R 231046Z JAN 09
FM AMCONSUL ST PETERSBURG
TO SECSTATE WASHDC 2669
INFO AMEMBASSY MOSCOW 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG 
AMCONSUL ST PETERSBURG 
AMEMBASSY HELSINKI 
AMEMBASSY RIGA 
AMEMBASSY TALLINN 
AMEMBASSY VILNIUS

UNCLAS ST PETERSBURG 000009 
 
 
E.O. 12958: N/A 
TAGS: RS ECIN EPET EN LG LH FI
SUBJECT: RUSSIAN GAS SALES IN THE BALTIC REGION - A COOPERATIVE 
VENTURE 
 
¶1. (SBU) Summary.  The history of the international gas trade 
from northwest Russia to its Baltic neighbors is an example of 
an extraordinary smooth and successful shift towards market 
principles.  The main factors that facilitated this were the 
financial willingness and ability of the Baltic consumers to pay 
market prices, the amenability of these countries to Gazprom's 
desire to have a significant stake in their national pipeline 
operators, and a simple pipeline geography which minimized any 
outside political considerations.  End Summary. 
 
¶2. (SBU) The Northwest Federal District of Russia is the region 
through which Russia supplies natural gas to the Baltic states 
and Finland.  The supply network utilizes the pipeline system 
operated by OOO Gazprom Transgaz Sankt-Peterburg, which is a St. 
Petersburg-based subsidiary of Gazprom.  This pipeline system 
directly connects Russia's main pipeline network with each of 
these countries.  In 2007, it transmitted 4.4bln cubic meters of 
gas to Finland, 3.4bln to Lithuania, 1.6bln to Latvia and 1bln 
cubic meters to Estonia. 
 
¶3. (SBU) Among the four countries, Finland is both the largest 
and oldest customer.  Finland began receiving Russian gas in 
1974 based on a twenty-year contract which had fluctuating 
prices based on the current market situation.  The contract was 
renewed for an additional twenty years in 1994, and has recently 
been extended through to 2025.  These long-term contracts have 
provided a stable environment for both Finland and Gazprom, and 
almost completely eliminated any political calculations from 
entering into what remains a commercial exercise. 
 
¶4. (SBU) Unlike the contract with Finland, the supply of Russian 
gas to the Baltic states during the first years after the 
collapse of the Soviet Union was based on short-term contracts 
with fixed prices.  These prices were considerably lower than 
those for other European countries.  It is important to note 
that, throughout the post-Soviet years, Gazprom continued to 
deliver gas to the Baltic states as stipulated by the contracts 
and despite various political tensions between the governments. 
This history of cooperation between Russia and the Baltic states 
carried over into the mid 2000's, when Latvia, Lithuania and 
Estonia were required, as part of their EU accession 
requirements, to adjust the terms and conditions of their 
contracts with Gazprom to make them more in line with those of 
other EU countries.  Consequently, Gazprom and the Baltic states 
worked out a three-year transition programs, which saw the 
introduction of long-term contracts and a gradual shift to 
market prices.  Though the shift meant a doubling of gas prices 
by the end of the three-year transition period, rapid economic 
growth in the Baltic states helped ameliorate the rise in costs. 
 The hallmark of the current set up is its stability.  There has 
never been any serious interruption of gas supply to the Baltic 
states, notwithstanding a few incidences of reduced pressure in 
the pipeline network at times for several hours due to technical 
failures.  Also, Gazprom officials have often praised the Baltic 
states as ideal customers for their prompt payments for gas 
deliveries. 
 
¶5. (SBU) The Baltic states have also been accepting of Gazprom's 
interest in having a large financial stake in their national 
pipeline operators.  In 1993 the Estonian Government allowed 
Gazprom Transgaz Sankt-Peterburg to participate in the 
incorporation of Eesti Gaas, the company which operates the 
Estonian gas pipeline network.  Gazprom now owns 37% of Eesti 
Gaas.   Gazprom was also welcomed to participate in the 
privatization of both the Lithuanian and Latvian national 
pipeline companies.  As a result, Gazprom currently controls 37% 
of the shares of Lietuvos Dujos in Lithuania and 34% of Latvijas 
Gaze in Latvia. 
 
¶6. (SBU) The geography of the gas pipelines in the Baltic region 
also played a role in the peaceful transition from Soviet days. 
The pipelines generally run directly from Russia to the Baltic 
states, and the pipelines stop in the recipient countries, with 
no further downstream foreign customers.  Thus, during 
negotiations between the Baltic states and Russia, there were no 
complicating factors over transit rights either into or out of 
the countries, and thus no issues which could impact foreign 
relations with any other countries.  The most significant 
exception to this simplified pipeline geography is Kaliningrad 
oblast, which is connected to the rest of Russia by pipelines 
running through the Baltic states.  But, this exception also 
added to the stability of the situation, as any disagreement 
between the parties which could have resulted in a disruption in 
gas supplies to the Baltic states would also have resulted in 
the isolation of Kaliningrad as well. 
 
¶7. (SBU) Comment.  The Baltic states, although being rather 
small consumers overall, represent an important example of how 
Russian gas exports were able to be smoothly and successfully 
transitioned to a market-based system.  Although the specifics 
of the Baltic states situation (their relative prosperity, the 
history of good credit, and the lack of geographic 
complications) are different from that of other former Soviet 
states, it shows the possibility exists to create a market 
dynamic which is mutually beneficial for both the gas importing 
and exporting countries. 
 
 
GWALTNEY