By Andras Simonyi and Co-authored by Gunda Reire

December 18, 2015

This is a story of Latvia, but with a lesson beyond. People with power in the energy sector meet people with political power, and the character of Latvia as a reliable Western partner, one that is resilient to Russia’s carrots and sticks, is tested mightily. In Abraham Lincoln’s words?”Nearly all men can stand adversity, but if you want to test a man’s character, give him power,” in a disturbing manner mirrors the ongoing process in energy market liberalization in Latvia.

On October 22, the Latvian parliament passed the first reading (of three required readings) of an amendment to the Energy Law providing for the commercial opening of the gas market in April 2017, and the unbundling (detaching from exclusive Russian control) of the “Latvijas Gaze” (Latvian Gas) natural gas utility.

It is not a coincidence that immediately following the fall of Latvian Prime Minister Mrs. Laimdota Straujuma’s government on December 7, the Parliamentary debates on the energy legislation heated up dramatically. Using the fall of the government opportunistically, the former Latvian Prime Minister, now the head of Russian controlled “Latvian Gas,” Mr. Aigars Kalvitis even felt free to describe the Latvian gas market liberalization as raiderism, robbing stakeholders, and attempts of property expropriation.

In the same Parliamentary committee debate, the Ministry of Economy backed down, despite previously supporting a more liberal commercial arrangement, and agreed to establish a subsidiary company (what is known in Latvia as a daughter company), instead of an entirely new separate (what is known as a sister company) company, which in effect complies with the wish of the “Latvian Gas.” This unfortunate outcome weakens Latvia’s future energy security.

In the beginning of this year, the European Union took a historic step by agreeing to a plan to build an Energy Union — the biggest energy project since the Coal and Steel Community. This would allow the pooling of resources across Europe and lessen dependency on Russia which provides around one third of the energy that Europe consumes. In the current geopolitical situation, this is a strategically necessary step, because Russia has used energy as a weapon and it plays a major role in its foreign policy. Nevertheless, the success of The Energy Union depends on member states’ political will to go down the path of energy sector liberalization and independence.

In Latvia’s case, the situation is even more serious. Russia’s (Gazprom) controlled Latvian Gas is the sole player in the Latvian gas market. The supply system is connected only with those of Lithuania and Estonia, and there is only one gas supplier to Latvia.

So far, The Klaipeda LNG terminal in Lithuania is the biggest project of energy independence in the Baltic Countries. It enables Lithuania and potentially its neighbors to: access alternatives to Russian gas, ensure greater energy security in the region, diversify regional gas supply, improve the bargaining position with Gazprom on gas contracts, and further reduce political vulnerability. Lithuanians were the first to detach the gas supply routes, and Estonia moved to do the same in early of 2015. Latvia, with its energy sectors intrinsically linked to Russia for sources and routes, and also virtually isolated from the rest of the European Union, faces high vulnerability and risks remaining an “energy island”.

The new energy legislation — amendments to the Energy Law, which is now heatedly debated in the Latvian parliament — is the key to Latvia’s energy independence and gas market liberalization. The government of Latvia has made a decision to separate Latvian Gas in to two legally independent enterprises, which have to fulfill first the functions of route operations and storage, and second redistribution and sales. It is the precondition to the opening of the gas market not later than April 3, 2017. Because of the operation of the Lithuanian Klaipeda LNG terminal in combination with the development of the Klaipeda-Kiemenai gas pipeline, the European Commission’s derogation, which previously allowed Latvia to keep the gas market closed and to postpone the liberalization, is no longer in force.
In spite of this, it is obvious that the Russian controlled head of Latvian Gas, its stakeholders and lobbyists are pushing hard to impede the already delayed opening of the gas market and separation of the company into two independent enterprises. Moreover they strongly oppose selling what is supposed to be a new company to investors not connected to the current Latvian Gas company and its current stakeholders. They have threatened international legal action, have made appeals which are essentially technical roadblocks and have “warned” that it is not possible to find “proper” new investors by 2017. In short, they are attacking the issue from every possible angle.

The Latvian parliament should stand firm in its position to end the monopoly of the Russian gas in Latvia. This is not about business, it is about the strategically political place of Latvia in Europe and about its economic future. The Latvian parliament will adopt the amendments to the Latvian Energy Law in the very beginning of 2016. There will be a true debate and the real political resilience of Latvian politicians will be tested in the Parliament. Passing this energy legislation will be a clear signal to both Russia and the West about the character and future security of Latvia.

(Andras Simonyi is the Managing Director, Center for Transatlantic Relations (CTR), Johns Hopkins University)

(Dr. Gunda Reire currently holds the position of Resident Fulbright Research Fellow at the Johns Hopkins University SAIS Center for Transatlantic Relations, Washington, DC She is Managing Director of the Center for International Studies (Latvia) and Visiting Lecturer in diplomacy studies at the University of Latvia and the Riga Graduate School of Law. She has served as Deputy Chairperson of the Strategic Analysis Commission under the Auspices of the President of Latvia, Chief of Staff of the Speaker’s Office and Adviser to several ministers.