit probably will involve a commitment not to provide encouragement to those in Soviet Moldavia whose appetite for secession has only been whetted by events in neighboring Romania. will be exacted by Moscow. At the very least,

 

• Ironically, Gerasimov himself alluded to economic, and particularly energy leverage, when asked on NBC’s "Meet the Press" on 31 December 1989, how the Soviet Union could make the Baltics remain part of the Soviet Union, he replied: "By persuasion and by proving that it’s better to stay in the Soviet Union — the new union, the new federation — than to go it alone….[The Baltics] cannot really be on their own in economic terms. If you take figures, you can see that these Baltic republics are getting our oil at very cheap prices, which they cannot get from the West, if they go it independently. And economically, they are integrated into our economy."

Lithuania: A Case Study

There can be little doubt that the brewing crisis between Moscow and the Baltic states poses a far more significant challenge to the Soviet Union even than the loss of its Eastern European empire. With the Lithuanian Communist Party in the lead (motivated perhaps less by a new-found attachment to freedom than by the recognition that it would otherwise cease to enjoy any public support whatsoever), for the first time, the Kremlin is facing anti-Soviet agitation organized and officially sanctioned by local authorities within the borders of the USSR itself.

Thus, when the Lithuanian party declared itself independent of Moscow’s tutelage on 20 December 1989 and stated that Lithuania’s eventual independence was its primary goal, the move provoked a strong reaction from Gorbachev. Denouncing the decision as "illegitimate," Gorbachev said "I am convinced that, nowadays, to exercise self-determination through secession is to blow apart the union, to pit peoples against one another and to sow discord, bloodshed and death. This is precisely the goal of secessionists in all republics."(1) Gorbachev told the Central Committee on Christmas day that: "The current party and state leadership will not permit the breakup of the federal state….If we cross this line, we will deliberately be heading toward the disintegration of the Soviet Union….Harsh necessity requires actions to preserve the state and secure its unity. Here we should not have any illusions as far as the intentions or the abilities of the central Government are concerned."(2)

It seems highly likely, therefore, that during his intensive meetings in Moscow last week with Lithuanian Communist Party leader Algirdas Brazauskas and ten of his senior associates, Gorbachev elaborated on Gerasimov’s implied threat of economic retaliation. While the exact extent of Lithuania’s exposure to such Soviet extortion cannot be determined with confidence,(3) evidently at least the Kremlin believes that a cut-off of oil from the Soviet Union would have a serious impact on the Lithuanian economy.

Interestingly, Lithuania’s nuclear power plant in Ignalina(4) provides a major source of electricity for the region. Lithuania also has several hydro-electric plants in Kaunas along the Neman River and a diesel-oil fueled electricity plant tied into the northwest region of electrical production for the Soviet Union.

On the other hand, some 60 percent of Lithuania’s export earnings are generated from products derived from Soviet-supplied oil and sold to Western Europe. (It is noteworthy, however, that over 90 percent of the hard currency generated from these energy exports goes directly to Moscow’s coffers.) Oil refining facilities in Mazeikiai, Lithuania produced 12.7 million tons of petroleum products in 1987 including gasoline, refined crude, diesel, bitumen, various liquid gases and sulphur. These facilities are supplied by a pipeline from the Soviet Union.

Many of the petroleum products refined at Mazeikiai are shipped out to Western Europe through the Klaipeda oil export terminal, a port sixty miles away. In 1989, 11.2 million tons were processed through this port — roughly 2 1/2 times the planned output. Where the Soviets to threaten to cut off the oil supply to such Lithuanian facilities, there would be profound economic dislocation. An important straw in the wind concerning Moscow’s coming economic retaliation for Baltic restiveness may have been last summer’s decision by the Soviet Ministry for Energy to eliminate funds for a second pipeline to Mazeikiai from the USSR.

Estonia and Latvia: Vulnerabilities and Assets

The other Baltic states are, under present circumstances, also dependent upon Soviet energy — and therefore potentially susceptible to Moscow’s economic leverage. For example, Latvia operates two major hydro-electric plants on the Daugava River which provide only half of Latvia’s electricity needs. The remaining 50 percent is imported from the Soviet Union and the other Baltic states. Latvia has no nuclear plants and imports 100 percent of its gasoline, diesel, natural gas, coal, and other liquid fuel sources for its population of 2.7 million.

For its part, Estonia is in the unusual position of having huge deposits of shale oil which are being extracted and used for electricity generation and yet is still susceptible to Soviet economic extortion. At present, the Soviets are wantonly exploiting this natural resource using irresponsible strip-mining practices and causing serious environmental problems. One observer described the region as "a lunar landscape" with heavy polluting of the rivers and "uncontrolled plumes of smoke" emanating from the conversion plants.(5)

While these resources might permit Estonia to become largely energy independent of the USSR — Estonia’s electricity output from the shale oil provides twice its domestic requirements — at present it is required to provide the electricity derived from the shale oil to the Soviet Union at prices set by Moscow and far below production costs. The Estonian electricity obtained by the Soviet Union supplies the Soviet city of Leningrad’s needs; it also is sold for hard currency to Finland.

Soviet Economic Leverage in the Baltics: A Two-Edged Sword

In short, while Moscow’s leverage over the Baltic states in the energy sector may be fairly significant, dislocations in the event of a Soviet economic boycott would actually be mutual. The Soviet Union relies on the Baltic ports for some of foreign trade, particularly for its energy exports. Electricity is obtained from Estonia and Lithuania and Moscow depends significantly on these republics for supplies in many areas including foodstuffs, consumer goods, automobiles, and high-technology items such as computers and instrumentation.

Moreover, the vaunted difference between world oil prices and the price the Baltics pay for Soviet oil may not be that great. Given that the Soviets price their oil exports (for example those sold to Eastern Europe) on a five-year rolling average, generally tied to the USSR’s five-year plans, the Baltics may be getting no "break" from Moscow at all in the near future. In fact, insofar as oil prices have been generally declining since 1986, the East Europeans and other consumers of Soviet oil are still paying a price based on a higher average from previous years.

The West Should Thwart Moscow’s Economic Coercion

If Gorbachev forgoes a brutal crackdown in the Baltics in favor of economic, and particularly energy leverage, such coercion should be viewed by the West as equally deplorable — if less bloody. To minimize the chances of either eventuality, the United States and its allies should immediately impress upon Moscow that whatever form intimidation may take will be unacceptable.

Specifically, the West should establish unmistakably that the Kremlin’s use of energy and other economic leverage — like the use of force — to stifle political and economic autonomy in Eastern Europe, the Baltics and elsewhere will entail real and lasting costs in terms of Soviet access to Western economic, financial and technological resources.

At the same time, serious consideration should be given to creation of a Contingency Energy Fund (CEF) that could be drawn upon (like the emergency currency stabilization package and food aid being offered by Western nations). The object of such a fund would be to cushion nations whose pursuit of genuine structural transformation results in economic dislocation and hardship — especially that precipitated by Moscow’s policy machinations.

1. Speech by President Mikhail Gorbachev before the Congress of People’s Deputies on 23 December 1989, reported in "Gorbachev Assails Secession Moves by Soviet Republics," Washington Post, 24 December 1989.

2. "Gorbachev Agrees to Go to Lithuania on Secession Move," New York Times, 27 December 1989.

3. When the Baltic Assembly convened in May 1989, committees of economists, scientists, engineers, and technical experts from the three Baltic states organized to begin to ascertain the true economic linkages among the three republics and bilaterally with the Soviet Union. It is only thanks to the painstaking detective work of these committees that the true extent of Soviet exploitation of Baltic resources, environment, and labor is becoming apparent.

4. The two reactors at this site came on line in 1984 and 1986. They are identical to Chernobyl’s design and, consequently, share its potential for disaster. Worse still, the plant is built on sandy soil with a high water table. Thus, radioactive leaks through the ground, in the event of a Chernobyl-like catastrophe, would be difficult to contain. What is more, Lithuanian geologists have discovered that — despite the fact that the Ignalina facility is built on a fault that was the site of an earthquake in 1907 of a magnitude of 7.1 on the Richter scale — it is only designed to withstand tremors of up to 5.5.

5. Interview on 3 January 1989 with Mari-Ann Rikken, Executive Director, Estonian American National Council, Inc., Arlington, Va.