By Demanding Russia’s ‘Complete Isolation,’ Baltics Risk Economic Annihilation: Here’s Why

“Step by step we have moved toward isolating Russia,” Reinsalu said in a recent interview with US business media. “Has it been enough? No, it has not been enough, because the war continues,” he added, referring to the security crisis in Ukraine, which the West has turned into a proxy conflict between Russia and NATO.

Reinsalu’s "remedies" include a total embargo on Russia’s banking sector to close any gaps left over allowing back-and-forth payments to continue, and a $30 price cap on Russian oil (half the $60 a barrel cap agreed by the G7 nations – which Russia has already balked at). The foreign minister also demanded tougher European Union-level sanctions on Russia, and increasing European weapons deliveries to Ukraine in 2023.

Estonia and its Baltic neighbors Latvia and Lithuania have been among the most vocal supporters of a hard line against Moscow since the escalation of the Ukraine crisis, consistently demanding tougher sanctions, more restrictions on Russian energy, and the delivery of as much weaponry and equipment to Kiev as possible. Tiny Estonia, whose military has just 7,200 active duty personnel, has sent over $330 million in military assistance to Ukraine this year, putting it in ninth place overall, just behind Sweden (who sent $390 million) and more than Italy (which delivered $320 million). Latvia and Lithuania sent an additional $330 million and $200 million, respectively.

But the Baltics have not been able to escape the realities of the consequences of the economic and energy crises resulting from the Ukraine conflict, and attempts to reduce economic ties with Russia – which has consistently been one of their largest trade partners – have borne their poisonous fruit.

In Estonia, inflation hit an eye-watering 24.8 percent in August, before cooling in subsequent months to 21.3 percent last month. In Latvia, inflation galloped into the double digits in March, and reached a steady 21.8 percent over the past two months. In Lithuania, residents suffered an inflation rate of 22.9 percent in November. The Baltic countries’ inflation rate has consistently been among the highest in Europe throughout 2022, behind only non-European Union members Moldova and Ukraine (where inflation reached 31.4 and 26.5 percent in November, respectively).

Double-digit inflation means higher prices for everything, from food and nonperishables to electronics, household items and cars. It also impacts economic growth, with Latvia becoming the first country in the EU to go into recession in October, with Estonia following suit in November, recording a 2.4 percent drop in GDP in the third quarter of 2022. Estonian economists have warned that households are already eating through savings, and will be left vulnerable by the time the next expected shock hits.

The inflation and economic crises quietly pummeling the Baltics has been exacerbated by the energy crunch, which the three countries’ governments have aggravated by embracing – and even spearheading – EU-level efforts to slap restrictions on Russian energy. With Estonia, Latvia and Lithuania depending on Russia for 12, 92, and 27 percent of their natural gas, and 32, 20, and 69 percent of their crude oil between 2020-2021, respectively, the need to replace this energy with costlier LPG shipped by sea, or oil from the Middle East, has already taken its toll.

Estonia, which enjoys modest reserves of shale oil, has resorted to restarting shale oil power plants, and shelving EU-mandated schemes to end the use of heavily polluting energy sources. In Latvia and Lithuania, the governments have eased forest protection rules, threatening local ecosystems and wildlife as people stock up on wood as a source of warmth in winter. In Lithuania, as power costs have jumped as high as €4,000 euros per megawatt hour – the maximum allowed ceiling, energy experts have been kicking themselves over the closure of the country’s Soviet-era Ignalina Nuclear Power Plant, which once provided electricity to the entire Baltic region and left over enough juice to export to neighboring countries. The plant, commissioned in the 1980s and closed down in 2009, produced over 307.9 billion kWh of electricity in its lifetime.

Notwithstanding the noisy statements coming out of government offices and parliaments in Tallinn, Riga, and Vilnius about “banning” Russian energy, and applause for Brussels’ latest efforts at restricting, sanctioning or otherwise complicating Russian oil and gas deliveries, the Baltic countries have remained shrinkingly silent about one source of energy from their eastern neighbor: electricity.

Belarus, Russia, Estonia, Latvia, and Lithuania are connected to one another via the BRELL electricity grid – a massive Soviet-built ring-shaped network of power lines, which the Baltics have used to buy hundreds of thousands of megawatt hours of Russian juice every month. The three countries promise to totally decouple themselves from BRELL by 2025, but these plans have been pushed back repeatedly in the past over the recognition of the costs involved.

With alternatives to Russian energy proving prohibitively expensive, some Baltic countries have even tried a variety of tricks to try to take some of the sting out of soaring costs. Last month, the US Treasury Department finally closed loopholes enabling the sale of the so-called "Latvian blend" of diesel oil – which involved the mixing of 49.99 percent oil produced in Russia with 50.1 percent from other countries, thus allowing for the oil to be traded as "non-Russian." The blend has been on sale since the spring, allowing the Baltics and foreign energy giants alike to enjoy cheaper and more dependable "non-Russian" *wink* energy deliveries.

Ordinary residents of the Baltic countries are no strangers to the consequences of their governments’ incessant battles with Moscow (which has remained among the top three trade partners of all three countries for decades). In 2014, after the US and the EU sparked the Ukraine crisis and kicked off its sanctions war against Moscow, Russia retaliated by restricting food imports from nations which sanctioned it. The sanctions war cost Estonian, Latvian, and Lithuanian dairy farmers and sprat producers hundreds of millions of euros, with many unable to find alternative markets and, out of desperation, even attempting a series of schemes for getting their goods into Russia – for example, by trying to import them through Belarus.

Notwithstanding the Baltic governments’ fervently anti-Russian stance (a stance which is not necessarily shared by their respective publics, by the way), the current crisis in relations has not managed to rupture ties entirely, and the region remains highly dependent on Russian resources and energy, and serves as an important transit artery for Russia (Lithuania especially, whose railway transit corridor carries goods from Russia and Belarus to the Russian exclave of Kaliningrad).

As the Ukraine crisis approaches its tenth month, and the Baltic countries – and the European Union as a whole – continue to suffer the consequences of the economic and energy crises, perhaps it’s time that the Baltics recognize that the more they try to “punish,” “restrict,” and “isolate” Russia, the more their own people suffer. After all, if the United States seems ready to throw European economic giants like France and Germany under the bus to protect their economic interests, of what interest – apart from a bridgehead for NATO aggression against Russia, can three tiny nations 6,500 km from US shores be to Washington?