STRATFOR June 7, 2013 |

Summary
The deterioration of Europe's political and financial institutions have forced Baltic states to consider forging stronger ties with Russia, the country they generally regard as the biggest threat to their respective national securities. Indeed, their foremost goal since the collapse of the Soviet Union has been greater independence from their eastern neighbor.

But Russian markets have become more attractive as those of continental Europe have weakened, so the Baltics are improving ties with Russia for the sake of their economic well-being despite their security concerns. For example, the foreign ministers of Estonia and Russia met in Kaliningrad on June 6 to discuss their countries' progress over several bilateral agreements, including a long-disputed border treaty. Baltic states will not abandon their goals of attaining greater independence from Russia, but they understand that greater independence partly depends on economic prosperity and that working with Europe alone will not help them achieve these goals.

Analysis
After the Soviet Union dissolved in 1991, Baltic states sought to reorient themselves to the West by joining the European Union and NATO. Estonia became a member of the eurozone in 2011, and Latvia and Lithuania are expected to join the currency union within the next few years.

Moreover, the Baltics are currently trying to wean themselves off their dependency on Russian natural gas through EU-backed infrastructure development. Lithuania's floating liquefied natural gas import facility is expected to be operational in 2014, and Estonia is competing with Finland for EU funds to build a terminal that can service the wider region.

Situated on the North European Plain, the Baltics are strategically important to Russia: Those who have invaded Russia have done so on this plain. Thus, Russia sees Baltic gravitation to the West as a strategic threat. To mitigate the perceived threat, Moscow has attempted to influence the actions of Baltic states through its position as the region's primary energy supplier and important trade partner as well as through the significant Russian minority living there.

This influence is best exemplified by a spat between Russia and Estonia in 2007. When Tallinn relocated a Soviet memorial commemorating the end of World War II from the city's center to the outskirts of town, some Russians living in Estonia rioted in the streets of the capital. In addition, Russia halted rail transit between the countries, much to the detriment Estonian business interests. Also, a subsequent cyberattack against the Estonian government was believed to have originated in Russia. The same year, Russia cut oil supplies to Lithuania because of a bilateral dispute.

Normalizing Relations
Though tensions between Estonia and Russia remain, their relationship has normalized in recent years. The aforementioned border treaty, which had been contested since 2005, finally made some progress in late 2012. The June 6 meeting also showed that Estonia and Russia want to improve trade relations. Estonian Foreign Minister Urmas Paet said he hoped to see progress regarding agreements on livestock trade and on double taxation. He also noted that Russia has become Estonia's third-largest trade partner and that the number of Russian tourists to Estonia increased by 30 percent from 2011 to 2012.

The European Union is still by far the Baltic states' most important trading partner, but Russia has gained relevance as an export destination. In recent years, all three Baltic countries have increased their exports to Russia; in fact, Russia was Estonia's third-largest export market in 2012, up from fifth in 2004. According to Trademap, Latvian exports to Russia have doubled since 2006, and Russia has been Lithuania's most important trade partner since 2005.

In addition, the growing Russian middle class has become an important source of revenue for the tourism sectors of all three countries. In 2012, the number of EU visitors to Estonia dropped by nearly 7 percent, while the number of Russians visiting increased by 31 percent. From 2011 to 2012, the number of Russian tourists visiting Latvia increased by 33 percent, and the number of Russian tourists to Lithuania increased by 44 percent.

The Baltics' Dilemma
Geography dictates that the Baltics will always be drawn to Russia economically. The prospect of economic prosperity means that both sides could benefit form this partnership. Latvia, Lithuania and Estonia have become more attractive to Russian businesses since they became EU members in 2004. For their part, businesses in Baltic states have warned political tensions should not impede better economic ties with Russia.

To some degree, ties with Russia are essential to economic prosperity, but these same ties could create new dependences on Russia. While the growing importance of the Russian market likely improves Russia's image among the Baltic business community (and undermines the governments' argument for greater autonomy from Russia), Latvia, Lithuania and Estonia will always be skeptical of Russia and will not forsake ties with the West.

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