Strategic Analysis: Russian Business Activity in Estonia (Abstract)

Estonia is less dependent on the Russian economy than are Latvia and Lithuania, on account of its closer relations with Finland and Sweden. Still, certain sectors, such as the transit and food industries, are linked with Russian trade and Estonia, in turn, relies on Russian imports of timber, chemicals and metals.[1] While the country is not a significant importer or consumer of Russian energy, it does serve as a significant transit country for Russian oil and other goods headed to external markets by way of the Baltic Sea. More than 300,000 barrels of oil per day of mostly refined petroleum products wereexported via Estonias ports, including Muuga, in 2011, where Russia controls a major terminal operator.

Although Estonia has the unique position in the region of being nearly energy independent, it does rely on Russia for 10% of its energy mix. Its primary fuel for powergeneration in 2012 was shale oil at 81 percent, while renewables contributed another 15.2 percent. Natural gas comprised the remainder. Nevertheless, the natural gas component is central to the countrys heating supply, which still creates a significant vulnerability that is worthy of attention. Estonias major natural gas company, Eesti Gaas, responsible for the purchase, transmission and distribution of gas in the country was, as of the start of 2014, 37% owned by Gazprom, 33.6% owned by Germanys E.On Ruhrgas, 17.7 percent owned by Finlands Fortum Heat and Gas OY and 10% owned by Itera Latvija. (Itera Latvija is 66% owned by Itera, a company registered in Cyprus, which is, in turn, owned by a prominent Russian business figure Igor Makarov). Gazprom remains the countrys sole supplier of gas.

Estonia has joined its fellow EU member states, however, in seeking to remedy this situation through compliance with the Third Energy Package and efforts to disentangle itself from Gazprom ownership and monopoly control. The country passed the so-called Estonian Law on Natural Gas for this purpose, although the subsequent reshuffling of ownership stakes and break up of Eesti Gaas, at least preliminarily, seemed to have a minimal effect on the level of Russian influence and ownership over the industry. More significant efforts have been made, however, to diversify its sources of supply through the development of the Balticconnector pipeline and LNG terminal project with the support of the EU.

On this supply side of the energy security equation, Estonia has in the past been vulnerable to various pressures emanating from Russia. During peak of winter, for example, gas demand on the Russian side of the border can reach a level where its population in St. Petersburg and northwest Russia is consuming all available supply, rendering Latvias Narva and Vrska cross-border points inactive. In this situation, the contract between Gazprom and Eesti Gaas forces Estonia to rely exclusively on its allotment at the Inukalns Underground Gas Storage Facility in Latvia — in which Gazprom holds a controlling stake. The facility, however, has limited capacity for delivering gas and, moreover, the pipelines connecting Latvia and Estonia are limited to a daily flow of 6 to 7 million cubic meters.


Excerpted Deals and Transactions:

  • The Baltic states have come to realize that the connecting of their power grids is just as important as the development of enhanced capacity natural gas pipelines and interconnectors. At present, Estonias power grid is only connected to Latvia and Russia. In December 2014, Estonian power grid operator, Elering, announced that the operators of the Baltic regions electricity grids have all come together and agreed on a road map to link their systems with each other and the rest of the EU by 2025. This goal, however, will depend on political agreements between the governments of the implicated countries and European Commission support and possible financing.
  • Russian investors reportedly control an oil terminal operator, Vopak E.O.S., which has a large terminal in Muuga. These investors have used Cypriot front companies for their investments.
  • On August 21, 2013, Russia’s Gazprom Neft, the fuel arm of gas giant Gazprom, made its second acquisition in the international bunker fuel (i.e., ship fuel) market with the purchase of Estonia-based AS Baltic Marine Bunker. Gazprom Neft subsidiary, Gazpromneft Marine Bunker, which was already active in the Baltic bunker market, planned to deliver at least 270,000 metric tons a year of bunker fuel to Port of Tallinn.