Russia: Moscow's Economic Threat to Estonia
Russia is unlikely to utilize economic means to exert influence or affect Estonian sovereignty due to Estonia’s strong trade partnerships with the European Union and NATO and high degree of energy independence. Russia will likely pursue non-economic options if determined to affect Estonian sovereignty due to Moscow’s lack of economic leverage on Tallinn. Potential access points for Russian economic intervention in Estonia include targeted disinformation and cyber-attacks in the tourism and mining sectors. The European Union and NATO members account for the dominant share of Estonia’s trade economy. In 2017, the European Union accounted for 63 percent of Estonian exports and 64.5 percent of Estonian imports, while NATO partners accounted for 50.6 percent of exports and 53.7 percent of imports. (a) Russia, Estonia’s third largest individual trading partner by value, accounted for 10 percent of Estonian exports and 9.7 percent of Estonian imports (9.8 percent of total trade) in 2017. (a) Russia’s ability to exert economic leverage on Tallinn is also inhibited by Estonia’s high degree of energy independence. Estonia is primarily energy independent due to its substantial use of domestically-mined oil shale, which accounted for 71.5 percent of the country’s total primary energy supply in 2017. (b) Estonia is currently attempting to diversify their energy supply as they are the second highest greenhouse gas emitter per capita in the European Union; however, this diversification is largely contingent on European Union investment with efforts to invest in renewable energy and cleaner oil shale extraction technology. (d) By relying on the European Union for clean energy investment, Estonia will likely remain disconnected from Russian energy reliance. Despite Estonia’s strong relationship with the European Union and NATO, Russia retains multiple access points for economic intervention including targeted disinformation to disincentivize international trade and tourism and targeting oil shale mining through cyber-attacks. Russia has exploited other former Soviet republics, such as Armenia, Georgia, and Moldova, through restricting oil and natural gas exports, (c) however, Russia is largely unable to utilize trade or export restriction in the petroleum energy sector due to Estonia’s domestic energy production. Russia holds a 44 percent share of Estonian petroleum energy imports, including refined and crude petroleum and petroleum gas, although petroleum accounted for only 2.6 percent of Estonia’s total primary energy supply in 2017. (b, a) Russia, if determined to affect Estonian sovereignty through economic intervention, would very likely need to pursue non-conventional tactics due to these barriers. Estonia’s strong reliance on international organization partners for trade forces Russia to pursue deterrence efforts in order to affect Estonia’s trade economy. A potential tactic to deter international trade includes targeted disinformation in order to demote the attractiveness of Estonia as a trade partner for European Union and NATO allies. Estonia’s tourism sector accounts for approximately 8.1 percent of the country’s gross domestic product creating a high impact, low probability access point for Russian intervention through targeted disinformation aimed at discouraging Estonian tourism arrivals. (e) A third access point for Russian economic interference is present in the Estonian oil shale mining industry as oil shale accounts for the majority of Estonia’s total primary energy supply. Russian disruption of the Estonian mining industry is possible through either hard target cyber-attacks aimed at disrupting facility operations or through disinformation highlighting Estonia’s disproportionate carbon emissions in an effort to weaken public opinion of oil shale use.
Russia is likely unable to influence or affect Estonian sovereignty through trade restrictions or tariffs due to Estonia’s strong reliance on European Union and NATO trade partners. Any restrictions imposed against Estonian trade are unlikely to have a significant, or long-lasting effect on the economy. Russian counter-sanctions in summer 2014 banned Estonian dairy and fish exports in response to European Union sanctions following Russia’s annexation of Crimea. While the counter-sanctions did have a negative impact on Estonian exports to Russia, the economic impact has not been significant. Since 2012, Estonian exports into Russia have continuously declined, so the impact of the counter-sanctions was further diluted. Additionally, in 2014, Estonian entrepreneurs were able to find new markets for their products, and diversify export destinations, lessening the sanctions’ impact. Estonia increased its total number of export destinations to 52 countries in 2014 following the institution of counter-sanctions, by increasing exports of dairy products to 20 new countries. (f) As seen through historical trends from Russian counter-sanctions imposed on Estonia in efforts to impact trade, there is little to no impact from these sanctions due to Estonia’s ability to diversify export destinations. In terms of diversification, Estonia, Finland, and Latvia are consolidating the gas market, and going in a single gas transmission tariff zone, which is going into operation at the beginning of 2020. (g) The BalticConnector, a bi-directional pipeline between Finland and Estonia will expand the Baltic gas market to the north, linking the countries, and alongside with the consolidated gas market, will help to diversify the regions gas supplies by creating more links with other gas projects in Europe. (h) Imports from Russia will likely decrease once the pipeline goes into operation in 2020, further reducing Estonian reliance on trade with Russia, specifically imports of natural gas.
Estonia’s high degree of energy independence very likely provides a barrier to Russian intervention in Tallinn’s energy sector. Estonia holds a strong position against Russia in terms of conventional oil and natural gas production due to Estonian domestic extraction of oil shale energy. In 2017, oil shale was the main energy supply accounting for approximately 85 percent of Estonia’s electricity production. (i) Oil shale is unique to Estonia and its use has caused Estonia to become a net power exporter. As long as Estonia continues to produce energy through oil shale, Estonia will maintain its strong position against Russia, but if Russia targets oil-shale production in the near to midterm, it would likely be extremely damaging to Estonia’s economy. If oil-shale were to be abandoned, it would force Estonia to be reliant on important energy, likely from Russia, backtracking on the independence Estonia has claimed in the past years. Furthermore, a hurried abolishment of oil-shale production could result in up to $443 million lost in export revenue, and put 13,000 Estonians in unemployment (j). Estonia is moving towards energy from renewable resources, and has begun operating the Auvere Power Plant, which can utilize both oil-shale and biomass as fuel. The total renewable energy produced from biomass in this power plant can cover the annual electricity needs for 50,000 Estonian families with average energy consumption (k). Leaders in the oil-shale industry state that this strategy will occur organically as units become old and shut down, which likely gives Estonia time to react, plan and prepare for this drastic change in its economy, yet remaining unprepared for any unexpected changes in the near to midterm. As Estonia moves towards renewable energy in the long-term, while attempting to remain energy-independent, Russia can likely disrupt this progress and impact the economy by removing or significantly impacting oil-shale production in the near to midterm. The BalticConnector Pipeline will further decrease dependence on Russian energy, and will reduce costs because of increased competition against Russian-owned oil company Gazprom, currently the main supplier of natural gas for the Baltic States. Gazprom has historically charged members of the region above-market-rate levels for its gas supply (l), so increasing competition and accessibility to oil with the BalticConnector Pipeline will likely allow prices to return to fair levels for all players in the region. Once the pipeline is connected with Lithuania and Poland in 2020, the gas market in the Baltic Region will no longer be reliant on Gazprom natural gas production.
If determined to intervene in Estonia, Russia will likely pursue non-conventional methods including disinformation and cyber operations in the tourism and mining sectors. High impact, low probability scenarios of Russian intervention in Estonia’s tourism sector include domestic disinformation campaigns to discourage Russian travel to Estonia and legislative efforts to increase border crossing difficulty. In 2017, Estonia’s tourism sector accounted for approximately 8.1 percent of the country’s gross domestic product. (m) Russians accounted for $248.7 million of tourist revenue for Estonia in 2017, supplying 11.6 percent of all foreign tourists. (n) Potential scenarios for Russian intervention in Estonia’s mining sector include hard target cyber-targets aimed at disrupting oil shale mining facilities and disinformation campaigns targeted at diminishing public opinion of oil shale use. Estonia relies on oil shale mining for 71.5 percent of their total primary energy supply and 85 percent of electricity production, creating a high impact access point for Russian interference through hard target cyber-attacks on oil shale facilities. (o, p) This scenario remains very unlikely as Estonia has been the victim of only one known cyber-attack, the 2007 Russian-linked denial-of-service operation which interrupted government, banking, and media domains by overloading website bandwidth with bot traffic in order to render the sites inoperable. (q) NATO, in response to the 2007 cyber-attack, established the Cooperative Cyber Defense Center of Excellence, a NATO collective tasked with cyber-security preparedness, training, and defense. Russia would more likely utilize disinformation campaigns aimed at diminishing Estonian public opinion of oil shale use in an effort to force Estonia to expedite their transition to renewable energy sources, ideally enabling errors to be made in the process.
Sources
a) Alexander Simoes, “Estonia,” 2017. The Observatory of Economic Complexity. https://oec.world/en/profile/country/est/.
b) N/A, “Estonia,” 2017. International Energy Agency. https://www.iea.org/data-and-statistics.
c) Justyna Pawlak and Adrian Croft, “Sweden Lashes Out at Russian “Economic Warfare” in East Europe,” 06 September 2013. Reuters. https://www.reuters.com/article/us-eu-east/sweden-lashes-out-at-russian-economic-warfare-in-east-europe-idUSBRE9850XA20130906.
d) N/A, “Estonia – Energy,” 17 July 2019. International Trade Administration. https://www.trade.gov/export-solutions.
e) N/A, “International Tourism, Recietps (current US$) – Estonia,” 2018. The World Bank. https://data.worldbank.org/indicator/ST.INT.RCPT.CD?locations=EE.
f) Meelis Kitsing, “Are Russia’s Counter-Sanctions Hurting the European Economy? The Case of Estonia,” 2015. Republic of Estonia Ministry of Economic Affairs and Communications. https://ecipe.org/wp-content/uploads/2015/04/ECIPE-Russian-countersanctions-220415.pdf.
g) Lefteris Karagiannopoulos, “Finland, Estonia and Latvia sign deal for single gas tariff zone,” 14 February 2019. Reuters. https://www.reuters.com/article/finland-baltic-gas/finland-estonia-and-latvia-sign-deal-for-single-gas-tariff-zone-idUSL5N2097KI.
h) Helen Wright, “Balticconnector Pipeline to be completed by end of year,” 1 October 2019. Estonian Public Broadcasting. https://news.err.ee/987293/balticconnector-pipeline-to-be-completed-by-end-of-year.
i) ICIS Editorial, “ICIS Power Perspective: Estonia will close 619MW of oil shale generation in 2019,” September 2019. ICIS. https://www.icis.com/explore/resources/news/2018/09/07/10257649/icis-power-perspective-estonia-will-close-619mw-of-oil-shale-generation-in-2019/?redirect=english.
j) Aili Vahtla, “Giving up oil shale would cost Estonia 1 billion Euro per year,” 5 November 2018. Estonian Public Broadcasting. https://news.err.ee/874659/giving-up-oil-shale-would-cost-estonia-1-billion-per-year.
k) N/A, “Electricity and Heat Production”. Eesti Energia. https://www.energia.ee/en/tehnoloogia/elektri-ja-sooja-tootmine.
l) Helen Wright, “Balticconnector Pipeline to be completed by end of year,” 1 October 2019. Estonian Public Broadcasting. https://news.err.ee/987293/balticconnector-pipeline-to-be-completed-by-end-of-year.
m) N/A, “International Tourism, Receipts (current US$) – Estonia,” 2018. The World Bank. https://data.worldbank.org/indicator/ST.INT.RCPT.CD?locations=EE.
n) N/A, Tourism in Estonia 2017,” February 2018. Visit Estonia. https://static1.visitestonia.com/docs/3198419_tourism-in-estonia-2017.pdf.
o) N/A, “Estonia,” 2017. International Energy Agency. https://www.iea.org/data-and-statistics.
p) ICIS Editorial, “ICIS Power Perspective: Estonia will close 619MW of oil shale generation in 2019,” September 2019. ICIS. https://www.icis.com/explore/resources/news/2018/09/07/10257649/icis-power-perspective-estonia-will-close-619mw-of-oil-shale-generation-in-2019/?redirect=english.
q) N/A, “Cyber Operations Tracker,” 2019. The Council on Foreign Relations Cyberspace Policy Program. https://www.cfr.org/interactive/cyber-operations.
